Penalties for high "order to trade" ratio will spur smarter algorhytms

Italian Borsa Move May Breed Brave New World of Algos

by John Bates, Chief Technology Officer, Progress Software

The Italian stock exchange Borsa Italiana's decision to clamp down on "excessive" HFT orders is likely to be a shot heard around the world. The Borsa is considering charging HFT firms for sending too many orders, particularly ones that do not result in trades, according to the FT.

Order-to-trade ratios have long been a concern of exchanges, ECNs and other trading venues as quote volumes go through the roof. If the number of orders being sent greatly outweighs the number of trades concluded, this can cause problems. All unnecessary orders (i.e. cancellations) create a load on exchanges; and they can provide a smokescreen to hide potentially abusive behavior (so called "quote stuffing").

I am willing to bet that the Borsa's move will be followed elsewhere. Most exchanges and alternative venues express concern that they will not be able to cope with the amount of orders coming down the pipe if they continue to grow. The SEC is considering charging HFT firms for cancelled trades, according to The Wall Street Journal. And interconnectivity between exchanges is increasing, so in order to trade smoothly between exchanges and effect arbitrage it is important that all destinations follow similar rules and procedures.

But many exchanges and ECNs, particularly in the U.S., have policies to encourage HFT rather than discourage. (Some venues even offer a tidy sum to attract large trades and liquidity providers by offering volume rebates.) The Borsa solution is the opposite of this -- it will discourage HFTs from experimentation.

But HFT players argue that it is necessary to dip their toes into the waters of the markets before they dive in and execute their trades. Their algorithms can dart in, test depth of book and trader/market sentiment, and swoop out -- often without doing any business.

The question here is, do you need to send out orders to test the market? What if you could watch and then act? Using trade orders is akin to being a venus fly trap, with your tentacles out waiting to catch the odd unwary fly. What if you could be more like an alert frog, waiting until you see the prey and then sticking your tongue out to catch the right one -- or lots of them?

Testing the waters with quotes is probably the most harmless issue in HFT. Other issues include quote stuffing, where HFTs "stuff" the book on a particular share with millions of orders, so that others cannot get in to trade. This is a kind of front-running, where the quote stuffer gets the deal done before the market can move on him.

On balance, I think the Borsa has the right idea. The Borsa benefits by having a more bulletproof trading platform, less sensitive to quote stuffing and errors. "Real" players are rewarded with real liquidity and done deals, while those who may have a more hidden agenda are discouraged from quoting.

I wonder if this is a brave new world for algorithms, where they have to pay a penalty for high frequency strategies. If so, they will have to change. The Borsa's solution, especially if it is embraced by other trading destinations, may spawn a new generation of intelligent "sensing" algos.

Today's algos that are using techniques to flood the market will be replaced by smarter ones that are more like the canny frog. They will weigh up their chances and dart their tongues out and catch the fly. Or they will miss the fly and learn from their mistakes, correcting and tweaking their techniques. You can be like the frog, but in order to do it you have to become more sophisticated. Weigh it up, ask some questions.

Source: http://www.huffingtonpost.com/john-bates/borsa-italiana-hft_b_1298943.html

Green energy stocks in bargain-basement territory

The plunge in pure-play green-tech stocks

Company Country Sector Symbol Exchange Price (Feb. 23) Change since January, 2008

Suntech Power China Solar panels STP NYSE $3.23 (U.S.) -96%
JA Solar China Solar cells JASO Nasdaq $1.94 -92%
First Solar U.S. Solar modules FSLR Nasdaq $37.20 -86%
SunPower U.S. Solar panels SPWR Nasdaq $7.91 -94%
Q-Cells Germany Solar cells QCE Frankfurt €0.32 -99%
Renewable Energy Norway Silicon REC Oslo 4.62 kroner -98%
Vestas Wind Systems Denmark Wind turbines VWS Copenhagen 57.10 kroner -90%
Gamesa Spain Wind turbines GAM Madrid €2.67 -91%
Suzlon Energy India Wind turbines SUZL Mumbai 27.95 rupees -93%


Green energy's deadly doldrums

by RICHARD BLACKWELL, Globe and Mail

The numbers are dismal. The stock of Denmark’s Vestas Wind Systems AS, the world’s biggest wind turbine maker, has plunged 90 per cent over the past four years. The United States’ leading solar firm, First Solar Inc., (FSLR-Q35.58-1.62-4.35%) has fallen from more than $250 (U.S.) to just over $40 in that same period. And Norway’s huge solar equipment maker Renewable Energy Corp. is trading at one-fortieth of its price at the start of 2008.

