$34 Billion Asset Manager Says Market Prices Are Manipulated, Accuses NYSE Of Intellectual Property Theft, Debunks HFT "Liquidity Provider" Lies

Tyler Durden's picture

As part of the SEC's process to fix the broken market, it is currently soliciting public feedback on a variety of issues. Why it is doing so, we don't know - after all anything that does not conform to the SEC's preconception of what the most lucrative market to the SEC's recent batch of clients (see earlier news about an SEC director going to HFT specialist Getco) is, just ends up in the shredder anyway. At this point to believe that the SEC will do anything remotely in the interest of investors instead of millisecond speculators, is naive beyond compare. Nonetheless, while combing through some of the recent public responses on the topic of market structure, we came across the following presentation by $34 billion Southeastern Asset Management (SAM), titled "Comment & Analysis on Equity Market Structure" which must be brought to the attention of all those who have the temerity to defend HFT as an altruistic source of liquidity provisioning. SAM's 4 points are simple, and laid out very easily so that even the mildly retarded  public, pardon, GETCO servants at the SEC can understand it: "1) The intent of the Securities Exchange Act of 1934 as provided for in its preamble is being twisted and abused for the benefit of gamblers and to the detriment of investors. 2) The markets are not "fair and honest", 3) Securities prices are presently "susceptible to manipulation and control, and the dissemination of such prices gives rise to excessive speculation, resulting in sudden and unreasonable fluctuations in the prices of securities. 4) The preceding three issues are fixable by the SEC." Let's dig in.

Before we get into the meat of the complaint, one of SAM's primary concerns, is that the US stock market has become the functional equivalent of China: trading intellectual property is routinely abused, stolen and used against its very creator.

  • The US equity markets are meant to facilitate investors' allocation of capital to businesses, thus expanding production and improving the quality of life in America.
  • The markets have strayed from this social purpose, and presently resemble casinos more than orderly markets. As a result, the economy is hindered, fewer jobs are created, and reasonable returns for true investors (not traders) are compromised.
  • The property rights of creators of intellectual capital are being systematically and openly ignored by the exchanges and certain market participants. The order originator's hard work, ingenuity, and prospective returns are being taken and sold by those who did not create it.
  • Whereas trading was once a means with which to match long-term buyers and sellers of businesses, trading has now become an end in and of itself.

And while these are rather philosophical concepts which will stump the SEC for years, and even then Mary Schapiro's lack of brain trust will still say evidence is inconclusive and the IP theft, as established, will continue indefinitely, SAM's disclosure about the true nature of HFT should be read by everyone, especially by the industry increasingly more conflicted defenders (why else would a firm like Getco go out and hire a pathologically "confused" person from the SEC if not for the fringe benefits of regulatory capture):

The traditional defense that HFT provides "liquidity" was completely disproven on May 6. Yet for those who still believe this naive argument, here is a more extended analysis.

and more:

Some undisputed facts for the novices in the HFT arena, such as the SEC:

As to what SAM requests of the SEC in order to take the first proper steps of correcting the busted market, here is the summary:

Forbid and prosecute the theft of trading decisions, which represent the actionable cumulative
value of a manager's intellectual property by stating that:

  • The creator of trading information is the owner of such information.
  • Brokers have a fiduciary obligation to protect such information of their clients.
  • Exchanges cannot repurpose such information for their own benefit without the express consent of the information's originator.
  • Exchanges and brokers must furnish the information that is released regarding an order to the order's originator.
  • Investors may opt to relinquish this intellectual property right, but, the default would be in favor of protecting information. No market participants can discriminate based on another party's elections.

Mandate that all investors receive the same market data at the same time by:

  • Amending Regulation NMS Rule 603 to prohibit "single exchange data feed[s]" and require an exchange or national securities association to provide any quotation or last sale data for an NMS stock to any investor only as part of a consolidated display of all quotation data and all last sale data from all markets.
  • Banning an exchange or national securities association from providing "Order 10" or any other identifying market data that allows participants to determine whether specific quotes or executions are linked.

Mandate that any order on an exchange or national securities association have a minimum duration of 1 second prior to any cancelations/ amendments taking effect. Alternatively, institute 1 second duration auctions during which all exchange transactions must occur.

