March 20. ‘More speed and less capital’
–Subject line quote above is from a BBG article quoting GS.
“Future liquidity disruptions may amplify price declines when the current cycle turns,” wrote Charles Himmelberg, Goldman’s co-chief markets economist. “Trading liquidity may be worse than it looks because trading volume in many major markets is increasingly dominated by more speed and less capital.”
Sounds like the stuff of flash crashes, doesn’t it?
–Yesterday’s session featured little change in interest rates with a bias lower as stocks tumbled. FB pasted -6.8%. SPX -1.4% and Nasdaq -1.8%. The fact that interest rate futures have a hard time rallying in the face of asset price declines likely shows underlying bearishness, though it might just reflect concerns about a hawkish outcome at tomorrow’s FOMC.
–There was quite a bit of futures roll on the ED curve, related to the expiration of EDH8. For example, at least 70k EDU8/Z8 bought from 13 to 14 which appears to be liquidation, both -14k in OI (14.0s). Buyer of 100k EDH9/EDM9 at 11, appears roll with OI -48k and +42k (11.0s). There continues to be heavy buying of 0EM 9700p for 3.5, settled 3.0 ref 9725.5. OI +66k.
–Just to revisit the idea of capital, all sorts of major electronic trading programs are run to end the day ‘flat’. It doesn’t take as much capital, as Goldman notes. It’s like the old-time concept of “just in time” inventory control. On a broader level, I keep circling back to the idea of banking capital. Plentiful in the US, but perhaps the underlying situation in europe is not quite as robust. For example, DB continues to hover near the lows of €12.6. It’s market cap is only 26.5 billion ($32b). As a comparison, JPM has a market cap it $396b. CS has mkt cap of 44b. How can the namesake bank of the most powerful economy in Europe continue to flail around these levels? Excess capital absorbs risk. That is the lesson. Excess capital equals central banks. Does the Fed want to aggressively withdraw capital?
