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The Day That Was - HFT's Superdominance
Following up to the earlier post about Direct Edge's Enhanced Liquidity Provider program, it again makes sense to appreciate the practical aspects of high frequency trading. Joe Saluzzi provides a good example from today's program trading bag:
The three HFT horsemen are C, BAC and CIT. These three stocks traded 860 million shares today which is 10% of all US Equity volume. Think about that: 3 stocks in a universe of over 5000 U.S. stocks represented 10% of the volume. How could this be? Look at the intraday chart of all three of these stocks and you will see a something in common: an early morning move followed by a flatline with a very tight range (around .05). Meanwhile, while these stocks were flatlining the market was heading higher. The S&P 500 gained around 10 points in the afternoon (or 1%) but these 3 stocks did not move. There was a constant bid to these stocks yet anytime they wanted to lift there seemed to be a constant offer just a few pennies higher. This is what HFT looks like. The HFT’s made a killing in these 3 names today – in addition to the .01-.02 spread, they collected about .005/share in liquidity rebates. Not a bad day for a supercomputer.
There is, on the surface, nothing with wrong with this... except that there is, and there is a legal name for it, which FINRA and the SEC use when they impose fines, bars and other nasty things - it is called churning. And what churning does, at least in this macro HFT context, is it creates the perception that the market is all good, trading with decent amounts of volume, when all that is happening is the HFT/SLP entities provide a shallow market on either side of the NBBO (which as the Traders Magazine article pointed out is a worthless concept in a world dominated by flash orders at the top hierarchical level), with little to no interaction by natural buyers or sellers (though if such appear, the algorithms, as the Direct Edge case demonstrated, can be easily taken advantage of by these same HFTs).
Furthermore, extrapolate a $0.0025/share rebate (or the $0.0032 that Direct Edge's Ultra Tier clients pay) and double that, as these were likely the same entities on both sides of the trade... and you quickly can see why mega churning in otherwise dead names like CIT suddenly become very, very profitable and can even mitigate marginal capital loss if such old-fashioned concepts like fundamental analysis were to kick in and reset the price to its true level. After all liquidity rebates plus spreads on 70% of all 8 billion shares daily adds up to a whole lot of money in one year. And surprisingly those who keep paying this "70%" day in and day out are happy to tip the "liquidity providers" for keeping an orderly, efficient market.
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Wonder what it will look like when it is all computers buying all alone?
'Churning' is discretionary trading in a client's account solely for commissions. 'Painting the tape' is manufacturing volume where there is none in order to erect a facade of investor interest. Both are verboten, but I think the latter is a better encapsulation of what's going on.
Agreed.
"MARK IT ZERO, DUDE"
you say "paint the tape" and are immediately branded a conspiracyist (for some reason we get that a lot). churning has less vile connotations to the utterer, although in principle same exact concept.
Thanks.
I appreciate all your input.
If a dope like me can sit in front of a screen all day and recognize these programs then they are recognizable to the blind, deaf and dumb.
Keep it coming.
F*** 'em.
;/
everybody knows we been having a paint party pretty consistently for quite a while. and yet no regulatory authority is doing a damn thing about it. again, a corrupted system, by its very nature, cannot be fixed. it need to be broken, dismantled, what have you and we start over from scratch. God help us all and who the hell knows what it looks like. if you are longing this market now, be extremely agile. you never know when the next outlier/black swan event is. earnings mean shit. anybody (buehler, buehler?) want to live in Cali right now? anybody read about how they closed their $26.3 billion budget gap. remember, cali is the guinea pig (canary in the coal mine) for the US.
don't get caught at the blackjack table when the fire marshall finally shows up.
The provision of 'supplemental' liquidity, i.e., liquidity for liquidity's sake, is basically indistinguishable from painting the tape. The only difference, as far as I can tell, is that one is encouraged and paid for by the exchanges, and the other is punishable as manipulaion. Your recurring point is a good one, Tyler, that any sort of false liquidity should be thought of as manipulation whether sanctioned by the exchange or not. But not calling it 'painting the tape' simply to avoid being called a conspiracy theorist robs the point of some of its force, and in any case seems a bit out of character for you.
