Effectively, the CME is lowering the cost to trade crude oil, gold, silver, copper, and a few other commodities. So far this has had no impact on prices of the SPDR Gold Trust (NYSE: GLD), United States Oil Fund (NYSE: USO), iShares Silver Trust (NYSE: SLV), nor in the iPath DJ-UBS Copper TR Sub-Index ETN (NYSE: JJC).

In the past, margin costs were raised on traders as an effort to curb runaway trading to the upside by making it more expensive for traders and speculators to trade energy and metals.  In short, driving up the cost of poker creates fewer gamblers. So what happens when they make it cheaper to trade?

The full details are here.

JON C. OGG

Now comes news after the close that the company is facing a potential delisting from the New York Stock Exchange after having received a “continued listing standards notice” from the NYSE because the average closing price of its common stock has remained under $1,00 per share for more than 30 consecutive trading days.

Eastman Kodak noted that it has six months after the receipt of this notification to regain compliance with the minimum share price requirement, assuming that no other listing standards arise and remain.  It regains compliance if the closing share price of at least $1.00 on the last trading day of any calendar month during the period and also has an average closing share price of at least $1.00 over the 30 trading-day period ending on the last trading day of that month or on the last day of the cure period.

All that has to happen is for Kodak to see a 50% gain in its share price from the $0.65 close.  With Antonio Perez’ great track record it is not major feat to question whether or not he will be able to easily accomplish that.  Perez may elect for a reverse stock split, but he should be reminded that reverse splits at troubled companies generally only allow short sellers to short sell more shares betting against a company.

JON C. OGG

The company issued a one sentence press release this morning saying, “MF Global today confirmed that the New York Federal Reserve has suspended MF Global’s designation as a primary dealer.”

• UPDATE: After 10:15 AM EST reports were coming out that MF Global is filing for Chapter 11 under bankruptcy protection. 

Now there are reports that MF Global traders are not being allowed to access the CME trading floor by CME Group Inc. (NYSE: CME) and additional reports that IntercontinentalExchange, Inc. (NYSE: ICE) is only allowing close-out transactions to be made by MF Global traders.

This is unfortunately one of those situations where a company is dying on the vine.  If financial firms cannot transact business, they are out of business.

Former New Jersey governor Jon Corzine was shown over the weekend to be instrumental in the bets that have brought the firm down.  Killing a big public financial company won’t be a great thing for what was otherwise a great career.

JON C. OGG

24/7 Wall St. was recently given a chance to interview Joe Toms, the new Chief Investment Officer of Prosper.com to hear about this growing sector. If you do not understand the peer-to-peer lending model, think about crowdsourcing loans for what would have traditionally been a personal bank loan. There is even a degree of microfinance involved, although in a larger and peer-based manner. Prosper is effectively the go-to name in peer-to-peer (P2P) lending, and the service eliminates the middleman to connect people who need money with those who have money to invest. In short, this allows Joe Public to be the banker to individuals. The aim is a win-win for investors and borrowers, hence “Prosper.”

There are many questions that borrowers and investors will want to know before they go in and participate in the peer-to-peer (P2P) lending market. Investors have started looking at peer-to-peer lending for its high yield and current income appeal, and P2P lending has grown more than 100% in the past year alone.

Prosper.com focuses on individual loans in the $2,000 to $25,000 range. Borrowers choose a loan amount, and they list what the purpose of the loan is. Investors then review loan listings and invest in listings that meet their criteria. The borrower then makes fixed monthly payments (collected by Prosper for the lenders) and investors receive a portion of those payments directly into their Prosper account. Individual lenders are able to invest as little as $25 in each loan listing they select and they get to consider credit scores, ratings and histories, as well as borrowers’ personal loan descriptions, endorsements (and participation) from friends and family, and community affiliations. Debt consolidation, home improvement and small business-related loans remain the leading loan categories on Prosper.com.

CIO Joe Toms noted that the consumer lending market is about $2.4 trillion in America per Federal Reserve data, but the average loan size is about $7,300 and about 90% of the market is controlled by six of the largest banks. Mr. Toms noted, “P2P can attack a market that is grossly inefficient. The Federal Reserve data shows that the average credit rate on the outstanding consumer credit has been more than 15.5% from 1985 to 2010 and the historic default rate has been closer to 4.7%.” Effectively, this has left a net interest spread of well over 10% and the market is now available for investors to participate in.

All you have to do is look at the exchange-traded funds and closed-end which track the emerging markets and the BRIC nations (and those surrounding the BRICs).  Ugly is not quite the right description and we will explain more after showing just how bad the carnage is.  Greece is no emerging market, but it is on the path to default faster than emerging markets used to default.

The ETFs for the broad emerging markets is not a good signal for their equity markets.  The revolutions of early 2011 did not help, nor did the food inflation, but the economic slowing is taking a hit here left and right.  iShares MSCI Emerging Markets Index (NYSE: EEM) closed down 2.1% at $34.36 and the 52-week trading range is $34.29 to $50.43 (52-week low was Monday).  Vanguard Emerging Markets Stock ETF (NYSE: VWO) closed down 1.75% at $35.20 and the 52-week trading range is $35.13 to $50.92 (52-week low was Monday). 

