Fed Raises Discount Rate by Quarter-Point to 0.75% (Update3)

[웃 910]

Feb. 18 (Bloomberg) -- The Federal Reserve Board raised the discount rate charged to banks for direct loans by a quarter point to 0.75 percent and said the move will encourage financial institutions to rely more on money markets rather than the central bank for short-term liquidity needs.

"These changes are intended as a further normalization of the Federal Reserve's lending facilities," the central bank said today in a statement. "The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy."

The dollar jumped and Treasuries extended losses as the Fed took another step in a gradual retreat from its unprecedented actions to halt the deepest financial crisis since the Great Depression. The Fed has provided hundreds of billions of dollars in backstop credit to banks, bond dealers, commercial paper borrowers and troubled financial institutions such as American International Group Inc.

"This is an unwinding of another unusual and exigent circumstance," said David Zervos, visiting adviser to the Fed Board in 2009 who is now a managing director at Jeffries & Co. in New York. "They tried to go out of their way to tell people this doesn't change their policy outlook at all."

The dollar rose 0.7 percent to $1.3514 per euro at 5:19 p.m. in New York from $1.3607 yesterday. It touched $1.3502, the strongest level since May. The yield on the 10-year Treasury note rose eight basis points to 3.8 percent.

Rate Increase

The discount rate increase is effective on Feb. 19. The Board also said that effective March 18 "the typical maximum maturity for primary credit loans will be shortened to overnight."

The Fed Board said the outlook for policy remains "about as it was at the January meeting of the Federal Open Market Committee." The central bank also cited last month's statement, which said economic conditions are likely to warrant "exceptionally low" levels of the federal funds rate "for an extended period."

It was the first increase in the discount rate in more than three years, and the move widens the rate's spread over the top range for the benchmark federal funds rate to 0.5 percentage point.

"The Fed is moving back to doing business as normal and business as normal is not targeting an exceptionally low fed funds rate of zero to 0.25%," said Christopher Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. "Today they raised the discount rate, and not tomorrow or the next day, but soon, they will be lifting the fed funds rate target as well."

Reliance on Credit

Financial institutions' reliance on Fed credit has waned as market liquidity improved. Discount window loans stood at $14.1 billion on Feb. 17, down from $65.1 billion about a year earlier.

"The increase in the spread and reduction in maximum maturity will encourage depository institutions to rely on private funding markets for short-term credit and to use the Federal Reserve's primary credit facility only as a backup source of funds," the Fed Board said in a statement.

"The Federal Reserve will assess over time whether further increases in the spread are appropriate," the Fed said.

Fed Chairman Ben S. Bernanke telegraphed the move in Feb. 10 testimony to Congress when he said investors should expect a "modest increase" in the rate "before long." Using language similar to today's statement, he said a move shouldn't be interpreted as a change in policy.

Capital Needs

The Fed's lending programs and their May 2009 review of the capital needs of the 19 largest banks helped restore confidence and liquidity in interbank lending markets. The TED spread, the difference between what the Treasury and banks pay to borrow dollars for three months, has narrowed to 0.15 percentage point from as high as 4.64 percentage points in October 2008.

The central bank closed four emergency lending facilities, including the Primary Dealer Credit Facility and Term Securities Lending Facility, on Feb. 1.

Primary dealer credit stood at $146.5 billion two weeks after the collapse of Lehman Brothers Holdings Inc. in September 2008. The facility had a zero balance when the Fed closed it in February.

The Federal Open Market Committee left the benchmark overnight lending rate in a range of zero to 0.25 percent at their meeting Jan. 27. Minutes from the meeting said officials "agreed it would soon be appropriate" to reduce the term of discount window loans to overnight and widen the spread over the federal funds rate.

Immediate Change

The minutes also said that the discount window change didn't signal an immediate change in the benchmark lending rate.

Fed officials "generally agreed that such steps to return the Federal Reserve's liquidity provision to a normal footing would be technical adjustments."

Prior to the financial crisis, the Fed kept the primary credit discount rate 1 percentage point above the target for the federal funds rate.