I like painting the tape.
First you accomplish paint fence.
Small board, left hand. Big board, right hand.
Come morning. Start early.
Tyler, (seriously) who exactly pays the liquidty premium?
Tyler, why the big run ups/downs in the a.m.? It seem to me that it would be easy to get on the wrong side with the HFT? Or is that the HFT guys gaming each other?
When they box it in in the afternoon, is that to recoup the losses via rebates from being on the wrong side in the a.m.?
Morning and afternoon volume spikes are usually 'real' volume. In the morning, you have to get your book straightened out after Europe and Asia markets close. At the close, you have to get things in line for the next sessions. These days, programs rule the rest of the session, unless there's some kind of news event.
If I understand this correctly, fundamentals can't kick in for lack of shares or volume available outside of the hft's control and the clearing trust is so corrupt a collapse in these three is impossible. Basically short proof. Did I get tat right?
too many cocktails to get captcha - this is fun lol.
It's hard to say what the fundamentals require right now. The massive AIG/Lehman unwinds of last fall and the Q1 selloff pushed the market down to a level that was not justified by the corporate earnings picture we're seeing emerge 6 months later. The market thus moves up back to its pre-September, downward-sloping trendline. By now we're almost back to trend, but not quite yet. So, if nothing exciting happens in the meantime, as corporate earnings get worse and worse, and the consumer withers to a dessicated corpse, the market should basically follow this downward trendline to a test of the low by the end of the year. If nothing has improved by then, we break the low and look for a new bottom Belldandy knows where.
That's basically how I expect this to work, and I've been trading accordingly.
I agree, except I am a true believer in market manipulation. GS and crew have the equities and Timmay and Ben got the $ and bond side. I think we pull back to 850 ver soon then I agree with GS target of 1060 before the fall. There is one more trend line up there. I posted 1050 in Octoberish about 5 weeks ago as target on my blog. Then crash. IMO they can't let market fall or we have total rioting in the streets (long overdue IMO). My other theory is that it will take an external source to break the market from their grip (China or terror or war....something). When people do start heading for the gates it will be obvious and market controls will be enacted more than once I think to stop the fall. It will get very ugly and I am investing accordingly as well!
5c range in Citigroup is 2% - significantly wider that the SPX's range today... 5c range in CIT is 5% - significantly wider than the SPX's range today...
Saluzzi is really really grasping at straws here. HFT's are making a market all day long in these cheap stocks and keeping the prices from moving HOW?!?!? By offering more when the stocks go up? and buying more when the stocks go down? Fighting the tape? Really? No... that's the opposite of what they want to do. They don't want to accumulate positions.
And why does everyone misunderstand the fact that "they" - the magical HFT computers - cannot get rich "trading back and forth?" Computer A taking liquidity from Computer B results in A paying a commish, and B earning a rebate. There is no money created. They may create the illusion of activity by trading with each other, but they do not create profits.
Acting as principal with a limit and agency/facilitation with a market offer (easy to assign those) on either side of the NBBO can allow one to arb the rebate quite well. If this is the case the clients of brokerage X should be quite angry.
TD - can you elaborate? you lost me with "market offer"
If I am a customer of brokerage X, and I put in a market order to sell, why should I care if the person with the best bid also happens to be my broker? As long as they are bidding at or above the NBBO, what is wrong with that?
I believe NASDAQ and NYSE all operate on FIFO queues, so it's not like my broker can jump to the front of the line when they see my market order.
nothing wrong with it. just goes to demonstrate how a broker can collect rebates on both sides.
If there is nothing wrong with it, why should "clients of brokerage X be quite angry" ?
And I have to take issue (again) with you saying that they are "collecting rebates on both sides". They are not collecting rebates on both sides. As we've discussed before, in your example, they are being paid a rebate by the exchange on one side, and they are charging a commission to their customer on the other. But two rebates are not paid on one order!
