ETF investors return after fleeing ahead of Brexit

Prior to the UK referendum, ETF investors were withdrawing funds exposed to Europe with net consecutive outflows totalling almost $5bn. However since Brexit, German exposed funds’ strong daily inflows have led a reversal.

  • Brexit vote sees end to relentless outflows out of European ETFs in 2016
  • German exposed ETFs grab lion’s share of past week’s flows, totalling $440m
  • Concern on euro currency weakness declining as euro hedged ETFs see large outflows

The return to Europe

ETF investors have been returning to European exposed ETFs amid the turmoil brought about by the Brexit vote. These inflows seem to have begun to turn the tide after sixteen weeks of consecutive outflows were recorded from funds exposed to European equities.

While not material relative to the more than $130bn in AUM across the largest 50 largest products, since June 23rd 2016 strong daily inflows totalling $365m have resulted in the first positive weekly inflows recorded since the middle of February 2016.

Top inflows into Germany

The largest weekly inflow into European equity exposed ETFs of $284m has been captured by the iShares MSCI EMU ETF which has just under $10bn in AUM (down over a third since the start of the year). The US listed ETF tracks large and mid-sized companies in Europe that use the euro as their official currency. Six out of the top holdings of the ETF are German, followed by two French firms. The ETF seeing the second highest inflow in the past week, totalling $153m, is the iShares MSCI Germany ETF.

In terms of outflows, the strongest this past week has been seen out of the Wisdom Tree Europe Hedged Equity Fund, totalling $317m. The fund provides US or dollar based investors with hedged euro exposure to European equities, and has seen consecutive weekly outflows continue through 2016.

Total consecutive weekly outflows for the ETF since December 2015 have crossed $7bn, with AUM of the ETF falling by half over the same time to $10.5bn under management currently. The ETF is one of largest managed by issuer Wisdom Tree, which has seen its total ETF AUM decline by $9.8bn in 2016, with the total at $37bn currently.

This decline in AUM and accordingly ETF earnings base has attracted short sellers. Shares in the asset manager have tumbled more by than half in the past six months. Short interest in the company is currently hovering near all-time highs with more than a quarter of shares outstanding on loan.

Originally published by Relte Stephen Schutte at Markit.

Market Recap May 27, 2016

Another solid day for the bulls as we had yet another pop at the open and then another round of buying into the close.  The S&P 500 gained 0.43% and the NASDAQ 0.65%.  This despite some mildly (not overly) hawkish comments from Janet Yellen.  “It’s appropriate for the Fed to gradually and cautiously increase our overnight interest rate over time,” Yellen said at a high-profile visit to Harvard University on Friday. That means a move could be appropriate in coming months, she said.

U.S. first-quarter economic growth was revised up to 0.8% from a previous reading of 0.5%, based on a fresh estimate that shows somewhat stronger home construction and restocking of warehouse shelves.

“I think if you look at the equity market and you look at Treasurys I think investors have upgraded their view of the economy a little bit. … You haven’t really seen that get translated into the Fed raising rates,” said John Bredemus, vice president at Allianz Investment Management. He noted while expectations for a rate rise have risen, the Fed is likely “not going to do much.”

“Yellen basically cemented what other Fed speakers had been saying over the past week and I am a little surprised how well the market has absorbed the news,” said Michael Antonelli, equity sales trader at Robert W. Baird & Co.

It is now a fair time to get out of the bunkers – the S&P 500 and Russell 2000 cleared resistance earlier this week, and Friday the NASDAQ joined the party.




The NYSE McClellan Oscillator has now been positive 3 sessions in a row.


Financials had a strong week.


Good news in brick & mortar retail?  Miracles do happen.  Ulta Salon Cosmetics & Fragrance (ULTA) jumped 9.1% after earnings from the makeup retailer released late Thursday topped Wall Street estimates.  This chart was actually very nice for a retail stock even before the earnings announcement.


The “low end” of retail continues to do well – as we saw earlier in the week.  Big Lots (BIG) rallied 14% after the discount retailer boosted its outlook for the year and reported a 20% rise in profit.


Still the sector was not perfect – GameStop (GME)  slumped 3.9% after the videogame retailer late Thursday reported an 11% drop in earnings.



Originally published by Mark Hanna at

Guy trading at home caused the flash crash

Hey look, they caught the guy who caused the flash crash of 2010! His name is Navinder Singh Sarao, and he lives in London and in 2009 he asked someone to help him build a spoofing robot:

On or about June 12, 2009, SARAO sent an email to a representative of his FCM in which he explained that he "need[ed] to get in touch with a [] technician [at the company that provided his trading software ("Trading Software Company #1")] that will be able to programme for me extra features on [the software]," namely, "a cancel if close function, so that an order is canceled if the market gets close."

