Gene Noser's 5 Suggestions On How To Regain Our Market Back From The Robots

Tyler Durden's picture

As more and more people voice their displeasure with the hijacking of the stock market by assorted HFT bucket shops (and oligopolies), with persistent defense by such industry participants as Irene Aldridge notwithstanding, we would like to present the latest opinion by Abel/Noser co-founder, Gene Noser (whose firm recently confirmed that just 99 stocks account for 50% of all daily trading volume) who explains where, in his view, we went wrong with market structure, courtesy of the ever accelerating technological encroachment, and provides five suggestions on how to fix the market, and begin to eliminate the various parasitic influences of the HFT fake-market making brigade.

Whose Stock Market Is This Anyway?, by Gene Noser, first published in Institutional Investor

As a long-time veteran
of the securities industry, and as co-founder of a brokerage and trade
cost analytics firm with a 35-year history, I have been party to many of
the changes that technology has brought to the equity marketplace,
mainly for the better. While technology has no doubt improved the
efficiency of our business, the recent rise of High Frequency Trading
(HFT) threatens to ruin the capital formation system that has served
investors of all sizes so well.

Prior to the proliferation of
HFT, both retail and institutional investors came together to seek
profit as owners of a company, and as a result helped support crucial
capital raising and secondary market functions for American business
owners. But seemingly what we have now is a major portion of market
participants – HFTs – who are unregulated, often undercapitalized, and
who provide no redeeming social function. As I see it, they exist to
extract value from real investors one fraction of a penny at a time,
over and over again. 

While our firm’s ability to embrace
technological change has served us well, I must draw the line with
HFT. At the risk of sounding alarmist, the May 6th “flash crash” and
subsequent trading halts in individual securities were the proverbial
canary in the coal mine. If regulators do nothing, our country risks
significant damage to our lauded capital markets system, and
subsequently our national security. Should financial terrorists fail to
honor trades, they would overwhelm undercapitalized clearing firms that
some HFTs use. In minutes, numerous trades would have the potential of
failing to clear, and our system would risk a disaster that makes the
fall of 2008 look like a cakewalk.

HFTs claim that they provide
necessary liquidity when trading. While this may seem true, the
differences in the responsibilities between HFTs and registered market
makers are where the dangers lie.  Registered  market makers,
increasingly a dying breed, have strict capital requirements and three
main responsibilities to the investing public:  1) Make an orderly
market when imbalances between buyers and sellers occur, 2) Bring two
customers together to facilitate trades, and 3) Act as an agent
representing customers.  Many of them failed to do so during the crash
of 1987, with dramatic consequences. Similarly, many HFTs pulled their
bids during the “flash crash” of so they would not be supporting a
falling market. HFTs have none of the capital requirements, regulations
or responsibilities that registered market makers comply with, yet they
are endorsed by trading venues and ignored by regulators.

have exacerbated the problem. No longer non-profit institutions with a
public duty, exchanges and alternative trading venues realized that
speed and reduced latency created an informational advantage, even
within a time frame of microseconds, and struck deals with HFTs to sell
access to powerful bandwidth capabilities. These arrangements allowed
HFTs to scalp profits from real investors by discovering their trade
intentions and running in front of their orders. It’s akin to thousands
of people walking down the street with money in their pockets, and
pickpockets knowing which people have the most money and the precise
location of that wallet for the picking. In the past, when human
specialists and market makers were caught front-running orders, they
were banned from the industry.  On the contrary the exchanges are now
encouraging a form of legalized front-running at investors’ expense.

more HFTs enter the market, speed and latency are like an arms race
with participants taxing capacity. Just recently it was reported that
one HFT purposely placed 5,000 bids per second in an attempt to jam and
slow down the NYSE’s quote system.  This jamming technique gave the
culprit another trading advantage in picking off high bids and low
offers.  Is this type of technological casino gaming good for the system
in the name of “liquidity?”  Does this leave a positive impression with
investors? Given the “flash crash” as one of the main reasons for the
waning interest of individual investors in the stock market, the answer
is no.

In order for the market to return to its true function of
capital raising and away from a select few computer warriors, lawmakers
and regulators should consider the following changes:

1) Subject
HFTs to the same regulatory scrutiny as anyone making a two sided
market. Scrutinize their books, capital and technology and be satisfied
that they are not purposely or accidentally placing our system at risk.

