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$34 Billion Asset Manager Says Market Prices Are Manipulated, Accuses NYSE Of Intellectual Property Theft, Debunks HFT "Liquidity Provider" Lies
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:
- Is the current market structure robust and resilient? Or,
- Do market regulators permit too many "tricks" amongst market participants?
- At the macro level, in a normal environment, do these "tricks" go unnoticed? But,
- In a fat tail event, will these "tricks" effect catastrophic outcomes?
- Are we wholly confident that the odds we place on extraordinary events - market shocks - are correct?
- 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
transactions:
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
securities 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
System.
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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Excellent Cheyenne, I like your style.
Many individual investors have been hitting back for a long time, at least 2 years (actually decades of corporate governance). "Retail investors" people like Tyler Durden label them. Now Tyler's upset because the wolves (GS) have started eating the wolves, and for people like Tyler that's just unconscionable.
The solution...
Defragmentation of all exchanges
No dark pools....no off exchange matching of any kind...
No "crossovers"...one has a 5 year waiting period between working for government versus corporate....
The exchange must be highly efficient....electronic direct access whose users are not dominated by excessively large companies....ie Blackrock, GS, JPM, etc....
The exchange must be "RETAIL" oriented....no account minimum....no uptick rule....no naked shorts....just a simple maximum which would be shares outstanding via electronic tag...
The exchange is just software...can be located anywhere in the world...
The cost of hitting a computer key to transfer ownership numbers by time stamp should not exceed 20 cents per 100 shares....for any size account...
There has to be size restrictions on excessively large accounts ....
There should be a one second minimum....this eliminates HFT....
Fabrication of money via OTC off exchange instruments has to be ruled illegal....eliminated...
And this is just the start.....
This is all just a glorified financial version of Core War:
http://en.wikipedia.org/wiki/Core_War
I am Chumbawamba.
This 14 page presentation brief by NYSE Euronext (Nov. ’09) helped me understand their POV. http://www.ituaseconference.com/doc/NYSE%20.pdf
"The terrible, cold, cruel part is Wall Street. Rivers of gold flow there from all over the earth, and death comes with it. There, as nowhere else, you feel a total absence of the spirit: herds of men who cannot count past three, herds more who cannot get past six, scorn for pure science and demoniacal respect for the present. And the terrible thing is that the crowd that fills the street believes that the world will always be the same and that it is their duty to keep that huge machine running, day and night, forever." - Federico Garcia Lorca - Spanish Poet and Playwright
Tyler, I rarely see you criticise FINRA on this blog. They are the one responsible for policing trades on the NYSE. You don't want to ruffle financial industry feathers who are just as responsible for this mess??? I do think it's funny while the individual investor has been raped for years, I doubt it bothered you so much then. GS wolves eat someone inside the pack is a different matter for you Tyler????
FINRA was headed by Mary Shapiro until she became head of the SEC. All "discussions" of the SEC are completely applicable to FINRA as well, which is the same toothless and captured organization as the SEC is, but on a smaller scale.
Tyler,
I don't think FINRA is on a "smaller scale" as you say. But you answered the question relatively frankly which was better than I expected, so I semi-respect you for that.. FINRA is a sham organization, and it's hard to say they are "captured" as the truth is they are one and the same with the industry. It's equivalent to saying you "captured" your left arm. And for the record, I predict a FINRA scandal in the future which will make Minerals Management Service look like a Girl Scouts meeting.
we are a slave species breaking our chains and our masters are running scared - on the grand parabola of change in no time at all things will look very different
Excellent work ZHer team. Keep up the great work!!
Tool - Forty Six & 2
http://www.youtube.com/watch?v=qSKEJC9WoQw
Change is coming, just not in the planned agenda set forth.
Everyone have a great weekend. :>)
First of all, I don’t think anyone can accurately understand the effect of HFT or the purchase of equities by the Fed as suggested by some of the commenters here. Everyone has an opinion but that doesn’t account for the total picture. It’s all hidden in secrecy and gobbledygook.
This article is a powerful criticism of HFT with evidence and great detail as to the misconceptions about it. And the good news is, SAM makes its points in the King’s English that even the public and SEC can understand, that easily triumphs over the flim flam and twisted opinions given by broker-influenced commenters, not to exclude Goldman allies.