Sarao was trading E-mini S&P 500 futures contracts, but he wanted a more convenient way to not trade them, so he e-mailed his FCM (futures commission merchant, i.e. broker) for help automating that. The idea is that he would put in a big order to sell a whole bunch of futures at a price a few ticks higher than the best offer. So probably he wouldn't sell any futures, since he wasn't offering the best price. But he had to keep constantly updating his orders to keep them a few ticks higher than the best offer, to make sure that he didn't accidentally sell any futures as the market moved. And that's a bit of a pain, so he programmed an algorithm to do it for him. Though he also seems to have done similar things manually, to support the algorithm's efforts, or to stave off boredom while the algorithm did its thing.

The point of this -- according to the federal prosecutors, the Federal Bureau of Investigation and the Commodity Futures Trading Commission, who are not happy with Sarao -- is that by placing all these fake sell orders, Sarao would artificially drive down the price of the E-mini futures. It's classic spoofing: He'd place a lot of big orders to sell, everyone else would say, "Ooh look at all those big sell orders, I'd better sell too," they'd sell, the market would go down, he'd buy, he'd turn off his algorithm, everyone else would say, "Oh hey never mind, things are great again, there are no more big sell orders," they'd buy, the price would go back up, and Sarao would sell the futures he'd bought at a lower price a moment ago. We've talked about spoofing before, and I've always been a little troubled that it works, but what can I say, it works.

On May 6, 2010, according to the authorities, it worked a little too well: Sarao did such a good job of driving down the price of the E-mini future that he caused a flash crash in which "investors saw nearly $1 trillion of value erased from U.S. stocks in just minutes." I'll put some more details downstairs but honestly they are boring details. Sarao traded a ton of E-mini futures during the flash crash -- "62,077 E-mini S&P contracts with a notional value of $3.5 billion" -- and made "approximately $879,018 in net profits" that day, or a profit of about 2.5 basis points on the notional amount, which I guess isn't bad for one day's work. He did this by, basically, putting in orders to sell thousands of contracts away from the best offer. Those orders were never executed, or intended to be executed, but they tricked people into thinking that there was a lot more selling interest than there actually was. That combined with a collapse in buying interest -- at one point Sarao's fake sell orders alone "were almost equal to the entire buyside of the Order Book" -- to create a collapse in prices. He profited from those collapsing prices by selling high and buying back lower. It's a pretty straightforward spoofing story.

So straightforward that one of the biggest puzzles here is why it took so long -- and the help of a whistleblower -- for regulators to figure it out. They came tantalizingly close:

As reflected in correspondence with both SARAO and an FCM he used, the CME observed that, between September 2008 and October 2009, SARAO had engaged in pre-opening activity -- specifically, entering orders and then canceling them -- that "appeared to have a significant impact on the Indicative Opening Price." The CME contacted SARAO about this activity in March 2009 and notified him, via correspondence dated May 6, 2010, that "all orders entered on Globex during the pre-opening are expected to be entered in good faith for the purpose of executing bona fide transactions." The CME provided a copy of the latter correspondence to SARAO's FCM, which suggested to SARAO in an email that he call the FCM's compliance department if he had any questions. In a responsive email dated May 25, 2010, SARAO wrote to his FCM that he had "just called" the CME "and told em to kiss my ass."

Emphasis added because come on: The futures exchange wrote to Sarao on the day of the flash crash, telling him to stop spoofing, and he called them back "and told em to kiss my ass." And then regulators pondered that reply for five years before deciding that they'd prefer tohave him arrested in London and extradited to face criminal spoofing charges. One conclusion here might be that rudeness to regulators really works.

Even odder, Sarao didn't just retire to a supervillain lair after the flash crash. The CFTC lists "at least" 12 days on which he allegedly manipulated the futures market; eight of them came after the flash crash, and he allegedly continued to manipulate the futures market more or less up to the moment he was arrested. The CFTC claims that Sarao basically started his spoofing career by causing the flash crash, and then went ahead and kept spoofing for another five years without much interruption. I guess he got more subtle at it? Not very subtle though; he was a consistently large trader, "placing, repeatedly modifying, and ultimately canceling multiple 200-, 250-, 300-, 400-, 500-, 550-, 600-, and 900-lot sell orders," versus an average order size of seven contracts. He also seems to have had some patterns (like putting in orders for exactly 188 or 289 contracts that never executed) that you'd think would make him easier for regulators or exchanges to spot. If regulators think that Sarao's behavior on May 6, 2010, caused the flash crash, and if they think he continued that behavior for much of the subsequent five years, and if that behavior was screamingly obvious, maybe they should have stopped him a little earlier?

Also, I mean, if his behavior on May 6, 2010, caused the flash crash, and if he continued it for much of the subsequent five years, why didn't he cause, you know, a dozen flash crashes?

