This page has been archived and commenting is disabled.
Continuing Up The HFT Flagpole, Sponsored Access Next In The Regulatory And Public Spotlight
Three months ago Zero Hedge, amidst a whole lot of hyperventilating, schizo-paranoid ramblings, managed to discuss sponsored, or naked access, as a key concern in the ongoing debate against HFT. Once again, we feel humbled that the WSJ (SEC) has decided to read between our disjointed commentary and make a prominent article (regulatory issue) of this critical topic.
Here is WSJ's take on the topic.
Federal securities regulators are examining whether an arrangement
that lets high-speed traders rapidly buy and sell large chunks of stock
anonymously could go awry and threaten markets.
Called sponsored or "naked" access, the setup allows high-speed
firms and other outfits to trade directly on exchanges using powerful
computers without the exchanges or regulators knowing who is making the
trades.
"We understand that some firms are offering so-called naked access
without effective controls over financial regulatory risk," said David
Shillman, associate director of the Securities and Exchange
Commission's division of trading and markets, which is stepping up its
scrutiny of the issue.
The practice is one of several involving high-frequency trading that is
troubling regulators amid a broader look at making securities markets
more transparent and stable. High-frequency firms collectively trade
billions of shares a day using computer algorithms to capture fleeting
changes in prices. The strategy recently has been one of the most
lucrative in the markets and now accounts for more than half of
stock-trading volume, according to industry estimates.
Sponsored access is akin to members of an exclusive club charging
others to use their pass. The members in this case are registered
brokerage firms that are approved and pay to trade on exchanges.
High-frequency firms or other traders such as hedge funds cut deals
with these regulated brokerage firms that let them use their computer
access codes -- known as a "market participant ID" -- to trade directly
on exchange computers that match buy and sell orders.
And here are the simplified threats:
One concern, regulators say, is that a trading outfit could suffer a
massive loss through a computer glitch that threatens the financial
stability of the sponsoring broker, or triggers a sudden and
unexplained decline in the broader market. Brokers that provide
sponsored access are on the hook for client losses that exceed the
client's capital.
"The risk is that neither the broker nor the exchange have any
obligation to implement technology that would allow them to act" if a
cascade of rapid-fire orders went awry, potentially destabilizing
markets, said Laurie Berke, a principal with Tabb Group, which tracks
computerized trading.
Defenders of sponsored access note that so far there has been scant
evidence that the arrangements pose risk to markets. They say brokerage
firms employ rapid posttrade checks that can quickly shut down an
operation if orders run amok. They also say high-speed traders are
sophisticated enough to avoid problems. For now, a patchwork of loose
rules among exchanges and brokers governs the practice.
The SEC says naked access poses threats to stability, whereas "flash
orders," a type of high-speed trading that recently has caught the
attention of politicians, raise concerns of fairness. Flash involves
some traders getting a sneak peek at market orders before other
investors. The SEC has recently sought to ban flash orders.
And here is why Goldman would not be happy to lose a major revenue stream if naked access was banned outright, and is likely negotiating behind the scenes to get its way: another issue Zero Hedge has speculated upon previously.
Goldman Sachs Group Inc. and Credit Suisse Group
AG provide a variant of sponsored access, according to representatives
at the firms. But, unlike Wedbush, they require the firms to route
orders through their computer systems before the orders go the
exchange; this step creates a more-immediate way to monitor trades.
Also, it appears that the only reason the SEC has finally decided to move its ass on this issue is that even though it has been considering this issue for a long time, only recently have HFT users realized what a bonanza it is to nickel and dime retail investors and dinosaur money (pension funds) to the tune of millions of times each and every second.
Though sponsored access has been on the SEC's radar for more than a
year, the agency's concerns lately have mounted as more firms jump into
the field of high-frequency trading, according to a person familiar
with the agency's thinking.
The SEC is concerned the exchanges haven't enacted new rules quickly
enough, according to a person familiar with the matter. Another concern
is that the exchanges could face conflicts of interest, since they
benefit from the huge volumes high-speed traders bring to the market.
If the exchanges don't act soon, the SEC may impose its own rules,
the person says. Though the SEC isn't expected to impose a ban, it
could require that users of sponsored access submit to pre-trade order
checks monitored by the brokerage firm. The rule would undercut the
practice by curbing the speed advantages firms get from sponsored
access.