The Fed increased the term on the loans to 90 days during market turmoil in March 2008, and reduced it 28 days on Jan. 14 this year.

Discount rate changes are requested by boards of directors at the 12 regional Fed banks. The Fed Board said it approved requests for the rate increase from all 12 regional Fed banks. Discount rate change requests are subject to final review and determination by the Board of Governors in Washington. Fed governors review discount rate requests about every two weeks.

To contact the reporters on this story: Craig Torres in Washington at ctorres3@bloomberg.net;

Last Updated: February 18, 2010 18:57 EST

http://www.bloomberg.com/apps/news?pid=206...uLUc4&pos=1

Here's the dollar against the other major currencies. That's actually a huge increase for the dollar and enormous declines for the other currencies against the 'greenback'.

Edited February 19, 2010 by Lord Infamous

[Pinocchio Liberal 268]

Inflation is on the way! GO BARRY!

[scandal 951]

Not just the discount rate. Fed funds rate is gonna be next.

http://www.marketwatch.com/story/fed-funds...view-2010-02-18

Fed funds futures raise rate-hike view

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CME Group Inc

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By Jacob Bunge

CHICAGO (MarketWatch) -- Fed funds futures traders in after-hours trade Thursday repositioned for the U.S. Federal Reserve to begin lifting its benchmark lending rate earlier than previously thought.

The move followed an announcement that the central bank would lift the rate it charges banks for emergency loans by a quarter percentage point, though officials stressed that this was not to be interpreted as a broader tightening of credit.

November 2010-dated fed funds futures contracts, reflecting market expectations for the overnight rate following the early November meeting of the Federal Open Market Committee, saw prices fall by 5 basis points in electronic trading late Thursday after the announcement.

The price move indicated that traders now see a 100% chance for the Fed to hike its benchmark rate to 0.5% by contract expiration, with a 16% chance that the rate could rise to 0.75%.

At the close of trading Thursday, the November contract priced in a 96% chance for a rise in the fed funds rate.

September-dated fed funds futures were recently down 3.5 basis points, pricing in a 40% chance that the FOMC would raise rates by that contract's expiration.

Late 2010-dated contracts have been among the more actively traded fed funds futures, as the U.S. central bank is not seen tightening its key rate until late in the year.

Thursday's decision to lift the Fed's discount rate to 75 basis points from half a point comes as the central bank sees less need in the market for access to emergency funds, after officials quickly moved to cut the rate to help floundering banks weather the deepening financial crisis.

The move was expected, with Fed Chairman Ben Bernanke signaling a hike in the discount rate in testimony released last week. He and other Fed officials have emphasized that shifts in the discount rate should not be linked to expectations for the more closely watched Fed funds rate.

Thursday's after-hours price action was another sign of life for CME Group Inc.'s /quotes/comstock/15*!cme/quotes/nls/cme (CME 290.50, -1.19, -0.41%) fed funds futures market, which saw trading activity fall off sharply after the Fed cut its benchmark rate to the current near-zero level.

Central bankers' stated preference to hold rates low for "an extended period" has given many participants little reason to hedge against imminent moves in the fed funds rate.

[웃 910]

The timing is interesting. Day before options expiration.....I flipped some GOOG calls for $1/contract but I still have a couple GOOG $550 March calls....They will probably drop 30% tomorrow....They couldn't wait one day? Why the day before options expiration......??

--------------------

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Fed Changes Terms In Front of OpEx Again by Karl Denninger

Posted at 16:52

Thursday, February 18. 2010

This is a load of ####### folks:

For release at 4:30 p.m. EDT

We just made sure that anyone who was long into Options Expiration - which is tomorrow - especially on index options which cannot be hedged or traded now, is screwed. Just like in August of 2007 when we did the opposite.

"The Federal Reserve Board on Thursday announced that in light of continued improvement in financial market conditions it had unanimously approved several modifications to the terms of its discount window lending programs."

Of course we couldn't wait until Friday after the close when it wouldn't hose people - instead, we timed this for maximum pain.