So I mean ... maybe he didn't cause the flash crash? There's a jointCFTC and Securities and Exchange Commission report that came out a few months after the flash crash that blames it on an effort by Waddell & Reed to sell some E-mini futures with an inept algorithm; lots of people have long had their doubts about that theory, and now the CFTC itself seems to have abandoned it in favor of the new one-guy-in-London theory. You could maintain a skeptical attitude about the one-guy-in-London theory too though. The CFTC says that Sarao's "Layering Algorithm" was turned on between 11:17 a.m. and 1:40 p.m. Central time, and that "the Layering Algorithm caused the price in the E-mini S&P contract to be temporarily artificially depressed while the Layering Algorithm was active. Once the Layering Algorithm was turned off and the orders were canceled, the market price typically rebounded." But the CFTC also describes the flash crash this way:

Between 1:41 and 1:44 p.m. CT, the E-mini S&P market price suffered a sharp decline of 3%. Then, at 1:45 p.m. CT, in a matter of 15 seconds, the E-mini S&P market price declined another 1.7%. The price crash in the E-mini S&P market quickly spread to major U.S. equities indices which suffered precipitous declines in value of approximately 5 to 6%, with some individual equities suffering much larger declines.

Get that? The flash crash happened when Sarao's algorithm had been turned off, and the price should have been rebounding:

I mean, look, he probably didn't help. The markets were nervous, and his spoof orders probably made them more nervous. Oneintriguing theory is that his orders interacted badly with Waddell & Reed's algorithm: Perhaps Waddell sold its futures too quickly because its algorithm thought that there was a lot of selling pressure behind it. But Sarao, according to the CFTC, was 20-29 percent of the sell-side pressure at his peak, and almost none of his orders executed. Other people provided the other 71-80 percent of the sell orders, and at least some of their orders executed, causing prices to actually go down. It seems unlikely that Sarao's not trading caused the whole crash. And, to be fair, the authorities say that Sarao's "manipulative activities contributed to an extreme E-mini S&P order book imbalance that contributed to market conditions that led to the Flash Crash," rather than coming out and saying that the crash was his fault. At the very least, though, he picked the wrong day to do billions of dollars worth of spoofing.

It's worth keeping the notions of "spoofing" and "high-frequency trading" carefully separated. Sarao may have been a spoofer, but he doesn't seem to have been doing the sort of high-speed algorithmic trading that usually qualifies as "HFT." He himself claimed to be "'an old school point and click prop trader' who had 'always been good with reflexes and doing things quick,'" and the "Layering Algorithm" that he used was a customized version of "a program that allowed non-programmers to engage in automated trading using spreadsheet commands and functions." He was also the sole owner and employeeof his trading firm, which he "operated from his residence." In style and substance he is not all that different from other spoofers we have known and loved, who did their high-speed trading by just punching keys really fast.

I have always been impressed and puzzled that low-tech spoofers have much success ripping off whomever they rip off. It's such a minimal fraud; it's just saying that you want to sell when you don't want to sell. It's always surprising that that could have a major effect on markets. John Arnold has argued here at Bloomberg View that spoofing only hurts front-running high-frequency traders, whileothers point out that "algorithmic trading tools are used by a wide class of traders," including long-term investors like Waddell & Reed who use algorithms to try to avoid the front-running HFTs. But the FBI's and CFTC's theory here is far more troubling: It suggests that existing algorithms are not just dumb enough to give spoofers some of their money, but dumb enough to give spoofers so much of their money that they destabilize the financial markets. It's not especially confidence-inspiring to read that a guy with a spreadsheet can trick everyone into thinking that the market is crashing, and thereby cause the market to crash.

  1. Also I guess to keep his reflexes sharp. From the FBI:
    On or about May 29, 2014, SARAO provided written responses to a questionnaire that had been submitted to him by the United Kingdom's Financial Conduct Authority, at the request of the CFTC pursuant to the International Organization of Securities Commissions Multilateral Memorandum of Understanding. In those responses, which I have reviewed, SARAO claimed that he was "an old school point and click prop trader" who had "always been good with reflexes and doing things quick."
  2. People, by which I mean algorithms, really rely on the order book to tell them what prices will do next. From the CFTC:
    Many market participants, relying on the information contained in the Order Book, consider the total relative number of bid and ask offers in the Order Book when making trading decisions. For instance, if the total number of sell orders significantly outweighs the total number of buy orders, market participants may believe a price drop is imminent and trade accordingly. Similarly, if the balance of buy and sell orders changes abruptly, market participants may believe the new orders represent legitimate changes to supply and demand and therefore trade accordingly. Further, many market participants utilize automated trading systems that analyze the market for these types of order imbalances and use that information to determine trading strategies. Consequently, actions in the Order Book can, and do, affect the price of the E-mini S&P.
  3. Here's the CFTC's more technical description:
    The "2010 Flash Crash" refers to an event that occurred on May 6, 2010 in the U.S. financial markets. Between 1:41 and 1:44 p.m. CT, the E-mini S&P market price suffered a sharp decline of 3%. Then, at 1 :45 p.m. CT, in a matter of 15 seconds, the E-mini S&P market price declined another 1.7%. The price crash in theE-mini S&P market quickly spread to major U.S. equities indices which suffered precipitous declines in value of approximately 5 to 6%, with some individual equities suffering much larger declines. After a few minutes, markets quickly rebounded to near previous price levels. In their Preliminary Findings Regarding the Events of May 6, 2010, the CFTC and the Securities and Exchange Commission noted that a significant imbalance between sell orders and buy orders contributed to a sudden loss of liquidity in the E-mini S&P market. This loss of liquidity, in conjunction with other market events, directly contributed to the E-mini S&P price crash.
  4. From the FBI:
    SARAO's use of the dynamic layering technique was particularly intense in the hours leading up to the Flash Crash. SARAO used the technique continuously from 11:17 a.m. until 1:40 p.m. SARAO began this cycle by placing the following five sell orders nearly simultaneously at approximately 11:17:38.782 a.m.: (1) 600 lots at $1,156.50; (2) 600 lots at $1,156.75; (3) 600 lots at $1,157.00; (4) 600 lots at $1,157.25; and (5) 600 lots at $1,157.50. At approximately 1:13 p.m., SARAO added a sixth sell order for 600 lots, bringing the total to 3,600 lots. The orders were replaced or modified more than 19,000 times before SARAO canceled them, without having executed any of them, at approximately 1:40:12.553 p.m.

