HFT "flash" Trade Fallout, Goldman Sachs Connection, Nasdaq Admission, Earnings of Interest: LINC, LOPE

We have been following this "flash" trading story closely and need to remain vigilant. The fallout from a clampdown on High Frequency Trade (HFT) could be far reaching and is difficult to predict. However, I'll take a stab at a couple of results that seem like obvious issues:

1) If HFTs are banned we should witness a disturbing collapse in trading volume. Over 70% of the NYSE volume today is program generated, a significant portion of which are HFTs. This may be good for the markets longer term as true levels of volume based on real buyers and sellers will return but disruptive shorter term.

2) Goldman Sachs (GS) earning could be seriously impaired. For years GS employees have been considered the "best" traders on the street. Was the company able to attract the brightest minds? Is GS in bed with Government? Probably yes to both questions but now we are able to see a little further behind the curtain and OZ is clearly aided by a bunch of computers getting fed information ahead of the street and profiting from the illegal early data. This is commonly known as front running and has been illegal for years. If this profit center is closed off GS will need to scramble to make up for the loss and EPS could suffer.

SEC Chairman Schapiro asked staff for method to quickly ban inequity from flash orders; says commission would need to approve proposal banning flashes, according to statement - Reuters

HFT "Flash" Orders: Nasdaq Admission?

...The New York Democrat, who has urged the U.S. Securities and Exchange Commission to clamp down on the practice, said parent company Nasdaq OMX is willing to submit to a potential ban by the agency after it "reluctantly" started offering flashes early last month.
Did I just read that correctly? Did Nasdaq OMX tell Chuck Schumer that it intentionally (even if reluctantly) began offering order types that do not contribute to public price formation and market transparency?

That is, did they (perhaps unwittingly) just admit to the true purpose of these order types and their willing participation in same rather than doing what any good steward of a public trust should have done - that is, standing up immediately as soon as this chicanery began and raising hell...?

Earnings of Interest

(Please click on the link above to review previous EPS posts)

Periodically I will post the EPS news of companies we find interesting. This is not a recommendation to purchase or sell the shares. I will not engage in the hackneyed approach of other writers and give advice about when to buy or sell. The purpose of these posts is to give you, the reader, an idea of what companies our research department deems worthy of review.

Of course, if you are an investor in any of the

Fortune's Favor Family of Funds or a client of RCM our door is always open. Feel free to call or email questions at any time.

LINC: Lincoln Educational Services beats by $0.08, beats on revs; guides Q3 and FY09 above consensus (21.04 ) : Reports Q2 (Jun) earnings of $0.27 per share, $0.08 better than the First Call consensus of $0.19; revenues rose 50.6% year/year to $128.1 mln vs the $120.9 mln consensus.

On its earnings call, says it hopes its Q3 and FY09 guidance may be a bit conservative... Co says it is increasingly focused on career development given the tough economy. Longer term, the co seeks to expand its degree programs and offer students the ability to go from diploma to degree, all in the LINC education system.... Looking ahead to Q3 and 2009, co says the outlook is very promising... Co says demand is strong across the country, and it saw good improvement in April starts. Co saw growth across all of its verticals. Co is seeing an uptick in its automotive programs. Co is moving ahead with rebranding recent acquisitions. New student starts improved impressively in the qtr... Co is seeing some timeframes lengthen for students to find jobs due to the tough economy... Co is extremely pleased with its execution. In Q2, the co completed the acquisition of Clemens College which, together with Briarwood College, are LINC's first two regionally accredited colleges. Co says these colleges will serve as the cornerstone of its next growth initiative.

LOPE: Grand Canyon Education beats by $0.03, beats on revs; guides Q3 EPS below consensus, revs above consensus; guides FY09 above consensus : Reports Q2 (Jun) earnings of $0.13 per share, $0.03 better than the First Call consensus of $0.10; revenues rose 71.7% year/year to $59.4 mln vs the $58 mln consensus. Co issues mixed guidance for Q3, sees EPS of $0.13 vs. $0.14 consensus; sees Q3 revs of $63.5 mln vs. $62.21 mln consensus. Co issues upside guidance for FY09, sees EPS of $0.66-0.67 vs. $0.63 consensus; sees FY09 revs of $260.5-262 mln vs. $256.40 mln consensus.