The WSJ also presents a wonderful example of just what represents your traditional momo quant group outfit: a 4 person group with $10 million in capital. Somehow we have gotten to a point where these kinds of jokers can push the market one way or another on oddlot trades due to a plunge in overall volumes as nobody trusts the underlying mechanics of equity markets anymore, and thus trades exclusively in liquid instruments such as, ironically, CDS.
One recent Wedbush sponsored-access client is Quadeye Trading LLC, a
New York high-frequency-trading firm with $10 million in capital.
Quadeye is run by four traders with a background in computer-driven
mathematical investment strategies, including Sudeep Gupta, who has
more than a decade of experience running quantitative trading desks at
Morgan Stanley and Merrill Lynch, now part of Bank of America Corp. Mr.
Gupta says the firm has "multiple layers of risk control."
Wedbush, which declines to share revenue figures or a
sponsored-access fee schedule, says firms using sponsored access and
brokerage firms that offer it are motivated to manage their risk, since
even small glitches can result in big losses that the brokerage firm
ultimately could have to bear.
"We think the risk decisions should be left to the people with the
capital on the line," said Jeff Bell, an executive vice president at
Wedbush. Mr. Bell says Wedbush hasn't incurred any losses from
sponsored access.
Bottom line - let's not forget: what Goldman wants, Goldman gets. In its recent presentation to the SEC, the squid noted that "naked sponsored access introduces the potential for significant systemic risk due to the lack of appropriate risk controls." Furthermore, previously Greg Tusar had said this of sponsored access, and specifically why Goldman is all for pre-trade checks:
"In the case of high-frequency trading, in particular guarding against
technology failures, oversized orders and other situations where
there's potentially systemic market impact, we believe strongly that
pre-trade checks are a prerequisite. We don't believe that's strong enough or what the regulators
want now, because of the potentially dire consequences, and because
we-as broker-dealers-bear much of that risk."
How convenient that the SEC moves only on issues that Goldman is happy to see the SEC move on. And would we be so bold as to wager that the SEC will ultimately decide for...pre-trade access monitoring for naked access, along the lines of what Mr. Tusar subliminally recommends? Why, would that perchance benefit Spear Leeds Kellogg's GSETConnect/REDIPlus/REDIPlus FX/Sonar/DMA/SIGMA/OptimIS/PortX current multi-billion infrastructure? We would be so bold as to say why "Yes, Virginia." What better way to front run everyone on the planet than to reroute every single HFT order from a common shared pre-trade clearance router that commingles flow and prop trades (of Goldman Sachs, natch) which is endorsed and in fact, encouraged by "regulators", thus effectively monopolizing front running not only on an Octavian but Galactic scale.
We can't wait to see the results of our wager.
»
- 8037 reads
- Printer-friendly version
- Send to friend
- advertisements -
If the WSJ is speaking about this (IMHO) patently and clearly illegal activity, it can only mean that HFT and all it's permutations and derivatives is being sacrificed on the alter of public discussion because GS and friends have moved on to the next scam.
WSJ and NYT are the papers of record for what is passe, not what is hot and breaking. If it's not played out, they aren't talking about it.
http://www.chicagoclimatex.com/
http://en.wikipedia.org/wiki/Chicago_Climate_Exchange
http://en.wikipedia.org/wiki/Emissions_trading
http://www.nytimes.com/reuters/2009/10/12/world/international-uk-climate...
They can go to hell. Obama is the biggest failure since the times of mono-cellular formation 4 billion years ago ( im not counting some other people here )
+1 The SEC is run by a bunch of wall street hack TOOLs
Goldman just wants to control everything so that they can lay the boom of booms when the sucker pops! 9:30:00
Goldman just wants to control everything so that they can lay the boom of booms when the sucker pops! 9:30:00
GS is just angling for higher barrier of entry to HFT, they want all HFT to come through them. Hey, they check the orders and make it safe! Thank you squid for looking out for us.
Good point.
I must constantly remind myself that we're watching a master magician at work. We can't allow ourselves to become distracted by the pretty girls or the waving hands and miss the hand in our pockets lifting our wallets.
Amen.
Is there *anyone* besides Zero Hedge and Rolling Stone both capable and willing to break this stuff?
I mean if Matt Taibbi can do this with absolutely no background in economics, investing, or law, where are *any* of the supposed 9,000 members of the Society of Professional Journalism?
By the time I learned about HFT (on ZH) I had already been run over by Indy cars while trying to pick up pennies on the track (and watching for the steamroller).
Question to the room:
If the WSJ is useless, and ZH is prolific but not omniscient, what other sources are there?