We have included the most active ETF chart on each from Stockcharts.com at the end of this report.  The data on the BRICs is almost shocking…

BRAZIL

Brazil may have energy independence and the Olympics headed its way, but the implosion there has been massive.  The BOVESPA lost 2.9% of its value on Monday and let’s just say that its high-flyers are now grounded due to more than just weather.  It seems that minerals and forestry are not going to generate cash, just like it missed out on royalties from the term “Brazilian” in personal grooming. 

iShares MSCI Brazil Index (NYSE: EWZ) closed down 2.1% at $50.89 and the 52-week trading range is $50.71 to $81.77 (52-week low was Monday).  Market Vectors Brazil Small-Cap ETF (NYSE: BRF) closed down 3.15% at $37.96 and the 52-week trading range is $37.73 to $63.78 (52-week low was Monday).  iShares MSCI Chile Investable Market Index (NYSE: ECH) closed down 3.8% at $51.16 and the 52-week trading range is $50.92 to $80.38 (52-week low was Monday).  Aberdeen Chile Fund, Inc. (NYSE: CH) closed down 4.9%  at $13.45 and the 52-week trading range is $13.37 to $26.56 (52-week low was Monday).

iPath S&P 500 VIX Short-Term Futures ETN (NYSE: VXX) is up 5.6% at $56.40 and the iPath S&P 500 VIX Mid-Term Futures ETN (NYSE: VXZ) is up 2.9% at $75.33.  These ETF prices are both higher than at the peak of selling you see on the actual VIX index chart because of how they trade with futures.

Technicians and technical analysts try to not look at anything other than the charts and the internal market statistics.  Fundamental investors are smart to at least take note of what the charts are saying, but they try to look at what the economic and company fundamentals are going to be in the next quarter to next year.  Right now the market is at a point where the technicians are in charge on the downside when the fundamentalists cannot agree whether or not we are entering (or have already entered) the next (or double dip) recession.

As you will see, here is the current VIX chart going back three years to show the S&P 500 SPDR (NYSE: SPY) after that.

JON C. OGG

The CBSX has now entered into a definitive agreement to acquire the NSX to expand the CBOE footprint.  In the release, it states that the CBSX will operate the NSX as a separate exchange but it will have savings from consolidating its data systems and its business operations.  While the deal is subject to SEC approval, this exchange merger  is tiny compared to acquisitions and mergers in exchanges.  The CME Group Inc. (NYSE: CME), NYSE Euronext, Inc. (NYSE: NYX), NASDAQ OMX Group (NASDAQ: NDAQ) and others have all made far larger acquisitions in the world of exchanges.

The CBOE offers trading in more than 7,600 equities and exchange traded funds listed on exchanges in the U.S. and the NSX has offices in Jersey City, New Jersey and in Chicago. If you look at the NSX equity trading volumes just for September, it looks as though the exchange averages more than 40 million shares per day. It noted that the September 22 trading data was 273,773 trades representing some 63,438,371 shares.  The September 16 trading data showed ‘only’ 170,684 trades but with a trading volume 90,568,375 shares.

CBOE shares are down 0.5%% at $26.21 on the news today and the 52-week trading range is $19.60 to $29.77.  Keep in mind that the CBOE has only been public since summer of 2010, and back then it was trading at just over $30.00 per share.

It is too soon to tell how this will alter Wall Street profit and sales targets.  Thomson Reuters currently has estimates of $1.53 EPS on sales of just over $510 million for 2011, but the deal is not expected to close until the fourth quarter.  The 2012 estimates are $1.74 EPS on about $557 million in sales.  Thomson Reuters also has a consensus price target of almost $26.50 on the stock.

JON C. OGG

The EC is probably naive enough to believe its math.  It claims that this could approximately raise €57 billion every year and it wants to start this tax in January 2014.

The effort from the European Commission in the financial transaction tax is dubbed “Making the financial sector pay its fair share.”  This may remind you of the Congressman DeFazio effort that crapped out here in the United States called “Let Wall Street Pay for the Restoration of Main Street.”  It took effort to kill that silly idea as well, but ultimately common sense prevailed over the killing of incentive.

The tax would be levied on all transactions on financial instruments between financial institutions when at least one party to the transaction is located in the European Union.   What is laughable beyond the proposal itself is that shares and bonds would be taxed at a rate of 0.1% and derivative contracts would be taxed at a rate of 0.01%.

Wait, a lower tax on DERIVATIVES???  How silly is this?  Investors buying or selling stocks would be taxed more than financial derivatives?  Ok, this moved from poor judgment to senseless!  If you include CDOs the argument might not be true, but financial derivative contracts between institutions brought on far more of the mess than stocks and bonds.

The Commission noted, “The financial transaction tax aims at taxing the 85% of financial transactions that take place between financial institutions. Citizens and businesses would not be taxed.” 