Fear Trade Back? Sergey Aleynikov & HFTs, Goldman's Trading Scandal, 2nd Stimulus, U.S. Office Market Collapse

News that Moves Markets

with RCM Editorial

On Monday I revealed long term trends that, as I said, must be respected. However, today I wish to offer a thought that may help those who wish to trade on a shorter time frame. Government manipulation, with the help of big investment banks, has turned shorter term decision making into a sort of black art form. Many traditional short term traders are becoming increasingly frustrated and chewed up by the seemingly incongruous volatility. Traditional decision making factors e.g. EPS news, technical analysis readings, other company fundamentals, have taken a back seat in the short term, say 3-4 months, to government desired outcomes. It's a brand new world so you must use new tools. Consider this:

The Government felt the need to recapitalize banks in March. So, with the help of GS/JPM and others the manipulation game began to rally the market. "Helicopter" Ben began talking about "green shoots", government statistics "surprisingly" began to look better, and GS proprietary traders made a fortune on the rally because they are just sooo good. Result: A 3 1/2 month equity market rally that led to massive capital raise for the financial space through major secondary offering. GS raised billions with a secondary priced @ $123 up from the Nov. low of $47.41.

However, the equity market rally resulted in a Treasury bond market sell-off and a disturbing hike in interest rates. The "Helicopter" and "Pinocchio" know that rates going up will kill any hope of economic recovery. So, now that suckers have invested billions in the financial space the focus has shifted to supporting the bond market at a time when issuance of new Treasury debt is exploding. Possible Result: Expect an equity market sell-off over the next few months to help support the Treasury bond market and keep yields down. The fear trade is back in vogue.

One more thought, the arrest of Sergey Aleynikov may not be getting the press coverage it deserves. High-frequency trading (HFT) platforms are a major Achilles heel of this market. Joe Saluzzi of Themis Trading wrote a phenomenal piece about HFT that I covered in my July 1st post. Take the time to re read this post to fully comprehend the dangers.

Bloomberg: Goldman May Lose Millions From Ex-Worker’s Code Theft

...At a court appearance July 4 in Manhattan, Assistant U.S. Attorney Joseph Facciponti told a federal judge that "...The bank (GS) has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways,” When I read this I almost fell off my chair. What a blunder by Goldman. In other words, GS uses the code to manipulate markets but in a fair way? Who determines what is fair? Drop the debate of fair or unfair and you can see that GS admits to manipulating the markets! Read more...

Zero Hedge covers this story with the respect it deserves: Is A Case Of Quant Trading Sabotage About To Destroy Goldman Sachs?
Posted by Tyler Durden

We must follow this story closely because program trades now account for about 50% of the volume on the NYSE and if the HFT model somehow grinds to a halt liquidity will plummet potentially wrecking havoc on prices. For more read the A Goldman trading scandal?

And the beat gets louder...
U.S. should plan 2nd fiscal stimulus: Economic adviser - Reuters
Reuters reports the U.S. should be planning for a possible second round of fiscal stimulus to further prop up the economy after the $787 bln rescue package launched in February, an adviser to President Barack Obama said. "We should be planning on a contingency basis for a second round of stimulus," Laura D'Andrea Tyson, a member of the panel advising President Barack Obama on tackling the economic crisis. said on Tuesday. Addressing a seminar in Singapore, Tyson said she felt the first round of stimulus aimed to prop up the economy had been slightly smaller than she would have liked and that a possible second round should be directed at infrastructure investment. "The stimulus is performing close to expectations but not in timing," Tyson said, referring to the slow pace at which the first round of stimulus had been spent on the economy.

Reality vs. "Green Shoot"...
U.S. office market continues to spiral down - Reuters.com
Reuters.com reports the U.S. office market vacancy rate reached 15.9% in Q2, its highest in four years and rent fell by the largest amount in more than seven as demand from companies and other office renters remained weak, real estate research co Reis said. "It's bad," Reis director of research Victor Calanog said. "It's decaying and getting worse. Given the depth and magnitude of the recession, you can argue that we are facing a storm of epic proportions and we're only at the beginning. The weak demand helped push up the average weighted U.S. office vacancy rate 0.70 percentage points during the quarter and 2.7 percentage points compared with a year ago, according to the report released. Asking rent during the quarter fell 1.4% to $28.43 per square foot. Factoring in rent-free months and improvement costs to landlords, effective rent fell 2.7% in the quarter to $23.42 per square foot. The second-quarter drop was more severe than the first quarter's 2.3%, dampening hopes the office market is bottoming out, Reis said. Year over year, rent was down 6.7%, the largest one- quarter decline since the first quarter 2002. "This is really only the third quarter that we've experienced negative effective rent growth," Calanog said. "Last time, the office sector had four years of negative effective rent growth."