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High Frequency Trading Goliath GETCO Becomes NYSE Designated Market Maker
Earlier it was announced that the NYSE has added GETCO as a NYSE Designated Market Maker, and that GETCO has purchased 350 NYSE DMM assignments from Barclays Capital. GETCO is already a supplementary liquidity provider (a program that was conceived as a temporary measure, yet which is now running almost a year past its original expiration date, merely to pay "liquidity providers" Goldman and GETCO), as well as a market maker on the NYSE. Yet the question of just how much principal/prop exposure GETCO takes (as the WSJ disclosed previously this amount is staggering and is often 10-20% of daily volume) in "providing" all this liquidity, deserves additional analysis, as being so intimately linked in various cross-markets means that GETCO, which is struggling in the face of ever increasing HFT competition, will now need to become an ever greater "economy of scale" (think Goldman) in the markets to extract the same unleveraged returns it did in the past. And by doing so, it will likely take on ever greater unbalanced prop exposure, whose eventual (and very sudden) unwind will prove most interesting due to the ever increasing implied correlation between all asset classes.
Themis Trading shares some additional insight into just what this development means for both exchanges and investors.
NYSE adds Getco LLC as a Designated Market Maker…hmmm.
Remember Getco? The High Frequency Trading Kings? (see here: http://online.wsj.com/article/SB125133123046162191.html and here: http://blog.themistrading.com/?p=283)
Well, recently Labranche sold their specialist operation to
Barclays, who just sold 350 “DMM assignments” to Getco LLC. See this
article:
http://www.securitiesindustry.com/news/-24670-1.html
NYSE Euronext and GETCO LLC, a global electronic trading and
technology firm, today announced that GETCO is expected to become a New
York Stock Exchange designated market maker.
In addition, GETCO said it has also purchased approximately 350 NYSE
designated market maker (DMM) assignments from Barclays Capital.
Financial terms of the transaction were not disclosed.
GETCO is a supplemental liquidity provider on NYSE, a lead market
maker on NYSE Arca, and will be a DMM on the NYSE and NYSE Amex. The
firm is a global liquidity provider in more than 30 markets in North
America, Europe and Asia; a registered market maker on the NASDAQ and
BATS exchanges; and is consistently among the top five participants by
volume on NYSE Arca, NYSE Arca Options, NYSE Liffe U.S., CME, Eurex,
and various other equities, futures and options markets, according to
the announcement.
Barclays Capital will continue serving GETCO’s NYSE-listed DMM
clients over a period during which GETCO will complete the process of
incorporating NYSE DMM-specific infrastructure into its trading
platform. The transfer of these issues will maintain diversity among
DMM firms and NYSE-listed companies, as announced when Barclays Capital
acquired LaBranche & Co. LLC’s DMM business last month.
“GETCO brings to this new role its strong performance as an NYSE
supplemental liquidity provider and NYSE Arca lead market maker, and
its exceptional track record of market-making expertise and
technology,” said Lawrence Leibowitz, NYSE Euronext Chief Operating
Officer and Head of U.S. Markets. “Having GETCO become a designated
market maker in NYSE-listed issues and in our upcoming trading of
Nasdaq issues on the NYSE Amex platform clearly reflects a vote of
confidence in the value of our market model for our issuer, investor
and trader communities.”
Dave Babulak, managing director of GETCO Securities, said serving as
a designated market maker for NYSE listed companies is “an important
priority for us.”
“Our clients will receive the same high level of market insight,
service and professionalism they expect from the NYSE’s market model,
supported by GETCO’s deep global liquidity and proven, market-leading
technology,” said Babulak.