"Like the closure of a number of extraordinary credit programs earlier this month, these changes are intended as a further normalization of the Federal Reserve's lending facilities. The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy, which remains about as it was at the January meeting of the Federal Open Market Committee (FOMC). At that meeting, the Committee left its target range for the federal funds rate at 0 to 1/4 percent and said it anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period."

We gave no warning either. Ha ha. You did wear your titanium plate in your pants, right?

"The changes to the discount window facilities include Board approval of requests by the boards of directors of the 12 Federal Reserve Banks to increase the primary credit rate (generally referred to as the discount rate) from 1/2 percent to 3/4 percent. This action is effective on February 19."

That's "right now", in case you didn't figure it out yet.

"In addition, the Board announced that, effective on March 18, the typical maximum maturity for primary credit loans will be shortened to overnight. Primary credit is provided by Reserve Banks on a fully secured basis to depository institutions that are in generally sound condition as a backup source of funds. Finally, the Board announced that it had raised the minimum bid rate for the Term Auction Facility (TAF) by 1/4 percentage point to 1/2 percent. The final TAF auction will be on March 8, 2010."

This is something we did warn about, and in addition we're giving notice. See? Hope you don't get a margin call in the morning - BOOYA!

"Easing the terms of primary credit was one of the Federal Reserve's first responses to the financial crisis. On August 17, 2007, the Federal Reserve reduced the spread of the primary credit rate over the FOMC's target for the federal funds rate to 1/2 percentage point, from 1 percentage point, and lengthened the typical maximum maturity from overnight to 30 days. On December 12, 2007, the Federal Reserve created the TAF to further improve the access of depository institutions to term funding. On March 16, 2008, the Federal Reserve lowered the spread of the primary credit rate over the target federal funds rate to 1/4 percentage point and extended the maximum maturity of primary credit loans to 90 days."

See above.

"Subsequently, in response to improving conditions in wholesale funding markets, on June 25, 2009, the Federal Reserve initiated a gradual reduction in TAF auction sizes. As announced on November 17, 2009, and implemented on January 14, 2010, the Federal Reserve began the process of normalizing the terms on primary credit by reducing the typical maximum maturity to 28 days.

The increase in the discount rate announced Thursday widens the spread between the primary credit rate and the top of the FOMC's 0 to 1/4 percent target range for the federal funds rate to 1/2 percentage point. The increase in the spread and reduction in maximum maturity will encourage depository institutions to rely on private funding markets for short-term credit and to use the Federal Reserve's primary credit facility only as a backup source of funds. The Federal Reserve will assess over time whether further increases in the spread are appropriate in view of experience with the 1/2 percentage point spread." http://tiny.cc/QqCpC

This is something we said we'd do, but heh, you gotta love our timing. We make a practice of burning people - a few years ago it was the shorts (who were right), this time it's the longs (who were also right - well up until this evening!

BTW, I shorted the close on the technicals in the futures (which if this reverses I can hedge and of course can't lose on now) - the market was heavy and it looked overbought, so you'd think I'd be happy.

I'm not - this sort of action, whether I personally make money or lose money, is not the point. The point is that this release was intentionally timed to hurt people, just as was the August 2007 one.

Bernanke and his pals ought to be run out of town on a rail for this sort of repeated abuse. They seem to think that the markets are their plaything, and all they're doing is destroying confidence with each and every move of this sort.

It is not what you do, it is how you do it, and this sort of thing is just yet another reason why The Fed must be audited. The timing on this is too damn suspicious - never mind that someone sold a metric ton of SPY right in front of the announcement - literally by seconds, 2 million shares were unloaded.

Betcha you can't find a cop.

http://market-ticker.org/archives/1978-Fed...OpEx-Again.html

Edited February 19, 2010 by Lord Infamous

[scandal 951]

Day trading is for weenies

[웃 910]

Day trading is for weenies

The saying I go by is if you wanna hold something, buy a teddy bear......Buy and hold and you'll be a bagholder for years....A lot of stocks will never return to their 2007-2008 levels.

