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Guest Posts: Even Simpler And High-Frequency Trading Alert - CIT
Submitted by Joe Saluzzi and Sal Arnuk at Themis Trading
Even simpler…
My partners frequently poke fun at me (ok there is a long line of
folks doing this…), specifically for thinking too deeply about a topic,
and expressing an idea with too much detail.
I would like to get real simple here. High Frequency Trading is
proprietary computer trading with the goal of collecting rebates,
and/or detecting real order flow (ie. instititional flow) and
frontrunning it and making pennies.
What bothers me? Two things:
First, whether the market is trading at a 16 P/E, or a 22 P/E, or a 30P/E… this is decided by 30% of the volume in the market.
70% of the volume is noise. In the “olden days” there were many
different types of market participants (Value players, MOMOGOGO
momentum players, Chartists, GARP players, and so on). None of them
were 70% of the volume. This made for an efficient market. This made
for a market where we felt strongly that the pricing in the market
reflected actual asset values. This new HFT 70% market share makes me
very nervous. I hope it does you, as well.
Second, the HFT players are courted by the Exchanges, ATS’s, ECN’s
and Dark Pools. They are given whatever they want, as these for-profit
destinations all want their volume. Would they (HFT) have grown to this
level if the exchanges and trading destinations were not for profit?
Is there a national interest in insuring that (1) our exchanges are
the fairest, with equal access for all to the best prices, and not just
those with their servers located inside the actual exchange, (2) our
exchanges are transparent, and (3) that the system is working as it
should, where asset values are reflected in prices? Was it the
beginning of the end when all our exchanges went to a for-profit model?
High Frequency Trading Alert -CIT
CIT had some awful news out this morning. The stock was halted
right after the opening and once reopened it tanked almost 50%. But
then a magical thing happened, the stock traded back to $1 from a low
of $0.75. What is so magical about $1? Any stock that trades under $1
is not eligible for a liquidty rebate from the exchanges/ecn’s. The
cost to trade sub $1 stocks is FREE but you don’t get the rebate. But
if the stock gets over $1, the the liquidity rebates which could be as
high as $.003/share kick in. So, it appears that the high frequency
traders will be desperate to keep this stock above $1 today so they can
keep collecting those rebates. There is no fundamental valuation for
$1, it is simply a matter of high frequency economics.
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CIT is below 1
It is now, but look at the volume drop from 1$ compared to <1$. I made about 25% riding it back up this morning once it reopened.
Finally, this whole high frequency thing is explained. Sort of, almost. Still not sure why anyone would think it would cause a stock to move in one direction, since the rebate is collected whether a buy or sale. And spending money to keep a stock above a dollar? Seriously? There ae a lot of stocks trading above a dollar. Why would Goldman care if CIT is eligible for a rebate?
Directions to create a conspiracy theory: Plant many grains of truth, shower them with random thoughts, watch a few grow.
cool. so if someone controls two companies, or if two companies collude, they can trade with eachother and cash-in twice. Once for the buy and once for the sell?
Money for nothing indeed.
cool. so if someone controls two companies, or if two companies collude, they can trade with eachother and cash-in twice. Once for the buy and once for the sell?
Money for nothing indeed.
Yeah, that would be a neat trick. Do you know anything about how rebates work? Because, they aren't free, the taker of liquidity pays the rebate received by the provider of liquidity. So I am not sure why two parties would agree to pay each other off that way. Come up with a rationale, okay?
unless a third party coughs up that money, like say, the USG.
You mean USG the building supply manufacturer? That's a queer notion!
fell below 1 at 1059 - 6 minutes after Saluzzi's post herein. They knew they were busted.
Reverse split coming to get those rebates?
Some exchanges will offer rebates on stocks under $1 as a percentage of the rebate vs the price. I know that Chicago does at least.
If Themis thinks HFT are creating more noise, then that should give fundamental traders more ways to make money. If HFT traders run a stock to levels that are silly, then they can sell to the HFT and make more money than they would have. If the stock is undervalued, and HFT are on the offer to collect a rebate, then this gives the fundamental player another offer to lift. Noise? thats perception. I think fundamentals are noise. Bernake himself cant predict the future, and over time even Buffet has fallen on his face. Short term traders have produced way more consistent returns than long term players and so I would argue have way more credibility. Further, short term players live by their profits, while longer term fundamental guys make money collecting fees regardless of performance
I am a short term player, I am currently looking at moving to other markets instead of stocks. The charts don't look right, the action is strangled and random.
You might be an exception to the rule, anon, but I personally know a lot of fundamental traders that had their a$$e$ handed back to them during the massive short squeeze this spring.
When 70% of the volume is picking up pennies based on supplemental liquidity rebates and front running algo strategies-- the question becomes how far can prices get stretched from fundamental values.
The answer may well be "much further than you or I think". As a short term trader, many have ended up on the short end of that stick.
Is this $1-price-level rebate the reason GM's shares traded above $1 long after it went into bankruptcy and everyone knew it was worthless?
