Isaac Newton posited 334 years ago in his third law of motion that mutual forces of action and reaction between two bodies are equal.

I wonder what he’d think of the relationship between the US dollar and equities, where this small action produces that decidedly unequal reaction.

After the Federal Reserve acted to shore up bank balance sheets by buying long bonds and mortgage-backed securities last week, the dollar trampolined and markets dropped like Newton’s apple.

Pundits blamed dismal economic data. Yet we saw money market-wide shifting from equities September 16 with quad-witching. Before the Fed offered a dim economic portrait. If money was reacting, it sure had a funny, proactive, organized way of showing it.

Today and Monday, the dollar weakened and stocks zoomed skyward in a Newton-flummoxing frenzy to reclaim paradise lost. How many believe this is rational investment behavior? If you do, there’s a solar-panel plant in California that might interest you. Continue reading →

If you absolutely must have trading data fast, who’s your huckleberry?

Burstream, apparently. The firm claims it can serve up actionable, meaningful trading data, no matter what market mayhem, in 600 nanoseconds. That’s 600 billionths of a second. The catch? You have to trade at the Nasdaq.

Burstream’s system is being installed at the Nasdaq OMX market center in New Jersey so the exchange’s important proprietary-trading customers will have a split-second – taken to the extreme – advantage. Customers wanting to use these superfast capabilities will be able to load their algorithms onto Burstream servers parked next to boxes housing the Nasdaq’s trade-matching engines.

Burstream systems will go near the Chicago Mercantile Exchange too. The idea is to unify data streams on stocks, commodities and derivatives so decisions about trading on divergence can be made faster than ever before possible. This is, of course, arbitrage.

Burstream says at its website: “Enable your high frequency trading algorithms to hit liquidity when it is revealed. Trade through market bursts while competitors exit the market. Sustained nanosecond speeds, even during message bursts will give your latency-sensitive algorithms a performance advantage.”

What makes Burstream special is its use of field-programmable gate-array chips (FPGAs) that can perform multiple calculations simultaneously, thus delivering a speed advantage over conventional hardware-processing techniques. Continue reading →

We were sitting on the porch in the shadow of the American flag Sunday September 11 when fighter jets streaked and thundered so low that all of Denver shook. We caught glimpses of pairs of F-15s and F-16s, afterburners hot. Later, we read that warplanes from Denver escorted two flights with suspicious passengers aboard. But the ten-year memorial passed in peace.

Speaking of thunderous roar, I attended the jam-packed NIRI Rocky Mountain Chapter’s kickoff session today. Nasdaq chief economist Frank Hatheway offered a thoughtful and statistical look at the market. He joked that when he first prepared slides two weeks ago, the trends were improving but he’d had to change his comments to reflect reality.

Dr. Hatheway launched his talk by comparing stock indices with VIX volatility, Treasury yields, oil prices and gold. He observed that investor-relations professionals today need to develop a level of understanding of these “macro factors” – benchmarks of group behavior across asset classes (clients, we include a Macro Factors segment on page two of your Market Structure Report). Continue reading →

When investors buy and sell shares, what happens?

The logical answer is “stocks go up and down.” Let’s get more specific. Among the 20 largest asset managers at the end of 2009, ten were bank-owned, says consulting firm Towers Watson. The five largest – Blackrock, State Street, Allianz, Fidelity and Vanguard – are independents that pass the preponderance of their buying and selling through the biggest sellside firms on passive equity and ETF trading programs.

The banks behind ten of the twenty largest asset managers include BNP Paribas, Deutsche Bank, JP Morgan, BNY Mellon, Credit Agricole, UBS, Goldman Sachs, HSBC and Bank of America.

The top ten futures brokers for 2009 were Newedge (Societe General/Credit Agricole joint venture), Goldman Sachs, JP Morgan, Deutsche Bank, Citigroup, UBS, BofA, MF Global, Morgan Stanley and Barclays. Continue reading →

While Irene splashed Wall Street, we Coloradans reveled in the ridden glory of the USA Pro Cycling Challenge. The 500-mile route hosted 130 of the world’s top cyclists including Tour de France winner Cadel Evans and both runners-up, Luxembourgers Andy and Frank Schleck.

We were there, clanging bells and hooting our hearts out. Here is winner Levi Leipheimer readying for the time trial that put him in yellow. The peloton left Avon here for Steamboat, and Levi is visible midway in yellow. At the finish, some 250,000 jammed downtown Denver for the epic, lapping conclusion. We are proud of American cycling and our state’s awesome organizational effort.

Speaking of peloton, Wall Street Journal reporter John Jannarone wrote Monday in the Heard column called “Traders Seek Salvation from Correlation” about how stocks race in formation. It’s among the best pieces we’ve seen on modern trading. Jannarone says that S&P 500 stocks show 80% correlation in the past month, meaning eight in ten move synchronously.

This is a source of distress for IR folks trying to distinguish a strong company story from the herd. We’d argue that rather than slamming the collective IR noggin into the burgeoning brick wall of macro-focus investing that you instead track program trading and establish what level is acceptable – and use it as an IR success measure. We wrote about this last week, so we won’t retrace the trodden path.

Why a mirror image across so much of the market? One driver Jannarone posits is Exchange-Traded Fund investing. According to Credit Suisse, these drive some 30% of daily stock volume. Jannarone also notes that trading in S&P 500 E-mini futures contracts is more than four times the combined daily volume of the two biggest S&P 500 ETFs, the SPDR, and iShares S&P 500 Index ETF. Continue reading →