It’s a similar story at Spain’s turbine maker Gamesa Corp., China’s big solar cell maker Suntech Power Holdings, (STP-N3.06-0.15-4.67%) and India’s turbine manufacturer Suzlon Energy Inc. All have seen their shares tank over the past few years. Q-Cells, Germany’s huge solar cell maker, had to restructure its debt to stave off bankruptcy.

What’s happened to these former high fliers? “They’ve been hit with a quadruple whammy,” said Tom Konrad, editor of the AltEnergyStocks.com website. The key issues:

-Low natural gas prices (NG-FT2.52-0.03-1.10%) have made that fuel a cheap means of generating power, cutting into renewables.

-Massive new production, particularly in China, has caused a glut of solar panels, pushing prices down sharply.

-The political climate has become less favourable to renewables, both in Europe and North America.

-The global economic downturn has prompted governments and corporations to tighten support and spending on renewables. And things could get worse: On Thursday, Germany said it will cut its solar subsidies more quickly than expected.

Mr. Konrad said he thinks some of these renewable-energy companies – particularly in the solar sector – are ready for a rebound. However, they are not likely to get back to their 2007-08 levels in the short or medium term, he said. Some companies probably will disappear through consolidation, although the incentive to buy up rivals right now is diminished by the overcapacity in the sector.

Analyst MacMurray Whale of Cormark Securities Inc. said he thinks it is unlikely there will be any kind of widespread recovery among renewable stocks until the global economy improves. “Green [is seen] as a luxury you can afford when everybody feels rich,” he said.

While some solar stocks have improved a bit recently, there will likely not be any significant rebound in that sub-sector until there is consolidation and production capacity is reduced, Mr. Whale said. “There is just not enough demand to soak up that capacity. We are seeing bankruptcies and real struggles, and we are going to continue to see that.”

Big companies, such as Vestas and First Solar, have strong balance sheets, he said, allowing them to survive – albeit with lower margins – until things pick up. But stock prices are not going to show any significant recovery for a considerable time, he predicts. “They could bounce around [at these levels] for years.”

The approach many investors are taking is to look for individual stocks in the clean-technology space that appear to have some momentum, Mr. Whale said. Some are buying Canadian natural gas engine-maker Westport Innovations, (WPT-T43.961.533.61%) for example because it is a play on low gas prices. But they are not diving into renewables more broadly.

Ric Palombi, a portfolio manager at McLean & Partners in Calgary, said the big pure-play clean technology firms pop up on his screen as potential investments because the stocks are so cheap at the moment. But that’s not a good enough reason to invest, because the current prospects for the industry are still poor until governments start to spend on the sector again. Until that happens, “What is the catalyst? What is going to move the stock?” he asks.

A better bet for investors is to consider utilities, power producers or developers who can actually take advantage of the downward pressure in equipment prices. Mr. Palombi said he owns Brookfield Renewable Energy Partners LP, (BEP.UN-T27.39-0.20-0.72%) a Canadian dividend-paying stock with power plants in Canada, the U.S. and Brazil. In contrast to the equipment makers, it has seen its stock rise about 35 per cent since the beginning of 2008.

Green stocks will get hit if oil falls on China slowdown

In addition to a rapidly down-turning construction sector and tightening credit at the Big 4 banks, the World Bank also believes China requires institutional reform, particularly more oversight of huge state-owned corporations.

Even though green energy stocks are alternatives to oil, short term price swings are often influenced by swings in oil pricing, which is likely headed down in coming months, based on the Chinese slowdown.

SUMMARY: Perhaps lighten up on green energy stocks and funds until a correction takes the oil price and the clean power sector down, and when everyone is panicking, that will be the time to go back in and bulk up.


China faces an economic crisis without reforms

by Bob Davis in Beijing, WSJ

CHINA could face an economic crisis unless it implements deep reforms, according to a report by the World Bank and a Chinese government think tank, which urges Beijing to scale back its vast state-owned enterprises and make them operate more like commercial firms.

The recommendation is contained in ‘China 2030’, a report set to be released Monday, according to a half-dozen individuals involved in preparing and reviewing it.