If I am a customer of brokerage X, and I put in a market order to sell, why should I care if the person with the best bid also happens to be my broker? As long as they are bidding at or above the NBBO, what is wrong with that? I believe NASDAQ and NYSE all operate on FIFO queues, so it's not like my broker can jump to the front of the line when they see my market order.
@TD: Interesting idea; I hadn't though of that. But, in the case of GS for example, principal volume dwarfs agency/facilitation volume. Delta-neutral rebate strategies would seem to require 1-to-1 principal-to-agency volume.
Goldman's limit principal can be met with MS' market agency. All clients are expendable. There is enough to go around.
I don't believe a word you say.
When the exchanges pay them to "offer" liquidity they don't need to make a profit on the "trade". If they buy and sell at the same price, they pocket .005
I don't know how that .005 is applied. Per trade, per share, or what.
it's per share - but you didn't read my post - the person TAKING the liquidity pays to execute. that's how the exchange gets money to pay the person OFFERING the liquidity a rebate. here's an example from the NYSE's press release:
NYSE and NYSE Arca Announce Changes in Equities Transaction Pricing, Effective March 1-- NYSE rebate of $0.0010 per share for adding liquidity in displayed and non-displayed orders
-- NYSE transaction fee of $0.0018 per share for removing liquidity;
so if the plan is to trade with yourself all day long and get rich off rebates, it's an epic fail.
The cost for volume traders are capped.
are you sure? i think they have a $120 fee cap PER transaction, which doesn't apply because we're talking about small lots anyway.
do you have a source?
HOWEVER - TD - i don't know if you ever noticed this or wrote about it:
Effective March 1, 2009, the following NYSE Arca equities transaction fee changes will go into effect:
For customers with an average daily share volume per month greater than 90 million shares in Tape A, B and C trading, including adding liquidity of more than 45 million shares, the new rates per share are as follows:
so you can earn .0001c per share by painting the tape... i don't know if they still have the "inverted" pricing structure for tape fees.
This seems to be saying that you get paid $0.0029 to put in an order and get charged $0.0028 to cancel it. How many times per second can a computer do this? The point is, nothing in that snippet seems to require the trade to cross.
not at all. only executed orders
Unless Computer A doesn't pay a commish because it's a holy "liquidity provider".
Did I get it right?
Profits no, revenues yes.
Remember dark fiber swaps?
And to further elaborate, all those dark fiber swaps were ways to set a "market price" for that capacity. When a real customer walks in the door, you've got a price set by trading amongst a cartel instead of an actual open negotiation with the customer. A very similar thing is happening here, the "liquidity providers" are setting the market price. When a real person walks in, that real person has to pay the price that the cartel is trading amongst themselves at. If you think that price isn't favorable to the cartel, you're fooling yourself IMHO.
Wash sale? That's a wash sale, right? Thank you.
That tight move happens when the opponents have the same strength... I say it was Goldman vs Goldman and don't mean the rogue coder.
Say GS trades against GS2 disguised as one or more institutional investors, back and forth all day. GS, at the end of the day, takes the rebate home and closes with no position and thus no risk/interest "I'm an SLP only". GS2 makes a small profit or loss for the investor "it was a tight market" and take side benefits with GS as a preferred partner or some such. Everything is sort of legal so far. Who is being defrauded? NYX investors, who are paying the rebate for no benefit.
I don't think this is for real, but hey, I had some spare time to thing about this.
What I want to know is where is the money coming from to pay all these HFT? Surely once the shareholders of NYSE-Euro see how much of their profit has been sucked into the banks they'll scream bloody murder. Won't they?
Btw, nice captcha. If they're all math problems I could write a parser to bust that quick. Gonna use OCR obscured pictures soon?
i cant help but to post this Dollar Cost Losing, i mean Averaging Calculator....just type in a symbol, and start and end dates....1998 to 2009 is a nice 12 year period....C, GM, CAL....plenty of good symbols to try as well..........
http://www.buyupside.com/calculators/dollarcostave.php
lets not forget commission or management fees!!!
Whos paying for all this rebate? its got to come out of someone's pocket, no?
the liquidity "taker" pays the rebate.
