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Are Reg NMS And The Explosion Of Various ATS The Source For The Stock Market's Volume Explosion?

Tyler Durden's picture




 

A useful chart from Themis Trading presents the exponential jump in stock volume since the adoption of Reg NMS and the appearance of various ECN/ATS middlemen, whose primary goal in life is to scalp spread... sorry, provide liquidity to an extent never seen prior to 2007. It is these very organizations, and the scores of micro traders who make money only courtesy of the resultant increased daily speculation and momentum escalation, that are now screaming about the implications of what proposed Reg NMS 2 would do to their top and bottom line, for obvious reasons. The explosion in volume of course is not synonymous with an increase in liquidity, unless one counts the "huge" benefit that one gets by trading Citi in 20 different exchanges (Citi alone accounted for 20% of NYSE volume today). The "strange attractor" of HFT, in which a HFT dominated stock attracts more HFT strategies with the flip of a switch, is the only "benefit" of magnified "liquidity", while the threat of massive systemic imbalance as every single trader jumps on the same side of the trade, as highlighted recently by traders such as Wilmott and many others, continues growing ever larger. It is time to take the market back from all these various tolling operations which provide absolutely no real benefits to the market.

 

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Wed, 12/16/2009 - 19:23 | 166704 Anonymous
Anonymous's picture

Let´s simplify this even further....

No offboard matching...

And only one board for all...

Easily regulated...

Same costs for all....about 20 cents per 100 shares...

Margin...same for all 4:1

Short sales....first come first served....no uptick
No more than the outstanding can be shorted....

No account minimum....

Direct access electronic exchange.... worldwide....

Wed, 12/16/2009 - 19:36 | 166724 Apocalypse Now
Apocalypse Now's picture

"It is time to take the market back from all these various tolling operations which provide absolutely no real benefits to the market." 

Tolling encapsulates it, imagine buses full of baby boomers hoping to one day retire, being driven back and forth mindlessly/aimlessly across a golden gate like toll bridge (insert your nearest toll here) and each taking out their wallets and paying the toll with each trip back and forth just for the priveledge of being on the bus.  Blankfein is driving, and he owns the toll booths - he wants to empty the wallets before the passengers retire.

Wed, 12/16/2009 - 21:58 | 166914 David449420
David449420's picture

Nice use of metaphor.

Wed, 12/16/2009 - 22:06 | 166924 WaterWings
WaterWings's picture

!

Wed, 12/16/2009 - 19:37 | 166727 Zippyin Annapolis
Zippyin Annapolis's picture

Whoa whoa --stop the presses-- so computers are bad, fast is bad, volumes are bad.

 

Lets just allow trading via telephone to nice men in expensive suits on lets say the old NYSE and have an auction lets say, every 15 minutes.

 

We can then all trade overseas where the spreads are narrower, there is liquidity and instant fills? Better yet we can just trade the pinks! Who need listed venues at all?

 

 

Wed, 12/16/2009 - 19:50 | 166745 greedo
greedo's picture

And while hyperbole is your middle name, why not point out how insane it is that any trading even occurred in those prehistoric days of... 2006.

Wed, 12/16/2009 - 19:58 | 166747 Apocalypse Now
Apocalypse Now's picture

"It is time to take the market back from all these various tolling operations which provide absolutely no real benefits to the market." 

Tolling encapsulates it, imagine buses full of baby boomers hoping to one day retire, being driven back and forth mindlessly/aimlessly across a golden gate like toll bridge (insert your nearest toll here) and each taking out their wallets and paying the toll with each trip back and forth just for the priveledge of being on the bus.  Blankfein is driving, and he owns the toll booths - he wants to empty the wallets before the passengers retire.

Now, with the exchanges giving rebates for providing liquidity, I wonder how far the rebate credits go - AND THIS IS A BIG POTENTIAL FIDUCIARY LAWSUIT ISSUE:

With the tolling arrangements, who shares in the loot and gets a cut?  The players - exchanges, investment banks, dark pools, mutual fund finanacial product companies, and investment fund managers?  Someone should track 12-B1 fees and exchange fees to see how far this goes.  If investment managers are getting rebates for sending buses back and forth a toll bridge (want to take bets?)- it is an outrage and a clear breach of fiduciary duties.

Wed, 12/16/2009 - 22:34 | 166960 FreakuentFlyer
FreakuentFlyer's picture

and next week read about:

how the increase in the number of highway lanes forces innocent Americansto spend more time sitting in traffic (brought to you by the evil illegal immigrant road construction lobby - thank you "Lou Dobbs" of financial blogs, aka ZH).

Thu, 12/17/2009 - 01:07 | 167095 dnarby
dnarby's picture

I'm sorry, but your point was lost in an overwhelming attempt at cleverness.