2) Exchanges
should alter their profit model by charging all market participants on a
message traffic basis, not bandwidth, as at least 95 percent of all
messages going into the NYSE are cancels or cancel/replaces of orders
that will never be executed. This will eliminate frivolous posting of
orders which go unexecuted and only attempt to sniff out real orders to
enable technological front-running.  Nobody will send 5,000 messages per
second down to any exchange in an attempt to derail a competitor if it
costs them real money.

3) Change the take and pay model for
buyers and sellers.  Each party pays 5 cents per hundred shares traded
to the exchange as a fee. Anyone who cancels a bid or offer before there
is a trade pays 5 cents per hundred. Registered market makers pay zero,
unless they cancel a quote before a trade takes place.

4) Move
to a Central Limit Order Book. The book must be protected up and down at
all prices. Only price and time get priority when trading. Solid bids
and offers will get priority, not phony ones that are cancelled in
microseconds. Price and time priority has worked for over two hundred
years, why are we trying to destroy it?

5) Examine and consider
raising the net capital requirements for clearing agents servicing HFTs.
Currently these firms allow many HFTs to use more leverage than most
investors. Should HFT-originated trades not clear and the system go
awry, these firms could go bankrupt in seconds and set off yet another
dangerous chain reaction.  If HFTs register as a market–maker, they
benefit from the same margin requirements as other market makers, but
absent those market maker duties.  HFT’s should post the same margin as
any other public market participants – 50 percent.

Washington and our legislators must act quickly before the next canary dies in the coal mine.

Gene Noser is the co-founder of New York-based agency brokerage Abel/Noser Corp. that has provided institutional trade execution and trade cost analysis since 1975.

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Nihilarian's picture

Electromagnetic Pulse!

dnarby's picture


How about this one step solution:


Require a minimum of one second for any bid/ask offer. 


That's plenty fast enough for 99.999% of the population, I'm sure.


Fidel Sarcastro's picture

I agree.  There should be no fees to cancel orders; however, I would suggest a FIVE second minimum window when trades couldn't be canceled.   

pan-the-ist's picture

I hate to say it, I love you guys, but you're all acting like luddites.  HFT is here to stay.  Time to adapt or go the way of the Dinosaur.

Fidel Sarcastro's picture

Who wants to physically destroy a loom (HFT)?  If they can stay in business with a 5-second delay, they're welcome to keep trading.  

rocker's picture

If HFT stays this will drive the markets much lower. The public will realize that this enforces the

ultimate ponzi scam. It will be interesting to see them run GS shares up and down from 45 bucks

to 55 bucks. Which is my open GTC bid on Goldman. "55"  I guess they will get what the want then.

Ha Ha Ha to them.

rocker's picture

If HFT stays this will drive the markets much lower. The public will realize that this enforces the

ultimate ponzi scam. It will be interesting to see them run GS shares up and down from 45 bucks

to 55 bucks. Which is my open GTC bid on Goldman. "55"  I guess they will get what the want then.

Ha Ha Ha to them.

JohnKing's picture

How about someone steps up and opens a human friendly exchange. The market is crying for such a thing.

NOTW777's picture

how about starting with the resignation of geithner & bernanke

Horatio Beanblower's picture

"It seems like almost everyone is warning of a coming economic collapse these days.  Do you remember Tony Robbins?  He is probably the world’s best known “motivational speaker” and his infomercials dominated late night television during the 80s and 90s.  He was always urging all of us to “unleash the power within” and to take charge of our lives.  Well guess what?  Now Tony Robbins is warning that an economic collapse is coming. In fact, he has issued a special video warning about what he believes is about to happen"...


What about Tony doing a guest post on ZH?

Number 156's picture

I like the guy.

He's a positive thinker that can still keep his feet planted in reality.'s picture

tony tony tony, i don't think so. he is a shrill. losers go to tony.

Number 156's picture

That's correct. He rehabilitates losers.

TooBearish's picture

He makes 30 mil a year and gets 350K for a speech - them losers maxing out they credit cards to buy the Robbins agenda?

carbonmutant's picture

Do bots have legal standing?

gbresnahan's picture

 I have an idea. Add a captcha image before each trade. (sarcasm)

molecool's picture

Even worse - have them solve an annoying algebraic equation including a minus.



bigdumbnugly's picture

1) Subject HFTs to the same regulatory scrutiny as anyone making a two sided market. Scrutinize their books, capital and technology and be satisfied that they are not purposely or accidentally placing our system at risk.


a little problem with #1 here.  this one's worked so well and so timely in the past...   who is to do this scrutiny and when?