    The CFTC provides some context:

    These orders represented approximately $170 million to over $200 million worth of persistent downward pressure on the E-mini S&P price and, over the next two hours, represented 20-29% of the entire sell-side of the Order Book. The orders were replaced or modified more than 19,000 times before being canceled at 1 :40 p.m. CT. At that time, the Order Book was severely imbalanced and Defendants' 3,600 Layering Algorithm orders were almost equal to the entire buyside of the Order Book.

    And he also did some manual spoofing, putting in manual orders to sell 188 or 289 contracts, which for some reason seem to have been his lucky numbers:

    At the same time that SARAO ran this lengthy cycle of the dynamic layering technique, he aggressively used the 188-and-289-lot spoofing technique. Between 12:33 p.m. and 1:45 p.m., SARAO placed 135 sell orders consisting of either 188 or 289 lots, for a total of 32,046 contracts. SARAO canceled 132 of these orders before they could be executed.

    So all the dumb algorithms looked at the order book and saw a lot of sellers -- some real, Sarao fake -- and not so many buyers, and they panicked and started selling too, and Sarao was there to pick up the pieces:

    During this two-hour period, Defendants traded 62,077 E-mini S&P contracts with a notional value of $3.5 billion.

    The FBI says that "In total, SARAO obtained approximately $879,018 in net profits from trading E-Minis that day."

  5. Here's how the CFTC characterizes his timing:
    The Commission has presented evidence that, from at least April 2010 to January 2012; July 2012 to June 2014; and September 2014 to present ("Relevant Period"), Defendants have manipulated, attempted to manipulate and/or spoofed the near month of the Chicago Mercantile Exchange E-mini S&P futures contract ("E-mini S&P"). Similarly, the CFTC has presented evidence that Defendants have profited over $40 million from E-mini S&P trading during the Relevant Period.
  6. From the FBI:
    While SARAO's dynamic layering technique was the most prominent manipulative technique he used, it was not the only one. Based on my discussions with Consulting Group representatives, I understand that analysts have also identified SARAO's repeated placement of 188- and/or 289-lot orders on the sell side of the market, nearly all of which he canceled before the orders were executed. Based on analysis of SARAO's trading activity, SARAO appears to have used this 188-and-289-lot spoofing technique in certain instances to intensify the manipulative effects of his dynamic layering technique, by further contributing to the E-Mini order book imbalance (i.e., the difference in the quantity of sell-side and buy-side orders) and corresponding price impact, which SARAO then exploited through his actual trading activity.
    What is more, Consulting Group analysts have identified a third technique whereby SARAO "flashed" a large 2,000-lot order on one side of the market, executed an order on the other side of the market, and canceled the 2,000-lot order before it was executed
  7. From DealBook today:
    The arrest casts a harsh light on the original explanation for the crash, which appears to have been completely wrong.
    After the flash crash, the Securities and Exchange Commission and the Commodity Futures Trading Commission produced a report that laid the blame on one trade from Waddell & Reed, a brokerage firm based in Kansas City, Mo. A Dutch academic later challenged that view, saying the answer was more complex.
  8. Note that the time scale is in Eastern time, one hour ahead of Central.To be fair, the CFTC also says (paragraph 77) that he continued placing fake 188/289-lot orders manually until 1:45 p.m. Central. But then it says (paragraph 78) that "Between 11:17 a.m. CT and 1:40 p.m. CT, Defendants' actions contributed to an extreme order book imbalance in the E-mini S&P market," suggesting that the main effect was before the flash crash.
  9. One speculative note: The 2010 SEC/CFTC report (page 21) shows the E-mini market depth, with a sharp drop-off of both buying and selling depth at about 1:45 p.m. Central/2:45 Eastern. Is that related to Sarao, who was allegedly 20+ percent of the sell order book? If he actually dropped off at 1:45, then my timeline in the text is off, and he might have been causing selling pressure until 1:45. If he dropped off earlier, though, might the disappearance of both buying and selling orders have caused trouble, as more traders decided that everyone else was panicking and shutting off their algorithms, and so they should too?
  10. And, crucially, actually being ready to sell. The FBI notes that Sarao "acknowledged that he traded large volumes of E-Minis in large lot orders, but again asserted that his orders 'were 100% at risk, 100% of the time.'" The FBI never denies that they were: If the price had moved against Sarao faster than his algorithm could cancel (if, for instance, a big buyer came in and took out several price levels all at once), he'd be selling a lot of futures.A lot of trader types view this as the difference between manipulation and legitimate trading: If you're at risk, it's legal. It should be said that this does not seem to be the CFTC's or FBI's view.


