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All You Need To Know About HFT: "Sell Everything, And Shutdown"; 4 Years Without A Loss
The reasons for last week's collapse will be probed for a long time, and likely no firm conclusion will ever be derived, because it was caused by a confluence of numerous factors. While there may be immediate causes for the plunge, the one recurring reason for both that crash, and all future ones, will be dominant role played by HFT traders as they now control market structure when they operate, and the massive vacuum left when they decide to simply shut down when things get too heated and there is no regulated liquidity provider backstop. As the New York Times reports yesterday from your typical HFT bucket shop "as the stock market began to plunge in the “flash crash,” someone here walked up to one of those computers and typed the command HF STOP: sell everything, and shutdown." A vivid and brief summary of what we have been warning for over a year. Also, we find out that just like Tradebot, which as "one of the biggest high-frequency traders around, had not had a losing day in four years" that Goldman, and all the other big banks who reported a flawless first quarter, are now nothing but one large HFT prop shop: they push the market higher on no volume, and when the selling in size commences they all just shut down. So much for providing liquidity when it is needed. And as for that 4 year track record... What did Madoff go to jail for again?
From the NYT:
Above the Restoration Hardware in this Jersey Shore town, not far from the Navesink River, lurks a Wall Street giant. Here, inside the humdrum offices of a tiny trading firm called Tradeworx, workers in their 20s and 30s in jeans and T-shirts quietly tend high-speed computers that typically buy and sell 80 million shares a day.
But on the afternoon of May 6, as the stock market began to plunge in the “flash crash,” someone here walked up to one of those computers and typed the command HF STOP: sell everything, and shutdown.
Across the country, several of Tradeworx’s counterparts did the same. In a blink, some of the most powerful players in the stock market today — high-frequency traders — went dark. The result sent chills through the financial world.
After the brief 1,000-point plunge in the stock market that day, the growing role of high-frequency traders in the nation’s financial markets is drawing new scrutiny.
Over the last decade, these high-tech operators have become sort of a shadow Wall Street — from New Jersey to Kansas City, from Texas to Chicago. Depending on whose estimates you believe, high-frequency traders account for 40 to 70 percent of all trading on every stock market in the country. Some of the biggest players trade more than a billion shares a day.
And for the closest rendering of the enlightened gambling that occurs each and every day, now that traditional investing is long-dead, the NYT brings you this. Observe the similarity between Tradebot's trading results and those of of Goldman et al this quarter.
These are short-term bets. Very short. The founder of Tradebot, in Kansas City, Mo., told students in 2008 that his firm typically held stocks for 11 seconds. Tradebot, one of the biggest high-frequency traders around, had not had a losing day in four years, he said.
But some in Washington wonder if ordinary investors will pay a price for this sort of lightning-quick trading. Unlike old-fashioned specialists on the New York Stock Exchange, who are obligated to stay in the market whether it is rising or falling, high-frequency traders can walk away at any time.
While market regulators are still trying to figure out what happened on May 6, the decision of high-frequency traders to withdraw from the marketplace is under examination.Did their decision create a market vacuum that caused prices to plunge even faster?
“We don’t know, but isn’t that the point? How are we ever going to find out what’s going on with these high-frequency traders?” said Senator Edward E. Kaufman, Democrat of Delaware, who wants the Securities and Exchange Commission to collect more information on high-frequency traders.
The HFT response: more of the same lies we have grown accustomed to reading from the HFT lobby.
“We are not a no-regulation crowd,” said Richard Gorelick, a co-founder of the high-frequency trading firm RGM Advisors in Austin, Tex. “We were all created by good regulation, the regulation that provided for more competition, more transparency and more fairness.”
But critics say the markets have become unfair to investors who cannot invest millions in high-tech computers. The exchanges offer incentives, including rebates, which can add up to meaningful profits for high-volume traders as well.
“The market structure has morphed from one that was equitable and fair to one where those who get the greatest perks, who have the speed, have all of the advantages,” said Sal Arnuk, who runs an equity trading firm in New Jersey.
And let's not forget that old broken record and now completely discredited standby: providing liquidity. Sure, when all the HFTs shut down at the same time as soon as the house of cards mirage is evident for all to see, liquidity is gone faster than any credibility this market may have.
