Tag Archives: Macro

Commodities Update

Now Ukraine is making a real impact on commodities. UK gas is up 4.2% MTD. Europe has three months of gas demand covered in case of disruption and 65 days of demand in oil inventories, according to ENI CEO.

Brent is up 0.6% MTD at $107.28/bbl, while WTI is up 2.75% at $103.48/bbl. The geopolitcal risk has cranked up with the Kiev government giving Russian separatists until this morning to disarm & leave public offices while there continue to be reports of a large Russian troop presence on the Ukraine border. Libya’s western export terminal Zawiya has re-opened after being vacated by protesters. CFTC data released on Friday saw money manager long positions in futures & options for the week to 8 April rise by 24,310 to 380,000 contracts. North Dakota oil production averaged 951k b/d in February, +16k b/d from Jan & +170k b/d y/y.

Coal is up 49bps at $81.30/mt. Indonesian thermal coal exports dropped to 32mt in January, the lowest level in 5 months and down 9% YoY, according to official customs data. Steel inventory continues to be drawn down rapidly in China, with reported stocks held by traders falling 3.9% over the last week. Trader stocks are now 15% lower than a year ago. Inventory of rebar on the Shanghai Futures exchange also dropped sharply, falling by nearly 240kt to 2.5mt, the lowest level since the rebar contract started trading in June 2009.

CO2 is up 15% at €5.39/mt driven by higher coal and gas utilization in Europe on security of supply measures and expectations of EU backloading to withdraw 9m tonnes of oversupply.

US gas is up 5% at $4.65/mmbtu as the weather trade slowly unwinds after inventories rose 4 Bcf, below consensus expectations of a 15 Bcf injection. However, strength is derived from the fact that inventories are now 826 Bcf, widening the deficit vs the 5-yr avg to 994 Bcf.

UK gas opens is up 4.2% at 53.20p/th driven by the Ukraine dispute and Gazprom threatening to cut supplies to Ukraine. Inventories are still above 4,000 mcm.

Power prices reacted positively to gas spike. UK power is up 40bps at 50.40£/mwh, German power is up 58bps at €34.55/mwh and Nordpool up 0.16% at €29.65/mwh.

High Frequency Trading and ‘Market Rigging’

My interview and debate on CNBC about High Frequency Trading.

By my colleague and friend Mike Earlywine @MEWINO, senior trader and options expert:

As you may have heard Michael Lewis has a new book out called Flash boys.  It is about High Frequency trading,(HFT) and it is creating quite the fire storm in the financial media and among the various market participants.

Michael Lewis has been in the press promoting his book by saying that the market is rigged.  Surprisingly, for how easy as it is to vilify wall street, there has been some push back.  Part of the problem is that HFT means different things to different people.  It is often confused with computer based trading or algorithmic trading.  Often it is spoken about in conspiratorial tones that make is sound illegal or something out of a bad Hollywood movie.  But his claim that the market Is rigged has galvanized many people to defend what is right about our market.  Either way,  It is a complicated topic and I hope this summary helps.

In the first part I use the Open letter from Charles Schwab to opine on what I think the real concerns are, and in the second part I give an example of HFT in its truest and simplest form

The controversy –

Like many I think the current market structure is flawed and rife with unintended consequences but I am hesitant to vilify the firms that take advantage of the fragmented market that has evolved over the past 10 years.

This letter from Charles Schwab really sets out in detail what a lot the controversy is actually about.

* My comments on the letter are in inverted commas.  http://www.aboutschwab.com/press/issues/

  • Advantaged treatment: Growing numbers of complex order types afford preferential treatment to professional traders’ orders, most notably to jump ahead of retail limit orders.
  • Unequal access to information: Exchanges allow high-frequency traders to purchase faster data feeds with detailed information about market trading activity and the specific trading of various types of market participants. This further tilts the playing field against the individual investor, who is already at an informational disadvantage by virtue of the slower Consolidated Data Stream that brokers are required by rule to purchase or, even worse, the 15- to 20-minute-delayed quote feed they have public access to.
  • Orders that jump ahead? What are these order types? I am still working with limit and market orders?!? There are no special order types just for HFT, but there are many SEC approved order types that are only used by the HFT type traders.  It can cost upwards of $50mil to put the infrastructure in place that would make some of these order types useful.