Themis and ZH, keep up the work on HFT. Volume is important, and if this volume is immaterial, which I happen to agree with, then current uptrend might not be as concrete as many thing.
Hypothetically, HFT should be neutral, providing liquidity and collecting an incentive for that liquidity (rebate). But if HFT algos are also being used to chase momentum, perhaps even anticipate (front run) a trend, then betas and market sensitivity are higher than meets the eye. VIX might not be reflecting that volatility and senstivity either. If so, stocks options on individual securities where HFT takes place might be undervalued, particularly on the put side.
Think about it.
Keep pressing,
Chris Monoki
The definition of HFT algos is fine, but it is not 70% of the market. You are assuming all program trading fits your definition of HFT and that is simply false. Again, great job posting someone who has no idea or experience with HFT or algos.
If you're referring to me, you are correct. I have limited understanding of algos, prop trading and HFT. Yes I know that each are different, and while I didn't highlight that in my previous post, there is some overlap -- HFT is used in prop trading; algos are used in HFT, etc. But, correct, they don't overlap perfectly, and there are other uses of algos and HFT outside prop trading, perhaps less sinister than ZH and Themis are alluding to. Nonetheless, an understanding of their impact within and interaction among each in the marketplace is important.
Most of my colleagues, many of which are investment managers, don't even know about the NYSE's program, rebates and HFT. They see volume with the same quality as yesteryear. Me, I'm trying to get a solid grib on HFT, etc. and the degree of overlap and usage with prop trading.
I would certainly welcome further enlightenment, leaving out insult to those attempting to obtain more understanding.
Keep pressing,
Chris Monoki
I wasn't talking about you Monoki, I was talking about the guys at Themis who fill and bill the "old fashioned way", "don't believe in any algos", and are whose business model is at risk because algos take their orderflow.
Ok, not related to this, but why the hell is Gold tracking SPX tick-for-tick, or is it the other way round?
cause when it's time to get out of usd, it's time to get out of usd!
Sup, Tyler.
Been busy, but I think the jingle of Goldman's collar can be heard right here. I guess it's all about semantics at this point, you say front running, I say quote collaring.
At the end, it's all about value manipulation for profit and gain.
None of this is based on asset value or reality based market dynamics, it's all just to quant for that. The markets are just walked around on a leash like little bitches, kept in line by quote collaring.
Yank the chain to make change for change you can make believe in.
Funny shit actually, since these dog walkers are all about "free" markets.
Well, it won't be so funny when the penniless-and-with-nothing-left-to-lose mob descends upon Wall Street and grabs these a--holes by the balls and drags them out on the street kicking and screaming. I'm sure those co-located servers will be a great help then.
Oh the much talked about pitchforks and torches, get over yourself.
This country went to soft for to long to ever man up and fight. No, I can envision all the strongly worded letters, though. Strongly worded letters soaked in tears of regret.
Remind me again how this all went down with the Saving & Loans? Ah yeah, that's the flavor.
Frank actually said he was 'chagrined', by Obama's actions re: funding for the IMF. Whoa.
"Remind me again how this all went down with the Saving & Loans?"
Well, 90% of the population didn't go bankrupt (or hungry) then, as it WILL this time.
And those poor saps on Wall Street are going to be sitting there some afternoon when people start banging on the door! Go get 'em tiger!
You seem to be pretty cynical, friendo. You don't happen to be part of the Wall Street crowd now, do you? If so, well, I'd definitely be in the denial stage if I were you. Rest assured, if you doubt for even one moment that the bankers will have their day of reckoning, I just have a picture to show ya:
http://en.wikipedia.org/wiki/File:Guillotine_model_1792.jpg
All well and good GG but the simple fact of the matter is that the phsychology of the citizens are such that you are in a minority. you must read more on AG and then BB as to why they support saving Banks and Big Business and then the support of stock markets. Look back on LTCM and the "V" shaped recovery (which they no doubt wish would happen).
They do not see that the filtered down effect is not working and will not.
Short term benefits only, is that the likes of GS ensured recapitalisation of a lot of companies. They have a global view and are waiting for the inevitable with the Euro, Yen, Pound and Rouble. The simple fact of the matter is that there is more than one 800lb gorilla out there and their individual risk appetite has not changed. Another sigma event will no doubt require another bailout to avoid the fallout and subsequent delay in any recovery.
They are looking beyond the US. Remember that those TARP loans (and subsequent bailout of AIG) did not only go to US Banks. Should the congress be made aware of this all crap will hit the fan. Hence the need to maintain loans secret, at least for the time being.
As for the Austrian theories on thsi specific cycle, Mises has laid his cards on the table as to what happens and that is a total collapse of the currencies. The question is will the monetization process employed work to that extent by the Fed?
