Stocks rallied this week on the back of a solid start to earnings season and a long-awaited resolution between Greece and its European creditors. The S&P 500 jumped 2.4%, the Dow rose 1.8% and the Nasdaq continued to outperform with a 4.3% climb. The tech-heavy index is now up 10% for the year versus 1.5% for the Dow.

Energy was the worst performing sector amid fears the agreed-upon Iran nuclear deal, which lifts economic sanctions, could further flood the oil market with excess supply. Risk assets surged to start the week after weekend negotiations yielded the framework for a bailout package for Greece, while safe haven assets like US treasuries initially declined. However, bond prices rebounded by the end of the week, with the 10-year US treasury yield finishing 0.6% lower at 2.34%. The US dollar appreciated 1.6% while the Euro dropped below $1.09.

Greece

Facing economic ruin, Greece ultimately blinked and capitulated to Germany, agreeing to harsh austerity measures in exchange for a rescue package closely resembling the rejected referendum proposal. While the perception is that creditors "prevailed," the ordeal could have irreparably damaged the collective psyche of the Euro zone experiment amid suggestions austerity is strangling European economies.

Despite infighting within Prime Minister Alexis Tsipras’ far-left Syriza party, the bailout deal was ultimately ratified with a 229-64-6 vote in Greek parliament. Tsipras responded by jettisoning party rebels from his governing coalition. With a deal in place, Greece is expected to receive a 86 billion euro cash infusion, with the ECB raising the banks’ Emergency Liquidity Assistance (ELA) access by 900 million euros, which will allow them to re-open this week.

While the deal allays near-term fears of a 'Grexit,' many view it as simply a short-term fix to a situation likely to rear its ugly head again in the near future. By the end of negotiations, Germany appeared most concerned about making an example of Greece as a warning to its larger Euro zone colleagues who may seek to elect populist regimes and pursue debt relief - even after the IMF broke ranks by declaring Greek debt unsustainable without a sizable haircut. Yields on 10-year Italian and Spanish bonds fell below 2% in the aftermath of the deal.

Asia

Chinese markets continued their wild ride amid extreme government measures designed to end the sharp sell-off. From an economic perspective, China allayed fears about an economic “hard landing” with a Q2 GDP reading of 7.0% against median expectations of 6.8%. China's debt, however, is growing faster than its economy, and is now twice the size of GDP.

On Friday, the Shanghai and Shenzen Composite Indexes rallied 3.5% and 5%, respectively, with the latter representing the largest rally since 2012. Friday’s gains erased prior weekly declines, and were triggered by news the government-backed China Securities Finance Corp. has up to 3 trillion yuan ($483 billion) available to support stocks. Concerns, however, persist about the long-term implications of heavy-handed government intervention.

Earnings season

Earnings season got off to a relatively strong start, especially in the technology sector, considering the tepid expectations for this quarter. Thanks largely to a stronger dollar, aggregate earnings are expected to fall 3.7% from the year-ago quarter, according to FactSet.  

On Friday, Google (GOOGL) recorded the largest one-day increase in market capitalization in history thanks to an earnings report that handily topped expectations. The tech giant has recently taken steps to behave more like a mature conglomerate, with an increasing focus on managing costs, but proved it still has growth engines humming as ad revenue grew 11%. The stock, after lagging the market and trading in a range for the past two years, spiked more than 16% to all-time highs.

Earlier in the week, Netflix (NFLX) rallied more than 15% after another impressive earnings report, while Intel (INTC) initially surged after an earnings beat before giving back all gains by week’s end.

The financial sector enjoyed a strong start to earnings season, with JP Morgan (JPM), Bank of America (BAC) and Citigroup (C) all handily beating expectations and staging impressive rallies. The big winners for the week were BAC and C, which each gained around 7.5%, while JPM has led the charge over the past six months with a 26% gain. US Bancorp (USB) only reported narrow beat but rallied nearly 6% for the week while Wells Fargo (WFC) and PNC (PNC) climbed nearly 4% after a narrow miss and beat, respectively. GS initially declined after a mediocre report, but still managed to eke out a 1.4% weekly gain.

Notable transport stocks reporting earnings were Kansas City Southern (KSU), which rallied 6.5% after a narrow beat, and JB Hunt (JBHT) which was basically unchanged after a narrow miss. Within the industrials sector Honeywell (HON) rallied 1.9% after topping estimates while General Electric (GE) gained 0.7% after an in-line report.

Economic data

CPI matched expectations with a 0.3% increase in June, with a 3.4% gain in gas prices accounting for a large portion of the increase. Core CPI (which excludes food and energy) also came in-line with expectations of a 0.2% increase.

Housing starts increased 9.8% in June, beating expectations, with multifamily construction rising 29.4% to record the largest monthly tally since 1988. US home-builder confidence hit its highest level in nearly a decade.

June core retail sales fell 0.1%, breaking an impressive three-month run. The University of Michigan's Consumer Sentiment Index declined to 93.3 versus expectations of 96.1, potentially reflecting rising gas prices and anxiety about the situation in Greece.