  • Is this what people mean when they say HFT guys can see an orders coming?  Are they monitoring the high-speed feed and then transacting in front of it against what are about to be stale quotes? YES that is exactly what they are doing.  The SEC is aware of and allows exchanges to sell this different feeds. After consolidating the ticker plants the high speed feeds are only 1.5milliseconds faster than the regular, but that is enough for these guys to pick off stale quotes.  (this is why co-location is so important. Every millisecond counts when your stealing fractions of a penny).


  • Inappropriate use of information: Professionals are mining the detailed data feeds made available to them by the exchanges to sniff out and front-run large institutions (mutual funds and pension funds), which more often than not are investing and trading on behalf of individual investors.
  • Can’t fault firms for taking advantage of all the information they are buying… but just what are they buying? How detailed and what data points are in there.  I can sniff out big order just watching the tape so I’m not sure how hard it would be to do if I was getting special data points. But whatever it is, it is not illegal or even surprising.


  • Added systems burdens, costs and distortions of rapid-fire quote activity: Ephemeral quotes, also called “quote stuffing,” that are cancelled and reposted in milliseconds distort the tape and present risk to the resiliency and integrity of critical market data and trading infrastructure.  The tremendous added costs associated with the expanded capacity and bandwidth necessary to support this added data traffic is ultimately borne in part by individual investors.
    • Posted shares don’t accurately reflect what can be truly transacted – HFT have a very low risk tolerance so they fade any move. They don’t stand still, they only transact when their model says they can get the offset.  I am the same way, I only transact when I think it benefits me, but I think in 5 and 10 cents increments. HFT math is done in fractions of a penny and includes rebates – my math leads to finding other intuitions with different opinions or a different urgency on timing.  Their math leads to small trades with little valuation component – rather it is based on their ability to close out the trade at a profit or flat.

    • I am constantly trying explain how I can struggle to buy 100k shares of a stock that has traded 1mil on the day.. but HFT can have that kind of effect, both through fading and because their activity can move a stock to a price level where the institutions don’t want to transact.  For example, it is not uncommon to see a stock move multiple percentage points on  HFT like activity, but when I come in to sell at that price there really is no contra side (there was no real price discovery, it was instead a temporary price inflation due to mechanical HFT strategies.)

  • This is the part that drives me crazy – I think it is probably market manipulation -They try to overwhelm the system in an effort to push the market to certain levels.  BUT the worst part of this gets little attention. By quote stuffing they are excluding participation by other investors. It is no longer about finding the right price or taking advantage of what you consider mispricing it is more about protecting turf and bending the rules to protect their access to liquidity.  The original rules of the NYSE included a rule that held an order up for a specific time so traders could match and bid or offer. It was just 1min and  allowed anyone to participate in the trade. It was there to make sure the biggest and fastest didn’t monopolize the exchange…they had it right and we have lost something in our quest for instant execution.

  • An Example and some further comments on this point:

Basic HFT example– a simplistic look at HFT trader strategy – This is an example of what they do, but it’s not what is causing the controversy


  • Exchange A pay a few basis points if you take liquidity  – business model promotes activity

Exchange B pays a few basis points for posting trades – business model incentives providing liquidity




My super-fast computer sees that Exchange A   has  100 ABC offered at $20


HFT – step one –  buy the 100 from exchange A  get paid fractions of a penny on rebate

HFT – step two – offer 100 shares of ABC on exchange B at the same price or a higher price depending on my strategy and or risk tolerance

HFT – step three – hopefully someone buys those shares and I get paid again because exchange B pays for liquidity

HFT – step four – repeat thousands of times a day in hundreds of different stocks