Deduct 5 points for pointing to blogs that rant about the unfairness/ignorance/malfeasance without bringing new facts to the discussion.
CG - Your dead on. Everything from this point forwards is just hand-waving and rhetoric. The only question is what is the squid doing with it's tentacles right now...
That's probably a big part of why James Simons decided to walk away last week, too.
http://www.zerohedge.com/article/jim-simons-retiring-rentec-sparcs-domin...
OT; but if you want to know the grand scheme, the master plan, the book of supremacy; i recommend you to read this http://www.scribd.com/doc/20935230/The-Grand-Chessboard
This should make for some interesting reading... thanks for the link
This might draw heat for posting here, but Brzezinski still has the ear of the Administration.
http://www.augustreview.com/news_commentary/trilateral_commission/brzezi...
He's currently working with a Soros group on some disturbing stuff.
Cheeky,
Thanks for the download. I'll take any other recommended readings that you may offer, as well.
in that case; these two are a must read
http://www.scribd.com/doc/20934497/A-Century-of-War
http://www.scribd.com/doc/20891098/Noam-Chomsky-Hegemony-or-Survival
Thanks again, Cheeky. Will read!
Noam Chomsky? Good call. America could learn quite a bit from him.
It always could have, but no one listened to him.
Cheeky...my turn to be Cheeky now....my First Degree is Philosophy. I happen to have Noam Chomsky's book 'Understanding Power' 3 meters from me... :) Some folks here in the states DO read Chomsky...
-Michael
Ha, Zebig is almost old school these days; used that as a source in a recent paper. Fascinating how he created the enemy that we're expected to fight for all eternity.
If you look past all the smoke and mirrors and see many of the so called "terrorist" attacks on American soil as the false flag attacks they are, you'll see that government's sole purpose in life is to create the (in this case terrorist) problem and then magically provide the solution, as long as you understand it will mean more of your money and less of your freedom.
CD; + 2000000
Thanks for the leads Cheeky. Phenomenal looking reads...love it.
GS ... Goldman Sechs
What the squid wants, the squid gets. My guess is that HFT won't work as well in a declining market and they've pumped this pig about as high as it's going. If they try to front run a declining market it'll crash. The search is on for bag holders and the squid will suck on the fed's bloated carcass until a more appetizing meal presents itself.
LOL
That bloated carcass wouldn't happen to look like your icon, would it? If I were to have Total Recall, I might think you were some kind of Martian hybrid named Kuato.
Then again, it might just be me.
"the squid"...
Voted best new slang term of 2009.
Yet the first two links on Google for vampire squid are still about the animal. Get with the Google bombing people. I want to see the first link go to gs.com and the first image be a smirking Lloyd.
There are thankfully plenty of other places to route orders that will not involve GS if pre-trade checks are put in place.
Lime, Lek and Genesis all come to mind.
Nearly everyone I see railing against sponsored access falls into the camp of fast broker-dealers looking for more clients (i.e. they all have a financial incentive to want to kill sponsored access and bring on more of the traditional business).
There are of course valid concerns with too many entities pushing order flow directly into the exchanges and errant order flow from software bugs or hardware failure... however I fail to see how the risk of any single sponsored client is different from that of their sponsor (i.e. why is the broker-dealer immune to the bug? they certainly have not shown that they are immune to fat fingering orders every now and then).
> If the WSJ is speaking about this (IMHO) patently and clearly illegal activity
There is nothing illegal about sponsored access nor trying to be as fast as your competition. It should be given thought by regulators so that everyone understands the risks (which I believe can be mitigated by the exchanges).
> That's probably a big part of why James Simons decided to walk away last week, too.
The guys is a billionaire several times over and is 71... did you expect him to work until he died?
One of the dangers with HFT is that any computer system can be compromised. The compromise may be "in house" with various individuals raking off money behind the scenes, or it could be an outright hacking scam that could do serious damage to any number of participants. The idea that these machines and programs are "safe" is a joke. I am a computer forensic analyst and can tell you that any machine can be compromised.
But what makes the sponsoree's computers more vulnerable than the sponsor's?
Someone needs to connect directly to the exchanges without a layer of indirection... and while there may in fact be logic behind why it may make sense to limit that group down to just broker-dealers, I fail to see how that changes any fundamental dangers of software errors or compromised machines.
If sponsored access gets killed off, I think the SEC will get many hits on the following web page outlining steps to become a BD, and there will be lots of work for securities lawyers.
http://www.sec.gov/divisions/marketreg/bdguide.htm
And the same WSJ reported the NYSE is spending 500 million on their new HFT, sponsored access exchange of the future in ... New Jersey.
