SEC Nonsense

by Larry Levin


If you didn't know that the SEC is a bought & paid for feckless government agency that wonders which corporation it can boot-lick next, then you must be living in fantasy land. In a (not so) stunning report, the SEC blames a $1,000,000,000,000.00 (TRILLION)...GLOBAL...equity meltdown on a small firm that hedged a small position. Yes folks, the idiots populating the incompetent SEC blamed a shocking 1987-style stock market route, the Flash Crash, on a minuscule 75,000-lot hedging order in the mini-S&P by Waddell & Reed.

Of course, the equally incompetent history-majors-turned-financial-experts in the Lame Stream Media lapped it up like one of Paris Hilton's...well...lap dogs. The media regurgitated the SEC headline of a "$4 billion" order like the good teleprompter readers that they are. No thought was needed. The teleprompter had spoken. It was one order from one company that did the damage.

Yeah, right!

According to the morons of the SEC..."At 2:32 p.m., against this backdrop of unusually high volatility and thinning liquidity, a large fundamental trader (a mutual fund complex) [believed to be Waddell and Reed] initiated a sell program to sell a total of 75,000 E-Mini contracts (valued at approximately $4.1 billion) as a hedge to an existing equity position."

So $4.1 billion "sounds" like a lot of money, and it would be if that was your bar tab at a Las Vegas pool party, but this was the S&P futures market and more importantly... a NOTIONAL VALUE. I noticed that the glittering-jewels-of-colossal-ignorance in the Lame Stream Media didn't bother to tell tell you it was a notional value in the SEC report, and rarely what the true size of the order was.

A "notional value" is the total value of a leveraged position, like a home purchase. Most people don't think of buying a home as a high-finance type of leveraged trade, but it is. After all, when most people buy a home, they put down 10% or less, and leverage the rest. The buyer's risk is what they put down on the home, maybe $20k, but the notional value of the trade (home) is the full $200k. So is the bank really at risk for $200k? Of course not! The only way that this "notional value" of $200k could really be at 100% default risk is if every single home value simultaneously dropped to ZERO. Aint' gonna happen.

The very idea of using "notional values" to describe risk is damn near fraudulent. It is used mostly by charlatans and hucksters; therefore, I wasn't too surprised to hear and read the financial press scream the notional value of Waddell & Reed's order all day -- as loud as they could.

The Lame Stream Media was told, in my opinion, that Waddell & Reed would be the fall guy for the Flash Crash and it ran with its orders to spread the word. But truth be told, it was only a 75,000-lot order in a sea of 6 MILLION.

Does the SEC think that we are so stupid that we will read this nonsensical drivel and simply believe it? Does the SEC think we can't compute that this order was less than 2% of the day's total orders? Does the SEC really want to let the HFT mafia off the hook - again? I guess it does.

To prove the SEC is full of "..it" I have attached this chart.

Click the chart up top to see.

You can see that even during last Friday's trade, which had shockingly LESS volume than the Flash Crash day, 75,000 sell orders will NOT lead to an Armageddon sell-off. The Waddell & Reed order was completed in a 20-minute time frame and was an algorithmic VWAP trade, which means it was traded around a target level for these 20-minutes. At least 50% of these sell orders were filled as the market was going up. In other words, it was not a market order that slammed the bid.

Last Friday all 75,000 sell orders shown between the arrows were slamming the bid. All of these orders were filled in just 15-minutes. Over the next 8-minutes or so, an additional 40,000 sell orders slammed the bid. Neither the 75,000 sell orders, nor the additional 40,000 sell orders caused a GLOBAL equity sell-off. There was no sell-off at all.

The SEC is indeed a pathetic and feckless government agency. It is just pandering to HFT lobbyists.



Previous Day's Trading Room Results:
Trade Date: 10/1/10
E-Mini S&P Trades*
(before fees and commissions):

1) FT buy @ 8:34am at 1144.50 = +.50 (1)

2) Algorithm positions (5)

3) “Reading the Tape” positions (6)…combined Secret’s, Algo, & “Reading the Tape” total… -5.50

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