“The benefits of the liquidity that we bring to the markets aren’t theoretical,” said Cameron Smith, the general counsel for high-frequency trading firm Quantlab Financial in Houston. “If you can buy a security with the knowledge that you can resell it later, that creates a lot of confidence in the market.”
The high-frequency club consisting of 100 to 200 firms are scattered far from the canyons of Wall Street. Most use their founders’ money to trade. A handful are run from spare bedrooms, while others, like GetCo in Chicago, have hundreds of employees.
Most of these firms typically hold onto stocks for a few seconds, minutes or hours and usually end the day with little or no position in the market. Their profits come in slivers of a penny, but they can reap those incremental rewards over and over, all day long.
A quick glimpse into the "sophisticated" work that goes into picking winners and losers:
The Tradeworx computers get price quotes from the exchanges, decide how to trade, complete a risk analysis and generate a buy or sell order — in 20 microseconds.
The computers trade in and out of individual stocks, indexes and exchange-traded funds, or E.T.F.’s, all day long. Mr. Narang, for the most part, has no idea which stocks Tradeworx is buying or selling.
Showing a computer chart to a visitor, Mr. Narang zeroes in on one stock that had recently been a winner for the firm. Which stock? Mr. Narang clicks on the chart to bring up the ticker symbol: NETL. What’s that? Mr. Narang clicks a few more times and answers slowly: “NetLogic Microsystems.” He shrugs. “Never heard of it,” he says.
And here is what will happen every single time when panicked volume selling picks up: the liquidity will always disappear, as long as HFT's role in market structure is not curbed and regulated.
Mr. Narang said Tradeworx could not tell whether something was wrong with the data feeds from the exchanges. More important, Mr. Narang worried that if some trades were canceled — as, indeed, many were — Tradeworx might be left holding stocks it did not want.
It's all good as long as the market rises without any participation. 401k holders are happy. However as the market is up on nothing but ultra short-term gambling by firms that have no clue what the stocks they churn daily, the days to the next massive crash are already counting down.
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> "Tradebot, one of the biggest high-frequency traders around, had not had a losing day in four years, he said."
Stop the presses. What!? Holy shit!
And they don't even know what they're trading. Abandon ship!
You think they'd throw in a 'losing day' here and there just to give the appearance of non-criminality...
"It's America. We already ran the probabilities of going to jail, so we'd rather make money than worry about getting cancer, plane crashes, and being struck by lightning."
What a fucking joke the world's markets have become.
Actually the process has changed the definition of "market". It has come well past the time when the "market" has to be re-defined and segmented into various categories or types. That task is beyond my expertise so I'll pass on supervising that endeavor.
love the "they might get stuck with stocks they don't want"
I KNOW!!!! the peasants are supposed to be left holding........
since 12AM, the futures have moved from -112 to green.....the pump monkeys are here, now expect the "buy the dip" cheerleading to be relentless on CNBC.....
fortunately, i talked all elderly relatives into selling out their stock portfolios over the weekend.....
thank god, they will be out before the close today.....
maybe Tradebot will end up holding some of their stuff.
hope so.
Looks like Benron opened up the swap lines in the middle of the night.
http://finviz.com/futures_charts.ashx?t=CURRENCIES&p=h1
Fake money, fake markets.
Step 1): Model the HFT algos
Step 2): Assemble backing and infrastructure
Step 3): Destroy algos
Step 4): Back to bed.....
Bots were doable when there were real investors to take the hits. Now it's just down right scary.
It ain't gonna be Skynet...
STOCKNET A.I.
Tha Terminator
Fastest to type HF STOP wins?
I think the only winners will be the ones frontrunning the FEDBOT.
all you need to know:
this
http://www.deshawindia.com/InformationTechnology.html
to support this
http://www.deshaw.com/QuantitativeStrategies.html
Advertising...no real content
I've been outed
yes Janice, I am a shill for D.E. Shaw
Our marketing strategy is to post links on blogs in the hopes of attracting new investors.
The geeks have taken over the world!!!
From their mother's basement.
Wait a second... They "typed" a command? What kind of system is that?
If I was in charge of designing this system, I would at least have a nice menu, with a number next to the option. "HF STOP" would be something like "0000", for instance. Much faster to type, and easier to remember in a hurry...
The real investors probably felt that they were always at the losing end of the trade.