As a DMM, Getco gets privileges. DMMs can trade competitively as
dealers. The privileges are greater than being just a SLP (supplemental
liquidity provider). A DMM has parity. That way everyone can get a
piece of the execution. And they must maintain a two sided market a
whopping 5% of the time. Yes 5%. This is how I understand it works,
anyway. An excellent explanation of how the floor works in these times
is given by Mr. Durden of ZH:
The NYSE’s most recent classification of the three main market participants is as follows:
Designated Market Makers
Designated Market Makers (DMMs) are at the center of the NYSE market
and are the only participants in any market who have true
accountability for maintaining a fair and orderly market. DMMs:
- Convene both a physical auction convened by DMMs and a completely
automated auction that includes algorithmic quotes from DMMs and other
market participants; - Have the obligation to maintain an orderly market in their stocks,
quote at the national best bid or offer a specified percentage of the
time, and facilitate price discovery at the open, close and in periods
of significant imbalances; - Provide price improvement and match incoming orders based on a
pre-programmed Capital Commitment Schedule, which has been added to the
NYSE Display Book, minimizing order latency. DMMs and their algorithms
do not receive a “look” at incoming orders. This ensures that an
intermediary does not see orders first, and that DMMs compete as a
market participant; - Are on parity with quotes from floor brokers and those on the
Display Book, encouraging DMM participation and higher market quality.
Trading Floor Brokers
Brokers on the NYSE Trading Floor leverage their physical point-of
sale-presence with information technologies and algorithmic tools to
offer customers the benefits of flexibility, judgment, automation and
anonymity with minimal market impact. Trading Floor Brokers:
- Have parity with DMMs and the NYSE Display Book, no matter whether
the Broker’s order is represented physically or via an algorithm or
e-Quote. That is, they can join the first displayed quote on the Book,
and split stock with that order. - Have the ability to route all or part of a customer order to an
external algo engine from their handheld order-management device. These
algorithms offer Floor Brokers the ability to provide customers with
additional execution capabilities in an environment that offers a
balanced combination of technology for fast, automated and anonymous
order execution; and a physical marketplace for discovering block-sized
liquidity and improving prices. - Can utilize a technology feature called Block Talk to more
efficiently locate deep liquidity. Block Talk is designed allow Floor
Brokers to broadcast and subscribe to specific stocks they have an
interest in, creating an opportunity to trade block-sized liquidity
that is not accessible electronically. Since the messages contain no
specific order information, customers benefit from a discovery process
in a secure environment free of impact, information leakage or
intermediation. - Also have the ability to identify via their hand-held
order-management system the last five buyers and sellers in a stock by
badge number. They can message a specific member that they are in touch
with the contra side. This is valuable information for pricing blocks,
as it is about real buyers and sellers, not indications of interest. - Have a special feature with their reserve orders: when the
displayed amount is exhausted, reserve interest replenishes on parity.
In contrast, the “upstairs” reserve order functions as it does in an
electronic market: replenishing at the back of the queue. - Are positioned to act on the expanded imbalance and indication
information at the open and close of the market. They can participate
as agent, or convey insight into the open or close for customers’
decision making.
And most relevantly, Supplemental Liquidity Providers
Supplemental Liquidity Providers (SLPs) are upstairs, electronic, high-volume members incented to add liquidity on the NYSE.
- The pilot SLP program rewards aggressive liquidity suppliers, who complement and add competition to existing quote providers.
- SLPs are obligated to maintain a bid or offer at the National Best
Bid or Offer (NBBO) in each assigned security at least 5 percent of the
trading day. - The NYSE pays a financial rebate to the SLP when the SLP posts liquidity in an assigned security that executes against incoming orders. This generates more quoting activity, leading to tighter spreads and greater liquidity at each price level.
- SLPs trade only for their proprietary accounts, not for public customers or on an agency basis.
- An NYSE staff committee assigns each SLP a cross section of NYSE-listed securities. Multiple SLPs may be assigned to each issue.
- A member organization cannot act as a Designated Market Maker and SLP in the same security.
- SLPs have the same publicly available trading information and market data that all other NYSE customers have available to them.
In my wayback mirror, I recall when a customer order took priority above all. Obviously that principle has been blown up. When
HFT margins get squeezed by new entrants and threats of regulation, the
existing big boys must do everything to preserve margin. This includes
paying the exchanges for colo space, and now paying for the right to
trade with customer orders on the exchange.
I am thinking we are all wasting time. Why take these
baby steps? I say financial institutions just start giving your money
away to HFT firms, in exchange for revenue. Just straight out giving. A
least each day you will be able to see, in your online account, what
exactly is being debited out of your account and into theirs.