The report, which addresses some of China's most politically sensitive economic issues, is designed to influence the next generation of Chinese leaders who take office starting this year, these people said. It challenges the way China's economic model has developed during the past decade under President Hu Jintao, when the role of the state in the world's second-largest economy has steadily expanded.

China 2030 cautions that China's growth is in danger of decelerating rapidly and without much warning, as has occurred with many high-flying developing countries once they reach a certain income level, a phenomenon that development economists call the "middle-income trap". A sharp slowdown could deepen problems in the banking sector and elsewhere, the report warns, and could prompt a crisis, according to those involved with the project.

It recommends that state-owned firms should be overseen by asset-management firms, say those involved in the report. It also urges China to overhaul local government finances and promote competition and entrepreneurship.

"China's state-owned sector is at a crossroads," said Fred Hu, chief executive of Primavera Capital Group, a Beijing investment firm. The Chinese government must decide "whether it wants state-led capitalism dominated by giant state-owned corporations or free-market entrepreneurship".

Even ahead of its release, the report has generated fierce resistance from bureaucrats who manage state enterprises, according to several individuals involved in the discussions.

China's political heir apparent, Xi Jinping, now vice president, has given few clues about his economic policies. Analysts expect the high-profile report will help to shape discussions among Mr Xi and his allies about whether to make changes to a state-led economic model that has alarmed Chinese private entrepreneurs and is becoming a source of growing tension between China and its main trading partners, including the US.

The report's authors argue that having the imprimatur of the World Bank and the Development Research Center, or DRC – which reports to China's top executive body, the State Council – will add political heft to the proposals. The World Bank is widely admired in Chinese government circles, particularly for its advice in helping China design early market reforms.

"The report lays out recommendations for a development growth path for the medium term, helping China make the transition to become a high-income society," said World Bank President Robert Zoellick in a statement announcing the report would be released.

Neither the World Bank nor DRC would comment specifically on the China 2030 findings.

Chinese Vice Premier Li Keqiang, who is expected to be named premier next year, endorsed the Chinese-World Bank project when Mr Zoellick proposed it during a trip to Beijing in September 2010. Its authors are also counting on the Number 2 official at the DRC, Liu He, who is also a senior adviser to the all-powerful Politburo Standing Committee, to help ensure that its findings are considered seriously by top leaders. Mr Liu declined to comment.

Among the most contentious areas in the report: how to manage state-owned enterprises, which dominate the nation's energy, natural resources, telecommunications and infrastructure industries and have easy access to low-interest loans from state-owned banks.

US Treasury Secretary Timothy Geithner and other Western officials argue that subsidies to those firms distort international competition. Domestically, critics complain that the firms choke off internal competition, use monopoly profits to expand into other businesses and pay only meager dividends.

The World Bank and DRC argue that asset-management firms should oversee the state-owned companies, say those involved in the report. The asset managers would try to ensure that the firms are run along commercial lines, not for political purposes. They would sell off businesses that are judged extraneous, making it easier for privately owned firms to compete in areas that are spun off.

"China needs to restrict the roles of the state-owned enterprises, break up monopolies, diversify ownership and lower entry barrier to private firms," said Mr Zoellick in a talk to economists in Chicago last month.

Currently, many state-owned firms have real-estate subsidiaries, which tend to bid up prices for land, and have helped to create a housing bubble that the Chinese government is trying to deflate.

The report also recommends a sharp increase in the dividends that state companies pay, which would boost budget revenue and pay for new social programs, said those involved with the report.

Chinese and US economists say that dividend money from profitable state-owned firms now are often directed to unprofitable ones by the State-owned Assets Supervision and Administration Commission, or SASAC, which regulates the firms and tries to ensure their profitability.

"It's an innovative proposal," said Yiping Huang, a Barclays Capital economist.

But others argue that the proposals don't go far enough. Neither the World Bank nor the DRC proposed privatising the state-owned firms, figuring that was politically unacceptable.

SASAC and the Communist Party's personnel agency name heads of state-owned firms and can replace them, giving the government great sway over the firms' decision-making. It isn't clear whether the report recommends changing that arrangement or proposes how the asset managers should be hired and fired.

How to handle such personnel "was the most contentious issue and was debated until the last hour," said a "China 2030" participant, who added that participants often differed on how much credit should be given to the state for China's economic development and how big a role the government and party should continue to play.