  1. Once I open a position I need to get in the front of the book to post my closing position to reduce my risk exposure
    1. No free lunch I am still exposed to the market and could lose money
    2. My models might have all kinds of stats on likely hood of execution  but I still need to be first to market to get paid
    3. I am competing not so much against traditional institutions but against other HFT players!
      1. I have to compete to buy or sell the opening position and I have to complete to close it too
      2. Being late can expose me to market risk that my strategy is not designed to manage

Energy Commodities see No Price Inflation from Ukraine-Crimea

Crisis? What Crisis? The Ukraine-Crimea conflict has to be the most uneventful geopolitical event solely judging by commodities price impact. Energy commodities are showing no price inflation from the Ukraine conflict as China slowdown is more relevant

Brent continues to shrug off any Crimea-Libya concerns and is down 0.8% MTD as the Chinese slowdown is vastly more important.

Russia is going to ship 88 cargoes of Urals crude from Primorsk, UST-Luga and Novorossiysk, highlighting there is no disruption to oil moves.

Spain could replace 10% of Russian gas exports to EU according to Platts. It would be achieved by boosting pipeline gas from Morocco and Algeria, fully utilizing its six regasification terminals to bring LNG and developing its own shale gas resources. However, the EU would pay 50% more if it replaced Russian gas with LNG, Norwegian gas and coal, and 80% more if it did so with renewables, according to Bloomberg and CERA.

China apparent oil demand in January-February fell 1.9% y-o-y, as the Chinese economy weakened. As a result of the shift of Chinese New Year from January in 2013 to February in 2014, apparent oil product demand fell -6.5% in January and rose 3.1% in February. In 2M14, inventory-adjusted demand slid 4.6% y-o-y.

According to Reuters, Libya’s national oil company said on Thursday that protesters had blocked the condensate pipeline linking the al-Wafa field to the Mellitah export complex. The gas pipeline is believed to be still operating. The protesters are reportedly threatening to stop exports from the Mellitah complex which is operated by ENI and NOC.

Coal is flat (-25bps MTD) at $80.50/mt. China announced a new plan to cut coal’s share of energy use to 65.0% in 20141, down from 65.7% in 2013, in a bid to improve air quality in major cities. With total energy consumption growth targeted at 3.2%, coal consumption would rise by just 1.6% this year while supply is expect to grow 3%.

CO2 is seeing another leg down, -28% MTD and moving close to flat on the year (+4.6% YTD), losing almost all the gains seen in the first months from backloading messages from the EU that do not address the chronic oversupply of more than 9 bn mt.

US gas is flat MTD at 4.6/mmbtu after Natural gas storage withdrawal was 57 Bcf. Natural gas storage is now at 896 Bcf, the lowest level since 2003. I expect there to be at least one more storage withdrawal (next week) before the injection season starts. Storage set to peak around 3,625 Bcf, which is approximately 225 Bcf below the 5-year average.

According to LNG World News, the Canadian government has authorised four proposed terminals on the country’s west coast to export LNG. The ministry of natural resources awarded the licences to Pacific Northwest LNG, Prince Rupert LNG, WCC LNG and Woodfibre LNG. Shipments from Canada’s British Columbia province can arrive in Asian ports in just 11 days, or nearly a month sooner than those from the US Gulf coast. All told, these long-term licences allow the four terminals to export up to 73.38m tonnes of LNG per year.

UK gas (NBP) continues to slide, down 8.8% MTD proving Ukraine is no real concern. European gas prices have not moved either, as inventories continue to be well above the 5 year average.

Power prices in Europe decline further: UK at 51.40£/mwh (-2% MTD), Germany at €34.55/mwh (-4% MTD) and Nordpool at €30/mwh (-2.9% MTD).

Conference “Is Spain on the Road to Recovery?” London School of Economics 19/3/2014


Conference with Luis Garicano, Emilio Saracho and Pablo Zalba moderated by Ferdinando Giugliano at the London School Of Economics on 19th de March 2014

Conferencia con Luis Garicano, Emilio Saracho y Pablo Zalba moderada por Ferdinando Giugliano en la London School Of Economics el 19 de marzo de 2014