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The Anonymity Of HFT Whales May Be About To Expire, Together With Their Revenue Streams
If you have been wondering why Rentec, GETCO, Citadel and Highbridge are sweating these days, it is because the SEC is preparing to finally remove the rock they all crawl under as they execute millions of trades each and every second. As Traders Magazine reports, "the Securities and Exchange Commission, in an effort to get more
information about high-frequency trading, plans to dust off an old
statute that allows it to require large traders to "self-identify"
themselves. As part of the plan, the SEC will propose a rule
implementing a large trader reporting system for non-broker-dealers." So if you see any particularly abnormal market behavior these days, don't be surprised if it is simply due to Jimbo and Kenny doing all the can to pocket last any minute revenue before the hammer comes crashing down.
So why does the SEC care about identifying these huge, market moving non-broker institutions? Because, apparently the brilliant regulatory idiots do not have an idea of who trades what right now. Correct: the market regulator is unaware if GETCO moves a trillion shares of AIG stock all on its own. How the hell are these people policing the markets if they don't have access to something as simple as that?
This new effort is expected to give the SEC more visibility into the
activities of some high-frequency trading firms. Currently, the SEC
does not have this access to this information.
David Shillman, associate director of the SEC's Division of Trading
and Markets, said the SEC can use its authority under Section 13(h) of
the Securities Exchange Act to force large trading firms, including
hedge funds and proprietary trading shops that are not broker-dealers,
to file a form with the SEC and use an identification number when they
trade. That would allow the SEC to gather information about their
executions and help determine what impact, if any, they may be having
on the marketplace.
"We need to get better baseline information about who the
high-frequency traders are and what they're doing," Shillman said. He
noted that high-frequency trading has grown significantly in recent
years. "It has become such a dominant part of the market that now may
be the time to revisit exercising our authority under Section 13(h),"
he said."Among other things, the Commission has authority to require all
large traders to self-identify and to use a large trader identifier
when they trade," he said.
What is the basis of Section 13?
The authority to establish a large trader reporting system hails from
the Market Reform Act of 1990, which Congress adopted in the wake of
the 1987 market crash. The set of initiatives in that legislation was
conceived to address the "causes of precipitous market declines,"
according to the SEC's 1991 annual report. Those initiatives also
authorized the SEC to collect financial information on broker-dealer
holding companies for risk assessment purposes, among other things.
The SEC in 1991 proposed Rule 13h-1, which sought to establish a large
trader reporting system. The proposed rule required large traders to
file a form with the SEC and receive a large trader identification
number. That number would have to be used by all broker-dealers
effecting trades for that firm.
The large trader reporting system never got off the ground. Foreign
banks resisted the rule because of confidentiality laws in their home
countries [no worries there anymore, eh UBS?], and in 2000 the SEC instead proposed Rule 17a-25. That rule
requires brokers to electronically send the SEC information about
"customer and proprietary securities trading," when the Commission
requests that information. The rule, adopted in 2001, enhanced the
Electronic Blue Sheet system, which enables the SEC to get transaction
and related information from brokers. The EBS system got its name from
the blue paper that the SEC's information requests had previously been
printed on.
As for why regulation on a by exchange basis is idiotic, and why Rentec will always be able to nickel and dime the populace absent a global overhaul in regulation that tracks the order flow by execution not by venue:
"Right now, we are looking through a translucent veil, and only seeing
the registered firms, and that gives us an incomplete--if not
inaccurate--picture of the markets," he said. FINRA is the primary
regulator of broker-dealers and is making a pitch to conduct
consolidated market surveillance across market centers. Ketchum noted
that market surveillance is made more difficult by the ability of firms
to move order flow from one market center to another "on a
second-by-second basis."
But what is making the East Setauket boys most nervous, is that practically overnight their entire strategic advantage (recall numerous filing under seal in any litigation involving Renaissance) will be taken away:
That additional legislative authority, Shillman said, could provide the
SEC "with more direct oversight of unregulated high-frequency traders."
