Sunday, July 26, 2009

For the talk of sunshine just over the horizon the true data tied to manufacturing economy remains surprisingly bleak. From the Railroad Transport industry's June data....

*Carloads originated on U.S. railroads in June 2009 were down 19.5% (252,078 carloads) from June 2008 to 1,037,928 carloads. June 2009 was the eighth straight double-digit monthly carload decline, but it was a smaller decline than the previous two months. Average weekly carloads in June 2009 (259,482) were 10,311 carloads higher than in May 2009.

• For the second quarter of 2009, U.S. rail carloadings were down 22.2% (945,652 carloads); second quarter intermodal traffic was down 18.3% 538,345 trailers and containers).

Despite their implication that June's decline was a "smaller decline than the previous two months" I would note that historically June experiences a sharp monthly uptick so June's "slower rate of decline" is likely little more than seasonality.

A little closer to home consider the fact that St. Lawrence Seaway traffic has plunged 36% in 2009.

"Freight traffic on the St. Lawrence Seaway slumped nearly 36 percent in the first third of the navigation season. The fall would have been worse but for strong shipments of grain to Europe and the Mediterranean.

The Canadian and American Seaway corporations reported that traffic through June 30 from season-opening March 31 fell to 9,024,000 metric tons of cargo, down 35.7 percent from 14,045,000 in the period last year."

There have been more than a few people questioning the ability of firms like Goldman Sachs to truly be trading so successfully in this environment. This article in the NY Times might explain some of their advantage (although the article doesn't specify Goldman, I think it's implied that all of the big banks are engaging in this sort of trading.).

"It is called high-frequency trading — and it is suddenly one of the most talked-about and mysterious forces in the markets.

Powerful computers, some housed right next to the machines that drive marketplaces like the New York Stock Exchange, enable high-frequency traders to transmit millions of orders at lightning speed and, their detractors contend, reap billions at everyone else’s expense.

These systems are so fast they can outsmart or outrun other investors, humans and computers alike. And after growing in the shadows for years, they are generating lots of talk.

Nearly everyone on Wall Street is wondering how hedge funds and large banks like Goldman Sachs are making so much money so soon after the financial system nearly collapsed. High-frequency trading is one answer.

Yet high-frequency specialists clearly have an edge over typical traders, let alone ordinary investors. The Securities and Exchange Commission says it is examining certain aspects of the strategy.

“This is where all the money is getting made,” said William H. Donaldson, former chairman and chief executive of the New York Stock Exchange and today an adviser to a big hedge fund. “If an individual investor doesn’t have the means to keep up, they’re at a huge disadvantage.”

The rise of high-frequency trading helps explain why activity on the nation’s stock exchanges has exploded. Average daily volume has soared by 164 percent since 2005, according to data from NYSE. Although precise figures are elusive, stock exchanges say that a handful of high-frequency traders now account for a more than half of all trades. To understand this high-speed world, consider what happened when slow-moving traders went up against high-frequency robots earlier this month, and ended up handing spoils to lightning-fast computers.

It was July 15, and Intel, the computer chip giant, had reporting robust earnings the night before. Some investors, smelling opportunity, set out to buy shares in the semiconductor company Broadcom. (Their activities were described by an investor at a major Wall Street firm who spoke on the condition of anonymity to protect his job.) The slower traders faced a quandary: If they sought to buy a large number of shares at once, they would tip their hand and risk driving up Broadcom’s price. So, as is often the case on Wall Street, they divided their orders into dozens of small batches, hoping to cover their tracks. One second after the market opened, shares of Broadcom started changing hands at $26.20.

The slower traders began issuing buy orders. But rather than being shown to all potential sellers at the same time, some of those orders were most likely routed to a collection of high-frequency traders for just 30 milliseconds — 0.03 seconds — in what are known as flash orders. While markets are supposed to ensure transparency by showing orders to everyone simultaneously, a loophole in regulations allows marketplaces like Nasdaq to show traders some orders ahead of everyone else in exchange for a fee.

In less than half a second, high-frequency traders gained a valuable insight: the hunger for Broadcom was growing. Their computers began buying up Broadcom shares and then reselling them to the slower investors at higher prices. The overall price of Broadcom began to rise.
Soon, thousands of orders began flooding the markets as high-frequency software went into high gear. Automatic programs began issuing and canceling tiny orders within milliseconds to determine how much the slower traders were willing to pay. The high-frequency computers quickly determined that some investors’ upper limit was $26.40. The price shot to $26.39, and high-frequency programs began offering to sell hundreds of thousands of shares.

The result is that the slower-moving investors paid $1.4 million for about 56,000 shares, or $7,800 more than if they had been able to move as quickly as the high-frequency traders.

Multiply such trades across thousands of stocks a day, and the profits are substantial. High-frequency traders generated about $21 billion in profits last year, the Tabb Group, a research firm, estimates. "


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