So what you have now is an unlimited liquidity source Fed. Reserve + Taxpayer and Algos leaching and sucking the source dry everytime.
Madoff is in jail for running a scheme similar to Social Security and Medicare. Except, of course, participation in Madoff's scheme was voluntary
There are no liquidity providers because the SEC has been actively driving them out of business for the past 2 years by taking away exemptions from onerous trading rules that suck liquidity out of the market and raising fees - usually at the behest of the "too big to fails" so that they can drive their competitors out of business.
And you keep begging for more SEC enforcement.
Only the HFT shops can survive on the thinner than ever margins (made thinner not by competition but by regulators, mind - thinner through competition is always better for the peasants).
The HFT shops provide 50-70% of liquidity.
If the SEC doesn't allow more trading exemptions for AT LEAST liquidity providers and reverse the regulatory fees and doesn't stop going after every liquidity provider for minor technical violations (and I do mean minor - like forgetting to buy back 100 shares of a much larger buy-in) but does go after HFT shops, THERE WILL BE NO LIQUIDITY.
The "peasants" whined and begged the SEC to kill the market. It has. You screwed yourself. Deal with it.
Nobody is going to lose their life savings to provide a bid for you.
They provide it when it guarantees profits. When losses can be incurred, liquidity, as the article demonstrates, is pulled within miliseconds. Seems like pretty liquid liquidity to us.
Market makers will only provide liquidity when they can hedge their positions. When they can't (and recent trading restrictions have made it way too hard), they aren't willing to provide it. A really good market maker CAN go for long periods without a down day - and I'm not even talking about an HFT shop. It's rare, but I've seen it with no shenanigans.
Pray tell - what business is willing to provide its service at a garuanteed LOSS? It's a bit stupid to complain that businesses are only willing to be in business if there's a profit to be made.
If providing liquidity is so awesome, why don't you quit bitching and go provide some. Make sure you tell your investors that you'll be willing to provide a bid or offer regardless of your probability of making a profit on the trade and see how much money you raise!
HFT is what you and the retail guys have bitched your way into. It's the last frontier of liquidity and without it, you get none.
Start either asking for fewer trading restrictions across the board or exemptions for MM's. Even as an MM, I think we should have fewer restrictions across the board because restrictions and exemptions create rents. There's no reason why we should have this many shorting restrictions and they're killing liquidity. The only reason the SEC loves the game of restrictions and exemptions is because they have more power that way.
Stop getting distracted by HFT.
KAT,
You have drawn attention ot some of the nonsense that passes for analysis. Why would people expect that there should be some liquidity provider out there which should intend to trade in a manner that will lead to losses? The analysis seems to stop and calls for criminal probes begin when it is revealed that the actually do and intend to generate a profit. It is only the pesants who are really entitled to profits. The little folks making a trade every year or so should be expected to provide the liquidity. They always rush in to buy when the market is falling and will reliiably do it on every tick - OH Yeah.
Can you please elaborate on which "recent trading restrictions" you talk about? Also who's to see we didn't provide liquidity at the bottom of the market drop by issuing a limit bid on XYZ security. Oh wait, the SEC said that trade was DKed, because I was willing to go on a limb and step in where the computers feared to tread.
oh...and btw....a big reason why HFT shops have been able to make money every day without losses is because most of them can borrow at basically 0% and invest in Treasuries. That's been a daily winner for a long time.
You have GOT to stop reading the tabloid that the NY Times had become. And if you do read it, please remember that most of their journalists are flunkies who were rejected from real jobs.
I think there's a confusion between HFT shops (which could be in that unmarked warehouse near you) and market makers (i.e. JPM, GS et al). The HFT shop will of course be buying and selling in whatever small timeframe they deem necessary. I don't see that they have explicitly guaranteed to be a bidder when things get bad. Now if GS starts ignoring orders until convenient, that's another story.
The article sounds rather dramatic, typing HFT STOP and crashing the market, but for an independent shop, it is not wise to suddenly dump 7000 E-mini contracts. Honestly, if they are trading in 11 second timeframes, they clearly saw the market turning long before the actual dumpage began.
Also, I think it is a convenient scapegoat. You think up until this moment, none of those HFT shops ever typed "HFT STOP"? I
Nice second derivative.