Thu, 12/17/2009 - 06:24 | 167218 FreakuentFlyer
FreakuentFlyer's picture

my point was that i disagree with the conclusions of the post and alternatives being proposed. like i disagreed with lou dobbs' anti illegal immigrant crusades, which also never proposed any feasible alternatives.

let me illustrate my point in another way - let's go back to 2004. do you remember the toilet paper back then - it has not changed since then. why - because there was no need for a change - that toilette paper was 100% adequate for what we needed all this time (now, that was a junk comment).

anyway - the structrure of our markets will change when we come up with a better alternative to address the same needs which caused them to change in the 1st place - participants want lower spreads and immediacy.

 

Thu, 12/17/2009 - 03:05 | 167172 delacroix
delacroix's picture

freak, you're drunk, go to bed.

Thu, 12/17/2009 - 06:27 | 167219 FreakuentFlyer
FreakuentFlyer's picture

delacroix, i appologize - my cat jumped on my keyboard and i lost the rest of my typing. here it is:

As far as I can tell, we are debating a mechanism that would reduce some negative aspects of our equities markets. Thus far, this “negative” behavior has been described as HFT. And, moreover, all HFT has been described as “negative” (in respect to the so called “fairness” of our public markets). On the opposite side of the debate, we have claims that market participants engaging in HFT, also, and at the same time, provide the service of liquidity as well as trading costs reduction, in the form of (relatively speaking) narrower spreads. Lastly, the 3rd side is against any (and all, especially new) taxes to be paid to the government.

 

Each side has thus far refused to accept the other’s claims. I will take a completely different approach - I will assume that all sides of this argument are making valid arguments, and that each of these arguments is worth being addressed by any change worth pursuing. Therefore, I will attempt to describe an approach to simultaneously address all of the above 3 main arguments.

 

Before I continue, let me make some basic statements/assumptions I will use as the foundation for my approach:

1.       (buy-and-hold) Investors are the most important market participants. Market structure should discourage (and not necessarily eliminate) any behavior which would tend to drive away Investors.

2.       Any “negative” consequences of HF TRADING, is about trading and not about attempts to trade – you can not “steal” profit from another trader (investor), unless there has been a trade.

3.       Therefore, HFT should be described in terms of position turnover (and not in terms of orders). Once we decide to use such a distinction, we can attempt to distinguish trades made as a result of Investor behavior vs. those trades made as a result of a Speculator behavior, for trades made in each instrument and the same account.

4.       Moreover, if we “assume” all HFT trading to be 100% speculative only, and entirely detrimental to Investors, then the extent of such a detriment can be only the amount of profit made on the profitable side (of this zero sum game).

Long story short, here is my “proposal”:

a)      Define HFT as “trading of individual securities in an individual (brokerage) account where the total nominal amount traded in one fiscal day exceeds X pct (e.g. 500%) of the maximum nominal position of the security in that account, held at any one moment during that fiscal day”.

b)      Once the total nominal turnover pct ratio has been reached, all “profit” made in that security/account/day is designated as HFT profit (net of all other fees and commissions) and is subject to Y % (e.g. 20%) fee to be collected by the broker and remitted to DTCC. In other words, if you have a 10k shares position, you could basically trade in-n-out 100share trades all day long and keep all your profits. And If you started with 0 shares in that same stock, once you hit your 3rd round trip, all the money you made that day in that stock/account would be levied the HFT pct fee.

c)       DTCC is the holder of all these cumulative fees per security, to be distributed quarterly, based on the ratio of each title holder of record pct of shares outstanding and number of trading days held over the previous quarter. In other words, if you held 10% of all shares outstanding of some stock during the entire quarter, you get 10% off all HFT profit made in that stock during that quarter.

d)      For the purpose of 401k, mutual funds, ETFs etc, make these DTCC “distributions” the same as dividend payments.

e)      Pct X and Y are to be “negotiated” periodically and their implementation to be monitored by whomever is regulating the exchanges (perhaps the 2nd smartest person on ZH can invent a process for this “negotiation”).

Basically, we should let the speculators still continue to inadvertently keep providing liquidity while making money, and use the profits they extract from their “victims” to encourage the victims’ continued participation in the marketplace. Meanwhile, the gov. does not get another opportunity to squander more of our money – the printing press is more than sufficient.

How long might an approach like this, continue serving its original purpose? Certainly not forever – just like today’s traffic regulations might require modification to address changes in behavior once we start flying our cars.

Thu, 12/17/2009 - 02:10 | 167137 Anonymous
Anonymous's picture

Market spamming is just that -- spamming.

These players just need to be shut down as they do offer absolutely zero in the context of benefit vs. pain in the arse.

Do NOT follow this link or you will be banned from the site!