Eliminate maker/ taker pricing rebates by:


  • Expanding the ban on excessive access fees in Regulation NMS Rule 610 to ban a trading center from offering rebates as they provide perverse incentives when order routing.
  • In light of the events of May 6, SAM provides the following very useful cheat sheet for the SEC on what Fat Tail events are, and what the proper questions to ask of those who derelicted their duties to preserve and orderly market structure:

    In statistics, fat tails (kurtosis) describe how often "outlier" events occur. The cliche "a once-in-a-lifetime catastrophe seems to occur every other week," is a commonplace reference to fat tails - extraordinary, unexpected events occurring more often than predicted.

    Fat tails are important in the financial markets as investors and regulators calibrate systems and expectations for the steady, normal state. When the abnormal occurs, most participants are caught off guard and find themselves in peril.

    After most fat tail events, a review of the contributing factors results in culpable parties explaining how their models could not have predicted what actually did happen.

    • 1987 Black Monday, portfolio insurance
    • 2007 Subprime Mortgage Crisis, exceptional default rates
    • May 6, 2010, DJIA temporarily falls nearly 1000 points, what was high-frequency trading's role?

    Questions for market regulators, legislators, and participants:

    1. Is the current market structure robust and resilient? Or,
    2. Do market regulators permit too many "tricks" amongst market participants?
    3. At the macro level, in a normal environment, do these "tricks" go unnoticed? But,
    4. In a fat tail event, will these "tricks" effect catastrophic outcomes?
    5. Are we wholly confident that the odds we place on extraordinary events - market shocks - are correct?
    6. Are market participants being consistently and effectively regulated, and are those strategic, tactical, and systemic risks being understood?

    Yet most interestingly is the direct attack at exchanges who provide enough information to those willing to pay millions of dollars for what in any other practice would be considered an unfair advantage. SAM provides an overview of just the kind of unfair advantage HFT's get when paying for preferential treatment by exchanges. Armed with the following information even computers with half a blown CPU will be able to legally front-run the entire market and make a killing. And people wonder why Goldman never loses money any more...

    In the regard, we were very happy to learn that SAM has sent a letter to our old, opaque friends at the NYSE, which has recently been losing gobs of revenue to dark venues and as such has taken the war against dark pools into the open, even as it itself allegedly engages in precisely the type of IP theft defined above. To wit:

    We hope that now that SAM's response has received far more public scrutiny, the SEC will no longer hide behind the "we didn't see it, so it doesn't exist excuse" - the invesros of America are disgusted with how the SEC has allowed what was once an efficient market to degenrate into a manipulated, broken and inefficient casino, which only generates benefits for a select few, and in which "trading has now become an end in and of itself" but is only profitable for those who, through kickbacks, are part of the "captured" regulatory club that knows the SEC will never touch them for endless market frontrunning and manipulation.

    In conclusion it is almost with shame that one has to be reminded about the very charter of the Securities Exchange Act of 1934, which described the requirement for regulation, and which was the very bedrock of what was once supposed to be an agency serving the public, and instead is now as worthless as US Treasuries will be in a few years:

    For the reasons hereinafter enumerated, transactions in securities as
    commonly conducted upon securities exchanges and over-the-counter
    markets are affected with a national public interest which makes it
    necessary to provide for regulation and control of such transactions
    and of practices and matters related thereto, including transactions by
    officers, directors, and principal security holders, to require
    appropriate reports to remove impediments to and perfect the mechanisms
    of a national market system for securities and a national system for
    the clearance and settlement of securities transactions and the
    safeguarding of securities and funds related thereto, and to impose
    requirements necessary to make such regulation and control reasonably
    complete and effective, in order to protect interstate commerce, the
    national credit, the Federal taxing power, to protect and make more
    effective the national banking system and Federal Reserve System, and
    to insure the maintenance of fair and honest markets in such

    Frequently the prices of securities on such
    exchanges and markets are susceptible to manipulation and control, and
    the dissemination of such prices gives rise to excessive speculation,
    resulting in sudden and unreasonable fluctuations in the prices of
    which (a) cause alternately unreasonable expansion and
    unreasonable contraction of the volume of credit available for trade,
    transportation, and industry in interstate commerce, (b) hinder the
    proper appraisal of the value of securities and thus prevent a fair
    calculation of taxes owing to the United States and to the several
    States by owners, buyers, and sellers of securities, and (c) prevent
    the fair valuation of collateral for bank loans and/or obstruct the
    effective operation of the national banking system and Federal Reserve

    Appendix: in order to demonstrate conclusively the false liquidity argument, SAM provides this additional Addendum which explains why "counter to the argument that investors save money by paying smaller spreads, true investors actually lose money because they are front-run" and also how retail investors keep getting consistently ripped off: "Retail investors once displayed the smallest public bids and offers. Unfortunately, retail investors have not changed their tactics to account for HFT rovers and are now displaying larger orders relative to other market participants on average."

