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Guest Post: “Large Trader Tag” by the SEC Insulting and Unconstitutional?
Submitted by Sal Arnuk of Themis Trading
This piece was emailed to me by a friend. Its author, John Harris,
according to his own bio, is “the founder and managing partner in
Ceylon LLC, a provider of communication software libraries that enable
traders to conduct electronic trading business on major industry
platforms.” So… I get it; he is staked in the debate. Either he or his
customers do not want their activities to be scrutinized by the SEC,
who is charged with keeping our markets fair and safe.
I am not sure I agree with the limits (2million shares per day/ or $20
million value… I would have gone way higher… higher to the point where
this is aimed at the HFT the SEC is trying to understand, without
catching any traditional mutual funds or hedge funds in the trap) that
the SEC is proposing, but I can’t think of a more reasonable approach
for the SEC to take, then to collect data on activities it does not
understand, yet seeks to regulate.
As industry participants who have watched this HFT defenses morph continually after each tactic fails, we are amused.
The first HFT defense was that “bloggers” were turtles who had no
clue about market structure and trading, and how it worked. This tact
did not work, as so many critics have turned out to have quite
extensive technical backgrounds, and trading experience and market
structure knowledge that dwarfed that possessed by their lawyers and
math majors.
The Second HFT defense was that there was no data anywhere that
has shown HFT activities to be nefarious and harmful, only conjecture.
Once numerous firms came out with studies explaining how the latency
arbitrage was actually working, and detailing the adverse tick
selection prevalent in specific trading destinations and ATS’s, this
defense also died down.
The Third defense, the one that proclaimed that, while predatory and
sleazy, current HFT was simply market making evolved, no different
than specialists back in the day. This also was shown to be not
exactly true, as the requirements for DMM’s, SLP’s and old school
specialists are/were vastly different. Oh yeah… as well as one really
big moral trap: If stealing an eighth or a teenie is wrong, then
unfortunately so is stealing $1dollar. Or $21 billion dollars.
Now we are at the point where HFT defenders claim outrage that SEC
employees might reverse engineer the prop algos that reverse engineer
the buyside algos and trade ahead. You can’t make this up.
A flashlight in a dark room always sends the cockroaches scurrying.
Which is why the SEC needs to stand firm, and remember their mandate to
promote fair and orderly markets for investors. If some nefarious
traders risk the SEC, the government, or the world seeing exactly how
they operate, then… well… I don’t know… then by all means please let
them take their “liquidity” offshore to an environment that will allow
their ilk to play. Don’t let the door hit you in the tukhus on the way
out. Hey who knows. Maybe we will attract real long term capital again
in the USA. Imagine that…
Anyways…. the piece; judge for yourself:
15 April 2010
Large Trader Reporting System Is Insulting, Unconstitutional
The U.S. Securities and Exchange Commission announced on April 14,
2010 that it has voted to propose a large trader reporting system (see
SEC Release No. 34-61908; File No. S7-10-10) .
If implemented as proposed, this system would allow the Commission
to obtain personally-identifiable data on the orders and trade data of
firms deemed “large” by the Commission, on the basis of arbitrary
thresholds it determines, without warrant or compensation for the
search and taking of the data.
A “large trader” would initially be defined as a person or firm
whose transactions in exchange-listed securities equal or exceed two
million shares or $20 million during a calendar day, or 20 million
shares or $200 million during a calendar month.
As proposed, this system violates the fourth and fifth amendments of the U.S. Constitution.
For persons or firms deemed large traders by the Commission, the
rule conditions participation in national securities markets on a
priori surrender of their fourth amendment rights to be secure against
unreasonable searches and seizures. Order and trade data is
highly-sensitive property of its owners. Absent a valid search warrant
based on probable cause and supported by oath or affirmation as
required by law, the Commission has no more authority under the law to
obtain and search such property than any other agency of government
would have to search a person’s home or other property without a
warrant.
The Commission has posited no exigent circumstances that would
justify a warrantless search or seizure of this valuable, proprietary
data. Surely if such exigent circumstances existed, the Commission
would say so. In any event, such circumstances could not possibly
implicate simultaneously the hundreds or thousands of persons or firms
whose rights would be summarily abrogated by the Commission’s proposal,
each of whom is entitled to a presumption of innocence under the law.
This rule allows criminal fishing expeditions by government agents, in
clear violation of the constitution.
If put into effect, the proposed rule amounts to a taking of private
property for public use without just compensation, in contravention of
the fifth amendment. If the Commission requires additional market data
in order to fulfill its mission, then it must purchase that data from
willing sellers on the open market. This rule would deny persons or
firms access to national securities markets unless they agree to a
taking by government agents. The proposal is tantamount to a
government agent telling the owner of beachfront property, “We want to
use your land for a naval shipyard, without actually purchasing or
leasing it from you. You will not be able to use any facility owned or
regulated by the government unless and until you comply with our
demand.”
This proposal is unconstitutional and an affront to free people and
markets. If the Commission possesses evidence of violations of the
securities laws of the United States, it has all the authority and
resources it needs to investigate such purported violations and to
prosecute as necessary. In America, we do not allow government agents
to search our persons, property, papers, or effects so that they can
better educate themselves on how we live, work, and interact with
others. Absent a specific and credible allegation of unlawful
activity, the Commission has no authority or legal basis to view or
parse the data it seeks through this proposed rule.
If the Commission is granted the power it seeks, its employees will
be able to reverse-engineer valuable, proprietary trading algorithms,
which they can then employ for their own profit. Arguably, by virtue
of this proposal, these employees will come to possess an information
advantage superior to that of any other trader on earth. Perversely,
once armed with this information, they could then shape their own order
flow and trading activities to avoid the prying eyes and sticky fingers
of other Commission employees.
