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As European Banks Pull Out All Stops To Defend Picosecond HFT, Themis Trading Explains The Lies Behind "Providing Liquidity"

Tyler Durden's picture


As everyone knows all too well by now, High Frequency Trading is arguably among the key culprits for all that is wrong with our broken equity market, culminating naturally with the events of May 6, 2010. Therefore, it is not surprising that regulators in Europe, which now has a much more fair and efficient overall capital market than the US, "plan next year to introduce new rules to restrict the trading activities of these traders -- tech-savvy hedge funds that generate huge volumes of orders -- to prevent a repeat of last year's U.S. "flash crash"." However, since HFT is nothing but a cheap way to promote vapor-volume momentum, while frontrunning everyone in the process, it is only natural that Europe's banks would come out kicking and screaming in its defense: "Europe's top banks are warning global regulators against curbs on high-frequency trading firms (HFTs), insisting that so-called "market bandits" are vital for efficient markets...A panel of managing directors from major European investment banks told the Reuters Future Face of Finance  Summit on Wednesday that punishing these traders was risky because they were a key source of liquidity that benefits all trading firms." Ah, "providing liquidity" - that universal euphemism for frontrunning, quote stuffing, inducing flash crashes and for pretty much every possible illegal activity, except for... providing liquidity. As for the fact that "market bandits" are "vital for efficient markets"... we'll just leave that one alone.

Some more on the dominance  of the "market bandits" in current markets:

These traders use super-fast computers to engage in various trades such as "shaving" -- buying and selling in nanoseconds to chase tiny margins -- and often collect a rebate from the exchange for creating liquidity as they go.

More traditional investors worry such speedy traders are effectively engaging in a legal, computerized version of front running -- where firms glean information about rivals trading plans.

The regulators are considering rules to slow them down and impose extra risk management requirements on them.

High frequency traders have hit the headlines in the past year after being partly blamed by U.S. regulators for the "flash crash" on May 6, when the Dow Jones Industrial Average plummeted 700 points before rebounding in a matter of minutes.

A single, computer-driven sale worth $4.1 billion by U.S. money manager Waddell & Reed Financial Inc sparked a sell-off that was exaggerated and accelerated by the high frequency traders.

A panel of U.S. regulatory experts last month proposed a raft of rule changes, which included imposing extra fees on HFTs -- a suggestion the top U.S. securities regulator, the Securities and Exchange Commission (SEC), acknowledged on Tuesday.

"The idea of a fee on cancellations is one that we have been very informally talking about internally with certainly no proposal to look at or contemplate," SEC Chairman Mary Schapiro told the Reuters Future Face of Finance Summit in Washington.

And while regulators debate, the "market bandits" have moved a stap function lower, and instead of nano seconds, are now dealing in pico seconds.

A second is a long time in cash equities trading. Four or five years ago, trading firms started to talk of trading speeds in terms of milliseconds.

A millisecond is one thousandth of a second or, put another way, 200 times faster than the average speed of thought. In the time it took your brain to tell your hand to click on this article, a broker or market-making firm trading in milliseconds could fill hundreds of orders on an exchange.

Milliseconds, however, are now ancient history. In the past two or three years, trading speeds have been shaved down to inconceivably tiny increments: from milliseconds to microseconds, and more recently to nanoseconds.

But in recent weeks trading geeks have started to talk about picoseconds in what is a truly mind-boggling concept: a picosecond is one trillionth of a second. Put another way, a picosecond is to one second what one second is to 31,700 years.

Speaking at a London conference on Tuesday, Donal Byrne, chief executive of Corvil, a high-speed trading technology company, caused a ripple of audible incredulity throughout the room when he suggested that trading speeds would likely be reduced to picoseconds in the not too distant future.

Why the need for picosecond trading? Why to frontrunning you better of course.

The answer is simple. Firms that trade super fast effectively put
themselves at the front of the trading queue and have priority over
other orders. This position gives them better information on the trading
behaviour of other investors and allows them to react faster.

Which brings us to the biggest lie of all: the universal excuse that HFT provides liquidity. It does not. It provides trading volume and churn, both of which are compensated by the exchanges in the form of liquidity rebates. Both can and are shut down with the flick of a switch. Themis Trading takes a slightly less serious look at this most abused of all market concepts.

A euphemism, as you all know, is a pleasant sounding expression
substituted for an unpleasant or offensive expression on sensitive
topics. I think they are best explained by offering a few examples,
which I do for you in the hope that it will loosen you up so that you
won’t shove hot pokers in your eyes when you read the linked-to Reuters
story further on. I am very tired of the euphemism, Providing Liquidity. And by the way, so are most on the buy-side. Here is Will Psomadelis, of Schroeder Investment Management:

“I fail to understand how we will benefit from the maker-taker
model that Chi-X is proposing when you really evaluate the true impact
of artificial liquidity and artificially compressed spreads,” he adds.”
Read more here: Artificial Liquidity Can Work Against Institutional Traders

Ok, to loosen you up:

Euphemism Examples:

-           Winning (Spending $500k in a few months on coke and
whores, blowing your incredibly generous TV gig, endangering yourself
and family, being a source of amusement and ridicule, destroying your
family name)

            -           Charming (throw away)

-           Hook Up (have crazy college sex)

-           Establish Clear Boundaries (tell someone to eff off).