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    mynhair's picture

    Hilarious!  If the SEC is as trashed as me, they got lost in the first two sentences!

    Truth is ignored by this admin.

    DeeDeeTwo's picture

    We are all on the same side, baby, we want old fashioned rules strictly enforced... and all forms of market manipulation eliminated. So OK:

    (1) You cannot be "front-run" unless you Play the Mook... and penny jump the penny jumper. And you cannot be spoofed... unless you dance to the spoofer's tune and pay more. I trade a universe of 300 stocks. I hold my ground with Limit Orders. If I'm being manipulated... I just go buy something similar. Or I turn the tables on the spoofer... if I can be bothered.

    (2) Why should we care about a $33 billion whale having "liquidity problems"? There is a reason 100 ton animals are extinct.

    (3) A retail investor accumulating a diversified retirement portfolio of ETFs using Limit Orders has 90% lower transaction and slippage costs then 15 years ago. Unless some idiot is trying to scalp the Dog of the Week against Bots... HFT has no effect on a small trader with a functioning brain. 

    (4) So it's harder for Pro Traders in 2010. Big Deal. Adapt or die.

    (5) The "Good Old Days" was your dad paying a 9.5% front end load for a "mutual fund" shilled on "Wall Street Week" by slimy con men. Good times.


    Hephasteus's picture

    I can't do that.

    1. I don't have a pack of mentos.

    2. I'm not psychotic and able to pretend hard enough.

    3. The last time someone gave me a fake buck up soldier speech. I stapled his tongue to his chin.

    chumbawamba's picture

    What?  You don't have Mentos?  Mentos is the freshmaker, dude!  Get with the fucking program.

    I am Chumbawamba.

    Al Gorerhythm's picture

    Your philosophical position is....? And the small trader is unaffected by HFT, you have got to be shitting me. I gave up trading in the mafia owned pits. The trading pits are where you have the Gambino family offering various trades of shares they don't own (have stolen or counterfeited), whilst the Lucchese's oversee the trades making sure all is above board.

    I'm happy for you in your successes in those pits but I have to say that the average guy, pulling in his weekly cheque and salting some away in a retirement fund, has no chance of avoiding the effects of market manipulations.

    I have many friends and aquaintances who have had to defer their retirements because of the types running the show. Fucking thiefs, milking the little guy, supported by mental midgets who can't tell right from wrong.

    Your pond is wide old cock, but only 1" deep.

    Mactheknife's picture

    It is really a quite simple proposition. The HFTs would have us believe that they are just the new and improved version of specialists and market makers. However, the facts reveal something that looks like a comparison between a two bit conman on a bicycle and Jessie James in a top fuel funny car. Actually, that is not even close. There is no comparison.

    Dr o love's picture

    Your post belies what a true novice you are.  Trading on longer time frames doesn't protect you from the bots that take advantage of you.  You should stick to your day job at McDonald's and leave the trading to the adults.

    Marc45's picture

    How did your limit orders fare during the "HFT" plunge last month?

    JW n FL's picture
    by mynhair
    on Fri, 06/11/2010 - 16:30

    ***** "Truth is ignored by this admin." *****


    Government is a “Tool” of the “Lobby”…

    The Lobby is a “Tool” of whoever wields the “Lobby”

    The “Lobby” today is used my Big Business (AAA rated Corps. / Banks) to ensure market share or more accurately that those businesses do not lose Market Share and hopefully they are able to grow their foot print thru legislation.

    Our economy is not dependant on innovation… it is dependent on Lobby who survives on dollars from “AAA” Rated Corporations… Maintaining Market Share and thusly the circle is complete.


    Regardless of who is elected the Lobby will continue to sway legislation; there are no exceptions for this rule.


    Control the Lobby and you control the Government.


    Kill the Lobby and the Voters are back in control of the Lobby (save the contributors?!).


    How many layers can well come up with of legalized corruption? Lobby? Layered Campaign Contribution? Pac Monies? Fund raisers? And on… and on.



    So, Obama? Who was cutting the Lobby off at the door of the white house?