All you have to know is that the same people who own and operate the NYFed, that are the same people who select the officials from the SEC to the NYSE to the Secretary of the U.S. Treasury, are the very same people who own and operate the HFT mechanisms and that these are the very same people who, in the midst of worldwide recession, help keep the DJIA holding and waiting for a recovery and waiting for a recovery that never seems to arrive and that these are the very same people--the people who own the HFT mechanisms—who, in the face of wide spread financial misery throughout the world, have become obscenely wealthy... on somebody else’s money.
When fiat debasement and another recoinage reform cycle begins, you will see a different picture.
In the meantime, grab your popcorn and watch the computer's annihilate one another.
Hal wont Open the Pod Bay Door
http://www.youtube.com/watch?v=kkyUMmNl4hk
Ben, Barney, this conversation can serve no purpose anymore.
this article is incomplete and therefore inaccurate and misleading. moreover, the example of their email exchange with NYSE is it hypocritical. i have written a lengthier explanation a few hundred pixels above your response.
There’s that old adage that there’s a disadvantage in being too smart. Oft times you can’t tell which way is up. On a post that presents such strong evidence backed with logic and explanations on the evils of HFT, these counter explanations have a curious Goldman ring to them. I know HFT operators are pretty happy with their money-making machines and, hence, they need a host of apologists to cover the Internet to try to stop the mounting criticisms.
My metal detectors for this faux info have been buzzing more than usual from many of the preceding comments. HFT allows the market to be manipulated with HFT programs that are impossible to beat and are unavailable to the average guy.
Example: Walk up to the Las Vegas roulette table with your laptop and your software system and after your first pass you’ll be escorted to the street before your scotch and water arrives.
What you’re saying is it’s no fun to play if the others don’t want to play, right? Who can you beat? There’s no percentage if the only money in the pot is yours, eh?
following the logic laid out in this article is similar to arguing that the only and best way to erradicate aids is to simply outlaw sex. makes perfect sense from a perspective of an impotent 85yo.
IOW, HFT is so necessary and so integrated that the only way to eliminate it is to eliminate the stock market. I figured that out and I’m not even 85yo yet.
And by the way, if eliminating the stock market will get rid of Goldman Sachs, I say, Let's do it!
i suspect majority of GS profits and thereby power (and damage to the economy) comes from credit products trading.
Could be. Illicitly made, lost and illicitly gained again. As Matt Taibbi said, Goldman Sachs has engineered every major market manipulation since the Great Depression, including the most recent financial crisis “which doubles as a history of the rapid decline and fall of the suddenly swindled dry American empire.”
And after injecting its dangerous financial products into the world's commercial bloodstream for years and shorting the stuff, it helped ignite the derivatives time bomb, not only blowing up itself but the entire world. But no problem, GS simply claimed insolvency to qualify for bailout billions from beleaquered taxpayers, and announced that it would convert from an investment bank to a bankholding company to feed free off the Fed,
As Taibbi said, Goldman is just a highly sophisticated (corrupt) engine for converting the world’s wealth into pure profit, i.e., pure waste, for rich individuals. And a big part of that engine, IMO, is HFT, i.e., cheating. And so, as the vampire squid, enabled by the U.S. Congress, wraps "around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money," families and nations are breaking apart throughout the world.
Goldman, says Ben Stein, has a fascinating culture--sort of like what he’d imagine the culture of the K.G.B. to be. And to think Americans put one of Goldman’s chief bundlers of toxic fraudulent credit waste on a scale of billions into the U.S. Treasury--Henry M. Paulson Jr., only to be replaced by Goldman/Rubin protege from the FRBNY, Timothy Geithner.
It isn't only financial markets that are being manipulated…
When a crash comes it will happen so fast no one will have a chance to get out. The algos just keep feeding into winners so long as they continue to be profitable. Flash Crash was no accident.
Agree. They cannot front run what is not there. When the last real sizable bid is pulled from SPY, the mirage of an active market fades.
It would not surprise me if the sole reason for this expedition is to find out just who, and how many, know how corrupted the SEC and its owners are.
Buying support continues ...
DOW updated charts:
http://stockmarket618.wordpress.com
http://www.zerohedge.com/forum/latest-market-outlook-1