I mean, "front-running." Not in the legal sense of front-running. If you're into this debate you know what I mean; if you're not, probably best to keep it that way.

Originally Published by Matt Levine at Bloomberg.

April Performance MSCI Developed vs Emerging Markets

Comparison Table for the April Global Markets Performance by MSCI World index.

Crowdfunding moves to Wall Street

Starting on Monday May 16, the U.S. Securities and Exchange Commission will permit small business to crowdfund equity stakes in their business.

The U.S. securities market is a bit late to the crowdfunding party, according to Denise Valentine, a senior analyst at industry research firm Aite Group. “This was a big argument to pull this through our system, it was not like in Europe where it was embraced. It was fought for and there are key leaders in the industry who have been trying to move this forward.”

Companies that meet the Commission’s definition of a small business under Title III of the JOBS Act may crowdfund up to $1 million per 12-month period from accredited investors after filing certain information to the regulator and making it available to potential investors.

Denise Valentine, Aite Group

Denise Valentine,
Aite Group

These new regulation will bring a new class participates into the corporate crowdfunding equation, according to Valentine. “The whole Title III idea was to open up this market for individuals who had some extra money, but could not find opportunities or were shut out from certain opportunities to become shareholders in companies.”

The crowdfunding initiative is much smaller than initial public offerings, which had a median deal size of $93.8 million in 2015 according Renaissance Capital.

To further retail participation, many in the market have suggested updating the Commission’s definition of accredited investor by lowering the net-worth threshold an accredited investors need which is set at $1 million in the U.S.

If investors’ annual income and net worth are more than $100,000, Title III permits them to invest up to 10% of the lesser of their net worths or annual incomes into a company’s crowdfunding process. If  an investors’ net worths or annual incomes are less than $100,000, they still may invest, but only up to $2,000 or 5% of the lesser of their annual incomes or net worths.

Also, investors may not purchase more than $100,000 in crowdfunded securities in a 12-month period.

Valentine is skeptical that this new method of raising capital will affect the dwindling IPO market of the past few years.

“There is this great drive in the IPO market to find the next Google,” she added. “That’s been going on for some time and why the IPO market has thinned out over the last couple years, aside from the economic situation.”

Yet, Wall Street might feel a bit of an impact as retail investors who are chasing returns look toward crowdfunding opportunities instead of fee-heavy mutual funds.

“This mass market, or Title III Market, felt that all they were subject to were expensive mutual funds with active management, which don’t always deliver on the return, or index funds,” Valentine said. “With crowdfunding, investors are going to make some money out of it and get a return instead of just a t-shirt for donating.”

Originally published by, Editor at Large at Markets Media.

Why markets have gone insane this year

There is something unprecedented going on with the markets, not with just the yen right now, but with all assets, as discussed by John Thomas, one of the founding fathers of the modern hedge fund industry.

A market where both fundamental research and technical analysis are utterly useless and everything goes the opposite of where it should is no place for me. Despite having negative interest rates and the world’s worst fundamentals, the Japanese yen has been skyrocketing since the beginning of February.

The last time the yen (NYSEARCA:FXY), (NYSEARCA:YCS) moved this sharply was when President Richard Nixon took the US off the gold standard in 1972, and currencies floated for the first time. The yen immediately shot up 10%.

I remember it like it was yesterday. There is something unprecedented going on, not with just the yen right now, but with all assets. So I am getting out of the way. If I don't understand what is happening with a position, I drop it like a hot potato.

This could be occurring because Japan's oil bill has been cut in half over the past year, shaving some $125 billion off its annual imports. That means less dollar buying and yen selling to settle the trade. However, in looking for reasons to explain the madness about us I could be too logical and analytical here.

In my travels around the US two weeks ago, I discovered what might be a more pressing reason to cause all asset classes to go haywire. I heard on the grapevine that there are at least a half-dozen large hedge funds with tens of billions of dollars in assets each that are going out of business.