    ***Cough*** “Bullshit” ***Cough***




    The President can do nothing without Congress… or the Senate… support.


    So who controls the Government? And who control the Lobby? And who used Tarp Monies / Fed Window 0% rates to pay for the death of innovation in favor of the fight for middle market share maintenance, growth or control. Free market only works if you can afford to Lobby vigorously.


    Behind The Sentiment Disparity: Main Street Vs. Wall Street



    Anyone who says Obama is a Socialist? Or that Bush was not? or maybe that there is a difference between the two?


    Just for the fun of it…



    There will be “NO!” fundamental changes due to the Lobby and until all of the fractured weirdo groups pool resources and get on the same fucking page… nothing will change. To many chiefs and not enough Indians… that all want the bull pulpit for personal reasons which over shadows any good that could potential come from their speaking publicly.


    Or so that would be my personal view and I am happy to go tit for tat with anyone who sees it differently. Vernacular aside, the position is bullet proof.


    The Banks are using profits to pay for their Lobby? not the 0% Fed Window?


    **** "In the first three months of 2009, the financial sector spent $104.7 million to lobby Congress and the administration, down 8% from the same period last year" ****


    So that I am clear... 2008 was a vintage year for Banks? they made soooooooooooooooooooooo much money on 2008 that in the first 3 months of 2009... they could drop $104.7 MILLION DOLLARS?



    But the failure was brought on by Bush pumping and then de-stabilizing the Federal dollars (really tax payer dollars) that where assumed to be safe by Bear, Lehman and so on... Don't get me wrong, Barney is an idiot Lobby whore just like Bush... but there is no difference between Barney, Bush, Obama, Clinton and so on... they are all moved by Lobby dollars... the song and dance is strictly for the public's entertainment.


    Obama is Bush part duex.. he is not a commie, he has taken every Bush program and ran with it... not run from it. Dont get caught up in the public spin machine.


    I offer... http://www.opensecrets.org/ see who owns your favorite representatives and then for fun look at the dem's side who should be against the reps push... and see how the dollars move the votes, not the party affiliations.


    John Mcsame spent all of a whole 10 minutes yesterday grilling Goldman, and said he was very disappointed in Goldmans behavior... he spoke less that the girl in Levin's ear...

    Top Industries

    John McCain


    Finance, Insurance & Real Estate






    Lawyers & Lobbyists











    John McSame spent 100 times less times talking about how we all have been screwed by Goldman for around 10 times more money than the other committee members where Bribed... Oops, I mean Lobbied with.


    There is no difference between the two parties, the lobby has bought and paid for all the whores inside the beltway, don’t think because of the cute sound bite you like hearing that the two parties are any different.


    Mactheknife's picture

    >There is no difference between the two parties, the lobby has bought and paid for all the whores inside the beltway, don’t think because of the cute sound bite you like hearing that the two parties are any different.

    Ahhh, a great truth! Two wings of the same bird of prey.

    Two words. TERM LIMITS

    Jendrzejczyk's picture

    Look into who owns the "homes" in the neighborhoods close to the DNC and RNC headquarters. New Jersey Ave. SE is a great place to start researching.

    Millions spent to renovate/decorate houses that sit mostly vacant so our elected officials can drop in and have brunch before some important bill is passed.

    eccitante's picture

    And then there is foreign policy and the wars (and all the other scams)...the sooner all this collapses the better, then we can just start over. In the meantime get out of the country if you can (wish I could), figure out a way to preserve what assets you have left & hopefully maintain some kind of standard of living, and if you are smart, make a few bucks from the action in the markets as the collapse/melt up gains steam.

    stickyfingers's picture

    NYSE rule - Know your client. Do they ever!

    wolfsonite's picture

    Nice find, TD. The HFT Misconceptions slide says it all ... one huge, rigged market.

    I need more asshats's picture

    Agreed. There should be one exchange for blackbox trading and another one for humans. I heard that one of these rogue algorithms bought a $11 million dollar estate in South Hampton last week! Fucking machines!

    Let them all fail's picture

    For those who have seen "Office Space" - HFT is the equivalent of their scheme to steal the rounded cents, less than a penny at a time that quickly adds up to hundreds of thousands, just on a much larger scale.  That's all this shit is, just a program designed to steal money.

    -Michelle-'s picture

    I'm amused to find there is an actual term for this: salami slicing.


    SilverIsKing's picture

    To be honest, when I first looked at your post, I winced.

