Thoughts From A Frustrating Day

Bernanke Says, 'Eat #$@#$%^%, Markets!'

Bernanke's hawkish testimony was not what Mr. Market ordered.

And I thought there was an inconsistency in his growth projections for the U.S. (3% a year in 2010-2011), although there has not been as much uncertainty of the economic outcome in a while.

Meanwhile, he emphasized exit strategies and de-emphasized further quantitative easing.

In essence he said, "Drop dead, Mr. Market!"

Yesterday, I had heard that the Fed was considering the elimination of 25 basis points on bank excess reserves.

Today, Chairman Bernanke said it was an option.

I believe the market is now muddle-valued.

While we have likely seen the lows for the year, the upside seems capped by the ambiguity of the current soft patch and the emergence of a number of nontraditional headwinds (higher marginal taxes, more costly regulation, etc.) in early 2011.

I believe the possible S&P 500 range for the balance of the year will be tight, between 1,025 and 1,150.

If I am correct, the best strategy today is to sell premium. Strangles and straddles seems to be the way to go now.

We now have a universe of market participants of too few real investors.

By exaggerating broader market moves as well as individual stock price moves, quant funds might be inflicting more damage than good in the efficient pricing of equities.

Yesterday, the high-frequency-trading nerds were in full swing, but to the upside this time. Many interpreted the late-day rally as "the first anecdotal sign of positive trading action in some time, and it carried through into the close," as BTIG's Mike O'Rourke commented last night.

Few complain when the algorithms take the market up (like yesterday). But I would prefer to be intellectually honest, even when the programs take the market up, and I will not stop writing about this subject until the SEC acts responsibly and curbs certain high-frequency-trading strategies.

High-frequency-trading strategies are now widely estimated to be 60% to 70% of total daily volume. On top of that, add on the substantial role of package trading for ETFs. Ergo, real buyers of stocks (individuals or institutions) are getting to be too small as a percentage of total trading to produce a balanced U.S. stock market.

There is a market void.

Flash prices to high-frequency trading must be stopped. As well, paying for bids and offers by various exchanges must be stopped.

At the core of these high-frequency-trading systems is a program that, by whatever means, tries to "run ahead" of a buyer or seller -- unlike index arbitrage, which was the link between markets in which high-frequency traders try to use advance information to run ahead.

Portfolio trading was done to accumulate or distribute at low-cost real portfolios. Is an investor paying one-tenth of $0.01 per share (or less) to trade a client or a broker who should be regulated?

The SEC absolutely has created this mess, with regulations that never envisioned essentially free access by unregulated clients that look like brokers.

The SEC has tacitly acknowledged this mess by saying five minute halts with 10% moves.

In other words, it is dealing with the symptoms not the cause.

We now have a universe of market participants of too few real investors. Investors are losing confidence in the legitimacy of the markets and are leaving the building under the not so watchful eyes of the SEC.

Kill the quants before they kill us!