Europe Begins Push To Ban HFT: Calls "Quote Stuffing" Market Abuse, Dark Pools "Tragic Error", And "Explicitly Rules Out" Flash Orders

Tyler Durden's picture

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Geronimo66's picture

Odd! Dutch regulator AFM did not found HFT any problem earlier this week.

MeTarzanUjane's picture

Exactly. Hyperbole.

When they push guess what they will get in return?

Connection: close

snowball777's picture

What is Mary Schapiro but Lloyd in drag?

Problem Is's picture

That's an ugly picture...

<CUE> WillB7...

Careless Whisper's picture

i still don't understand why retail traders can only enter an order with two decimal places, but others get to use up to four decimals, thus jumping in front of the retail orders.

WTF

velobabe's picture

william, i want to talk to you today†

your UNamerican.

williambanzai7's picture

Tough talk. Timmah, get Ben on the horn to explain how money printing works.

Fat Ass's picture

Quite simply --- FUCKING BAN all computer trading now. Just introduce a simple rule that trades must stand for say 120 seconds ...............

and that's the end of the whole insanity. At a stroke. Simple.

We live in a bizarre "no action possible" era. All we need is simple ACTION, someone, somewhere, at some level, should just ban computerised trading.

It's silly and does nothing to help the world - so just get rid of it altogether.

If it was completely banned .. a few hundred people would lose their (completely silly) income.

Who cares about those few hundred people? Nobody ... just COMPLETELY BAN FUCKING COMPUTERISED TRADING instantly, this afternoon.

But we live in a strange time when that SIMPLY WON'T HAPPEN.

We truly live in an "age of inaction." It's more or less impossible to do ANYTHING. Even something as staggeringly obvious as "just ban computer trading" ... it will never happen.

Why?

It's bizarre. We live in the "age of inaction."

We should simply completely ban computerised trading this afternoon. It's plain silly and should just be iliminated. But .... that won't happen. Why? We live in a bizarre age of inaction where "nothing can be done."

Threeggg's picture

11/25/10 DUBAI, United Arab Emirates (AP) -- Abu Dhabi Commercial Bank said Thursday it is suing Credit Suisse and credit rating agency Standard & Poor's, alleging it was misled over a 2007 investment that went sour.

The case is the second filed by the Abu Dhabi government-controlled bank in New York involving complex financial instruments known as structured investment vehicles that fell prey to the credit squeeze brought on by the subprime mortgage crisis in the U.S.

ADCB alleges that Credit Suisse failed to disclose conflicts of interest and provided misleading information when packaging and selling the investment vehicle, which went by the name Farmington. The bank says it was pressured to invest in the deal in 2007 to protect its stake in an earlier, similar investment known as Stanfield Victoria that was coming under pressure at the time.

As part of the agreement, ADCB claims it was required to enter into another transaction known as a credit default swap designed to protect Credit Suisse's exposure to the Farmington deal, which it believed "carried minimal risk."

Structured investment vehicles were set up to borrow money by issuing short-term securities at a low interest rate. They would lend that money by purchasing long-term securities at higher interest. Investors were able to profit from the difference, as were issuing banks that charged fees to structure them.

ADCB is suing S&P because it alleges the rating house made inaccurate assessments tied to the Farmington investment by assigning ratings to underlying assets that were "investment-grade," suggesting they were relatively safe.

Ala'a Eraiqat, ADCB's chief executive said the lawsuit aims to protect the bank from potential losses, but he doesn't expect it to have a major effect on the company's earnings.

"For the benefit of all our key stakeholders, it is appropriate to take action against parties who we believe misled ADCB," he said in a statement outlining the lawsuit. "On close examination, the investment was sold to the bank in an unacceptable manner."

Representatives for Credit Suisse and S&P declined to comment.

ADCB is pursuing a separate suit involving structured investment vehicles against Morgan Stanley, S&P, and another rating agency, Moody's Investors Service.

That case, a class-action suit filed in 2008, seeks damages resulting from the collapse of an SIV known as Cheyne that was backed by U.S. mortgages and other securities.

http://finance.yahoo.com/news/Abu-Dhabi-bank-sues-Credit-apf-1922649766.html?x=0&sec=topStories&pos=7&asset=&ccode=

How many law suits are we going to have in 2011 ?  Thousands !

This is like when your in a drunken stuper going to bed with a hot girl you picked up at the Pub, and then as you wake up in the morning slowly gaining your vision she starts looking mighty Shreckish'.

Gettin Ugly !

qussl3's picture

What better way to force a bid into the bond markets by removing the phantom bid in the equities.

Will be fucking funny when the liquidity chooses to move into commodities and PMs.

Bearster's picture

The fact that Europe--not exactly known for their belief in free markets--is proposing to ban something is does necessarily help prove that this something is bad.

And, btw, if HFT's are to close their positions after only a brief holding period, they must sell as often as they buy.  The claim that they exert an "upward bias" on prices is dubious.