    Thanks for the link though.  I feel much better.


    BTW, no bank failures yet.

    I need more asshats's picture

    Yea I read that. The definition for Salami Attack is in there too. Salami Attack, hehhehe.

    tom a taxpayer's picture

    No matter how Wall Street slices it, it is still baloney.

    Mentaliusanything's picture

    The answer is simple - AXE meet OPTIC FIBRE. Shazam 

    OutLookingIn's picture

    "will these 'tricks' effect catastrophic outcomes?"

    So we axed Trixy down on toidy toid and toid avenoo, an she said... okay nevah mine what she said.. da point is... what was da qweshun agin? Gotta go. Late fer woik at da ssseeecee. Seeeyuooz latta.  

    sysin3's picture

    We got these new-fangled things called "computers" now.  Seems like them boxes could be forced to display a consolidated, coordinated best bid/offer and last trade ..... of any security, anywhere in the world.

    Dark pools are bullshit.  Post your bid or offer, which gets displayed on the *one* trading venue for that security.  You either get hit or you do not.  Live with it.

    One tape to rule them all, and in the darkness bind them.

    Kali's picture

    They are starting to eat their own.  People always worry about what us peons will do, but watch out when the big hyenas start fighting amongst themselves!

    chinaguy's picture

    "we didn't see it, so it doesn't exist excuse"

    ....nope more like:

    "we couldn't understand it, so it doesn't exist excuse"


    Mitchman's picture

    Bravo TD!!!  And Bravo to SAM!  Enough of this bullshit!

    Interesting the way the NYSE is dodging the question.  It's obviously going to take yet another lawsuit to bring some transparency to this den of thieves.

    peterpeter's picture

    How are they dodging the question when they post the protocol on their website: http://www.nyxdata.com/doc/5970


    AccreditedEYE's picture

    What Megabank hole did you crawl out of Peter? Why don't you go back to it? multi-million dollar bonuses don't get paid to Managing Directors that aren't giving their full attention to F-ing the already broken system....

    ReallySparky's picture

    Thank you Zerohedge. 

    peterpeter's picture

    Writing a letter to the NYSE to ask what is in the data feed and having it published on ZH, seems much less effective than just going to the NYSE website and reading the document: http://www.nyxdata.com/doc/5970

    It is there for all to read...  It doesn't take millions of dollars to get this feed, just $5000/mo (http://www.nyxdata.com/openbook/#1288)

    Now, if they are pissed that they are leaking information about their hidden orders (and I'm going to go out on a limb and say that they are big proponents of dark pools if they dont like the information leakage from executed hidden orders on lit exchanges), then there is a simple solution:

    Post multiple hidden orders with different order reference numbers.

    If their broker-dealer can't do that for them, then I would suggest that they stop spending time writing letters, and look for a better BD to execute for them.

    The time period that orders are on average on the books is a function of the minimum price tick (1 penny for stocks trading over $1), which is now substantially more granular than when we were trading in fractions.

    A 1/16th move was more than 6 times a 1 penny move.

    If they can't connect the dots and figure that the frequent changes in price are caused by the change in the size of price increments, well - then they really shouldn't be writing long diatribes about market structure.

    A much more informative graph would have looked at pre-decimalization price changes as against the most closely related buckets of decimals (i.e. a 6 penny move would be equivalent roughly to a 1/16th move).

    If they don't like the granular and frequent price changes, then I'm sure someone would be happy to trade with them in quotes that are expressed in the nearest 1/16th fraction, where a data feed is provided that will shield SAM from the more accurate and more rapidly changing prices and make things just like they liked them in the old days.


    Captain Willard's picture


    We built a great country and a great stock market on the old NYSE rules of "public/time priority and precedence" of customer orders.

    Please explain to us how these HFT assholes are helping long-term investors and companies reduce the cost of investment capital and build a better country (and world).

    peterpeter's picture

    If you traded 10 years ago, did you not pay more per share in commissions with a much higher spread?

    Did you think that reduction in costs and tighter spreads was from the stock market fairy?


    Let them all fail's picture

    Any reduction in costs is more than made up by the additional costs of being front-run and increased market inefficiency, not to mention the general disintegration of trust in our markets.  The long-run implications of this HFT-driven systems are highly destructuve for our markets and economy regardless of your assessment of these small short-term benefits you propose.