Poor performance has led investors to demand redemptions en masse. That means unwinding possibly $100 billion worth of positions. And every one of these positions was financed by short sales in the Japanese yen. The only way for them to get out of these positions and raise cash is to buy yen, a lot of them, to close those shorts.

 If this is the case, it would explain a lot of what is going on in the markets this year. The worst performing asset classes of 2016 have been those where hedge funds were major owners. Those would include US banks, short positions in ten-year Treasury bonds (NYSEARCA:TLT), shorts in the Euro (NYSEARCA:FXE), and special situations like Variant Pharmaceutical (NYSE:VRX).

It provides the logic behind the atrocious performance by the big tech FANG stocks in recent weeks. And yes, it gives the backdrop for the enormous overreaction in Apple (NASDAQ:AAPL) shares after the Q1 earnings report.

It gets worse. When markets sniff out that big positions have to be shifted, they suddenly go illiquid. That leads to small amounts of capital triggering exaggerated moves in the underlying prices. That has given us the enormous volatility in all asset classes we have seen this year. Look at oil, stocks, gold, gold miners, silver, and the yen and they are all delivering the most extreme moves in a half century.

This all makes markets impossible to trade. Markets aren't breathing. We are seeing one straight line move after another. Prices aren't trading within defined channels that traders make their living from. Instead, they are going ballistic. In other words, the price action of 2016 can be described as liquidity events.

And this is the good news. All liquidity events burn out. Eventually, the positions get liquidated, the investors get their money back, and markets return to normal. You could blame all this on negative interest rates, which have never occurred before in history. I have never seen the strategist community so clueless before.

You might also ascribe it to the demise of the hedge fund. It seems that whenever industry assets approach $3 trillion in assets, it implodes. The market can accommodate only so much "smart" money. Almost all hedge funds accumulated their stellar track records when they were small. Get above $20 billion and they can only generate slightly better than utility-type returns. Only a select few friends of mine have been able to keep the numbers coming.

 My strategy has always been to break even when it is tough, and coin it when it is easy. This is one of those break-even times.

This is why my performance has been flat-lining just short of an all-time high for months. This too shall pass. When it does, it will be back to racking up double-digit returns, as I have done with this service for the past eight years.

Personally, I have great hopes for the second half of the year, when the presidential election gets out of the way. (Original article at Seeking Alpha with some charts by the author)

Disclosure by author: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.  I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Originally published by John Thomas at Wealth Management through Seeking Alpha.


These are the sectors investors love and hate right now

Credit Suisse quarterly take on the best and worst sectors as published at Bloomberg by Julie Verhage.

At times like these—when the overall market is flat and Wall Street in general doesn't expect the S&P 500 to move much higher through the end of the year—there's even greater interest in figuring out which stocks and sectors will outperform.

The team at Credit Suisse AG, led by Chief U.S. Equity Strategist Lori Calvasina, looked at which sectors have the most bullish and bearish consensus views from hedge funds, mutual funds, and sell-side analysts. It does this on a quarterly basis, and here are some of the takeaways from the current positioning compared to historical norms.

Here's a look at the "crowded" trades where all three camps are in agreement:

  • Underweight small cap retailers
  • Underweight small cap household and personal products
  • Underweight large cap materials
  • Overweight large cap banks
  • Overweight small cap semiconductor companies and semi equipment
  • Overweight small cap software and services

Underweight small cap retailers Underweight small cap household and personal products Underweight large cap materials Overweight large cap banks Overweight small cap semiconductor companies and semi equipment Overweight small cap software and services
Figuring out the bullish or bearish stances varied by investor group. For hedge funds, Credit Suisse looked at net exposure to indexes like the Russell 1000 and Russell 2000 as well as exchange-traded funds (ETFs). Compiling the mutual fund data required looking at the overweights relative to that fund's benchmark. Lastly, sell side data was determined by the net buy ratings.

However, don't start buying large overweights just yet. The team said that this heavy consensus sentiment has them a bit concerned. There's "extreme, potentially peaking bullishness across the board," they wrote of the large cap banks. When it comes to small cap semis and semi equipment they also observed "extreme bullishness in all camps, likely [a] peak among [hedge funds]." So even though banks have struggled in 2016 due to factors such as interest rates remaining lower for longer, it might not be time to buy.

To be the contrarian, look at a potential bottom in small cap retail where they say the positioning "supports our mid-April upgrade to market weight, but there may still be some risk of unwinding in large caps."

Originally published by Julie Verhage at Bloomberg.

Market Connectivity as a Service?

Lucera Financial Infrastructure and Perseus have teamed to create an on-demand Software Defined Network that allows financial traders to tap into market connectivity on an as-needed basis.

Dr. Jock Percy, Perseus Telecom

Dr. Jock Percy, Perseus Telecom

“You don’t need to own to infrastructure or the heavy assets, now you can buy it by the drink,” Perseus CEO Jock Percy told Markets Media. “This is the ‘uberization’ of capital markets connectivity,” he said, referring to the ubiquitous transportation network.

