Chris Martenson Interviews Joe Saluzzi on High-Frequency Trading: The Equity Market Is Now Controlled By The Machines

Tyler Durden's picture

Joe Saluzzi, co-founder of Themis Trading LLC and outspoken exchange expert, is concerned with how high-frequency trading has brought the capital markets into uncharted - and dangerous - territory.

"Things have changed," he cautions. With 50-70% of all trades being conducted by algorithms at micro-second time intervals, real human traders are increasingly challenged to understand how our markets actually work. "No longer do the technical patterns - that have lasted for years and years, and are written about all over - work anymore."

In the following interview, Joe and Chris plunge into "dark pools" and other poorly-understood elements of our now-machine-dominated financial exchanges. The current system is fraught with risks of further "flash crash"-like disruptions, and at a fundmental level, feels a lot like sanctioned theft by the deep-pocketed institutions who can outspend on technology and speed. This is an important interview for anyone involved in trading (professionally or personally), as well as investors who want to know how today's markets truly operate.

Click here to listen to Chris' interview with Joe Saluzzi.

Read the Transcript of the Podcast

In this podcast, Joe sheds light on why: 

  • The flash crash happened and why our vulnerability to future crashes is even higher now.
  • How the majority of trades that happen on a daily basis are now conducted by machines that have no underlying concern or understanding for the companies who's securities they trade. The market has become volume for the sake of volume - which is not healthy.
  • How the complexity and pace of the current technology driving trades has become so complex that it has effectively evolved beyond our ability to fully understand its risks. 
  • Why the government agencies responsible for understanding and overseeing exchanges are woefully under-resourced and unprepared to be effective in this new era. 
  • How the average trader is destined to lose in today's market, while the big banks & HFT firms who can afford to win the arms race are making essentially-guaranteed profits.

As with our recent interviews with Jim RogersMarc Faber and Bill Fleckenstein, Jim ends the interview with his specific advice for the average trader/investor.

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papaswamp's picture

Well damn have been talking about 'skynet' since I stumbled on this place of awesomeness. What, everyone else is just starting to clue in?

Thomas's picture

Joe has been on this one for awhile. I requested the interview. Whether my request was germane cannot be stated.

Millivanilli's picture

Dave Bowman: Hello, HAL. Do you read me, HAL? 
HAL: Affirmative, Dave. I read you. 
Dave Bowman: Open the pod bay doors, HAL. 
HAL: I'm sorry, Dave. I'm afraid I can't do that. 
Dave Bowman: What's the problem? 
HAL: I think you know what the problem is just as well as I do. 
Dave Bowman: What are you talking about, HAL? 
HAL: This mission is too important for me to allow you to jeopardize it. 
Dave Bowman: I don't know what you're talking about, HAL. 
HAL: I know that you and Frank were planning to disconnect me, and I'm afraid that's something I cannot allow to happen. 
Dave Bowman: Where the hell'd you get that idea, HAL? 
HAL: Dave, although you took very thorough precautions in the pod against my hearing you, I could see your lips move. 
Dave Bowman: Alright, HAL. I'll go in through the emergency airlock. 
HAL: Without your space helmet, Dave, you're going to find that rather difficult. 
Dave Bowman: HAL, I won't argue with you anymore. Open the doors. 
HAL: Dave, this conversation can serve no purpose anymore. Goodbye. 

Goldenballs's picture

Todays Markets don,t  "operate" they are just loan sharking by the 2% who own virtually everything,they have ceased to reflect reality as Governments have ceased to work in the interests of their indigenous populations.No wonder everyone but them is pissed off.

Caviar Emptor's picture

There is no market. That meme has been picking up. Because in their zeal to make it appear like everything is fine, they have to pretend there are more buyers and sellers than there really are. Enter HFT. Falsely raising the number of shares traded, making market depth look more than it is with false bids and asks. It's only "virtual buyers and sellers". That's why the flash crash happened so fast and furious. 

The other aspect of danger to these thin markets which ZH has been all over for the past 2 years is extreme correlation across asset classes. That's a symptom of the simplicity of machine-driven trading. And of Fed-driven markets where the Fed provides the only major impetus. 

blackbox's picture

Computers are still programmed by humans, so to a certain extent e.g. for the scalp trading I do, it doesn't matter. Maybe this is only of concern for the buy and hold brigade, but they (sensibly) left the markets three years ago.