It doesn't change any of the fundamental dangers. Apparently, the money involved is significant. That means someone will mess with the system. Maybe they will just skim off a little bit and go away. But if their motives are more sinister then some really bad things could happen. This whole thing goes to the heart of robotics and the theories of using macines to control processes that are too complex for humans to control. As long as the machines "behave" then everything is OK. Bad machine behavior can be induced by bad people. That is my only point. If it happens then the speed at which bad things take place will lead to really bad consequences. The key is this: Who is really in control ..... the machines or the people who think they control the machines?
and then Skynet becomes self aware right? I only make that sarcastic comment because although i agree it's certainly possibly that some algo could run amock, I'm quite sure that if you look at errors in the marketplace you'll find that they are almost all Joey BaggaDonuts entering orders with fat fingers on systems that don't have good safeguards in place - NOT computers taking over and destroying the world on their own.
and I seriously challenge TD's claim that HFT funds with $10MM in capital are pushing this market around.
Tyler, you seem bipolar as to wether or not you want sponsored access. You suggest it could bring down the market, yet you don't want GS running pre-trade checks. Are you for it or against it? You already complain enough. We don't need you complaining about both sides of an issue.
i am sure you don't "need" me complaining at all
Instead of replying with moronic no-speak, will you answer the question as to whether you are for or against sponsored access? And if you are against it, how do you reconcile that with the fact that you don't want GS to check the trades before they are sent to the exchange?
c'mon Jbeyer - are you new here or something? don't you know that when GS checks the trades what they are really doing is sending every single order to their own prop desk so they can mercilessly frontrun each and every share that is traded. That's what vampire squids do. /sarcasm.
there are about 50 posts on ZH filled with non-moronic speak which answer your question in detail.
I have a question then, TD - since i'm pretty sure you are AGAINST sponsored access: why don't you want GS to check the trades, since checking the trades would safeguard against the kind of potential computer algo run amock scenario you are concerned about?
Why would you assume that? And if indeed you are right, the whole concept of pre-trade checks is moot isn't it - why validate a derivative (pre or post) of a flawed (since you are sure we are AGAINST it) construct. Wouldn't one attack S.A. directly? For more info I refer you to page 16 of the GSET Summer 2009 pitch.
OK, so no sponsored access? And no pre-trade checks?
I get it, no computers at all! Let's go back to the barter system. We can all carry around pieces of eight. /sarcasm
well, tyler, if the reason you're against sponsored access is because it opens up the risk of skynet becoming self aware and computers going bezerk and blowing up the market - THAT concern is rectifiable via pre-trade checks. the articles you post on the subject ALWAYS feature this risk as a main talking point - in fact, again, in this article, it's the first and main point - yet you KNOW there is a remedy for it - pretrade checks... Still, somehow, you find a way to hate the pretrade checks
It's not the problem in the pre-trade check themselves; but in the institution which should conduct them ( or do you really think ALL of us are morons here ). FFS; there isn't one honest and not corrupted institution in the USA ( or anywhere else for that matter ) which i would believe when it comes to anything related to money. Don't legislate, or conduct the counter measure which would effectively solve nothing; BAN it altogether.
Cheeky, when you refer to 'Ban[ning] it altogether', are you referring to computerized trading? I know you have a few screws loose, but I didn't think you were THAT off your rocker...
only a moron could ask a question like the one you just have.
Listen, you cheeky douchebag, your statement was
'Don't legislate, or conduct the counter measure which would effectively solve nothing; BAN it altogether'
It is unclear, but your statement seems to refer to computerized trading. In this discussion thread, the counter measure was the counter measure to sponsored access. So you clearly seem to be referring to computerized trading in general. If you'd like to clarify what you were referring to, then we can have a adult conversation about this.
Hey, he might be a cheeky douchebag, BUT HE'S OUR CHEEKY DOUCHEBAG. You know what the hell he was referring to, troll.