That oversight could allow the Commission to more effectively probe the
trading strategies of firms and propose rules to address activities
that are considered problematic, he said.
We appreciate the SEC being ahead of the curve on this one, just as it has been so prescient on all other matters. Should this initiative become effective we would be even willing to acknowledge, in a manner taking after the Obama administration, that the SEC has prevented or forestalled 600,000 market crashes. Unfortunately any regulator is only as good as its most recent horrendous judgment (and the SEC has many of those).
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...brilliant regulatory idiots... I have a problem with this sentence.
bpj....
ZH is widely credited with being the primary force that brought the HFT problem to the forefront, coalesced an influential group of people to take action, and moved the SEC into action. As is customary and usual, ZH invests an enormous amount of time and wisdom in producing follow up pieces.
Thanks much for your insightful opening comment.
shill bitch
Squid puppet!
I'll never forget the first time I saw your brother in person. I have nothing to say to you, clown.
http://upload.wikimedia.org/wikipedia/commons/thumb/3/3b/SculptureCheGue...
Thank you for this update TD.
Hey Rahm! C'mon guy, you know the midterms are getting tougher every day. There are lots and lots of votes out there for the congressional candidates who:
* demand the removal of Mary Schapiro.
* demand that the TBTFs be chopped down to reduce systemic risk.
* at least do a no brainer and get rid of that fool geithner.
* shitcan the reappointment of bernanke.
I also have a very, very valuable piece of advice but you are going to have to contact me and we can chit chat.
Let we little people know the secret handshake.
Anon, you already know it.
Well, how do I contact you?
ask larry summers
You calling me out again Dead one? I refer you to my comments made some time before.
- Love Rahm
just trying to help you out Rahmster. will trade you your midterm victories for saving the financial system for my kids.
You already know what I think of your kids & their future Dead One. As long as they are willing to take their place on the great treadmill and do their very best imitation of a hamster an steroids and meth willingly subscribing to the various myths of the nation I will be pleased.
- Love Rahm
will keep an eye on it
devil always in the details.
As with Madoff, unless there is an electric shock chair installed for the persons being the watch dog, they wouldn't recognized a nuclear explosion if it went off 10 feet away
> Correct: the market regulator is unaware if GETCO moves a trillion shares of AIG stock all on its own. How the hell are these people policing the markets if they don't have access to something as simple as that?
Because it isn't quite so simple.
It may be relatively easy to get a daily roll-up of which firms traded how many shares of each equity/option/swap/etc. at which prices and do a high level volume and profit analysis - but that is not going to shed any light on whether the underlying strategy responsible for those trades is something that the SEC would subsequently frown upon (i.e. is it legitimate market making activity, totally acceptable statistical arbitrage, momentum trading, fundamentally driven - or something of more dubious legality).
Getting information suitable to understand the trading strategies not only requires very sophisticated data analysis (the kind most likely employed at HFT firms rather than the SEC), but an enormously detailed data stream (i.e. micro-second granularity with full order type and routing instructions along side cancel requests and execution reports). A system like that would take many years to construct, and would likely then have too much information for all but a tiny subset of the human population to be able to begin to process in any meaningful way.
I personally think that *all* trades should be flagged with a unique identifier that is sent to the SEC, to assist in sniffing out obvious insider trading post facto - provided that the information is only ever seen by the SEC. If a system is built to capture the largest traders anyway, it would be less than an order of magnitude increase in system storage to keep track of every single trade... For all US based trades, the report could just include the SSN or tax ID of the account holder (information the broker dealers already have).
Assuming the reporting that the SEC is currently considering is implemented by broker-dealers (i.e. the BD sends a report to the SEC rather than the exchanges), I see no reason to believe that competitors will see each others trading activity in any more clarity than they currently do - which is the only reason I think most of the HFT (which for the most part implement perfectly legitimate strategies) should be sweating any bullets - and I've seen no evidence that they are sweating bullets.
