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Is the Federal Reserve becoming concerned about margin debt, especially relating to HFTs? Last week I referenced a report stating for the first time in December the Fed questioned its 21 primary dealers whether or not they extend credit to HFTs. Approximately two thirds answered yes.
The front page of yesterday’s Wall Street Journal stated the Fed is now considering becoming more involved in this $4.4 trillion market fearing a potential shock if an unexpected externality occurs. The WSJ states the margin debt is lower than it was in 2008 but is more concentrated in non-bank actors…aka trading firms.
The Federal Reserve is not relying upon newly passed legislation for this potential oversight but rather the 1934 SEC Act.
Last week the SEC stated approximately 96% of all orders entered are not executed. Moreover the SEC stated 81% of October’s volume was the result of HFTs.
Reiterating last week’s remark, is the SEC acting proactively, potentially resolving a problem before one actually occurs?
To write the obvious, I blame recent market performance upon HFTs, a vastly unregulated industry that did not exist 5 years ago, an industry that is not playing by the same rules as the typical investor or investment firm. To quote the SEC, high frequency trading firms have “created a un level playing field.”
Yesterday was a volatile trading session, starting strong then trading moderately lower to around a key support area (NASDAQ was off over 1%) and then back into nominal positive territory, a recovery that occurred during the last 15 minutes.
What will happen today? Alcoa commenced fourth quarter earning seasons with an upside surprise. Perhaps the only definitive statement to make is that the markets are vastly oversold and there is little confidence in the upcoming earning season.
Last night the foreign markets were mixed. London was up 1.49%, Paris up 2.19% and Frankfurt up 2.20%. China was up 0.39%, Japan down 2.71%and Hang Sang down 0.89%
The Dow should open moderately higher as commodities and the currencies if nations that produce raw materials pared declines and China stepped up its defense of the yuan.
As widely noted the NASDAQ has fallen or eight consecutive days, down about 11.3% its level one year ago. Some of its marquee leaders are now down over 30% in about four months. Wow! Is the momentum trade ending an ugly death just as it has in every other era?
The 10-year is off 5/32 to yield 2.20%.

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Ken Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.