Market liquidity: the ability of an asset to be turned into cash without affecting the broader market.
Market liquidity liquidity: the ability of a liquidity provider to convert every asset to cash without affecting the broader market.
So May 6th was a failure in market liquidity liquidity. Obviously we need providers for that - otherwise known as traders, investors, humans, retail, buy side, chumps, monkeys. Without them playing, May 6th is just an appetiser for the future
It appears Kat has an inside look at HFT...A valued addition in a debate about market integrity. We cant turn back time but can sure slow a speeding freight train with no brakes.
Just from my pure self-interested perspective, I'd love it if liquidity were to crash - to kill these overinflated asset prices and expose the crapola nature of so many of these securities.
So yeah, kill liquidity, force corporate America to have its balls shaved, and reboot the system before it leads to a massive war or some other unmanageable black swan.
If you want to do some stuff about market structure, we can talk about that. The trading networks are relatively new. They can be rebuilt. I even know the guys who put them together. I just have to say that it's become obvious that people won't accept that the big banks have a built-in advantage (in part because they built the fucking network).
Whatever new system that gets built will need to be fully transparent, be more neutral about execution speeds, and provide more warnings to retail investors.
SEC has to stop telling retail that it's protecting them. Retail should be treated like one-armed bandit lever pullers. That's what they are. That's what they always will be. It's what they demand.
No insight into HFT - only into market making as a non-HFT shop.
"Tradebot... had not had a losing day in four years"
Gentlemen, WE have found El Dorado!
Are you sure it's not Perpetual Motion that has been inadvertently found?
What's the difference?
(Sorry, could not resist...)
To provide some balance to the HFT story...A few years ago a co-worker of mine decided he wanted to help his 12 year old son develop his new interest in investing. They poured over potential stock purchases and made the decision. "Let's get started with one (1) share of Coke." Sounds like a story from the dark ages.
It's difficult to characterize HFT as gambling if the bots have not had a losing day in 4 years.
Such wisdom and you are correct :-)
They are highly rewarded because of the enormous risk involved. lol
An enlightening article....indeed. The INGSOC reality drives the little guy into penny stocks of mining exploration companies.....hoping to make a buck on something "real." I live in the interstitial spaces...between the toes on the gorilla....where O2 levels are near zero.
The idea that a market should be "fair" is paradoxical, and naive.
Just face it. Trabebot got you beat. And you wouldn't be in the market unless being beat was a possibility. A fair market is a market where money is distributed according to how much value each trader has added to the community, that is, money is divided equally between traders each day. (Unless someone performs a Heimlich maneuver on the floor.) No one would trade there.
Deep down, you wanna show Tradebot who's the boss, don't you? Of course you do. That's why we have stock markets. Apart from giving people that much sought after ego boost and government approved chance to fool money off lesser intelligent fellow citizens, they're utterly pointless. Not saying they're not providing an important function for our society.
The discussion whether HFT provides liquidity or not is most amusing, and a beautiful manifestation of the ingenuity of the human brain in its constant search for rationalizations that enables it to to grab what it can for itself and leave others out to dry, while feeling good about it. And how can you blame it for trying? It should be well adapted to the idea of survival of the fittest by now.
I was thinking "Word." until your third paragraph.
Stock markets provide very useful functions - they permit venture capital to exit its investees (snark), and they permit liquid exchange of rights to future distribution of cash flows to equity (the liquid nature of [most] listed stocks is why listed stocks trade at a premium to unlisted equity with identical cash flows).
At the end of the day (moving to the thrust of the post itself)... even if HFT players are buying and selling stuff and they don't know what it is... who gives a shit so long as the playing field is (roughly) flat?
Otherwise, do you require that people trade solely on fundamentals, or would you permit technical trading so long as the trader knew the name of the stock? Must anyone buying an S&P ETF be able to name all 500 component stocks, or would you go further - must they know its GICS sector [at what leel?], or must they have performed a valuation? Must a would-be investor use the Damodaran model selector to pick the model, or can they pick their own? What about estimates for the ERP and Beta and so forth? Should you be obliged to get them from a central repository?
HFT traders risk the capital entrusted to them (be it their own, or an amount raised by appeal to external investors); they win or they lose depending on their trade performance. So long as the exchanges were prepared to offer identical terms to ANYBODY who saw fit to have a crack at HFT, then those who don't do HFT are CHOOSING to deploy their capital in a different way.