Cognitive Dissonance's picture

IMHO the existence of the HFT model is being supported by national security directives as the only way to prod the market in the direction they wish. It solves the greatest number of problems as seen through the end of a political Coca Cola bottle. It feeds the TBTF banksters and various hanger-ons and co-dependents while allowing the PPT to manipulate and elevate when so desired.

Of course, nothing is bigger than the market and this too will fail. And in a spectacularly big way.

Number 156's picture

Agree. We are looking at a three legged table about to be missing one leg.

Question is, if they do manage to remove the HFT model, what will they use to replace it? 

Young's picture

More like two-legged table - how the hell is it still standing up. Agree with CD, nothing is bigger than the market; and even if these rocket scientist believe their bots have superior AI, that is not the case. A robot programmed by a human cannot (yet anyway) handle all the complex situations possible in a rational way. Therefore we get flash crashes, and rest assured, there will be more.

mrhonkytonk1948's picture

Bingo!  No proof, of course, but William of Occam suggests that manipulation of the markets for political purposes (including payback for past favors to the banksters, an economic tranquilizer for the sheeple who think "the Dow" is the economy, and the illusion of wealth regained for the monied and campaign-contributing portion of the electorate), seems to explain the greatest number of odd observations with the fewest assumptions.   I would put the continued blind eye turned by the SEC on naked short selling into the same bucket.  "You know something's happening here but you don't know what it is, do you Mr. Jones?"

ToNYC's picture

Mr. Jones has left the building.

Kaiser Sousa's picture

CD -


please provide evidence of ur "national security" assertion...

i would like to have factual basis before proliferating information...


Cognitive Dissonance's picture

They don't exactly lay down bread crumbs to the prize nor offer up signed confessions. And considering how hard the FED's trying to keep their portion of the PONZI under wraps, one's imagination doesn't need to work to hard to understand what's going on.

However, every now and then the main stream media actually exposes small pieces. For example, this little gem.

ZackLo's picture


Holy shit man good find! the implications of that are crazy.

TraderMark's picture

But...but....but then there will be no liquidity and our market will suck as it did in the 80s and 90s!


Sudden Debt's picture

If a bot can do you job, do a career change.

Some Americans think we still need people to do money work. Why do you think we shipped those jobs to these monkey countries at the first place?

When all was well, nobody wanted to do these jobs. Now there are less jobs and they suddenly want to do that work again till all gets better again so they can bail out on them again.

If you want to do a monkey's job, move to Asia.

If you want to do a real job, look for it or start your own biz.

But don't sit on your ass, complain and wait till the next wellfaire check comes in!

Widowmaker's picture

Interesting perspectives.   Just this morning I was talking with a friend, trying to forecast the remainder of the finance industry consolidation.   I came to 30% or a third reduction (at least).

I know it doesn't get discussed a hill of beans on ZH, but garage capitalism is fantastic right now (personally).  I would recommend  funding someone else's [solid] business right after starting your own business.

It seems that main street is where the bot's are not.  There is nothing high frequency about it.

... and then there is the free food.


Atomizer's picture

Quants: The Alchemists of Wall Street's picture

T Y L E R        D U R D E N


    M A X      K E I S E R

prime ministers for New World Order

      z e r o    h e d g e

on a long enough timeline, the survival rate for everyone drops to zero

defender's picture

If it is a New World Order, why are the same people going to be running it?  ...Just a thought that keeps popping into my head everytime that I hear that phrase.

Sudden Debt's picture

These post are now posted on monster. They just need to apply there and send their résumé.


MGA_1's picture

Or, let 'em eat each other up and melt the market down !

Irwin Fletcher's picture

This excerpt alone is worth a hippie, utopian laugh. God bless the good ol' days when everyone came together in pursuit of a redeeming social function. Otherwise, I move along.

"Prior to the proliferation of HFT, both retail and institutional investors came together to seek profit as owners of a company, and as a result helped support crucial capital raising and secondary market functions for American business owners. But seemingly what we have now is a major portion of market participants – HFTs – who are unregulated, often undercapitalized, and who provide no redeeming social function."