+1
and, let's not kid ourselves - (highly) computerized trading is here to stay. just like we will never go back to hand written letters in order to do away with email spam.
about the only way to significantly reduce HFT, while still maintaining the framework of trading via electronic messages, would be to have a transaction tax. this would not "stop" computerized trading that is merely automated and hence still faster than human trading, but it would "kill" strategies whose symptoms are order-to-trade ratios below same level, depending on the fee amount. another way would be to have a combination order fee and transaction fee.
however, announcing either one of these changes would result in the biggest crash of them all.
besides - if one were to assume that the current state of the US stock market is highly bizarre, and we decided to list the culprits for such a state, HFT would def. not be on top of that list.
One solution may be separate indexes that are only algorithmically traded.
A blackbox exchange. You may be surprised how many algo traders would be into this.
Tyler said it himself; "HFT Whales".
There's a reason for the High Stakes tables in the casino. Because you can have the best of both worlds. You can still kill the little guy, and if you really have the best and brightest you can kill the big guys.
A clever, well connected blogger could broadcast Wall St. Bot Wars visualized. Ala Dana White style and make a killing.
When are you going to launch your concept?
"Correct: the market regulator is unaware if GETCO moves a trillion shares of AIG stock all on its own. How the hell are these people policing the markets if they don't have access to something as simple as that?"
This blows my mind, and that is why nobody should have their money in the system until it is structurally fixed. Naked shorts and naked non-delivered longs are tools of manipulation.
Yes, every transaction should have associated SS# and security unique identifier (for every individual security - separate number for each stock in circulation).
Unless each security is specifically numbered it is impossible for the DTCC to reconcile. For market makers that sell securities not in their inventory (assuming held for delivery like shorts), any sale would be cash in their pocket like check kiting and printing money.
Good work, TD.
If SEC prevails ( a very big IF ) we will know. DJIA daily volume at 300M will be the giveaway.
And who might that benefit?
Wider spreads, fewer trades on which to collect fees for FINRA and the SEC which would in turn mean higher commissions.
Less liquidity in smaller equities yielding less efficient market allocation of capital due to increased risk of an investor's inability to unwind a position easily.
+1
"less efficient market allocation of capital"
Is that even possible? Trained chimps couldn't allocate capital less efficiently than the market has recently.
> Is that even possible?
Sadly, yes. There are many historical examples.
At least if bubbles are going to be blown with ZIRP debased money, it's good to spread the wealth among the spectrum of market caps.
Imagine if we had crazy speculative inflows into capital markets and there was a greater bias towards large companies because of liquidity risk.
Trading in a room full of 'Agent Smiths' who in reality represent one entity, is hardly efficient, unless you are on the collusive side of the trade. Tight spreads are part of the deception, along with the phony volume. anyone who trades in 'smaller equities' these days is very foolish.
viruses are amazingly efficient as well... unwinding your position after death, very easy.
At least 2 of the 4 firms you mentioned are B/Ds. And the others probably are too. This will change nothing for them.
Listen...
CHRIS POWELL, was interviewed for about 10 minutes Friday by Eric King of King World News.
We discussed the purchase of International Monetary Fund gold by the Reserve Bank of India, the purchase of gold by the Sri Lankan central bank, the observation by Bloomberg News London bureau chief Mark Gilbert that pervasive government intervention has distorted all markets, and the continuing destruction of the middle class in the United States. You can listen to the interview at the King World News Internet site here:
http://tinyurl.com/yhc4jfg
The social utility function of markets used to be transparent price discovery and liquidity aggregation. In this brave world of profit at all costs, society no longer has markets - instead it has predatory manipulation. It's going to take a long time and a lot of muscle to get transparency and liquidity back again. I'm not sure we're ready yet to take up the challenge as those profiting are going to put up a hell of a fight.
nice to see you back london banker.
Yea nice. Reward the under-performers.
Every journey begins with a single step. Every nano second we wait the process becomes ever more challenging.