Let's say that we declare today that all stock purchases have to be held for some pre-determined period of time - a day, for example. Well, there will still be people who evaluate their portfolios weekly (or over even longer timeframes); ZOMG they will be at a disadvantage!!! Horrors! Extend the timeframe! These '2-day-traders' are stealing from old widows and pension funds!
That said, let's stipulate that a lot of HFT shops are offered terms that none of us schmoes could ever dream to get; the ability to sniff the order queue prior to the orders' appearance in depth, routing advantages (effectively, but not ACTUALLY, queue-jumping)... and so forth.
The stance against HFT reminds me of the whining by the Australians after the Bodyline series, where the English cricket team worked out how to reduce the threat posed by Donald Bradman: set a leg side field and bowl him bouncers.
Bradman's average halved, and the Australians whinged like red-haired children.
The Aussies said "This is not cricket!" (to the people who invented the game) and kept whining until the laws were changed. Would they have done that if they had been the ones who thought up the stratagem? Hardly. Would cricket be [more] boring today if Leg Theory was still permitted? Probably not (at least, it would still be 75% less boring than baseball).
At the end of the day, HFT cannot materially change the operating cash flows of a company - they can change the trajectory of the stock price, but not for long. (The same was true of daytraders in tech stocks in 1995-2000).
So small fry need to make a decision: are you a trader, or an investor?
If trader, are you happy being in the same pool as the HFT piranha? If not, either become and investor or get a different job.
Same goes for anybody who routinely takes notice of sell-side research (or, worse, Abby Cohen's S&P targets): if you're silly enough to trade based on it, then you deserve everything you get - but Goldman et al should still be permitted to publish their research, if only to give us someting to chuckle at.
Cheerio
GT (Aussie? Yes. Evil? Hardly.)
HFT FOR DUMMIES
Q: How do you have 100% "win" days?
A: Easy:
[ben@localhost ~]$ sudo zirp
[timmy@localhost ~]$ sudo chown gs:tbtf nyse
Shit is so cash.
prolly also need
chown gs:tbtf senate congress
No need to chown these:
$ ls-l congress
-rwxrwx--- 1 frbny tbtf 535 March 4 1789 congress
Wall St is the new version of siliCON valley. Don't go to MBA school, pursue computer science.
Here’s the part no one, or very few people get… the machines are plugged into social media and other media outlets. The machines do in fact imitate people, the machine move when people would move or buy. The numbers I have heard quoted are 70% (here) movement or buying and selling on a given day, which I hate to make the point of 70% would be a LOW! Ball estimate when considering the market is tanking, at which point the market is floated 100% by the machines which are on over ride commands.
The machines are supposed to emulate the real market, the machines are supposed to push the market higher thusly restoring confidence in the market… The machines are doing their job, now that the machines are in place I think that if we where to follow trends of who is causing the distress in the market place? People trying to shake pennies loose? People marching forward a much more extreme point of view? Who, is fucking up a machine run market on auto-pilot and more importantly what does someone gain from shaking the goose that lays the golden eggs, all day every day? Crowd control?
1. Providing the platforms for studying the dynamics of population and social change.
2. Generating plans for the future on the basis of present understanding and current
action.
3. Creating programme/projects that are maximally effective yet economical in
tackling needs of the populace.
4. Establishing priorities and otherwise provide a rational basic for taking action to
alleviate needs.
5. Identifying current and future needs of the various groups in the society.
6. Identifying current needs of various sectors of the country for services.
7. Measuring progress in goals attainment.
http://www.fig.net/pub/proceedings/nairobi/ayeni-adewale-TS3-1.pdf
Or… something a lil older?
This article presents evidence about very ancient Chinese theories of managerial control -- how superiors and subordinates should relate, and how to control, lead and motivate people. The ancient Chinese used duties and ceremonial etiquette to increase social integration. They also developed well-articulated bureaucracies with departments, coordination links among officials, standard operating procedures, and audits of officials' performance.
http://pages.stern.nyu.edu/~wstarbuc/ChinCtrl.html
easy fix. SLPs should have the same obligations that traditional market makers have to stay in the markets during panics to balance out their special privileges (flash order etc).
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