How fast trading adds up
It’s been called the “revenge of the nerds.” It’s high-frequency trading, the super-fast orders of stocks, options or futures that are designed according to an algorithm and executed without human intervention. Programming replaces investment prudence.
High-frequency trading has been hailed as an innovation, a development that has lowered trading costs for all while improving prices. It’s also a likely culprit in incidents that have de-stabilized the markets, causing valuations to fluctuate wildly. The latest hiccup in the U.S. was an unexplained, minute-long 29 percent jump Wednesday in the price of Kraft Foods Group (KRFT). India’s stock exchange Friday had a glitch that briefly wiped out $58 billion in market capitalization.
Regulators are looking at how to rein in these markets, but fast trading has a built-in constituency that goes beyond the trading firms. Exchanges benefit from the practice as well. A report by Raymond James & Associates analyst Patrick O’Shaughnessy said no exchange is more hooked on hiqh-frequency trading than CME Group (CME), owner of the Chicago Mercantile Exchange and the Chicago Board of Trade.
After running his calculations and checking them with exchange management, O’Shaughnessy issued a report saying that CME’s futures markets derive around $627 million, more than 20 percent of their revenue, from high-frequency trading. It’s no wonder, then, that CME built a powerful, 428,000-square-foot computing center in Aurora and has been renting space there to trading firms that want proximity to the machines. It’s called “co-location,” and it a way to sell preferential market access, even if the “preference” is a slight fraction of a second. That’s a real edge in this world.
Earning about 18 percent of revenue from high-frequency trading is InterContinentalExchange (ICE), CME’s Atlanta-based competitor, O’Shaughnessy said. He reported lesser reliance on the trading at NYSE Euronext (NYX), Nasdaq OMX Group (NDAQ) and CBOE Holdings (CBOE), owner of the Chicago Board Options Exchange.
CBOE’s high-frequency trading revenue was around 6 percent of its total, O’Shaughnessy said, adding that tighter regulation probably won’t be a disaster for any exchange, but the threat of it probably will hang over the stocks for some time.
CME and CBOE did not respond to requests for comment Friday. They’ll have plenty to say through lobbyists as federal agencies get closer to a regulatory crackdown.
DEBATE BAIT: I guess President Barack Obama had a topsy-turvy week. First, there was no more commitment or urgency in his debate performance than if he were a tenured professor. The detached Obama did something highly unlikely. He made Mitt Romney the likable one.
Then, the Labor Department comes along Friday and reports the unemployment rate dipped to 7.8 percent in September from August’s 8.1 percent as employers added 114,000 jobs.
Something’s out of whack when anonymous bureaucrats make a better case for the president’s re-election than he does himself.
GROWTH STOCK: Analysts at William Blair & Co. believe in the growth prospects of Oak Brook-based TreeHouse Foods (THS), a maker of private-label foods whose board used to include Michelle Obama before she went on to better things. TreeHouse products include pickles, pasta, salad dressing and coffee.
A Blair team led by Jon Andersen issued a report that said growth in private-label items remains robust, with competition highly fragmented. That means an opportunity for consolidation.
Consumers are switching to dollar stores and other nontraditional retailers and TreeHouse is working on new strategies to keep up with them, the analysts said. They have an “outperform” rating on the shares, which closed Friday at $54.35. The shares are down 16 percent this year.
HOUSING HOPE: William Strauss, senior economist at the Federal Reserve Bank of Chicago, sees evidence of both short-term and long-term improvement in housing. For now, for-sale inventories are getting lean and prices in many cities — although not Chicago — are starting to rise, he told the Chicago Association for Business Economics on Thursday.
The long-term positive comes in demographics, he said. People have delayed forming new households, staying with parents or doubling up to save money. Strauss said that if the economy improves, pent-up demand for housing will be unleashed. “When people have greater confidence about their earning opportunities, I think you could see a lot of people wanting to get out from under their roommates,” he said.
CLOSING QUOTE: “Investors don’t necessarily see that there are misdeeds going on, but they sense that things are out of control.”—William Hummer, chief economist, Wayne Hummer Investments, on last week’s trading glitch in KRFT