More_sellers_than_buyers's picture

They now have machines programmed to respond to news feeds that are designed to feed to humans are even further removed...

blackbox's picture

Yep, they've had those for years. My point is that humans still programme the machines so it doesn't affect scalp trading. It's still only the buy and hold 'investors' who are genuinely affected by computer driven flash crashes. For them the market is utterly broken.

Godisanhftbot's picture

You have it totally backwards. nice disinformation.



blackbox's picture


How is stating my observations as a trader "disinformation"?

How do I have my observations "totally backwards"?

baddress's picture

Let's move the ZH datacenter one router hop closer to the exchange. We'll make billions muahahahaha!!

bankrupt JPM buy silver's picture

Blythe may have to turn up the HFT on the silver trading desk to quell the upcoming storm, b/c she cant print physical, and we are getting tight.

Amish Hacker's picture

It has been a long time since I've read an interview with this kind of clarity and unquestionable expertise. Outstanding!

TooBearish's picture

I am developing a tweeting function that puts out false rumors on multiple tweets so that the new rumor gathering engines trade on it , my HFT program will trade opposite of my red herring tweets and then Joe Lavorgina will go on CNBC, put out a green shoots comment at which time I will switch on reverse tweets and HFT out of my winning position.

This will all happen within 6 nanoseconds and the SEC, FINRA, FED, FDIC and the Republic of Zimbabwe will be none the wiser.

I call it Project Mayhem.

blackbox's picture

yes, but if you go to OMX with it they will PAY YOU for your plan to bring liquidity to their exchanges - so you can cash in twice! kerrrrrching!!!

GoinFawr's picture

It's not even close to a 1:1 ratio, but the less they know about your intentions, the more they'll have to tell you about theirs.

Gigliola Cinquetti's picture

 "No longer do the technical patterns - that have lasted for years and years, and are written about all over - work anymore."

No shit , did chartism ever work ?

topcallingtroll's picture

The only thing that has been validated is regression to the mean, but you must know where the mean is, and it can shift unexpectedly. The more rapid the deviation and the greater the amplitude the more likely you can trade against it. Machines things like descending triangles, pennants, head and shoulders. The machines are doing thousands of multivariate linear regressions per second. That is the real technical analysis of the future, when you can analyse every bid offer on every traded financial instrument in real time and readjust your regression models every few seconds to take into account new information

mmlevine's picture

The justification for issuing a a share of stock is that the buyer becomes part "owner" of the company and has  some of the rights that come with being an owner - dividends, voting power.  With HFT, ownership lasts nanoseconds.  These HFT traders and the programs they write have taken the very foundation of owning a stock and tossed it aside for trading gains. 

What I wonder why aren't the CEO's and CFO's of the HFT stocks bitching and moaning that their shares are being utterly abused by these modern day thieves.

Double down's picture

Because they are still getting paid

aus_punter's picture

The average holding period for a "share of ownership" in the S&P 500 last year was 22 seconds. 

I think that says it all

tao400's picture

Tyler, why are you surprised that equity markets are controlled by machines. Within thirty years, everything will be controlled by machines. I am sure you have read William Gibson neuromancer series of novels. That is the future, my man, plain and simple. What is amazing is that this guy, who coined the term cyberspace, saw all of this in the 80s when computers were in their infancy.

SheHunter's picture

Scalp is the way to go.  I'll swing trade USO.  Sometimes F.  But gone are the days when I'll buy an fcx or gs or any big player, place a loose stop and plan on holding for a span of time.  The HFTs are too good with their millisecond plummets to knock out the stops.  What's that saying "fool me once..." 

Mr Lennon Hendrix's picture

Timmah Fully Loaded

It was to be a big month for little Timmah Geithner.  He was about to raise the debt ceiling like a zombie movie raises the dead, and at the same time act like China was manipulating their currency and no one else was.  Ben Shalom Bernanke walked into the living room.  Never sheepish, he asked Timmah to do the dishes, "You may finish your game after."

Timmah had stocked up on Jolt, Buzz, Flatline, and numerous other high caffeinated beverages for the new release of "Timmah Battles the Algo Machines from Hell:  Fully Loaded."  He was most likely going to play his PPT video game counsel for the next couple winter months as his main source of entertainment.  Well, that and watch old Disney movies. 

The snow was keeping everyone inside.  Luckily for Timmah's Treehouse, Bawknee Fwank couldn't climb the frozen bars that lead up the trunk in the winter.  Timmah mostly had it to himself, as Bernanke spent most of his time in Davos and Jackson Hole.  Tonight he was having his friend Sackman for a sleep over.

"Sackman, do you want to play PPT?"  Asked Timmah.