Tripps's picture

GOOD IDEAS. take back the market and money will come back

Dr. No's picture

I would be careful about trying to turn those Algo's off.  The algo's will send out a program to erase your history, falsify your finacial records, and discredit you.  Kind of like sending a robot back in time to kill of the leader of the resistance.  I seen the movie.  Although there is sometime hope, it always ends Skynet still up and running.

jkruffin's picture

The only two thing that need to be done are :

1.  Ban HFT

2. Get a regulator that actually penalizes the scammers.  No slap on th wrist crap like they have been doing for decades.  If I can steal $20 billion and only have to pay $500 million in fines, and I can keep on trading.  Whoop Dee Dooo! Guess what I am gonna keep doing? (Ala, Goldman Snakes and JPM)  This is the largest issue, there is no regulation and no permanent penalties for those caught doing the corruption.  If caught, ban them for life from the markets, close their doors.  End of story.

ThisIsBob's picture

50-60% of transactions are HFT. If you stop HFT (and thus colocation rent) do the exchanges make enough money to stay in business?'s picture

H I     B O B

my name is kathy

can we embrace each other, each week†

Plinko's picture

50-60% of transactions are HFT. If you stop HFT (and thus colocation rent) do the exchanges make enough money to stay in business?

If the computers are the only ones trading, how successful of a business model is it?

ex VRWC's picture

They cannot 'take the market back from the robots'.  Its because the 'Mighty DOW' is the only finger in the dyke preventing massive collapse of sentiment.  There are still people who will not believe that things are bad while they see the markets treading water or slightly increasing.  They are looking for that green arrow on their TV screen.  How else do you explain the mantra that we actually entered 'recovery' when clearly we did not?  The only thing that 'recovered' was the DOW and the bankers who profit from its rigged trading schemes.  No, they will not try to 'take the market back' because, sadly, it is nothing but a propaganda tool now.


Musical?  Add your voice to the chorus at

MarketFox's picture

Do not agree with this author....


The entire marketplace needs to be revamped and defragmented....

What will solve HFT is very simple....3 words....


Other items....

Built for RETAIL

No dark pools or off exchange venues

No short sale rules such as upticks....however size limitations...and cannot exceed total outstanding locates....electronically tagged....

No account minimums....

Up to 10:1 margin at the choice of the customer and the broker....

Also commissions should not exceed 20 cents per 100 shares....

All public instruments are to be traded on the exchange...

Business model ...BATS style....

The exchange can be located anywhere today...why ....because it is software....

There should be simple electronic surveillance...

Boiler plate standard format....

In currency and language of choice....


Managers...funds ...long and or short....should trade like a stock....or a management unit...all in the open for all to see...all on one exchange....


Also...the SEC is so conflicted with the revolving employment door of the large firms....that they should be eliminated and replace by a central worldwide surveillance group that has a neutral Switzerland....


Let me tell you what the market REALLY NEEDS....

Over 2 BILLION RETAIL accounts pressing buy sell orders on their own computers....


No looking back.....

In the currency and language of choice....

This is where the world is headed....

And no what the exchange does not need is a handful of large managers...Just look at PIMCO....GS...others....This is just plain stupid....

And part of the reason is large firm program trading .....

Plain jane vanilla stocks and bonds guys and gals....and lots of it....

For better wealth distribution worldwide....

The big firms are killing the markets...not unlike sending good paying jobs overseas....

Time to send the SEC away....retired.....

And this is just the beginning of the list....


michigan independant's picture

Remember who makes what and what does the Consumer decide.

What I mean is since I work Corporate for over 30 years we train people to function. Some services are bad and some good. Until the Consumer decides I survive making things that Civilization does indeed need. I hope you do also.

And this is just the beginning of the list.... @ #538861

Excuse me for being simple but innovation will decide until the beltway decides

to confiscate in there infinite wisdom.

peace and choose the power of your pocket book.

williambanzai7's picture

The people who program the trading machines scoff at the idea that fundamentals are of any importance. They laugh at people who attend investor conferences.

They come from the same schools and read the same papers. They are highly correlated nit wits.

So we have a thin market, dominated by algo trading programed by idiots who think the whole market is some kind of video game. Their strategies are basically the same when you cut through all the bullshit.

How can this be a good thing?

Why is it any surprise that minute there is unanticipated stress the market seizes up instantaneously.

This is not resource allocation. It is resource misallocation.

With investors fleeing equities in droves, the SEC is proving what a waste of taxpayer money it is.

michigan independant's picture

So true.

It's not that government has lacked information needed to fix the problem. It is institutionally incapable of bringing about the desired result, since the principles of profit and loss, private property and contract, enterprise and entrepreneurship, do not exist in government. Any Government operates with an eye to its own short-term survival, and those of its connected interest groups, and nothing else. Mises

Until the people wake up as we are seeing that is... How many is really the question I feel. 

Does the market care.