2009 Recapitulating Thoughts On HFT From Themis Trading's Joe Saluzzi
Zero Hedge has been a little quiet on the topic of HFT lately, not because we have come to peace with the threat that HFT presents to equity markets (we have not), and if HFT lobbyists are successful, CDS is next, or because we have realized that no matter what, Mary Schapiro will never, ever do the right thing and take a preemptive action instead of always doing damage control after the fact, until such time as the broader population finally realizes just how worthless the organization of the ex-Finra multi-millionairess is and forces its closure (please Judge Rakoff, do anything you can to accelerate this), but because we have been fascinated by the parallel farce that is the financial reform legislation which is nothing but yet another massive form of bailout for the big banks. We recommend our readers read David Reilly's terrific overview of HR 4173: poor David is likely one of the 2 people in the entire world who read the entire 1,279 pages of mostly useless drivel. Some of its key points highlighted by Reilly are the following:
-- For all its heft, the bill doesn’t once mention the
words “too-big-to-fail,” the main issue confronting the
financial system. Admitting you have a problem, as any 12-
stepper knows, is the crucial first step toward recovery.
-- Instead, it supports the biggest banks. It authorizes
Federal Reserve banks to provide as much as $4 trillion in
emergency funding the next time Wall Street crashes. So much for
“no-more-bailouts” talk. That is more than twice what the Fed
pumped into markets this time around. The size of the fund makes
the bribes in the Senate’s health-care bill look minuscule.
-- Oh, hold on, the Federal Reserve and Treasury Secretary
can’t authorize these funds unless “there is at least a 99
percent likelihood that all funds and interest will be paid
back.” Too bad the same models used to foresee the housing
meltdown probably will be used to predict this likelihood as
-- The bill also allows the government, in a crisis, to
back financial firms’ debts. Bondholders can sleep easy -- there
are more bailouts to come.
-- The legislation does create a council of regulators to
spot risks to the financial system and big financial firms.
Unfortunately this group is made up of folks who missed the
problems that led to the current crisis.
-- Don’t worry, this time regulators will have better
tools. Six months after being created, the council will report
to Congress on “whether setting up an electronic database”
would be a help. Maybe they’ll even get to use that Internet
-- This group, among its many powers, can restrict the
ability of a financial firm to trade for its own account.
Perhaps this section should be entitled, “Yes, Goldman Sachs
Group Inc., we’re looking at you.”
-- The bill also allows regulators to “prohibit any
incentive-based payment arrangement.” In other words, banker
bonuses are still in play. Maybe Bank of America Corp. and
Citigroup Inc. shouldn’t have rushed to pay back Troubled Asset
Relief Program funds.
-- The bill kills the Office of Thrift Supervision, a
toothless watchdog. Well, kill may be too strong a word. That
agency and its employees will be folded into the Office of the
Comptroller of the Currency. Further proof that government never
-- Since Congress isn’t cutting jobs, why not add a few
more. The bill calls for more than a dozen agencies to create a
position called “Director of Minority and Women Inclusion.”
People in these new posts will be presidential appointees. I
thought too-big-to-fail banks were the pressing issue. Turns out
it’s diversity, and patronage.
-- Not that the House is entirely sure of what the issues
are, at least judging by the two dozen or so studies the bill
authorizes. About a quarter of them relate to credit-rating
companies, an area in which the legislation falls short of
meaningful change. Sadly, these studies don’t tackle tough
questions like whether we should just do away with ratings
altogether. Here’s a tip: Do the studies, then write the
So even though the next massive bailout is merely at most months, weeks or days in the future, so is the next HFT-precipitated market crash. The reason for this keeps on being trumpted, as usual, by the sole voice of sanity in the HFT jungle, where any change in the rules is likely going to cost High Frequency Predatory Scalpers billions in lost revenue, which explains their constant whining in conflicted industry publications. Ultimately, HFT lobbyists may have completed their jobs, as Schapiro hopes to take another page out of the Obama playbook and promtply bury all dissent under the rug of collective social amnesia, facilitated by the Fed's prodding of equity markets ever higher. Don't worry Ms. Schapiro, we will constantly be there, reminding the public of your ongoing epic failings, for the duration of your tenure at the SEC. And when we are not there, we are grateful that people like Themis Trading's Joe Saluzzi can carry the torch. Unfortunately, the proof of Saluzzi's hypothesis would require a Black Monday-like event, at which point it will be far too late for meaningful damage control.
Joe Saluzzi discusses HFT on Bloomberg TV earlier: key point - HFT has helped tighten spreads in large cap names, but in the small to mid-cap stocks, a NYSE study demonstrates that liquidity has decreased and volatility has increased. As more and more HFT cannibalization occurs, expect this trends to impair large-cap names next.