[웃 910]

I would have made a fortune if I went for the February $540 GOOG calls.....I looked at them in the morning with GOOG at $537 / $538 and the calls between $1.8 and $2.20

GOOG ended up rallying to a $545.00 day high and closing at $543.18........The calls closed at $4.80 and actually more than tripled from the day low to high: http://finance.yahoo.com/q?s=GOP100220C00540000

I went with the $540 March calls while GOOG was at $537 / $538.....Got in at $13.80..... The pathetic pieces of trash closed at $15.20, up a mere 4.8%: http://finance.yahoo.com/q?s=GOP100320C00540000

I sold mine at $15.00......

Edited February 19, 2010 by Lord Infamous

[scandal 951]

Dude, you do what you want. Seriously.

I used to trade options, around 2002-2003. I traded mainly on Micron , Oracle and a few other tech issues. Sometimes aggressively bearishly directional - naked puts, sometimes just a volatility play - butterflys, straddles. For a while I was doing pretty well at it too. I felt I had a sense for the underlying's trend, was pricing my theos, and was looking a few months deep behind the front month. Overall, I probably wound up about 10-20% higher on my initial stake during that period. Eventually I realized that if I kept it up I'd be behind. It's not a game for amateurs and I had enough sense to know I was one. I work at a trading firm now. I let those guys run with their models, I'm content just to keep our market data systems and trading platforms running.

[mawilson 2,133]

It's not a game for amateurs and I had enough sense to know I was one.

Day trading is for weeniespros

Fixed

[웃 910]

Day trading is for weenies

So I am a weenie? Check out this morning trade of the day. In at 9:35am, done by 9:56am....Also have XNPT, 4K shares around $6.8

[w¡n9Nµ7 §£@¥€r 123]

*bows in Sir Infamous's general direction*

BTW- I love how you included the "Update 3" in the header. Cute.

[scandal 951]

It's not a game for amateurs and I had enough sense to know I was one.

Day trading is for weeniespros

Fixed

Day trading absolutely is for weenies, more and more so all the time.

The game has increasingly moved to high frequency automated trading.

An individual trader sitting at home or in a bucket shop looking at his eSignal charts simply hasn't got a chance to compete against an organized firm that has developed proprietary algorithms and is continuously backtesting those models against mounds of historical data. That same individual trader has no chance against the firm who has colocated their models at the exchanges on super low-latency connections. And he has no chance to get in and out of a trade when he's competing against firms that are able to profit from very rapid trading on penny-wide spreads.

That's not to say an individual trader, like our friend Confucious here, can't bet a directional trend and be right. Sure, he can do that, for a while. And by trading options he can amplify those gains with a nice fat delta (the rate of change of the option to the underlying). But he should recognize that what he's doing is speculating, aka gambling. People make money playing poker and blackjack too. Personally, I wouldn't make a career out of it.

Here's a writeup from the WSJ about Getco. Confucious: you should read this. Carefully. These are the guys on the other side of your trades.

Full disclosure: I do NOT work for Getco. I am in this industry however.

http://online.wsj.com/article/SB125133123046162191.html

Meet Getco, High-Frequency Trade King

By SCOTT PATTERSON

CHICAGO -- One of the biggest players in the hot area of high-frequency trading is one of the least known.

Getco LLC, a private company with fewer than 250 employees, often accounts for 10% to 20% of the daily trading volume of many U.S. stocks, the company has said, including highly traded names such as General Electric Co., Oracle Corp. and Google Inc.

Since its founding a decade ago, the firm has risen to become one of the five biggest traders measured by volume in stocks and other instruments that trade electronically on exchanges, such as Treasury bonds and currency futures, according to firm executives, who spoke with the Journal this week, and other people in the industry.

"They are probably the biggest market maker in the U.S. stock market," said Justin Schack, a vice president at Rosenblatt Securities Inc. who closely tracks high-frequency trading. A market maker is a firm that always stands ready to buy or sell a stock.

High-frequency trading, in which traders use powerful computers and algorithms to trade at lightning-fast speeds, has grabbed attention after it produced stellar results during the financial crisis and amid estimates that it now accounts for more than half of U.S. daily stock trading.

