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Forget HFTs, You Should be Worried About the Fed

by on April 9, 2014 9:50 pm BST
 

In recent weeks, there has been an outcry about high frequency trading and Michael Lewis’ book “Flash Boys.” Traders and market makers were irate that these highly intelligent programmers found a way to buy and sell assets in microseconds, and then sell it back to them for a tenth-of-a-penny premium. Many market participants wallowed that these algorithms were rigging the financial markets, yet not as many wallow about the Federal Reserve’s farce that is playing out like a Greek tragedy.

Let’s be frank: there is no need to worry about HFTs when the central bank conducts policy on asset prices. The S&P seen a meltdown since Friday after multiple rejections of (another) high at 1,887,28. It then pulled back 50 points going into today’s FOMC minutes. The NASDAQ declined over 200 points heading into today; both indices have now retraced over 50 percent of the pullback. Traders fall for Yellen’s siren song:

4h Chart of COMP (NASDAQ)

4h Chart of COMP (NASDAQ)

 

4H Chart of SPX (S&P500)

4H Chart of SPX (S&P500)

“Several participants noted that the increase in the median projection overstated the shift in the projections,” according to the FOMC minutes statement, as the FOMC strays from their own policy makers that rates could rise quicker than expected. During Fed chair Janet Yellen’s first FOMC conference in March, she let slip that the Fed funds rate could rise as early as six months following the end of quantitative easing. Now, the Federal Reserve is telling the markets that it could be a long way off until a rate hike. No worries, the Federal Reserve is as confused as you are.

The FOMC minutes stated “members agreed that there was sufficient underlying strength in the broader economy to support ongoing improvement in labor-market conditions.”

Philadelphia Fed President Charles Plosser said he was “pleased” with the March non-farm payrolls report (which initially triggered the equity sell-off), and Chicago Fed President Charles Evans said that economic “conditions are looking pretty good right now.”

And, the often hawk flip-flopper, President of the St. Louis Federal Reserve Bank James Bullard has rallied behind a rate increase in early-2015. He was previously quoted in saying a rate increase should happen in 2014, but has stepped back from that stance. Bullard has said “probably means something on the order of around six months or that type of thing,” referring to a rate increase after the asset purchases end.

If that is so, why does the Fed feel the need to continue this erroneous monetary policy? Why wait on a gradual increase in the Fed funds rate? It’s simple, the equity market would collapse.

Risk assets looked like they were on their way to a healthy pullback, but the Fed gave traders monetary crank and quick shot of hopium to hold off any pullback of significance.

Icarus is a popular figure in Greek mythology, and it has quite a few similarities to the current Fed situation. Icarus (risk assets) was the son of master craftsman Daedalus (Federal Reserve). Daedalus crafts wings made of wax, so he and Icarus could leave the island of Crete. Daedalus told his son not t0o fly to high near the sun, or he would crash into the sea. While in flight, Icarus flew to0 high and realized his wings had melted. Needless to say, it did not end well.