April 7. What if HFT regulation causes liquidity to drop?
–Employment data was only slightly weaker than expected, but failed to provide confirmation of economic lift off, causing massive liquidation of bearish bets. Implied vol was crushed right across the curve. Open interest in tens fell 195k (nearly 8%), as the yield fell over 6 bps to 272.4. Green euro$ pack gained just under 10 bps, blues and golds a bit over 10.
–Tech stocks were hammered, with many large names -4.5 to 5%. From this year’s highs, NFLX is down 25%, FB and AMZN about 21%. Not exactly a flash crash, but new found scrutiny of HFT could easily factor into continued volatility. Market News reported that Brussels is stepping up EU oversight of HFT firms, even those that don’t take outside investor funding. The Hill has a piece suggesting new momentum for a financial transaction tax. http://thehill.com/blogs/on-the-money/banking-financial-institutions/202722-will-flash-trades-lead-to-a-financial
–In today’s environment of regulatory zeal, I can imagine a day that starts off ugly, causing HFT shops to collectively say, ‘hey we better shut down today, because we might get blamed for this…” Ironically, the very regulators that are supposed to ensure liquid and orderly markets might contribute to a black hole.
–Bullard speaks today at 11:45 NY time. Fed minutes on Wednesday.
–A couple of quick notes after Fri trade:
1) 0EU 9900/9862/9825p fly 40k sold at 5.0 (some covered 9914). Exit trade. Entry price was 5.5 versus 9909, so pretty much of a scratch. This trade was looking for forward timing regarding Fed rate hikes…data didn’t provide confirmation so position was cut.
2) According to prelims lost 195k open interest in tens. Again, just a lack of confirmation about a more aggressive Fed
3) 2EM 82/83ps sold at 6.5 covered 26. Just a roll into long 9825p’s
4) Option vol smashed. West coast continues to sell strangles, i.e TYM 22/24.5 from 51 to 49.
5) FV vol, which had been strong at around 3.3 settled 2.9 (after taking out weekend). So atm straddle went from around 1’09 to 1’00s Friday. All treasury vol at new monthly lows. Bond at only 6.8. Atm straddle went from 2’58 to 2’38 (131^ to 133^).
6) No reaching for fixed income calls as the result of Nasdaq sell off. No real panic.