    Even, hypothetically, if HFT reduced spreads and commissions as you suggest, it does not mean that this method of "trading" should be legal.  Maybe its a matter of opinion, but our markets need to restored to a system driven by prospects in the underlying investments and economic conditions driven by intrinsic valuations rather than trades executed in milliseconds which take advantage of refunds and "lots and lots of pennies" - there is no investing involved in HFT - the market seemed just fine before HFT come into play, lower spreads can be beneficial to investors, but commissions are irrelevant to this conversation despite you bringing it up. 

    KidDynamite's picture

    Let Them all Fail:  I think a lot of people mis-assign the "disingegration of trust in our markets" that you mention.  There is no doubt that it's a very difficult time to traverse our markets - but that's because government policies are totally fucking up asset prices and making it hard for investors to make "logical" choices - not because Hal 9000 is running wild and manipulating the markets.  After all - assuming we fix the stupid rules about canceling trades, wouldn't you guys like a flash crash every day?  I would -  Other traders doing stupid irrational things is nothing but OPPORTUNITY for everyone else to make money.  Do you think HFT algos are driving stock prices  up too high?  Eureka!  you can short stocks!  You think HFT algos are driving stock prices down too low?  BUY!  other market participants' irrational actions are EXACTLY how you make money.


    Contrast that to market access issues - it's impossible to argue that the retail investor doesn't have an easier and cheaper time trading now than they did ten years ago.  Where you used to pay your Merrill broker $149 a trade and a 25c spread, and then a few years later your Schwab broker $39.99 and a teeny spread, while accessing 20 minute delayed quotes,  today you can pay any number of brokers $9 or less, lift offers and hit bids for a penny spread, and get real time data.  Yes - your real time data is 50 milliseconds slower than the colocated real time data, but that shouldn't matter to you INVESTING decisions anyway, and again, the time delay has been closed from 20 minutes to fractions of a second.

    HFT traders compete with other traders.  yes - they make it harder for Joey Baggadonuts Day Trader to scalp CSCO in SOES.  That's a different issue from saying that retail investors are getting hosed.  after all - where do you draw the line?  it's ok for Joey Baggadonuts to "trade" with his tools that Jane Retail doesn't have, but it's not ok for HFT Harry to do Joey Baggadonuts's job better than Joey can?  unless we're just going to ban all "trading" and require anyone who wants to buy a stock to submit a proposal to the SEC showing that they've done their research, and petitioning as to why they should be allowed to buy the stock as an investment... but i don't think that's the way to go...

    Let them all fail's picture

    Very true that gov't is much to blame given their management of our economy, understand your points, but as a matter opinion don't feel that computer alogrithms being executed in milliseconds should be allowed to trade.  Computers are good for placing and executing trades, but not for building programs designed to exploit other traders.  If they make money regardless of market action, these funds are literally decreasing the profits (long or short) which are possible to be made for other traders, investors, etc. and more important decreasing market efficiency as a result - Aside from limit orders, etc., people need to be responsible for initiating trades rather than computer programs.

    You don't have to do research, your reason for buying is irrelevant...thats a stupid comment, its not about having a reason.

    So you feel that HFT is solely responsible for decreasing online transaction commissions?

    KidDynamite's picture

    the reason i made the comment about "reason for buying" is because you made a comment about intrinsic valuations. I was trying to point out that you can't decide which "Traders" you want to ban - in my opinion, and say that one trader has a right to trade for a profit while another doesn't.  Look - INVESTORS deduce what they think the value of a stock is.  If you're an investor, you want as many traders as possible in the marketplace.  More traders can only mean more people to sell you your good at your price.  yes - liquidity.   It also means more people to do crazy irrational things like sell ACN down to a penny so you can rationally scoop it and profit.  That's a GOOD thing, not a bad thing.

    TRADERS on the other hand, hate HFT, because they are getting out-traded.  Why does one (slow) trader have a right to make money in the marketplace but  another (fast) trader doesn't?  if you want HFT banned, where do you draw the line?  Why is it ok for some non-hft guy to sit there at his desk daytrading to try to make money?  why does he have any more right to those profits than the HFT guy?  answer: he doesn't. as long as everyone has equal opportunity to be one of the HFT guys.  As far as i know, everyone does.  And an article today said they're trying to further level this playing field: 


    I don't really understand why they say the market needs to be opened up - i think it's already open, but hey - open it more - great. nothing wrong with that.

    in other words, you don't need to be "GS" or "GETCO" to get this data - anyone who wants to pay the fees can do it. I think PeterPeter said it's $5k a month.  That's not prohibitive.    it shouldn't be free. If you think you can make money off it, pay the price, develop the system, and go for it.  That's how any business works. You have to invest in it first.

    side example:  Tyler has been talking all week here at ZH about the EURJPH vs ESU0 convergence trade.  Is that "fair" ? most people can't do that trade at home.  I can't do it.  That doesn't mean that no one else should be able to do it.


    as for commissions:  commissions absolutely decreased as a result of increasing volumes and competitiveness of access - which has been helped by all market participants, of which HFT plays no small part.