But the robots also affect price, the taker also pays the spread between the with-robot and sans-robot prices.
~
OhMeOhMy!
Hilarious!!!
I guarantee that a few other junkers are being gamed by the supercomputers. Check out RF, HBAN, and DRYS, as they are always one of the "most active" on the CNBC pre-market ticker.
http://clearstation.etrade.com/cgi-bin/bbs?post...
Pretty much a plethora of lotto tickets for these computers to trade and get their rebates. Pretty soon, hundreds of stocks will be getting microtraded on the NYSE, and soon we will be trading 5 billion daily.
Wonder what kind of chart software is used. Probably a 1-second chart and the tightest of Bollinger Bands.
Think of it as "Channeling Stocks.com" for Supercomputers...
LOL...
I have a theory. People like shit and like to spend a lot of money on shit and like to get screwed.
TD...rather than calling it "painting the tape" or "churning...why dont you try calling it what it really is...KICKBACKS (liquidity rebates). Why is this even legal? Do you remember the days of the nasdaq market makers (AND YES, MADOFF as well was big in this) paying for order flow, which then came under regulatory scrutiny?? This is the same thing and it is screwing up out markets....I would love to see you expand on this campaign....if we outlaw these rebates, I surmise that most of what you have talked about here in the last month will grind to a halt and these HFT's will have to reinvent a new way to make money.
Mav
Wait, the total volume on NYSE was 1.2 billion. Are you saying that 75% of all trading on NYSE were those 3 stocks and the rest of the volume was everything else?
NYSE volume was 5.3 billion today.
According to here, as well as my datafeed, it appears to be 1.2 billion. Am I interpreting the numbers incorrectly?
http://online.wsj.com/mdc/public/page/marketsdata.html
Well, the official volume was 1.2 billion, and that seems the most relevant to Saluzzi's point. So go with that figure. I mistook NYSE Listed Volume of 5.3 billion for the official print. Why we can't have a consolidated tape that actually consolidates, I'll never know.
On this note, good to see that DRL has had such good fundamental news come out in the last week. No? Must be big institutional buying. No? Guess it's time to just chalk up that action in the last week to normal trading; clearly rational price discovery...
TD...rather than calling it "painting the tape" or "churning...why dont you try calling it what it really is...KICKBACKS (liquidity rebates). Why is this even legal? Do you remember the days of the nasdaq market makers (AND YES, MADOFF as well was big in this) paying for order flow, which then came under regulatory scrutiny?? This is the same thing and it is screwing up out markets....I would love to see you expand on this campaign....if we outlaw these rebates, I surmise that most of what you have talked about here in the last month will grind to a halt and these HFT's will have to reinvent a new way to make money. Mav
More and more, actual thinking is being replaced by HFT. Welcome to the Matrix.
How is liquidity judged differently from the program trades? Is everything beverything based on the bid/ask? How are stocks rocketed up on low volume and sell off hard on light volume? I never undrestand that
http://seekingalpha.com/article/112537-payment-for-order-flow-madoff-s-e...
Here's the SEC's response:
zzzzzzzzzzzzzzzzzzzzzzzzzz...........
Watching all the chatter on this same topic over and over as "new information" is "discovered" is hilarious. To put this in perspective for those not familiar with the intricacies of trading in today's markets, much less high frequency trading, imagine reading this thread except it is titled "electricity can not only power light bulbs, but appliances too! If you plug in a vacuum and turn it on, it works. Tomorrow we will "discover" that you can plug in a blender and it works, too!"
Everything being "discovered" in these threads is publicly available information. The entire compensation scheme for exchanges is transparent. Fee tables, market data revenues, etc. all have to be published and approved by the SEC. When exchanges demutualized (because they were clubby places with ridiculously high transaction fees, no service, and not transparency) they had to make money some way. As noted by other posters, the Fair Access Rule requires that all products and services be made available to all qualified entities on the same terms and fees. You can enter a slow car in a race, just don't complain when the guy with the faster car beats you.
So.... what is your point... By your tone you obviously believe in EMT... By that logic everything is already priced in (not just the transparent stuff). Does that mean all media should cease to exist as you have already foreseen all possible permutations of all future events based on information at this moment?