Time will tell and in the interim the likes of GS will make the money.
why would they attack NYC when they can just steal shit from you? That's the risk in all this... we'll descend into chaos to cannibalize before uniting in any relevant way... those police budgets get less and less... our prisoners get released because we can't pay for them... prosecutors stop prosecuting certain crimes (see Cali.)... hope you build a moat around your house...
It will be a facebook inspired million people mob on wall street. They just need to stay there long enough for the angry mobs to arrive. You just wait, right there!
Where will wall street go and hide? Hamptons?
I think most of them can go wherever they want.
Still have not heard the concrete evidence Themis had regarding seeing offers back away or not filled when they put limits in above that offer to buy? Where is the evidence?
Still have not heard the concrete evidence about GS having the ability to see orders before they get to the market. Where does that stand?
This is all fun, but getting real old. I think GS is suspicious, but grow tired of the conspiracy theories that fade with no evidence. And now, after a couple weeks with no further evidence, here you are quoting Themis again. This is ranting and not productive. Throw the idea out there, see if you get anyone to support it, but if it dont stick and no evidence is found drop it.
Hey Tyler, you're the man. Quick question for you. Seems to me hft traders would be making pennies but eventually losing dollars. Is this right? Or is the game so tied up that these things are really not even speculation? Hard for me to understand how the Var isn't really Var.
Thx.
I dont think Themis is attacking Goldman. I like the post. It makes sense to me. Like Oceans. A healthy ocean and ecosystem is one where there are many types of fish. If market participant or species becomes 70% of the ocean, I dont think the ocean is healthy.
The market evolves, as does the ocean. As one type of trade gets crowded, it becomes less and less profitable and then more and more participants leave and hunt elsewhere. ebb and flow - no conspiracy. HFT is just one way to make money right now....and something else will be the best way next year. Its not unethical, its within all the rules and regulations. So, unless someone can find the unethical or rule breaking culprits this thread is lame.
Sophistry.
If HFT is used in prop trading in effort to add liquidity and to collect profitable rebates; and if that algo 'anticpates' and/or reacts to order trend, then is it possible that HFT-based prob trading run the potential to front-run a House's own clients for prop trading/rebate profits? If possible, then, yes, it's not only unethical, but illegal.
Keep pressing,
Chris Monoki
Front running wouldn't be illegal if a well-connected outfit managed to get some language inserted in a law that made it not so illegal under certain circumstances. I don't have any knowledge of that, but seriously, why would anyone break the law when all they have to do is change the law?
70% of the market does not fit his stated definition of HFT. It's like saying 70% of the ocean is fish.
Semantics.
Tyler,
Thoughts on this proposed new regulation for Credit Rating Agencies? I thought the provision to discourage "rate shopping" was interesting. Could this mean trouble for some of the companies looking to re-finance?
I guess I don't fully understand the concept of HFT. You've got a computer that looks at pending orders and tries to determine if they are institutional/retail orders and then tries to get the HFT orders filled first? And then it sells those same shares to the institution/retail for a slightly higher price?
What is the liquidity rebate?
To answer your first question: no computer legally looks at customer orders and then front runs the orders. This is illegal.
When you provide liquidity (sit on the bid/ask) an exchange pays you. When you take liquidity (cross the bid/ask) an exchange charges you. Some HFT strategies are based on providing liquidity and thus making the rebate/ payment from the exchange. An exchange pays for liquidity because without liquidity they go out of business.
CIT back above a dollar! This conspircay is proven! NEXT!
And this means no stock can EVER go below a dollar! Wow, talk about a sure thing!
If as you say the CIT example proves a sure thing, you should take out tons of leverage and buy every stock that drops below $1... let me know how it works out for you.
Thanks, I already said that.
I was mocking you. Sorry if my sarcasm wasn't clear.
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on Mon, 07/20/2009 - 22:05
#10864 Are they going to assume the roll of the bankrupt Fannie Mae and Freddie Mac? Is the 'Shadow System' taking a bank holiday? WTF! A complete sham. Caterpillar's revenue is down 66% (40-some% last year!) and they have laid off 20% of their employees. BAC upgrades from neutral to buy. thus the stock is up 15% over the past 5 days. GTFO!
Caterpillar is completely dependent on the US government's ability to extract $$$ from the tax-payers and foreigner investors and funnel it into projects such as bridges to nowhere.
Watching the market over the past week has been excrutiatingly painful. The absolute ridiculousness of it
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by Anonymouson Mon, 07/20/2009 - 22:05
#10864 Are they going to assume the roll of the bankrupt Fannie Mae and Freddie Mac? Is the 'Shadow System' taking a bank holiday? WTF! A complete sham. Caterpillar's revenue is down 66% (40-some% last year!) and they have laid off 20% of their employees. BAC upgrades from neutral to buy. thus the stock is up 15% over the past 5 days. GTFO! Caterpillar is completely dependent on the US government's ability to extract $$$ from the tax-payers and foreigner investors and funnel it into projects such as bridges to nowhere. Watching the market over the past week has been excrutiatingly painful. The absolute ridiculousness of it