The Commission should withdraw this insulting, un-American proposal.
All market participants should oppose and refuse to cooperate with it.
John Harris is founder and chief executive officer of BondMart
Technologies, Inc., a developer of capital markets trading technology.
He is also a founder and managing member of Ceylon LLC, a provider of
communications software libraries that enable traders to conduct
electronic trading businesses on major industry platforms.
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HFT MONITORING BUREAU/SEC:
http://williambanzai7.blogspot.com/2010/04/sec-to-launch-hft-monitoring-...
"If the Commission is granted the power it seeks, its employees will be able to reverse-engineer valuable, proprietary trading algorithms, which they can then employ for their own profit."
Like the one GS has that manipulates markets?
Ok, so they tag'em, it's standard gov't procedure when they want to no nothing but look like they are doing something, akin to putting up warning signs on nuclear dumps.
Everyone talks their book.
The last argument is bizarrely circular... Stop them from watching me shoot fish in a barrel because then they'll be able to figure out how I'm screwing you, design an even more advantageous way to shoot fish in a barrel and screw you even worse than I do.
> Everyone talks their book.
Especially the guys at Themis, hanging on to the threads of a (thankfully) dying profession.
OT, just so you know, yall at ZH are about to let the rest of the smoke out of the server, lol
What value does 'trading' add to the economy, aside from that necessary for individuals and institutions to acquire securities for their own personal enjoyment?
Make all the order flow public, all quotes and data. Open the books of the banks to public scrutiny.
I'm not arguing for or against the merits of HFT reporting, but I'm not sure if it's that different than, for example, requiring a bank to file a currency transaction report if a customer deposits or withdraws more than $10,000 in cash. I wonder if John Harris also believes that violates the "presumption of innocence"?
I wonder if the goal is first to tag them then start a Tobin tax. Tax the HFT transactions and don't tax retail.
> I wonder if the goal is first to tag them then start a Tobin tax. Tax the HFT transactions and don't tax retail.
If they were taxed, most of the orders would never have existed.
I know, the gvt doesn't realize that. They are probably forecasting billions in new tax revenues but as soon as they start the tax trades will drop by 99.9999999%.
Do you want to feel good for a few minutes OR do you want to crash broken mkts ? There is much crap within HFT and client frontrunning, pennying and spoofing are entirely egregious BUT equity mkts are terminally ill. Mkt structure isn't being broken by HFT, rather, it is being buttressed by it. When u handicap these grossly egregious practices, investors WILL suffer mightily. Once the HFT anesthesia is taken away, the punch bowl left over will be entirely rancid. And I love the "let's get long-term investors back" and "HFT can go elsewhere" sentiments. Hmmm, where IS / HAS volume migrated to ? Look: some of HFT sucks, but, it is the price we all pay for fake, phony mkts. You want HFT and DJ 11K or no HFT and DJ 8K, today ?? I'd love to see all hyper-latent algos outlawed cause then those of us who actually write code and know what technical analysis + proprietary design development looks like would have even more of a field day. That said, HFT is a morphine drip and when it goes so too will the terminal patient, who has about 5 lymphonic nodes left and each has already rsvp's for the wake in advance. I understand how frustrating it seems but this will go down as a great pyrrhic victory.
"If the Commission possesses evidence of violations of the securities laws of the United States, it has all the authority and resources it needs to investigate such purported violations and to prosecute as necessary."
Against whom? the Federal Government? for providing the monies used to pump up the Market as a whole?
"In America, we do not allow government agents to search our persons, property, papers, or effects so that they can better educate themselves on how we live, work, and interact with others."
They will prosecute themselves... ?
"The Commission should withdraw this insulting, un-American proposal. All market participants should oppose and refuse to cooperate with it."
The small fish cry foul and the larger manipulation will go un-documented. Piggy backing and getting lagged out of the money... the smaller fish will say it's un-American... thats rich.
"In America, we do not allow government agents to search our persons, property, papers, or effects so that they can better educate themselves on how we live, work, and interact with others."
Hey, that was the best line in the whole routine. Nearly fell out of my chair.
..waitaminnit, you mean he was serious?
There is a simple solution for what the SEC should do.
All short sales are electronically tagged first come first served, as to stock shares outstanding, such that it would be impossible for expansive naked shorting to take place.
This would just be a numerical, and non id type of fix.
No more locates required, it will just be a number that is or is not met.
Very simple.
No downtick rules required.
Make a quoted price good for 5 seconds. Surely that's not too onerous.
All better now.
5 secs = ages for todays ultra-speed trading.
Even if its not HFT, all it takes is 2 guys at different prop desks calling each other up and setting the arbitrage opportunity up.
Thanks to the folks at ZH for posting my viewpoint, void of grammer, spelling prowess and all that. I want to add one point, made by Jamie Selway at WhiteCap Trading: "I think the author needs to acquaint himself with OATS data, or SEC Rule 17a-25, or the way regulation works generally."
The markets have been fronting and haircutting trades since it was invented. The supercomputer just bleeds the vig more slowly and in smaller increments and off larger volumes.
In earlier days, all maritime shippers into NY or Philly accepted there would be a 3-5% short on their shipments. It was a business expense. The cops, longshoremen, politicians, teamsters all chopped up the vig.
I don't defend the practice for a minute. But at least the old way of chopping up the vig got to families and kept them eating. The truck driver and the longshoreman got free chew and cigars and whiskey. And their daughters got silk stockings ( a big deal during WWII ).
These Wall Street/Bankster asswipes hoard the whole load for themselves. Then wonder why the peeps hate their guts.
Go figure.