I don't like him, Tyler. Can I eat him? Please let me eat him, Tyler, I'm hungy.
I don't think the OP made any claims about future prices or events. He simply pointed out that the obvious, that nothing is revealed in these threads that you could not learn in an economics text book or a financial industry trade publication. Nothing illegal or even immoral. For example, equity trading volumes are always dominated by just a few names, its not new, it didn't start happening in the last few days. But if you insist that today's chart is proof of some vast conspiracy, an army of disgrunted retail traders, gold bugs, and anti capitalist activists will fall over themselves to agree with you. You seem like a smart guy, smart enough to know that it doesn't matter whether you are correct if you tell people what they want to hear.
You miss the point of all these posts, entirely.
How about I give you War and Peace, translated into some foreign language that you aren't familiar with. Sure, its all there for you. Why don't you understand it? Just read it, okay?
Instead, what ZH has done is take something very complicated, (purposefully complicated, right?) foreign, if you will, and translated it so that the millions of people who have their money right along side your HFT can now understand how they are being tricked.
Funny you should bring up morals...We won't go there, surely.
You are wrong. The information may be "available", but it's not well understood and definitely not ready for consumption by large parts of the population. It takes someone to put it all together and to show exactly why the system is broken.
I've been doing a substantial amount of reading on this over the past few weeks, and it's ridiculous how much there is to learn. There is literally a completely different world out there that no one except for people on Wall Street know about. Zerohedge is doing a great job illuminating this for us, the regular joes.
The "stock market" has been sold to us as a vehicle to invest for our retirement. "Buy and hold!" But that's bullshit. The entire nature of the stock market is a big game, and we need to understand that it is, and either pull our money out and put it into CDs, or learn the rules of the game. Zerohedge is helping those of us that want to learn what the rules of the game are.
I agree completely. Needless complexity is a way for the brokers et al to fleece the public. Reminds me of a great quote from Josie Wales, Don't piss down my back and tell me it's raining
"Dyin ain't much of a livin, boy"
"Well you going to fire those tings, or just whistle Dixie?"
GREAT movie.
I see Paulson as "The Duck of Death" being kicked through the streets like Gene Hackman did to Richard Harris
in "Unforgiven.
May they become dreadfully sick and die a painful, limgering death ffor what they did to my country. And thank you for your service.
"Dyin ain't much of a livin, boy"
"Well you going to fire those tings, or just whistle Dixie?"
GREAT movie.
I see Paulson as "The Duck of Death" being kicked through the streets like Gene Hackman did to Richard Harris
in "Unforgiven.
May they become dreadfully sick and die a painful, lingering death ffor what they did to my country. And thank you for your service.
Test:
Trying to post some live charts, but can't seem to get them to display.
<img src="http://bigcharts.marketwatch.com/charts/big.chart?symb=AAPL&ma=1&maval=5..." /><br /><img src="http://bigcharts.marketwatch.com/charts/big.chart?symb=SBUX&ma=1&maval=5..." /><br /><img src="http://bigcharts.marketwatch.com/charts/big.chart?symb=YHOO&ma=1&maval=5..." /><br /><img src="http://bigcharts.marketwatch.com/charts/big.chart?symb=GILD&ma=1&maval=5..." /><br /><a href="http://www.hedgefundcrash.com/code/bigcharts/" style="text-decoration:none;display:block;width:100%;background:#f90;font-size:12px;" title="Hedge Fund Crash">Hedge Fund Crash</a>
http://bigcharts.marketwatch.com/charts/big.chart?symb=aapl&compidx=aaaa...
working on it
Hey, Robot Trader... email me:
marla @ zero hedge [ dot ] com
"I heard somebody say:
Burn, baby, burn!-Disco Inferno!
Burn, baby, burn!-Burn that mama down!"
CIT flatlining irked me after buying Monday then seeing the bad news pop overnight. I had a stop in so whatev, but that was just flat a rock yesterday.
Looks like a banner day today, at least until it isn't.