In short, this is taking the VAT to financial transactions.  The EC even says so itself.  The report noted, “The financial sector enjoys a tax advantage of approximately €18 billion per year because of VAT exemption on financial services. A new tax on the financial sector would ensure that financial institutions contribute to the cost of economic recovery and discourage risky and unproductive trading.”

We have said it before and will say it again.  This is nothing more than taxing incentive.  How will financial institutions trade when they know that they will be taxed even on trades that they lose money on?

Why citizens need to care about this is that if it does raise anywhere close to the desired amounts, what is to stop the lawmakers from deciding that every day citizens should get to participate in this tax as well?  That is not out of line.  If it moves, Europeans can figure a way to tax it.  Now they have figured out a way to tax incentive.

When the transactions between financial institutions dry up and when the banks and brokerages fire even more workers, the endgame will have seemed silly.  The banks of Europe are already under more pressure than they (and their shareholders) would want.  This is just one more gash into a bleeding patient.

Normally we would call this a strategy thought up by Mr. Dumas, but we worry that the lawmakers won’t truly get the pun.  This is an idea from “Mr. Dumba$$”…

Jon C. Ogg

The thresholds will lower the broad market decline percentage triggers, shorten the duration of the trading halts, and also change the reference index.  The existing market-wide circuit breakers were originally adopted in October 1988 and have only been triggered on one day in 1997.

The basic proposals are as follows:

• Lower the market decline percentage thresholds from 10%, 20%, and 30% down to new levels of 7%, 13%, and 20% from the prior day’s closing price.
• The duration of the trading halts that do not close the market for the day would go from 30 minutes, 60 minutes, or 120 minutes down to 15 minutes.
• Rather than six time periods, the only two relevant trigger time periods would be before 3:25 P.P. and on or after 3:25 P.M. 
• The new proposal would strip the Dow Jones Industrial Average as the reference index and would change to the S&P 500 Index as the pricing reference.

Normally, we might not support changes of this magnitude.  Our concern is that the Flash Crash of 2010 was damaging enough that some measures needed to be reviewed.  More importantly than that, some estimate that trading machines, the computer to computer trading, now accounts for up to 75% of the trading in the liquid stocks out there.  That figure varies wildly depending upon the day, but all you have to do is read what we wrote about the dangers of  nanonsecond trading.  

Imagine if the machines actually dumped 1 billion trades upon the market in one second.  A stretch, yes.  Theoretically possible, yes.  If you do not trust our notion on this matter, remember this: a survey on Wall Street noted that high-frequency trading (HFT) is mostly bad for everyone except the HFTs themselves.

A public comment period will take place but here are the full proposals from the SEC site.

JON C. OGG

It turns out that the bulk of financial institutions are at a disadvantage as well.  An outfit called Liquidnet, an institutional marketplace, noted that about two-thirds of institutions are worried about HFT, led by global firms and in the U.S. and in Europe.

Liquidnet conducted a Institutional Voice Survey that polled 630 institutional asset management firms in its contact list, which are said to manage a sum of more than $13 trillion and who have about 70% of the assets managed in the United States.  This year’s data is based upon more than 300 responses.  The results: “strong conviction among the vast majority of long-only traders that HFT is a negative for institutional investors trading in large size…”

Liquidnet went on to say that investors are “clearly concerned that their long-term investment styles are at odds with the speculative, nano-second profit taking approach utilized by high frequency traders.”

As far as more detailed figures, Aite Group and Tabb Group gave studies saying “almost 75 percent of overall daily equities trading can be attributed to high frequency trading.”  In short, the machines and programs are just buying and selling shares back and forth to each other all day long.

The results showed that (at the top five global institutions) there were 73% of the traders who regarded HFT as a high-priority market-structure issue.  North American traders were at two-thirds concerned, while 60% of European respondents were concerned, and more than 50% of Asia Pacific traders were concerned.

At the beginning of the summer we talked about the new angle of trading stocks in one-billionth of a second.  That was the nanosecond trading.  The flipside is the market risks: imagine if one billion orders came to the market in a second.  The only good news is that the odds that you could ever see that take place would take too much money.

If you are Joe Retail, you have no chance at fighting these HFTs.  They get to execute ahead of you, they get to trade sub-penny (try turning in an order with a decimal of less than a penny – like $23.143 – and see what happens), and they have been able to do flash trades in the past.

The only good news we have ever really been able to come up with in a market where there is this much computerized trading is that at least in times of difficulty a retail investor can be assured that there is a better chance that there will be a bid or ask out there in more active stocks.

If Liquidnet is right, now it is not just Joe Retail who is worried about the impact of the markets under the wave of HFTs.

Just do not ask NYSE Euronext, Inc. (NYSE: NYX) nor Nasdaq OMX Group Inc. (NASDAQ: NDAQ) to come to your aid.  If there is really anywhere close to 75% of the trades coming from HFT, they are loving that these entities exist.  Imagine what might happen to share trading volume if these HFTs disappeared.  THat wouldn’t be good for the NYSE nor for NASDAQ.

Follow the money…

JON C. OGG