From: Justin X Gratz To: Undisclosed recipients:; Subject: Eye on the Market, July 13, 2010 Date: Tue, 13 Jul 2010 16:51:20 +0000 Attachments: 7-13-10_-_EOTM_-_5_best_things_about_theilash_crash.pdf !Wine-Images: image001.png; image003.png; image006.png; image012.png All eyes are on European bank stress tests, which will be released on July 23. After their release, our European head strategist Cesar Perez and I will take a look at the results. For European banks, it could serve as an important inflection point; for U.S. banks, the test results marked the bottom. But in the U.S., the tests incorporated loss assumptions that were even more severe than losses realized during the worst stretch of the 1930's Depression, and also came at a time when the global recovery in production was just getting underway. Given the size of the European system, reliance on wholesale funding, slower trend growth and higher levels of corporate and household debt, stress tests will have to be credible to prompt money market and bond funds to start providing capital again. Our focus will be on the rigor of loss and GDP growth assumptions; recently announced decisions to expand the tests to more banks should be seen as a "given". The 5 best things about the Flash Crash On May 6 2010, major U.S. market indices dropped by over 9%, with a 7% decline within one 15-minute span, temporarily evaporating $1 trillion in market capitalization, before recovering. The SEC has not yet determined what caused this event. In their examinations, the SEC is dealing with a world that has changed a lot from the traditional floor-based outcry model; the percentage of total volumes executed by floor brokers and specialists fell from 52% in 1999 to 7.5% as of 2007. That's why the Flash Crash discussion includes a focus on high-frequency trading. Market research estimates that HFT has grown in the U.S. to 70% of all trades (50%-60% of shares traded). In Japan, HFT is roughly 30% of all trading,