Using the network’s Software as a Service (SaaS) model, Percy said once a customer is on-boarded, he or she can log on via a secure-access portal and connect as they wish, 24 hours a day 7 days a week. This contrasts with legacy connectivity, which entails procuring, setting up and plugging in racks, servers and other physical equipment.

Billed as the first on-demand SDN exclusively for the capital markets industry, the network provides traders with cross-connection points encompassing more than 246 counterparties and 53 co-location centers across 24 cities, 15 countries and six continents. It combines Perseus’s low-latency, global, fiber network with Lucera’s SDN, compacting go-to-market network implementation cycles to no more than two days, or 45 times faster than the industry standard of 90 days.

“Forget about dealing with bandwidth and expensive hardware – a thing of the past,” Lucera CEO Jacob Loveless said in a release. “By creating the world’s largest SDN and devoting it exclusively to the financial markets, we’re game-changing the culture of connectivity that the industry hasn’t seen since the extranet arrived on The Street.”

Jake Loveless, Lucera

Jake Loveless, Lucera

“Perseus is the ideal partner to make this happen with their unrivaled speed and Points of Presence touching every major financial center across the developed and emerging world,” Loveless continued. “By being faster and more flexible than traditional service providers, SDNs now allow traders to connect to new markets on a customized, pay-as-you go basis.”



Originally published by  at Markets Media.

Inside the Nondescript Building where trillions trade each day

Inside the Nondescript Building where trillions trade each day.

Equinix's NY4 data center hosts 49 exchanges among the customers that have set up servers in the Secaucus, New Jersey, facility.

Six miles northwest of the New York Stock Exchange as the microwave flies, across the Hudson River and within earshot of Interstate 95, is a building with no name. Only three numbers mark its address, and, like much of its surroundings, it’s nondescript, encircled by windblown trash and lonely semitrailers waiting to be hauled away somewhere. It’s a part of New Jersey that’s, well, ugly.

It’s also a critical node in the U.S. financial system: The 49 different exchanges that lease space at this data center sent a record 9.6 million messages per second through its fiber-optic cables in February. Every day, electronic trades representing trillions of dollars’ worth of equities, derivatives, currencies, and fixed-income assets pass under this roof. This is NY4. This is where Wall Street actually transacts.

Servers in cages at NY4
Servers in cages at NY4. Photographer: Christopher Payne

It’s just one of the crown jewels ofEquinix, the $22.2 billion company that’s quietly grown into the world’s largest owner of interconnected data centers. To give you an idea of Equinix’s lead in the space, you would have to add up the market value of its five closest U.S. competitors to roughly equal its market cap, according to data compiled by Bloomberg.

Equinix pitches its centers as more than just storage space for servers. Its clients pay in part because of who else is there. That includes the Chicago Board Options Exchange, Bats, ICAP, Nasdaq, the NYSE, and Bloomberg LP, the parent company of Bloomberg News. IEX Group, the firm that starred in Michael Lewis’s 2014 book Flash Boys, stashes a key piece of its hardware in one of Equinix’s New Jersey data centers: a coil of fiber-optic cable that slows orders down by a fraction of a second. And those firms are just from the handful of financial industry customers Equinix discloses. It connects more than 6,300 businesses to their customers, and most of those firms don’t want it known that they lease one of NY4’s metal cages, which are identified only by numbers, not names.

Equinix’s nonfinancial clients, meanwhile, include some of the Internet’s biggest names:, AT&T, China Mobile, Comcast, Facebook, Hulu, LinkedIn, Microsoft, Netflix, Pandora, and Verizon. Much of the Internet is literally run through the nondescript buildings Equinix has scattered around the world. “They’re a crucial component of how the cloud works,” says Colby Synesael, an analyst at Cowen & Co. who covers Equinix. “It’s where the Internet lives.”

The security at NY4 bears this out. To get from the parking lot to a spot where you could touch one of the servers you’d have to go through five checkpoints. One of them is a so-called man trap with two automatic steel doors that never open at the same time. Your palm print is required twice in addition to your PIN code. A wall of video monitors captures every nook and cranny of the 338,000-square-foot building.

Once you’re in, the space is enveloped by a rush of white noise from the thousands of computer fans whirring away to keep the servers cool. To help maintain the temperature, the ceiling is 45 feet high, roughly four stories up. It’s barely visible—not just because of its height, but also thanks to all of the suspended trays of cables and cooling ducts running overhead. All this goes toward one statistic: Equinix says in its annual filing that it kept its facilities up and running 99.9999 percent of the time in 2015.