-           Chilean Sea Bass (Patagonian Tooth-Fish)

-           Sweetbread (Thymus Glands)

-           Downsizing (firing)

-           Pre-owned (used)

-           Enhanced Interrogation (torture)

-           Revenue Enhancement (tax)

-           Wardrobe Malfunction (look at my breast with a pasty on it)

-           Glow (sweat)

-           Ethically-challenged (A Congressman)

-           Lobbyist (One who offers bribes, but went to a good college)

-           Quantitative Easing (Money Printing)

-           Contingent Convertible (A Way to get Around Bank Capital Standards if the sh$t hits the fan).

And now, hoping you are loose, and have removed hot pokers from your general vicinity:

-           Providing Liquidity: The
evolution of the SOES bandits in the 1990’s into DATEK, ISLD, NSDQ, and
finally Big HFT firms who run ahead of your orders. You bid $21.04, six
of them bid $21.05 and take stock up to $21.18. This automated sludge
is now somehow Providing Liquidity, because it has been
repeated often enough. They didn’t provide you liquidity; they screwed
you and provided you heartburn. And as we all knew they would they are
actually meeting with regulators and claiming that if anyone attempts to stop them, they won’t provide their liquidity anymore. Read the article here:


If You Regulate Us We Won’t Provide Liquidity Wahhhh

By the way, Jack Vensel, the gentleman towing that party line in the
above article, is a friend of ours from back in our Instinet days. I
fondly remember grabbing a cup of Timothy’s coffee with him many
mornings outside on Broad Street as well. He is a good man, and a great
salesman. Citigroup is lucky to have him. The Messenger does not equal
the message.

Oh yeah. Almost forgot. Here is yet another in a slew of examples of
how their “liquidity provision” is healthy for the market. I give you a
visual example of our exportation of our market structure to the rest of
the world:


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Thu, 03/03/2011 - 10:36 | 1014726 kato
kato's picture

remember when they used to complain about SOES Bandits? that is a quaint long time ago.

Thu, 03/03/2011 - 16:11 | 1016176 Ident 7777 economy
Ident 7777 economy's picture

SOES Bandits and DATEK; how I had forgotten:

Thu, 03/03/2011 - 10:37 | 1014733 Oh regional Indian
Oh regional Indian's picture

HFT is nothing but momentum trading taken to the extreme. it will eat it's own tail at some point. Soon. Which leaves this mockery of a market and the curious question as to why anyone not having "access" woudl play in it?

reminded of Vegas, where the ringing bells made everyone think their next pull would be th eONE.

India is well on it's way to HFT land, with some large brokerage/iinvestment houses allowed to place their "terminals" inside the bourse. Have not seen jerk-around due to them yet, but I think they're just practising.


Thu, 03/03/2011 - 11:03 | 1014809 Ray1968
Ray1968's picture

Then NYSE leases server space right INSIDE their data warehouse for HFT platforms. The closer you are to the data, the picoseconds you can shave off.

They are making a killing just leasing space. This problem will not go away. They are in it for themselves and don't give a shit about investors.

Thu, 03/03/2011 - 10:38 | 1014734 Convervative Co...
Convervative Connection's picture

I'll be the first to admit that I may not completely understand the situation, but what effect would quantizing all trades to a specific interval (eg, once a minute) have on the market at large? What effect would it have on HFT?

Thu, 03/03/2011 - 10:52 | 1014773 Oh regional Indian
Oh regional Indian's picture

None really. Pandora's box is open.

They will program the bots to crowd into the last/first pico-second of the minute, depending.



Thu, 03/03/2011 - 11:09 | 1014832 Ray1968
Ray1968's picture

Not really. You could establish a 1 second delay on every quote request and order. It would kill the HFT.

Or just outlaw it and prosecute violators. (oops, I said a funny: prosecute violators)

Thu, 03/03/2011 - 12:25 | 1015174 Oh regional Indian
Oh regional Indian's picture

It woudl have to be randomization as said below. Else, I think my point holds. They can sniff patterns, really really fast. it's what they do.


Thu, 03/03/2011 - 11:23 | 1014887 Convervative Co...
Convervative Connection's picture

When a trade is entered, the quanitization process would ensure that it would be executed in the next batch, however, there would be no guarantee as to when it would get processed in the batch itself. In essense, randomize the execution of all trades within the quanta.

This removes any possible benefit of crowding around the interval.