While data was somewhat mixed, there was nothing to derail the Fed’s rate hike calendar. In Congressional testimony Wednesday, Federal Reserve Chairman Janet Yellen noted signs of economic improvement and hinted the FOMC is likely to increase rates later in the year if the trend continues.

Week ahead

• Monday: Notable earnings – Halliburton (HAL), Morgan Stanley (MS); IBM (IBM)
• Tuesday: Notable earnings – Verizon (VZ), Baker Hughes (BHI); Apple (AAPL), Microsoft (MSFT)
• Wednesday: US existing home sales, Notable earnings – American Express (AXP)
• Thursday: China flash manufacturing PMI, Notable earnings – Caterpillar (CAT), Eli Lilly (LLY), McDonalds (MCD); AT&T (T), Visa (V)
• Friday: EU flash composite PMI, US new home sales, Notable earnings – Biogen (BIIB)

• What is algorithmic/systematic trading?
  • Algorithmic/systematic trading is the broad term for a system that is programmed to use some type of mathematical model to autonomously execute trades. A human programs a strategy into a computer based on a given criteria, and the computer runs the system from there.
  • HFT is a type of algorithmic trading, but not all algorithmic trading should be considered HFT
• What is manual/discretionary trading?
  • Manual/discretionary trading is the broad term for a human making subjective decisions to execute trades, typically based on a set of subjective criteria. A manual trader could be a retail investor placing one trade per month, a professional day trader making several hundred trades a day, or a large institution buying large quanities of shares on various time-frames.

1. The use of extraordinarily high-speed order submission/cancellation/modification systems with speeds in excess of five milliseconds or generally very close to minimal latency of a trade
2. The use of computer programs or algorithms for automated decision making where order initiation, generating, routing, and execution are determined by the system without human direction for each individual trade or order
3. The use of co-location services, direct market access, or individual data feeds offered by exchanges and others to minimize network and other types of latencies
4. Very short time-frames for establishing and liquidating positions
5. High daily portfolio turnover and/or a high order-to-trade ratio intraday
6. The submission of numerous orders that are cancelled immediately or within milliseconds after submission
7. Ending the trading day in as close to a flat position as possible (not carrying significant, un-hedged positions overnight)

1. Passive market making
   1. Passive market-making primarily consists of placing bids and offers (limit orders) to provide liquidity to the market. Profits are derived from buying at the bid and selling at the offer to capture liquidity rebates offered in the maker-taker model.
   2. Regulators are concerned about the quality of the liquidity HFT passive market making supposedly provides. Because of the bad incentives of the maker-taker model, there is heavy layering of the order book and high, rapid cancellation rates of 90% or more.
2. Arbitrage
   1. Arbitrage strategies seek to profit from pricing inefficiencies on the same asset across different marketplaces. Arbitrage will always exist in financial markets, but should not exist based on speed incentives from exchanges across related markets.
      1. Statistical arbitrage (“stat arb”) is the practice of exploiting pricing differentials between correlated securities and markets. Statistical arbitrage can be applied over any time-frame using mathematical modeling techniques.
      2. Latency arbitrage is the practice of exploiting a technology speed advantage. Latency describes the time that elapses from the moment a signal is sent to the moment it is received. The main disconnect when discussing the difference between non-predatory HFT and predatory HFT is confusion about the difference between statistical and latency arbitrage.
3. Structural
   1. Structural strategies most purely look to exploit market structure inefficiencies by obtaining fastest delivery of market data through server co-location and direct data feeds. With access to the fastest quote information, firms could look to prey on executions from market participants accessing slower feeds.
4. Directional
   1. Directional strategies look to profit from the anticipation of directional movement in securities prices, unlike the prior three mentioned strategies which do not take unhedged risk.
      1. Order anticipation directional strategies look to identify and get ahead of large orders that may affect price, while using those orders as free options (exit points) in case the security’s price does not move in the anticipated direction.
      2. Momentum ignition strategies involve a firm submitting a series of orders in an attempt to ignite a rapid directional price movement. This concept, called “spoofing,” tricks algorithms and manual traders into buying or selling aggressively. Momentum ignition strategies may also look to trigger existing stop-loss orders to ignite further price movement. Spoofing is illegal, but hard to identify and prove.

1. Order Protection Rule: ensures investors receive the best possible execution price on a security across all exchanges. The rule was designed protect investors from existing “trade-through rules” that allowed for disadvantageous executions, especially on limit orders. The intentions of the rule were good, but its unintended consequences have harmed market structure.
2. Access Rule: This rule gave birth to a system called the Securities Information Processor (SIP), which is basically the aggregation of quotes across all public exchanges to create a universal National Best Bid and Offer (NBBO) for every security. Data feeds from all the data centers of the exchanges into one central processor, which then spits out a universal spread. Regulators created this rule in order to tackle what they saw as ill effects of increasing fragmentation of public exchanges, but instead it exacerbated fragmentation and flight to dark pools.