The 12 air-handling units in NY4 move cold air via overhead ducts.
The 12 air-handling units in NY4 move cold air via overhead ducts. Photographer: Christopher Payne.
They’re big on backups. In case of a power failure, NY4’s uninterrupted power supply room has 5,600 batteries on standby to provide eight minutes of electricity while the generators rev to life. Should the air conditioning fail and risk the servers overheating, there are three 150,000-gallon tanks filled with water chilled to 45F. Running that cold water through pipes would give NY4 staff 20 minutes to get the AC fixed. Oh, and the generators: 18 of them, each the size of a locomotive engine and able to crank out 2.5 megawatts of power. Equinix keeps 180,000 gallons of diesel fuel on-site to run them. In terms of footprint, NY4 is roughly the same size as a Manhattan block. If you want to look out the window, too bad. There isn’t one.
There’s a slick appearance to it all, from the red-lit foyer to the metal all around and the blue lights that shine from above. This last feature comes in handy at night for security purposes, but it’s also got an aesthetic touch to it. “When everything is dark and you only have these blue lights, it looks really cool,” says Michael Poleshuk, senior director of operations for Equinix in the northeast region, as he leads a tour.
Another reason the location is important to Wall Street is because NY4 is only one part of Equinix’s Secaucus, N.J., campus. The company has spent the last 20 years growing and consolidating the industry into its own spider web of interconnected data centers from Frankfurt to Tokyo to London to Rio de Janeiro to Sydney. This is the company that controls a significant part of modern finance: the sites where you plug in the actual computers that fuel today’s hyperfast and hyperconnected electronic trading.
“I call them the 800-pound gorilla of the data services market,” says Inder Singh, an analyst at SunTrust Robinson Humphrey. “I see these guys as a key bridge between customers and suppliers.”
The neutrality Equinix has established by not competing with its customers is also important, Singh says. “It is the Switzerland of data center players,” he says. That has a downside, though. “Equinix definitely leaves some money on the table. But they would probably be losing some of their coveted customers.”

Equinix provides only “dark fiber”; it doesn’t move data itself. That’s created opportunities for other companies. A startup called Lucera is one of them. The company operates something like a telecom within the data center by using software to interconnect the banks, exchanges, and investment firms that have servers at NY4.

“If Goldman Sachs wants to connect to 100 people, they just run one cable to us,” says Jacob Loveless, Lucera’s co-founder and chief executive officer. In turn, that one cable from a firm can then connect the client to any of the other 52 data centers around the world where Lucera operates.

The larger idea Loveless and his partner Peter Durkan hit on is moving Wall Street onto the cloud with shared infrastructure. After 10 years at Cantor Fitzgerald, where he was the firm’s head of high-frequency trading, Loveless realized there were too many trades out in the world that were great ideas but impractical: Implementing them would take six months and $500,000 because of the connections that needed to be made to another bank or investor or exchange that might be halfway around the world.

It would take a bank about three months to create a new connection to another bank if it did it on its own, Loveless says. Lucera’s fastest time to connect two of its users is eight seconds. That’s because the company is software-based and relies on hard-wired connections already created by Equinix. Lucera’s mean connection time is only two hours, Loveless says.

Standby power comes from 18 generators that can crank out 2.5 megawatts each
Standby power comes from 18 generators that can crank out 2.5 megawatts each. Photographer: Christopher Payne

NY4 and other data centers like it make this a reality, but it wasn’t always this way. At the dawn of electronic trading in the 1980s, major banks such as Goldman Sachs or Bank of America had to lay wire and cable to create their own networks to connect to customers. If you laid one bank network atop the other, they would have all been basically the same, Loveless explains, which is another way of saying it was hugely inefficient. Then in 2000, a company called Radianz set out to create a global network that promised access to the major financial institutions through a single connection.

It worked. British Telecom bought Radianz in 2005 for about $130 million. Lucera, which got its start in 2013, is now a sort of second-generation Radianz as it offers to handle the complicated interconnections within a data center like NY4 for its clients.

“If I’m a customer and I want to connect to 270 companies, I can either run 540 connections out of my own cage or they can run a pair to us and we’ll run the rest,” says Michael Badrov, global head of operations for Lucera. As he spoke in the firm’s cage at NY4, three workers were busy doubling Lucera’s capacity to take on more customers.

On the roof of NY4 on a rainy February morning, the skyscrapers of Manhattan could just be seen to the east. To the west, planes lined up to land at Newark airport. Microwave antennas that look like satellite-TV receivers are pointed toward Chicago, Newark, and north of the city where the signal can get hooked into the fiber-optic cable that ends in London. That’s where Equinix’s LD4 center is located.

This global network of densely packed data centers is now the reason you can trade a stock on your smartphone in a way that was unimaginable 10 years ago. The six or seven intermediaries needed—AT&T, your brokerage, the NYSE, and so forth—are all housed under Equinix’s enormous roof.

John Knuff, Equinix’s general manager for financial services, looks at this dense cohabitation and sees the future. “I always say, keep your customers close,” he says. “But keep your vendors even closer.”

Originally published on Bloomberg by Matthew Leising and Annie Massa.