Critics say high-frequency traders can trade ahead of less fleet-footed investors and squeeze pennies out of their pockets. Defenders say high-frequency shops help markets operate more efficiently by constantly stepping in to trade securities when investors wish to buy and sell. That, in turn, makes trading cheaper for individual investors.

The Securities and Exchange Commission has increased its scrutiny of high-frequency trading, even as exchanges rush to attract the high volumes the trading firms bring. In turn, Getco has increased its contact with the SEC and others as it seeks to influence policy decisions on matters such as rules governing options markets.

Getco's founders, former floor traders in Chicago's futures and options pits, say a lot of confusion surrounds the industry they helped pioneer.

"Electronic markets have been the best-performing parts of the financial markets" in the past few years, said Dan Tierney, a co-founder of the company with Stephen Schuler, in a rare interview. By contrast, many securities and derivatives traded over the counter, such as credit default swaps, malfunctioned amid the credit crisis, with devastating consequences.

Mr. Tierney, a 39-year-old who favors jeans, T-shirts and tennis shoes for work, points to volatile stock markets in late 2008 as a way high-frequency trading helps grease the market's wheels. As investors scrambled to sell stocks, high-frequency outfits such as Getco stepped in to buy.

One day last October, Getco juggled about two billion shares, representing more than 10% of the volume in U.S. equities, according to a person familiar with the firm.

Without high-frequency traders, Mr. Tierney says, the market's losses could have been much steeper. The Dow Jones Industrial Average plunged 14.1% that month.

All this has been profitable for Getco, which earned about $400 million in 2008, trading mostly with its own money, people familiar with its finances say. Getco, which stands for Global Electronic Trading Co., declines to comment on its profit.

In 2007, private-equity firm General Atlantic LLC invested about $300 million, a deal that then valued Getco around $1.5 billion.

At Getco, traders stare at enormous high-definition screens stacked to the ceiling that display trades in virtually every financial instrument traded electronically on exchanges. Large white boards, thick with scribbled formulas and intricate diagrams, line the walls of its expansive trading hub on the second floor of the office tower that houses the Chicago Board of Trade.

Unlike traditional Wall Street firms, the company holds relatively few securities by the time markets close for the day. Nor does it use much leverage, or borrowed money, to amplify the effects of its trades.

Since it constantly buys and sells, it can move in and out of hundreds of millions of dollars' worth of securities every day with a relatively small amount of capital. It favors shares that are the most heavily traded.

During the trading day, it can lose money if it accumulates large positions and the market suddenly moves against it, a risk it works to minimize by trading quickly in and out of markets, as well as through hedging strategies.

For example, if Microsoft shares are trading in range of $24.09 and $24.12, an investor may place an order to sell Microsoft for no less than $24.10. On the other side of that trade could be Getco with an order to buy at $24.10. Getco likely also will have an offer to sell Microsoft for $24.11.

If the trade works, Getco will make money on that tiny spread. Sometimes they don't; the challenge then is to get out as quickly as possible. In this case, if it accumulates a large amount of Microsoft stock at $24.10, however, it will stop buying and offer to buy and sell at lower prices.

Getco depends on the success of its proprietary complex algorithms to help it make money on the transactions more often than not. It also can pick up tiny rebates that some exchanges offer to firms willing to take the other side of trading orders. The company focuses on hiring top computer programmers and technicians, as well as traders.

Messrs. Tierney and Schuler founded Getco over a handshake in a small office at the Chicago Mercantile Exchange on a Friday afternoon in October 1999.

The previous year, Mr. Schuler, now 47, had been trading futures contracts linked to the Standard & Poor's 500-stock index. His wife was pregnant, and he was considering his future. As he watched electronic trading capture more volume, he concluded floor trading was becoming outmoded.

"I was feeling threatened," he says.

He started learning more about how electronic markets work. In 1999, he met Mr. Tierney, a floor trader at the Chicago Board Options Exchange, who also had been researching electronic trading.