No, I really don't know what the F!#@$% he was referring to. I assumed he was referring to computerized trading, and I show above why any person with average reading comprehension would think that. But you seem to speak moron-speak. So please translate for me.
things to be BANNED
1) co-location
2) rebate
3) option to flash/not-flash ( flash altogether )
4 ) dark pools
5 ) ownership of bank holding companies and financial holding companies in exchanges
6 ) financial holding company practices ( i.e GS borrowing at virtually no cost, then buying a stake in a Chinese car manufacturer )
7 ) SIV's
8 ) secrecy on short positions
9 ) Madoff exemption
extremely rigorous regulation on the following
1 ) proof that HFT is liquidity beneficial ( to be proved every week )
2 ) independent regulator
3 ) derivatives trading
4 ) naked shorting
5 ) market maker practices
this is just from the top of my head; i could give you a full list with many more categories ( which i will most probably do when i get some sleep )
i don't understand, Cheeky. I agree that the guys doing the checking (ie, GS) are in the business of making money. Are you suggesting that if an algo using GS's sponsored access pipes went off the rails and started submitting orders to sell tens of billions of shares, that GS wouldn't stop them? I am confident that they would. That's why they have checks. The fact that GS likes making money is irrelevant. pre trade checks are a very easy thing to implement. On my former desk, there was always the risk that someone put an extra zero or two in the cell when multiplying a basket (like, sell 200 SPX units, instead of 2 SPX units, or 2,000,000,000 instead of 2,000,000) - so we had strict controls in place to make sure that no one sent out a mega-order error. That's all we're talking about here.
Tyler, you have come down in favor of banning sponsored access before, but I don't believe you have ever suggested any alternative other than what GS proposes. Kindly point me in the direction of these "50 posts".
Every single time that I question your logic in a straightforward manner, I get this same BS from you. I hope your followers and minions start to catch on to the crap you are selling.
Cheeky (or do you prefer Bastard) ... Thank you for your posts ...http://www.chicagoclimatex.com/ is absolutely fantastic and to see that GS, Al Gore, and H Paulson are principals, will wonders never cease?
yo Bear ! Yeah, its a scam and nothing else; oh and while we're at it; did you see this shit ( sorry for the source, but i'm to lazy to go directly to YouTube ) http://www.youtube.com/watch?v=_jqcnBugnl8&feature=player_embedded fucking disgusting , Al Gore that is ...
Beam me up Scotty........
Al Gore = Total Fucking Fraud
CB ... Thanks again for your post. Polar Bears are not endangered but their cousins the Perma Bear is really losing ground! Go short C02, my new crusade.
If, or better said, WHEN Cap'n'Trade passes Tyler and ZH should make it their primary target and tear a new one to the morons who voted yes for it. They should try to connect with some scientists and give the scientific explanation here in ZH, and thus show what utter and ridiculous scam all this stuff about Global Warming is + Tyler and the crew should do it from economic point of view. This is nothing more than a theft from the American, and i have no doubt, all the people of the World.
Crap n Tax. The people who dream these things up really are brilliant at stealing from the sheeple.
I am Chumbawombat.
Sodeep Gupta is the illest name for a trader. I think I give him a shout-out.
One of the Cruelest Things They Have Ever Done to Us!
I'm not going to tell you who they are, I'm going to let you figure that one out for your selves. What I am going to tell you is what they did.
They took away your 7Th Amendment. Oh, you still have it, you just don't know you do. Let me tell you what they did. They created the bar association, that's to bar you from entering. Then they appointed the Judges who work with the bar association to keep you at bay.
They also made you think you could not defend yourselves through advertising. You believed them and that's how you lost your 7Th Amendment.
Please re-learn how to use the 7th Amendment and use it.
Here's a link you may want to use to get an education.
Red Beckman Seminar
http://video.google.com/videoplay?docid=-5959251658237547562#
Michael, are you related to Mr. Bastard? An illegitimate son perhaps? Remarkable resembalance (is this still alliteration day).
BREAKING NEWS. A Ninth Circuit judge in San Francisco has just ruled that the Constituition is Unconstitutional.
So now what?
Where is Chumbawamba
monetize my pokemon cards, bitches.
Sponsored access exists due to existing regulation: regulation requires equity trades to be executed through a registered broker-dealer. Large buy side firms (HFT or not) can only connect directly to a DMA firm (most likely) by paying a commission to a broker-dealer. The broker-dealer and DMA firm clear the trade and the various reports also required by regulation. Since a commission must always be paid, why would a buy side firm (HFT or not) not prefer the fastest route to exchange/ECN/ATS/etc? When an enticing order is open, anybody would want to match that order first. Institutions also prefer to camouflage their trading activity to avoid moving markets. Trading in the name of the sponsored broker provides anonymity. A large firm doesn't want to world to know that it is accumulating or dumping certain shares.
Tom Woods on ending the Fed: http://ow.ly/ua3C