    Implicit simplicit's picture

    The rules of the game simply are not fair to the average trader and /or investor. The HFTs are ruining the game because of the amount of capital they are able to deploy, and the sophisticsted algorithms used to deploy the capital.The majority can not  afford the equipment and capital; thus the rules either need to be reset for the majority to play fairly in the game, or the game should just be played by the HFTs with each other.

    Its like one rich team playing a sport with all the high tech equipment to protect them taking advantage of the poor opposing team wearing leather helmets. The playing field should be leveled.

    KidDynamite's picture

    your comment illustrates many of the misconceptions about high frequency trading.  Capital is a totally different issue.  and yes - CAPITAL is what moves stock prices, not computers.


    because an algorithm is sophisticated and takes work to write, that means that it shouldn't be allowed?  wow. i'm not going to debate you on that one, Implicit - if  you believe that, you're living under a different set of beliefs than I am.


    i also won't argue with you about a "level playing field."  as i said - the important thing is that everyone has the opportunity to succeed - not that everyone succeeds... It's no different from any other business.  The field is open for you - hire a programmer and get some co-lo space. it doesn't cost millions of dollars.

    Implicit simplicit's picture

    Kd, my point was not that algorithms should not be part of trading, but that the combination of volume, algos and capital deployed by the wealthy create an unfair advantage. Do you believe that there is no need for change? What would be wrong with setting time/volume limit breakers to level the playing field for those that are not as rich as the algo manipulators?

    KidDynamite's picture

    but i answered this above already.  how do you say that HFT Harry can't do his trading, but Day Trading Danny can do his job?  they're the same job, but one guy does it better, with more technology... or that only little guys can use algos?  it makes no sense. 

    The solution is to make the access EASIER for everyone - which is precisely what it happening, according to the NYT Dealbook article i linked.

    i absolutely positively believe that times have never been better (from a market structure point of view, that is) for the retail investor, and i think that is the important thing.   Contrast this to saying that now is an easy time to invest - it's not - but that's not because of HFT - as i said in my first comment - it's because of government intervention and bastardization of asset prices.

    Everyone needs to distiguish retail investor from small day trader.  The goal is to protect retail investors, not to protect small day traders who are having their lunch eaten by faster more sophisticated traders.

    Implicit simplicit's picture

    The article offers a good solution, however the debate centers around the advantage of the "deep pocketed". The location issue in the distance variable of speed would still give the advantage to the wealthy. Those are the only ones who could afford to rent/buy space as proposed by the article. I don't think the disagreement we have is not lack of knowledge on my part as much as it is an ideological difference of opinion about how to level the playing field (volume/time breakers) even further than making everything  dark pool. I am always willing to learn and change my opinion. Thanks for the response.

    KidDynamite's picture

    thanks for the reasonable dicussion.  i'll close by repeating that it's not just the wealthy that can buy colocated server space and fast data feeds - that's a fallacy, and it's a key point.  like any business, however, of course there are costs.

    dcb's picture

    Tell me kid.

    What is the purpose of the market?you design a system for the purpose you want to acheive. If the purpose of the market is an attempt to match buyers and sellers of goods for better capitial allocation then hft is bad.

    if the purpose of HFT is to make the markets function for the max benefit of traders then HFT is good.

    I do have huge issues with rebates from exchanges. big mistake. I think the best way to deal with it is via a transaction tax. the only people hurt will be the HFT is structured low enough. the other problem with HFT is that it is anmomentum designed thing that functions on charts and little else. it desabilizes the market. Why should someone who looks at cash flow etc. invest in a computer driven trend following, trend ine dominated market.

    A market is a function of the dominant way people trade on it. Hence that is what our current market is.

    in regards to the retail investor as long as spreads are reaonable they don't matter becuause by their very nature they don't trade that much. so that argument isn't valid.