Later that year, the two set up shop in a small office in the CME and started trading S&P futures contracts electronically. They installed floor-to-ceiling computers that at times became so hot they pushed the temperature in the room to 100 degrees.

Their goal was to create an all-electronic market-making business. By 2001, Getco employed about 20 people and had branched into exchange-traded funds.

Around that time, stock exchanges switched to decimalization, pricing stocks in dollars and cents rather than dollars and fractions, a change that narrowed spreads and boosted the importance of swift trading to capture gains.

In 2003, Getco started trading fixed-income securities such as Treasurys; it expanded into currency markets and, more recently, commodities.

The boom in ETFs in recent years has also boosted high-frequency trading, as moves in and out of the funds can mean hundreds of trades in the underlying stocks. More recently, exchanges have been ramping up their technology platforms, making high-frequency trading easier and more profitable.

Today, Getco operates in electronic exchanges around the world. It has offices in New York and London and has about a dozen employees in Singapore, where it expects to expand soon.

A priority now is trading more on options exchanges. The company says regulations currently in place restrict the ability of options investors to get the best price. If options markets are more open to high-frequency traders, that will make the market more competitive, increase volumes and give investors better deals, it says.

[웃 910]

Today was an unusually remarkable day. First, 25 minutes into the opening bell I took a massive amount of profits, 80 cents * 50 contracts

Also noted that I bought XNPT yesterday with 4K shares avg. $6.8

Today I sold 2K @ $7.2, another 1K @ $7.95, another 500 @ $8.2, and kept the remaining 500 for Monday....Check the XNPT chart (from $19 to $6.4 overnight....there's your buy and hold approach):

If I matched today's gains each day I'd be making roughly $20-30,000 per week....Obviously that's not going to happen...But, I do know some individual traders that do very well...Extremely well.

I have a website which is actually very low-key but there is a quant trader on there. He has some cool picks and he is using algorithms to get in and out. He is very consistent but he's not gonna ever match a move like I made overnight on XNPT or within 25 minutes like with FSLR...

He's the real deal...

Here is his trading desk:

Here is his profile:

http://followthestockguru.com/guru_detail.php?guruid=40

I know the odds are against me and most will lose. But there are a lot of individual traders that make a living out of trading and I hope to be one of them!

I did get some X $50 March puts @ $1.85 and $1.7 and held over the weekend so that could turn ugly, but we'll see....

Edited February 19, 2010 by Lord Infamous

[alienlovechild 75]

I know the odds are against me and most will lose. But there are a lot of individual traders that make a living out of trading and I hope to be one of them!

I'm not a day trader nor have I ever been one but it seems to be akin to gambling in that there are high risks and high profits and like gambling people talk about how much they won without mentioning how much they lost. Also reminds me of the experts who said you can't lose in housing.

"Day traders rapidly buy and sell stocks throughout the day in the hope that their stocks will continue climbing or falling in value for the seconds to minutes they own the stock, allowing them to lock in quick profits. Day trading is extremely risky and can result in substantial financial losses in a very short period of time. If you are a day trader, or are thinking about day trading, read our publication, Day Trading: Your Dollars at Risk. We also have warnings and tips about online trading and day trading.

Under the rules of NYSE and the Financial Industry Regulatory Authority (FINRA), customers who are deemed "pattern day traders" must have at least $25,000 in their accounts and can only trade in margin accounts. For more information, you can read FINRA's Notice to Members and the New York Stock Exchange's Information Memo.

The Connecticut Council on Problem Gambling has a quiz to help you decide if you are gambling in our markets and where to go for help."

http://www.sec.gov/answers/daytrading.htm

[scandal 951]

Today I sold 2K @ $7.2, another 1K @ $7.95, another 500 @ $8.2, and kept the remaining 500 for Monday....

I know the odds are against me and most will lose. But there are a lot of individual traders that make a living out of trading and I hope to be one of them!

So you're holding positions overnight, and over weekends. Had any margin calls yet? You will, I assure you.

Good luck dude. I seriously hope you have a Plan B. You're going to need one.