So, in today’s bizarre trading world, where a “speed bump” can be defined as a delay of 350-millionths of a second, the SEC voted Friday to certify the IEX Group Inc as the U.S.’s 13th national stock exchange. The decision is notable in that it makes the IEX the only exchange anywhere to include a purposeful “slowing” of all incoming orders. If by slowing, of course, you mean a pause faster than the blink of an eye.
The oldest exchange in the U.S. is the Philadelphia Stock Exchange, now known as NASDAQ OMX PHLX, founded in 1790
Not surprisingly, virtually all the kings of speed, not least of which the NYSE, NASDAQ, and Bats Global Markets, were apoplectic in their response to the regulator’s pronouncement. Hedge-fund manager Citadel actually warned that the delays would create stale prices. If by stale, of course, you mean something on the order of 10-3 seconds.
The Chicago Stock Exchange, founded in 1882, exists today by offering its Sub-second Non-displayed Auction Process (SNAP)
IEX, meanwhile, claims that the less-than-a-millisecond delay is just long enough to protect slower investors from predatory high-speed traders that can front-run their orders. And by slower investors, of course, they mean those without an IBM Silicon-Germanium processor.
The SEC’s most recent approval for a trading exchange was ISE Gemini in July 2013
It’s a given that in this other-worldly flash trading universe, high-frequency traders will quickly find a way to manipulate the IEX speed bump. The SEC, still running in a Buttonwood Agreement pace, said it would conduct a study within two years to examine the impact of the 350-millionths of a second delay on the prices that investors received on trades. If by two years, of course, you mean never.
What the markets have been doing…
All the major benchmarks recorded losses for the period, with the more volatile smaller-cap indexes falling harder than the large-cap lineups. A noticeable decline in heavily weighted Apple at the end of the two-week stretch weighed especially on the technology-heavy NASDAQ.
Allegedly, speculation about the upcoming “Brexit” vote in the UK, which is reportedly leaning toward the nation leaving the European Union, drove much of the sentiment on Wall Street. On the economic front, the Fed’s June policy meeting had little impact on markets when its results were announced on Wednesday afternoon. As expected, policymakers held rates steady, but forecasts suggested an even slower pace of rate increases than earlier anticipated. Expectations are the central bank will likely to wait until September before announcing its next rate increase.
|Index||Friday’s Close||Two-Week Point Change||Year-to-Date Change|
The Fed’s meeting announcement did provide an overall boost to bond prices, with mixed economic data — industrial production and manufacturing each declined in May but retail sales came in higher than expected – having little impact. May’s producer price index actually came in solid, rising at its fastest pace in a year. Brexit fears, meanwhile, unsettled the investment-grade market, particularly the banking sector. The high yield market retraced most of its month-to-date gain, while municipal bonds continued to post positive returns.
|Fixed Income||Yield||Two-Week Change|
|Bloomberg Corporate Bond Index||2.98%||-(0.05)%|
|30-Year Municipal Bonds||2.23%||-(0.24)%|
Eleven Signs You Own The Right Portfolio…
- You’re so well diversified that you always own at least one disappointing investment.
- Your livelihood isn’t riding on both your paycheck and your employer’s stock.
- If the stock market’s performance over the next five years was miserable, you wouldn’t be.
- You can remember the last time you rebalanced.
- You have no clue how your investments will perform, but a great handle on how much they’ll cost you.
- You don’t have any hot stocks to boast about.
- For every dollar you’ve salted away, you have an eventual use in mind—and the dollars are invested accordingly.
- Jim Cramer? Who’s that?
- A year from now, you plan to own the same investments.
- You never say to yourself, “Wow, I didn’t expect that.”
- You take tax losses when they’re available — but they aren’t available very often.
Quote of the Week…
“We are backing off the idea that we have dogmatic certainty about where the U.S. economy is headed in the medium and longer run.”
– James Bullard, president of the Federal Reserve Bank of St. Louis
Number of the Week…
$11 billion: The estimated amount by which Goldman Sachs Group, J.P. Morgan Chase, and Morgan Stanley scaled back plans to return money to investors, after their own assumptions about future risks turned out to be rosier than predictions made by the U.S. Federal Reserve.
What Fund Architects has been doing…
One of the reasons we set out to trade just once a month is because over any 30-day stretch there will be a lot of noise. The kind of noise we heard over the last couple of weeks. The kind of noise that spooks investors into emotional reactions. The kind of noise we try to avoid by having a process.
Our intention is to reset the Fund Architect Portfolios once a month based on sector and asset class rankings. Our process recognizes that while any given news event could push the markets one way or the other, it’s hard, impossible really, to trade around that kind of short-term action. The last couple of weeks are good proof to that reality.
That’s not to say the Investment Committee can’t override the strategy if we identify something that’s clearly out of the ordinary — some extraneous event the system can’t recognize that might have a real impact beyond the short term. But we have to see real opportunity — undeniable opportunity — to override the process. Investors can be assured we take the decision seriously.
Meanwhile, the Portfolios continue to hold the large- and mid-cap equity positions we picked up first of the month, as well as the high-yield and convertible fixed income ETFs we added at the same time.
Interestingly, U.S. Treasuries are once again at the top of our rankings. You might recall we took a large position in the 10 years early in the year and successfully sold it in April. Here in mid-June they’re basically back to where they were in January. At the same time, there are trillions of dollars in sovereign debt around the world trading in negative yields. Things look a little crazy right now, but the process will tell us where the opportunities lay. The process helps us make sense out of the noise.
The views in this commentary are those of Fund Architects. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this commentary, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any discussion or information provided here serves as the receipt of, or as a substitute for, personalized investment advice from Fund Architects or any other investment professional. The information contained within this commentary should not be the sole determining factor for making investment decisions. To the extent that you have any questions regarding the applicability of any specific issue discussed to your individual situation, you are encouraged to consult with Fund Architects. Information pertaining to Fund Architects advisory operations, services, and fees is set forth in Fund Architect current disclosure statement, a copy of which is available upon request. Fund Architects, LLC is an SEC Registered Investment Advisory Firm.