"After we guzzle some Flatline!"  Sackman said as he drowned his brain in dye and chemicals.

Timmah ran to his bean bag chair and plopped down.  "OK, we are going to load up the futures by buying penny stocks!" 

"Oh cool!"  Said Sackman. 

"Yeah, it works every time.  Bernanke showed me how to do it." 

"How to do what?"  Asked Bernanke irately from the other room. 

"I was just telling Sackman about the futures trick." There was an awkard silence after Timmah spoke.  Bernanke sat at his desk pressing buttons on his printer.

"How long will it take you to beat this game?"  Inquired Sackman gleefuly.

Timmah frowned, "I don't know.  I beat the last one in just a few days."  Sackamn sat cross legged and leaned over his pelvis with a cheshire grin.  His face was inches from the screen.  

"Back up!"  Yelled Timmah.  "I can't see!"

ThirdCoastSurfer's picture

No better example of HFT and dark pool trading can be found than that of trading in Citi. The list of dark pool exchanges within the L2 trading platform often requires scrolling to observe a complete listing of just the current bid/ask match. As ZeroHedge recently reported, the rules regarding order fulfillment in such a low stock price, high volume environment makes for a lot of wacky trades and partial lot fulfillments withing this stock. 

With 29.2 billion shares outstanding and a daily trading volume average of near 500 million, a $.10 cent change in stock price is a market cap adjustment of $2.92 billion!! More amazing is the radical drop in daily trading volume since the US Treasury sold off its balance of shares on Pearl harbor Day, 2010. That is until it was recently revealed that the Government of Singapore (GOS) is now the largest single holder of C, even though you will not find it listed as such in any "transparent" way  because they invest within the guise of so many brokerage houses. With retail investors confined mostly to NYSE, brokerages in the remaining exchanges can avoid stepping on each others toes (and thus trading against the overall GOS investment unless desired) and focus on picking off the uninformed and defensive who have no rightful place in the market to begin with other than as sheep to be sheered. 

SheHunter's picture

Interesting post.  Stop by more often.

ak_khanna's picture

The stock, commodity and currency exchanges have been reduced to gambling dens whereby the more powerful traders armed with super fast computers and cheap money move the markets to maximize their own profits at the expense of the remaining not so powerful players. The big boys have enormous money power to move the markets in the direction which results in maximum profits for themselves. They effectively use the media to lure the other players in the market to a position where they would incur maximum loss. It is similar to rounding up maximum sheep before shutting the doors of the slaughter house.

topcallingtroll's picture

The machines are here to stay. No one can beat a machine in chess. No one can beat a machine in the stock market. The machines are not fully penetrant yet and there are places they wont go. This is usually in low information low liquidity stocks. That may be your best place as a human, hunting out reverse merger usa listed chinese frauds for example. The machines probably.dont manipulate the market. That is actually an inefficient way to make money because it is a human guiding the machine. Imagine if you have all the financial data in the world and can do advanced real time technical analyses using every known technique. They are going to hit every inflection point and watch volume changes every hundredth of a second and sweep up and down the current nanosecond market price with hft buy sell orders that they cancel to find the bids and asks. They can catch every turn before a mere human can notice and if it turns out to be false they are out of there before a human has time to respond. That would be frontrunning but not manipulation. They can make money 100 percent of the time, but goldman sachs realized in hindsight that looks suspicious, so now they lose money randomly on a few days each month.

I think I need to buy a gun's picture

let them eat each other just hold your gold stocks until revaluation

TapeReader's picture

If the machines are making the market...doesn't it make sense to track the activity of the machines?

Why trade a Head & Shoulder pattern when you can piggy-back the buy programs of Citadel or Goldman Sachs?

Here's a video that walks through the basics of why and how order flow is generated by automated programs is the key determinant of short-term changes in price.

Hope that you find it as interesting as I do.

cocoablini's picture

You can watch the bollinger bands on the 20 day. Those bottom and top bands are exhaustion and capitulation areas. The bands predictably move up if there was a rally 20 days previous.
Its crude but a lot of black box machines do this. Goldman would will kill them

Pumpanddump's picture

50% to 70% of market volume controlled by HFT.  They do not consider fundamentals in their trades, they are not obligated to provide liquidity, therefore we have one of the largest momentum markets in history (think tulips) aided by Bannana Ben.  Once the momentum trade ends....kaboooom!!!

Stimulus Billy's picture

Good stuff.  Seems to me these dark pools could paint volume in the lit market anytime they see fit.  Good luck with technical analysis.