Far better to deregulate exchanges, so that new companies who are able to grasp the issues of queueing including segregated queues, latency, and high-performance computing can take market share from the dinosaurs at NYSE who (according to the picture I get at ZH) don't seem to be able to keep their system robust against a few thousand quotes per second.

But that's what regulation achieves: incumbent protection.  So you need more regulation and more and more, each new wave made possible, justified, and demanded by the results of the previous.

Sudden Debt's picture

The first question:

after how many quotes is it called quote stuffing?

Second question:

Is there a limit on accounts people/firms can use on quoting on 1 stock?

 

Whatever the answers, it's going to be peanuts to find a backdoor.

You just can't stop it.

UNLESS:

1. You stop digital trading

2. You put in a surtain time a buyer will have to hang on to a stock they buy.

Results:

C R A S H

GoinFawr's picture

"The first question:

after how many quotes is it called quote stuffing?"

Ans. One (1), if there was never any intent for the order to be filled.

 

"Second question:

Is there a limit on accounts people/firms can use on quoting on 1 stock?"

Ans. Congratz, you found loophole number 1,298.

As for your 'crash' scenario: yah, it's likely, if everyone suddenly had to hold their shares for 2 minutes, but only while the TBTF's still had some spleen left to vent on us. After the big boys finished firing their bullets into the world's economic head it might well cease to exist as it has existed for the last hundred years or so, indeud. Then again, that running sore of a beast needed taking down anyway, right? When resurrected we could have a real golden winner in its place; who knows?

"Gonna make an omelete you gotta break a few eggs" and all that cal...

Regards

 

Sudden Debt's picture

Ans. One (1), if there was never any intent for the order to be filled.

Almost half of the time I put in a buy or sell order, in the middle I change my mind.

Also selling when a stock crashes forces you to sometimes enter 4 to 5 orders.

That would send me to jail?

GoinFawr's picture

And you`ve hit the nail on the head: "intent" it can be very tough to prove... but in your specific cases:

"Almost half of the time I put in a buy or sell order, in the middle I change my mind."

But when you put those orders in, you intended them to be filled, not manipulate the price in one direction or the other so you could create an arbitrage situation for another position you hold.

"Also selling when a stock crashes forces you to sometimes enter 4 to 5 orders...That would send me to jail?"

I don't think so, as you had a desire for every one those transactions to occur, rather than entering them as a means to pull the price back up to where you could profitably close a position already held.

Intent

Oh, and ability too; I don't want to assume anything here, but it is unlikely you alone have the power to place and pull bid/ask sizes at a rate that would move around the price of anything above a low volume penny stock. In that case however...

All IMHO, natch.

Regards

Sudden Debt's picture

Thx for the responce. You sound a bit like a lawyer :)

Sudden Debt's picture

And I'll only say it once!

Sudden Debt's picture

They day they actually figure it out how it works (somewhere between 2052 and 2060), and be able to actually make a law and push in into European law, I'm sure they'll ban it.

 

GFORCE's picture

Maybe the checks haven't made it to europe yet?

GoinFawr's picture

Looks like the usual "show and tell" session to me.

We get shown that everyone is well aware of the egregious dangers of certain trading practices, but we are told absolutely nothing about what is really going to end up being done.

IMHO on how this will play out on the global marketplace:

Any legislation or regulations enforced will be acutely focussed on limiting small businesses' use of the technology, while the largest firms will get a long list of 'exemptions' for usage, and simply continue to consolidate their skimming power by forcing out smaller algo-rythmic competitors who will have been subsequently crushed anyway by additional onerous beancounting requirements.

"Do as we say, not as we do, peasants."

Anyone else getting a bit tired of this meme?

Regards

erik's picture

The question is where is the buying power coming from to offset mutual fund outflows and insider selling?

If it is ETF inflows then we need data to confirm that.  According to State Street, ETFs held $772B in assets at the end of June 2010.  Total ETF assets dropped 0.4% in 2010 as of June 30th.  Gold ETFs and Bond ETFs saw inflows that totaled ~$30B, which means that stock ETFs must have seen outflows equal to that in order to reach the -0.4% drop year to date in total ETFs as of June 30th.

The problem with stock ETF flows is that there are both bear and bull stock ETFs so just looking at the inflows and outflows doesn't necessarily tell us about direction.  Though SPY is the largest stock ETF which suggests that outflows means stock selling.

So up until the end of June 2010, we saw stock mutual fund outflows of $22B, ETF outflows of ~$30B, and insider selling too.  The stock market was down 8.9% year-to-date as of June 30th 2010.

Since then we have seen ~$50B in stock mutual fund outflows and huge insider selling.  There is no data on ETFs since June 2010 that I can find, but we can infer that there have been outflows from stock ETFs based on the other two data points.  Contrary to the data though, the stock market is up 16.3% since June 30th 2010.