Even so, said individuals involved with the report, SASAC bitterly criticized the proposal in meetings of the "China 2030" group and would strive to block them from coming into being, out of concern it could lose power. Indeed, many of the recommendations are considered so politically fraught that the Chinese insisted that the report be labelled a "conference edition" – meaning that it is subject to change after comments at the Beijing conference where it will be presented Monday. SASAC didn't immediately respond to a request to comment.

Mr Liu, the DRC official, was among the top Chinese staffers who drafted the current five-year plan and is considered close to China's current leaders as well as Mr Xi, the presumptive next head of China's government and party. Mr Liu, who meets regularly with US officials, has argued publicly that foreign pressure and ideas can help build momentum for change in China.

"Liu decides the flow of information, gives policy makers recommendations and organizes meeting agendas," said Cheng Li, a China scholar at the Brookings Institution in Washington DC.

In a signal of the challenges now faced by Chinese businesses, a gauge of nationwide manufacturing activity was slightly higher in February but remained in contractionary territory for the fourth straight month. The preliminary HSBC China Manufacturing Purchasing Managers Index was 49.7 in February, compared with a final reading of 48.8 for January, HSBC said yesterday. A reading below 50 indicates contraction from the previous month.

China now is vulnerable to a sharp slowdown, said Jun Ma, a Deutsche Bank China economist, because it relies too heavily on industries that copy foreign technology and doesn't produce enough breakthroughs of its own, a problem that limits the growth of many developing countries.

South Korea was able to keep growing rapidly after it hit a per capita income level of $5,000 – about where China is today – because it pushed innovation. China lags behind South Korea badly in patents produced per capita, he said, an important measure of innovation.

China 2030 urges a big expansion of early-childhood education and nutrition to make sure that poorer Chinese youngsters don't quickly fall behind wealthier ones, said those involved with the report. While such programs are commonplace in wealthier countries and Latin America, they pose a particular challenge in China because of its system of revenue collection.

Chinese local governments often draw much of their revenue from the sale of land, rather than from taxes. That has led to deep resentment among poorer Chinese as village officials underpay for land on the outskirts of cities and sell at steep profits to real-estate developers. The report urges that Chinese social spending be funded more by dividends from state-owned firms and by property, corporate and other taxes.

"We'll be recommending that all resources be put on budget," Mr Zoellick said in his Chicago talk, and "that public finance needs to be transparent [and] accountable."

Additional reporting: Kersten Zhang and Aaron Back

Green Stoppcks Central likes Zoltek (ZOLT)

Zoltek (ZOLT) Reports Big Profit Surge, Shares On The Up & Up

Posted by Tate Dwinnell, February 3, 2012, Green Stocks Central

Zoltek (ZOLT) has been one of the best green stock performers in recent months nearly doubling in price and it’s going to pop again tomorrow as the company reported a big surge in profit. The company posted a profit of .28/share on revenues of $47 million vs the analyst estimates for .05 in EPS on revenues of $46 million. That’s a huge improvement over the year ago quarter when the company posted a loss of .05 share on revenue of just $33 million. The CEO said the wind turbine business represents its biggest growth potential and continues to improve. He expects the large wind turbine segment to increase 15 – 25% per year for the next decade. Back in February CEO Rumy declared that growth is coming and the stock surged for a few days. However, it didn’t take long for the stock to take another big nosedive. If indeed, the wind energy industry is entering a sustained growth phase shares look enticing at current levels. This is great news for an industry that has really struggled.

“We are pleased to report strong gains on both the top and bottom lines in the first quarter and continuation of the momentum we experienced in the fourth quarter of fiscal 2011,” said Zsolt Rumy, Zoltek’s Chairman and Chief Executive Officer. ”Our performance resulted from several internal and external factors. Our net revenues were up almost a third, despite the drag on our reported sales from the decline in the value of the Euro during the quarter, reflecting our expanded customer base in the wind energy business and increased sales of composite intermediate products. Our margins were positively impacted by a more profitable product mix, higher utilization of our production capacity, better operational performance, lower raw material costs and the decline in the values of the Hungarian Forint and Mexican Peso. We believe our first quarter results evidence that our carbon fiber business is on a path to increase significantly this year.”

Technically, the stock looks outstanding and you can’t say that for many green stocks these days. ZOLT should move to the top of most green stock watchlists based on the technical improvement and the results last quarter. The stock pushed above the 200 day moving average today with heavy volume and it’s up another 9% in after hours trading. While extended in the short term, any pull backs represent a nice opportunity for an entry.