    At this point there is so much information out there from respected folks like King and haldane this shouldn't be an issue. it remains an issue because of only one reasn the banks want it for profits. It is kind of like the efficient market theory. dead for years but retained because it is a theory that justifies max profits for the industry.


    You ever notice the theory these folks adopt always is the one that gives them ma profits, never the one that limits them. That alone should cause you to be critical. they didn't adopt hft because they made less money they or helped us. they adopted it because they made more money then they make up the reasons it is good later.


    Can I day trade using hft on a macd 10 minute cycle on spy and make money almost every time. yes. that isn't they way I want to trade. But since I can make the most money that way that means that it is how the market functions.  But at least these firms should be paying like I do for the trade and not getting rebates. this is a huge distortion to the market. the fact that most hft groups don't hold positions whould tell you something. it means fundamentals play no role in investing, only trading, hence it destroys the purpose of why markets were invented in the first place. 


    To be honest I have seen you write on this topic for a while and you are a lost cause. no matter how much evidence, or philosophical approach discussion one presents you never alter your view. kind of like the insisting on creationsim instead of evolution or the earth is flat.

    If it is about asking to protect the retail investor why not let them decide. But we know that isn't going to be allowd to happen. same as financial reform letting people vote on the issue. If it is better for me, and I don't want it it should be my choice, not hedge funds, goldman, etc. yet they are the one's saying how something I don't want helps me. It isn't my choice. Later if I want it back I can revote. You relly think the retail investor (buy and hold type) thinks HFT is good.

    Implicit simplicit's picture

    By the way KD, you make some valid points and your comments regarding "one giant dark pool" seem worth consideration.

    KidDynamite's picture

    the dark pool concept is too philosophical for most people, but it's really not complicated.

    basically, trading is by nature, predatory.  The point of traders is to look at market information and deduce where stocks are going to go.  If you know there is a buyer of 100,000 shares of XYZ, that tilts your expectations to the upside.  You may think this sucks - if you do, i understand.  I happen to have been a trader, so i don't think it sucks, i think it's the point of trading (contrast that with investing, though, which is different of course).   it's why i find so much of what the Themis guys write hypocritical - they are trying to use their smarts to figure out where stocks are going.  Good for them.  the "machines" are doing the same thing - but they're doing it faster and better than humans can.  it's a consequence of capitalism.


      Some HFT algos do a very fine, fast version of this trading - and the way to prevent it, if you don't like it, is to remove the information, by making markets dark.  don't show bids/offers, and no one can "prey" on them.

    KidDynamite's picture

    but let's not lose sight of the key point:  you referred to "the cost of being frontrun."  You have 1c spreads now.  You can lift the offer and pay that 1c spread.  That cost has NEVER been lower.  It's not my opinion - i don't understand how anyone can debate it - it's a fact. 

    Yes - there are now many very smart market participants (like HFT traders) who can crunch millions of data points a second and deduce that if you bid $45.05 for 500 shares then the stock has .005694% more likelihood of eventually trading at $45.06 than if you had never bid $45.05.  So that HFT algo might bid $45.06.  Without getting into an inane debate about how that is absolutely positively NOT frontrunning, you can simply avoid the  whole issue by paying the 1c spread. 

    There is always going to be a cost of trading.  The cost now is lower by many magnitudes than it has ever been.  There is a remedy for this, by the way, and that's to consolidate the market into one big dark pool where bids and offers aren't shown, so no one can trade off of the informational value contained in such bids and offers.  Somehow, indescribably, though, the same voices on this blog who have voiced anti-HFT sentiments have voiced anti-dark pool sentiments, which makes very very little sense.  Dark pools are the antidote to HFT's information processing advantage.


    Cheeky Bastard's picture

    If you are the same KidDynamite who often frequents SSA blog and the same KidDynamite of Kid Dynamites World; I would just want to say i really enjoy your writings. Keep up the good work son, not that I need to tell you that.

    Eally Ucked's picture

    As I can see you are briliant trader, making money left and right, buy, sell, short, long whatever.

    The only problem, despite all those savings we get from you and HFT, is that when we dummies leave the market how your brilliance will bring you money? I bet that you are able to rip off computers and Goldman will have 100% negative results for their trading days. Where all those trading gains for major banks are coming from, if they trading against each other some of them have to have losses, isn't it valid point? So if all of them have trading gains then their data is bullshit or the market has to go up thanks to their trading.