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Legendary hedge fund manager Leon Cooperman blasted algorithmic trading for exaggerating price moves stating “it is scaring the hell out of the public.”

Cooperman further commented “everyone I know of that has accumulated wealth, whether it’s Warren Buffet of Mario Gabelli has lamented about the impact of this type of trading and the US SEC needs to explain its position on such trading.”

Cooperman also stated the issue at hand is that if the “algos” do not withdrawal from the market in periods of volatility which in itself creates liquidity issues, the “algos” want to buy if the market is going up and sell when its going down offering no market stabilization measures that was present in days of specialists.

Finally he stated it is not a question as to if a systemic crisis will occur but rather when if there are not changes.

As I have noted many times algorithmic trading now accounts for over 60% of volume.  The regulatory entities are primarily focused upon speed and cost of execution rather liquidity and capitalization, the crux of Cooperman’s remarks.

Two weeks ago a natural gas ETF and an oil hedge fund failed because of the volatility in the energy markets.  In a matter of 36 hours about $500 million evaporated.  Are these one off events or something of significance?

I will readily acknowledge I have no idea as to the structure of the products listed above, but that in itself is also a gargantuan issue…few have any idea as to how ETFs and algo models are comprised.

I have lamented several times that ETFs are similar to the CDOs that were prevalent a decade ago. Most thought CDOs diversified risk away, liquidity was always present and values would not quickly change.

Yesterday the WSJ wrote “US Debt distorts Bond Benchmark.”  Because of increased Treasury borrowings, 40% of the value in the leading bond market investment benchmarks is comprised of Treasuries.  This is up from 20% in 2006.  In almost every dimension, Treasuries yields are considerably lower than where they should be given current economic conditions.  The Journal writes this could create market imbalances.

I ask what happen to values of all securities if yields unexpectedly spike, a spike that is amplified by momentum based algorithmic trading that Cooperman et.al. has warned about?  Perhaps this is the systemic risk Cooperman fears. 

Commenting on yesterday’s market action, equities were flat ahead of the G-20 meeting.

Last night the foreign markets were mixed.  London was down 0.75%, Paris own 0.52% and Frankfurt down 0.72%.  China was up 0.81%, Japan up 0.40% and Hang Sang up 0.21%.

The Dow should open moderately lower ahead of the G-20 Meeting and monetary policy uncertainty as the Minutes from the recent FOMC meeting indicate that all decisions will be data dependent.  I ask is this not an obvious course of action?   The 10-year is up 5/32 to yield 3.02%.


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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.