"In this brave world of profit at all costs, society no longer has markets - instead it has predatory manipulation"
What about HFT in inherently predatory and manipulative? Investors always paid some costs to execute a position - these costs have fallen over time and faster in markets more penetrated by HFTs (multiple studies support this and I haven't seen any decent study to the contrary).
"It's going to take a long time and a lot of muscle to get transparency and liquidity back again."
There was MORE transparency and liquidity when the markets were dominated by pit traders and specialists with their private information?!? Maybe you consider it more transparent b/c you could actually understand how specialists and pit traders made huge profit margins with their crazy spreads and exclusive rights.
I'm not sure what to think of this. On the one hand you have all the dirty market makers and black boxes who offer 50k shares, fill you for 500 when you try to swipe it, and then cancel. These bots need to go.
But then on the other hand, I can totally see how Goldman and friends could totally take advantage of this.
But fair pricing Peter !! In a country that almost every thing sounds unfair atleast on the financial front !
"That additional legislative authority," Shillman said, could provide the SEC "with more direct oversight of unregulated high-frequency traders." That oversight could allow the Commission to more effectively probe the trading strategies of firms and propose rules to address activities that are considered problematic, he said."
Corrected version:
"That additional legislative authority, Shillman said, could provide the SEC "with greater ability to determine who should be paying vig to the regulators." That oversight could allow the Commission to more effectively determine how much payola to extract from such firms and implement methods to allow further regulatory capture and maximize the payoff to the regulators from firms that are considered problematic, he said."
Wall Street is a RICO. Sorry. I'm trying to figure out how to get unwound but they got me into tax deffered accounts...I should have paid my house off instead.
The writing is already on the wall. That's why James Simons bailed out when he did.
http://www.reuters.com/article/businessNews/idUSTRE59769820091008
I'm sure it has nothing to do with him being over 70.
It's bullshit, snarky comments like this that completely ruin internet interaction. Someone with absolutley no balls making a smart-ass comment, and doing it anonymously.
Oh yeah, and being over 70 did have something to do with it. But when you make $2.5B at 70, $2.8B at 69, and $1.7B at 68, then do an about face and walk away, it tells you what the greatest quantitative trader in the world knows is about to happen.
By the way, Tyler and everyone else at ZH thinks that's why he bailed, also:
http://www.zerohedge.com/article/jim-simons-retiring-rentec-sparcs-domin...
Put a name to it, or don't post.
Well, at what point in time do you think a billionaire many times over should call it quits?
75? 80?
He doesn't need any more money, and perhaps he'd just like to enjoy his life after realizing how fleeting it is (he has had 2 sons die at early ages).
So - count me out of the "everyone else" for why he bailed.
If you look for a consipracy is everything, you'll find it.
As for putting a name to it, I'm certain whomever the anonymous poster was (and it wasn't me) could easily secure a descriptive handle on ZH such as "Trend Kill", and that would remove your concerns about his anonymity just how?
I think that pp has it correct.
Besides, IMHO, a rule 17(a)-25 implementation on the scale contemplated would put the SEC at a huge manning and equipment disadvantage when compared to The Squid and all the other marine creatures.
They wouldn't be able to procure the computational power on their budget and they for sure couldn't get the quant help they would need on a gummint pay scale.
In short, no worries for our cephalopodic HFT friends.
KptLt. laughing swordfish
9er Unterseeboote Flotille
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Ben Left The Bloodstains On The Fed’s Carpet
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The director of the SEC's Trading Division is named David Shillman? Shillman? Man who shills for who, I wonder?
Don't hold your breath. The "conservatives" will never allow it. The Dems will be too timid to do it on their own.
"more effectively probe the trading strategies of firms"
That's the HFT itself and we already know it. The question is SLP will report it together or they don't because they are special?
We may need a circuit breaker for out-of-whack volumes.
And what is the timeframe for releasing the data? If it's not a few hours after the close it is stale, useless data.
Trading quickly is not a strategy... and what falls under the catch-all of HFT is quite a diverse set of strategies, from arbitrage to valuation to predatory.