The Paper Chase: Freelancing Strong, See the Best HFT Rundown Ever
The economy created 192,000 jobs in March. The Unemployment rate remained at 6.7%. Previous months jobs estimates were revised upwards, but still remain below economist’s expectations.
Auto sales came in better than expected. We are on an annual pace of 16.4 million vehicles sold which is much better than analysts expectations.
Federal authorities have opened an investigation into Citigroup’s Mexican affiliate Banamex. There is a claim of 400,000,000 dollars in fraud as well as bad loans issued.
Amazon released its set-top box Fire TV to compete with Apple TV, Roku and Chromecast. Fire TV will allow users to stream video, games and music to television sets helping the retail internet giant to find a place in consumers’ living rooms. Fire TV will cost $99 dollars per unit.
Jobs Report
The March jobs number is an improvement over both the previous three years and last couple of months with the supposed effects of weather. As we have stated repeatedly, The economy is growing modestly and jobs will only improve marginally under these conditions. We are recovering but to most people this does not feel like a full recovery. The increase in hours is not translating into sustained wage growth. Export numbers are down, indicating that the transformation of the economy from predominantly excess consumer spending (growing faster than income grows) and excess residential construction (the impetus of the expansion in the 2000’s) to investment- and export-led growth is still a work in progress.
Longterm Unemployment
There has not been very much improvement in longterm unemployment in spite of great improvement in short-term unemployment. Longterm unemployment is higher than what we’ve had before in any recovery. There are real questons as to whether those people will they ever find jobs, for the people displaced are apart of an aging, middle-aged workforce.
Numbers
In spite of market performance on Friday, there is reason to be optimistic about this report. An average of 34.5 hours worked per week tied the high since the recovery. Though a volatile number, 400,000 household employment cancels out the zero number of the previous month. Currently, there is no pressure on the labor market to cause a wage rise. Wages rose .4% on the last report, but the number was 0 at this time. There is no imminent tightening by the Fed which means bullishness for equities.
The Fed
The Fed projects changes in real GDP in 2014 to be 2.8% to 3.0%, 3.0% to 3.2% in 2015, and 2.5% to 3.0% in 2016. Their projections for the unemployment rate in 2014 is 6.1% to 6.3%, 5.6% to 5.9% in 2015, and 5.2% to 5.6% in 2016. Finally, their projections for personal consumptions expenditure (PCE) inflation in 2014 is 1.5% to 1.6%, 1.5% to 2.0% in 2015, and 1.7% to 2.0% in 2016. If the Fed is correct, there will be pressure to tighten, but as we have stated, the Fed has not often been correct with their predictions on the economy. This jobs report suggests there will be no Fed action for at least 6 months to a year.
High Frequency Trading
High Frequency Trading (HFT) uses complex algorithms to analyze markets and execute orders based on market conditions. Typically, traders with the fastest execution speed will be more profitable than others. Critics say traders are “scalping” pennies from investors. For example, let’s say you buy 100 shares of IBM. Your order to buy is routed to a market maker who will internalize or try to match your buy order with an equal sell order from its own inventory. In the unlikely event it can’t be matched, your order will be sent to a stock exchange or a dark pool (private trading venues run mostly by brokerage firms). There are 13 different exchanges and 40 dark pools all of which are not open to the retail investor. At the exchange or dark pool, the order might interact with a HFT which bought the stock a penny lower a short while earlier and is hoping to sell it a penny higher to you. Institutional traders who place large orders complain for those pennies add up on large orders, and the market moves around them when placing those larger orders making it more expensive to trade.
Fairness
Computer supported HFT slices seconds into microseconds, virtually allowing the market to move at one speed for insiders and another speed for everyone else. The Justice Department is currently investigating HFT. Remember, a trade is not complete until someone fulfills the other side. Currently, the HFT industry competes on a level playing field using information that is widely available to provide quotes to be matched. They provide liquidity as they are waiting for transactions to be executed on both the buy and sell side.
Rigged Market?
The stock market is not rigged. HFT does provide opportunity to add value, but does not always because firms frontrun. Frontrunning is when a broker trades equity based on information received before clients. Frontrunning is illegal. There are fast and slow ways to access data that are not private or special. There may be a necessity for a “restrictor plate” on the market to get everyone at the same speed.
Time
There are 1000 milliseconds in one second. HFT is in microseconds. There are 1000 microseconds in one millisecond. There is no need for that kind of speed. It provides HFT with an unfair edge.
Remedy
Currently, there is a direct feed and consolidated tape that reports prices to the market. The disparity in the two feeds allows for arbitrage and gaming of seconds. Also, orders to exchanges without volume go to other exchanges. HFT machines get glimpses of those orders, and can get to the next exchange faster and take away that order faster than your pension plan. There is a need for a referee in these trades. While consolidated feeds need to be expedited, it is important to note that direct feeds are not necessarily faster and are widely available to everyone.
Freelancing
Nearly one in three American workers (42 million) are or have freelanced. The total income from independent work topped 1.17 trillion in 2013. Nearly 3 out of 4 freelancers worked at least 30 hours per week in 2013. Half of the american workforce is expected to be independent by 2020.
The nature of work has changed, and the concept of work is being rethought. People want to be their own boss. Work can be done from home. People who are employed and looking for other jobs, people who can’t find jobs, and young people who are looking to pay for school are all freelancing. Obamacare will make it easier since now people will not have to keep a job to maintain affordable health insurance. It is impossible for this kind of economy to exist without technology and the Internet. Freelancing used to be localized, but can now be global.
Fancy Hands is a personal assistant service which will do anything that can be done from a desk for a flat fee starting at $25 per month. It was established in 2010 with 10,000 assistants, 7 employees and 1.5 million dollars in venture capital raised. Fiverr is ebay for services, allowing people to offer their skills in the form of products to a global audience starting at 5 bucks. Also established in 2010, it offers over 3 million services, has 100 employees, and has raised 20 million dollars in venture capital.
AMT
The Alternative Minimum Tax (AMT) is a tax calculation that adds back into adjusted gross income certain items that are tax-free or can be deducted from the regular tax. The IRS is banking on the AMT getting the wealthy to pay more. For families, $80,800 of income is exempt from AMT while $51,900 in income is exempt for singles. Incomes between $200,000 and $500,000 fall into an AMT trap.
AMT Triggers
Living where there are high state and local taxes, exercising stock options, reporting large investment interest, raising lots of children, using a home equity loan for something other than home improvement, having a pile of miscellaneous deductions, and claiming accelerated depreciation are all triggers for the AMT. There is little many people can do to stop these triggers.
Avoiding AMT
Not much can be done at this late of a date, but you can get a jumpstart on 2014. Limit bunching itemized deductions, maximize tax-deductible contributions to IRA or SEP-IRA, defer income, maximize tax-deductible contributions to 401(k)s, offset capital gains by selling money-losing investments, pay off home equity loans.
Disclaimer: Killing The Breeze is not a registered investment advisor or advisory service. It does not tell or suggest which securities or currencies should be bought or sold. The employees or affiliates of Killing The Breeze may hold positions in the stocks, currencies or industries discussed here. There is a very high degree of risk involved in the market. Killing The Breeze assumes no responsibility or liability for any trading or investment results. All content posted is for educational purposes only and independent advice should be sought from a professional to confirm validity and accuracy of any claim made.
The information should only be a starting point for doing additional independent research in order to allow you to form your own opinion regarding trading decisions. You should ask the firm with which you deal about the terms and conditions of the specific securities which you are trading and associated obligations. You should always check with your licensed financial advisor and tax advisor to determine the suitability of any investment.