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> And by doing so, it will likely take on ever greater unbalanced prop exposure, whose eventual (and very sudden) unwind will prove most interesting due to the ever increasing implied correlation between all asset classes.
With position hold times measured in minutes on the long end and micro-seconds on the short end of the time horizon, and without having to make a market more than 5% of the time, just how do you expect that they have any correlation in their P&L to asset prices?
Are you suggesting that they don't have internal risk controls to limit their net long or short exposure to any market, and if so - on what do you base that assumption (as I would bet large sums that said controls do exist)?
I understand people not liking companies with a perceived advantage (although I disagree that the advantages are "unfair"), but I don't think there is any evidence, nor any logic behind claims that HFT traders like GETCO take on positions that increase the odds of a disorderly market unwind. Rather, I think a very good case could be made that the HFT traders help smooth out trading, completely analogous to how market moves downward are exacerbated in the absence of short sellers (since there is noone who needs to cover shorts causing upticks).
They start flat and they end flat. In between, in stable markets, they do "smooth out trading." In unstable markets they add to the instability when they have to rebalance, causing a lot of price volatility at the very moment the market needs price stability. Remember, if you start flat and you end flat you certainly don't end up adding interday liquidity, and intraday you could be a liquidity supplier or demander depending entirely on your risk controls and inventory at that moment. Intraday volatility in unstable markets is very much affected by the entirely unknown and (so far as I know) unregulated risk models of these intermediaries.
Excuse me professor, a short seller is a seller first and in all likelihood selling into a falling market. Exactly how much of the great sell off last year was mitigated by the presence of short sellers. None. I know you are a badass electronic trading mofo, but you don't understand simple supply and demand. Have a nice day.
The rewards for the (up to this point) successful continuation of the Ponzi are now being handed out to select participants.
Ya gotta pay the troops (Praetorian Guard) or they just might turn on their master.
Barclays is the only bank still run by the deRothschildes. Citing Ferguson's , "The House of Rothschild".
-"[t]he question of just how much principal/prop exposure GETCO takes (as the WSJ disclosed previously this amount is staggering and is often 10-20% of daily volume) in "providing" all this liquidity, deserves additional analysis, as being so intimately linked in various cross-markets means that GETCO, which is struggling in the face of ever increasing HFT competition, will now need to become an ever greater "economy of scale" (think Goldman) in the markets to extract the same unleveraged returns it did in the past. And by doing so, it will likely take on ever greater unbalanced prop exposure, whose eventual (and very sudden) unwind will prove most interesting due to the ever increasing implied correlation between all asset classes."
-"NYSE Euronext and GETCO LLC, a global electronic trading and technology firm, today announced that GETCO is expected to become a New York Stock Exchange designated market maker."
win a pulitzer already.
Joe Saluzzi won't be impressed.
These prop desks plain and simple will cause the market to go in one direction, UP. All these charts that say goodbye Dow 10,000 mean nothing. The market is being minipulated. How can any chart be valid? Charts are so 90's. If the Fed wants the Dow to go above 10,000 , Then it will. What the fuck is so hard about that?
Assuming that a trend develops were people diversify out of stocks and into cash or bonds or gold etc and even start redeaming from mutual funds and IRA's.
Can the fed stop the drop?
just a continuation of the sceme of things..
anyone read: http://www.iamned.com ?
usa is an innovator, you can't say ben and tim are done with the things they can do to inflate, when you can change laws you can change the world
insanity abounds, just wait until the next bear, zero will not be out of the quesiton
Crazy that throughout all this mess...and with the spotlight firmly on the BS...the greater powers continue to foster/protect their schemes right in front of us. It is a middle finger pointed right at us and all we can do is say "hey man...that's not cool"...and they can laugh and say "go fuck yourself...what are you gonna do about it...you little bitch?"...and we say..."uhm...yeah...uh...fuck you too" and post a comment on a blog.
I am out of the market all together. If everyone does, then we point our middle finger to them.
I think however, that there are too many day traders, speculators who would never stay out. Gambling is a vice. Get out while you can. They may restrict selling and redemptions one of these days.
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