This begs the question, where is the money coming from to offset the substantial selling?

erik's picture

"Net cash flow into U.S.-listed ETFs reached an estimated $32.9 billion in the recently ended third quarter, according to a report sent to clients Monday by Morgan Stanley Smith Barney.  Not surprisingly, emerging markets and bond ETFs collected the lion’s share, a combined $24.6 billion in assets during Q3 2010.  Inflows in QQQQ with $2.4 billion and the SPY at $1.6 billion."

-----------------------

So we have ~$50B in stock mutual fund outflows offset by a mere ~$4B in stock ETF inflows, and massive insider selling.

Where is the money coming from to move the markets higher?

FunkyMonkeyBoy's picture

No accountability, no audits, no answers. That's all you need to know. The market is at where the powers that be want it to be by the second, minute, hour and day... no need to for logic to apply in this systematic corrupt nonsense.

merehuman's picture

Erik, turn yourself in for mental stabilization and reconditioning.

Critical thought is not allowed

Dr. Acula's picture

Is this a case of EU government interfering with the operation of stock exchanges?

Since they know so much about markets, why don't they go further and just fix the prices of the stocks at the correct values?

 

Hondo's picture

Ban all fascist activity.

RobotTrader's picture

Stopping computer-based financial gambling is a complete and total waste of time.

My prediction is that within 18 months, stocks worldwide will be traded 24/7 round the clock.

Don't believe me?

Just check out sports betting, which is at least 10x bigger than financial speculation among the public.

There are virtually an unlimited amount of bets that can be placed, 24/7, on any sport, of any "derivative" you can think of, from thousands of offshore casinos accessed from PDA's.

And exactly what do you think is going to happen once the sheep are herded back to the NYSE casino?

There will be 24/7 trading available on smartphones, anywhere, anytime.

Of course, the only way for the sheep to be enticed back in to the NYSE is for the Dow to break out over 14,000 again, which might take another 18 months.

 

Sudden Debt's picture

with the premarket en pré- prémarket and the pré- pré- pré market trading thats going on these days, it seems like a happy few already get that privilege of trading 24/7.

I still don't get it when the after- after- aftermarket closes and the pré- pré prémarket starts. It's like every times it happened, I must have blinked my eyes...

 

Why not erase all regulations and let the stock market run like the OTC markets where the companies can have full control of all trades.

Add a few more shares without communication of how many they add, cancel sell order and put their shares first in line.

Cancel buy orders when things improve and start a buy back themselves...

UTOPIA!

tip e. canoe's picture

Noyer stirs dark pools.
What's the frequency, Madame?
...cockroaches scatter...

FreakuentFlyer's picture

stopping the use of computers in trading, is about as likely as going back to handwriting in publishing.

 

any "quote duration" setup can still allow for computer edge, by using computers to more quickly make order changes a nanosecond or picosecond upon the time limit expiration.

 

the only remedy that might work is to use brokerage data to identify HFT trades (all brokers know the time delta between position opening and closing - exchanges do not). then you can report on such trades, and levy a profit tax to be distributed to non HFT market participants, in a dividend like distribution.

 

this type of an approach would still give the traders (&HFT) an incentive to provide liquidity as well as reduce the trading costs to investors who pay for the privilege of immediacy.

max2205's picture

I usually go ugly early. At the pub and at the open

trx's picture

Ban HFT? Ban on computerized trading? Sure...why not ban the whole internet!

(Cell phones, too!)

And while we're at it; make computer science illegal, put some tough restrictions on evolution and erase all Darwinistic material from students text books...

I'll side with RobotTrader on this one.

Wanna bet aginst capitalism? Go ahead!

This is just another example of naive regulatory ignorance.

By the way; Norway raised its cyber threat level to 3 (the highest) this week after severe attacks against the Government building. Somehow the ministers and their staff had "forgot" to update their Adobe PDF readers.....

Hackers Attack Norwegian Government – Again

 

Now, I'll get back to my rare-earth-metal-ion-doped inorganic crystal based quantum computer.

Cheers!

GoinFawr's picture

"Ban HFT? Ban on computerized trading? Sure...why not ban the whole internet!

(Cell phones, too!)"

Not the most causal sequence of events you've outlined there trx, now is it?

 

trx's picture

Naa..perhaps not ;-)

Guess it's mostly an expression of frustration over the regulatory ignorance in general.

I'm well aware of the problems with HFT, but in my mind the financial authrorities are taking the wrong approach. Why don't start by forbid the exchanges to hand out information to selected customers before is distrubuted to the rest of the market? That's just plain unfair...

Anyway - in a couple of years even Grandma will be a high frequency trader...

(On average - computer speed doubles every 18 months)

So, let's keep it real, okay?

Ted K's picture

HFT and quote stuffing isn't "Market abuse"!!!! It's rich bastards like Goldman Sachs partners giving the great unwashed the beneficent gift of "price discovery".  Damn don't ruin this for me after all the work WSJ's editorial page, FOX news, CNBC, and DrudgeReport have done to brainwash us!!!!  You bastaaawds!!!

Atomizer's picture

How Television Works

http://www.youtube.com/watch?v=uBm9ZyIg3I0

Hope everyone had a grand Thanksgiving