Thu, 03/03/2011 - 11:46 | 1014962 Bob
Bob's picture

Yeah, you'd still have that problem.  Wonder what the response to proposed randomization would be? LOL

Thu, 03/03/2011 - 10:59 | 1014798 Rogerwilco
Rogerwilco's picture

There are only 450 minutes in a trading day. Think of the consequences! Empowering in-duh-vidual investors at the expense of robotic minions will lead to the loss of hundreds of seven-figure incomes (those good-paying jobs). Let's not forget their kids have to eat too, and what will happen when all those third and fourth vacation homes hit the RE market? Dangerous ideas you speak.

Thu, 03/03/2011 - 12:19 | 1015139 Vendetta
Vendetta's picture

In stuff I've done before for control systems, the smaller the time slice that a piece of data represents, the better the control system can control and manipulate a system.  They are sometimes called predictive/adaptive modeling algorithms.  Larger time slices means less control and less manipulative capability

Thu, 03/03/2011 - 10:49 | 1014759 fragrantdingleberry
fragrantdingleberry's picture

"Providing liquidity." Is that like a money shot?

Thu, 03/03/2011 - 11:31 | 1014907 ebworthen
ebworthen's picture


Yeah, drink some pineapple juice and a quart of water an hour before, she'll appreciate it.

Thu, 03/03/2011 - 10:50 | 1014766 gordengeko
gordengeko's picture

Yes, we've been trodding on the winepress much too long:
Rebel, rebel!

Babylon system is the vampire, yea! (vampire)
Suckin' the children day by day, yeah!
Me say: de Babylon system is the vampire, falling empire,
Suckin' the blood of the sufferers, yea-ea-ea-ea-e-ah!
Building church and university, wo-o-ooh, yeah! -
Deceiving the people continually, yea-ea!
Me say them graduatin' thieves and murderers;
Look out now: they suckin' the blood of the sufferers (sufferers).
Yea-ea-ea! (sufferers)

Tell the children the truth;

Thu, 03/03/2011 - 10:50 | 1014767 Bansters-in-my-...
Bansters-in-my- feces's picture

And the Rothschilds smile...:0)

Thu, 03/03/2011 - 10:57 | 1014787 Bruce Krasting
Bruce Krasting's picture

The only possible outcome will be another crash. I look forward to that. TD will throw egg on all of these folks (including Mary Schapiro) when it happens.

They just will look dumb.


Thu, 03/03/2011 - 11:11 | 1014794 michigan independant
michigan independant's picture

Scalpers, and they just measure the standard deviation. Until the Consumer chooses to scrape these leeches off they are Slaves. As long as the BORG "Borg voluntarily submit to cybernetic enhancement as a means of achieving what they believe to be perfection (they also force their idea of perfection on others)gets there dues on the beltway there fine as they piss on you and tell you its raining crowd. Overall like most normal Citizens we take care of our family and friends not at the expense of others on this blue speck on the cosmos.   

Thu, 03/03/2011 - 11:06 | 1014823 bunkermeatheadp...
bunkermeatheadprogeny's picture

"Providing liqudity" to the "frozen credit market" was also the lie to justify TARP.

Thu, 03/03/2011 - 11:14 | 1014855 lynnybee
lynnybee's picture

Criminals-gone-wild......Charlie Sheen is a chiorboy compared to these guys .

Thu, 03/03/2011 - 12:38 | 1015231 Vendetta
Vendetta's picture

indeed.  Another distraction from what is actually important

Thu, 03/03/2011 - 11:26 | 1014893 Doubleguns
Doubleguns's picture

So now the computers are going to front run us by the equivalent of 31,700 years. They could dance a jig around us whilst slapping us silly for years and we still would not know that it was coming.

Thu, 03/03/2011 - 11:46 | 1014961 myztix
myztix's picture

Take a look at BSFT

Taking HFT to the max.

Thu, 03/03/2011 - 11:54 | 1014997 Dr Hackenbush
Dr Hackenbush's picture

Churning is a phishing scheme, plain and simple, seeking whom $ they may devour.    

Thu, 03/03/2011 - 12:02 | 1015039 djsmps
djsmps's picture

You left out the most famous European Euphemism:

resettlement = death

Thu, 03/03/2011 - 12:12 | 1015095 simpleminds
simpleminds's picture

Welcome to the new mafia.  Makes the old one look like amatuers.

Thu, 03/03/2011 - 12:14 | 1015107 myztix
myztix's picture

more like ninjas or assassins..

Thu, 03/03/2011 - 12:52 | 1015294 lynnybee
lynnybee's picture

the more i know (primarily by reading ZEROHEDGE, which requires a lot of studying & trying to understand things that i have never been exposed to before) the more i have become thoroughly depressed & disgusted.     i feel i must leave the country & convince my adult kids to leave with me......... but, where to go when you are old ?    i cannot start over, no country would take me .   

Thu, 03/03/2011 - 15:18 | 1015956 scratch_and_sniff
scratch_and_sniff's picture

relax fella, its not the end of the world, dont take everything you read so seriously, a lot of it is just horseshit and general speculation at best. Have a beer and think about something else for a while, things are going to do what they are going to do, regardless of what anyone says.

Mon, 03/07/2011 - 20:46 | 1028111 lsjcma
lsjcma's picture

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