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Joe Saluzzi Provides Further Color On Program Trading

Tyler Durden's picture




 

Some more insight from Themis Trading's Joe Saluzzi from a video clip with BNN earlier today. Also follows up on his earlier post about program trading in the context of AIG. The part about algorithms looking for bonuses and Lexuses is amusing but morbidly troubling.

 

 

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Wed, 07/15/2009 - 17:36 | 7481 Anonymous
Anonymous's picture

"Full-blown matrix..." Ha. Interesting stuff. Nice plug for ZH from Saluzzi.

Wed, 07/15/2009 - 18:09 | 7495 Stuart
Stuart's picture

Yes, I noticed that too.  Was a very good plug for ZH.   Kudos to Tyler et al.

Wed, 07/15/2009 - 17:43 | 7484 3Gonads
3Gonads's picture

 Ok, so again, any trader/scalper knows this is going on for YEARS now.

 

  I still say this co-location right at the exchange is tantamount to selling the right to frontrun. 

 

   They put SOES bandits out of business for doing basically the same thing. In this case the frontrun is on the microsecond level, but so what.  ANY PEEK IS A GOOD PEEK. 1 ms or 1000, its all the same.

   You can try to trade against these bots but you can never tell when they will pull or sweep the other way and cost you more than you made in 10 trades.

 

Wed, 07/15/2009 - 20:02 | 7557 Anonymous
Anonymous's picture

Doesn't this amount to frontrunning ??

Wed, 07/15/2009 - 20:19 | 7567 Anonymous
Anonymous's picture

Frontrunning is trading in front of a customer order. It is illegal. Collecting and analyzing publicly available information and trading based on your insights is legal. And guess what, someone will be the fastest and most accurate in doing this. The result of their actions is to translate meaningful information (strained from a stream of mostly noise, it's incredibly difficult to do) into price changes which make the price more accurate relative to what's knowable at the time. Unfortunately for people like Saluzzi, a 19th century "tape reader", a lot of the information that quicker, more talented, machine-using, more insightful players uncover is information about large size that he's trying to deceptively move without anyone knowing the truth about what he's doing. There's nothing wrong with what Saluzzi is trying to do. What's wrong is crying foul when the one-sided benefit you wanted to obtain is defeated by people who have made a bigger investment in what's important for trading.

The big winners in all this are small traders who are not fleeced by large professional size deceptively getting them to buy or sell at insufficient prices. I can understand Saluzzi's campaign against technology and modern information processing, it's his ox that's getting gored. The thing that's truly hilarious is that what Saluzzi wants to be legal, his "tape reading", is just another example of where professionals have an edge over the little guy. But it would never occur to Saluzzi to outlaw what HE does, only what his competitors are doing better than him.

Wed, 07/15/2009 - 21:31 | 7599 Anonymous
Anonymous's picture

How does having a HFT platform between the NYSE server and a customer not amount to frontrunning ? Does the inept SEC monitor what these algorithms do ? It just takes a couple of lines of code for the HFTs to frontrun the customer. Has anyone audited what these algos do ?

Simple Q: Who does the code review for these algos since it sits in the middle of two transacting parties ?

Wed, 07/15/2009 - 22:14 | 7633 Anonymous
Anonymous's picture

Most HFT operations don't have customers, but are trading for their own account. Again, if you trade in front of a customer order, you are a federal criminal.

Thu, 07/16/2009 - 07:45 | 7738 Anonymous
Anonymous's picture

You are giving half facts. "Most HFT operations...", well some do right

Wed, 07/15/2009 - 22:02 | 7620 jm
jm's picture

I'm sympathetic to what you're saying.  I think people get confused by the notion of being there first and frontrunning.  Totally different things.  And I agree that liquidity provision helps small block and uber-small block traders. 

My concern is that too many "liquidity providers" in the market just clog up order execution and change pricing.  For example, imagine a bunch of country line dancers trying to move to Marla's techno-acid funk.  Just too clumsy and falling all over each other causing a chain reaction.

I'd like to know your thoughts.

Wed, 07/15/2009 - 22:18 | 7638 Anonymous
Anonymous's picture

Well, there have been a number of clumsy screwups in the evolution of the technology. But at this point, the systems work pretty darn well. It takes a fairly rare event to disrupt order flows, such as the Lehman aftermath, but even that didn't cause trading to halt despite the massive influx of orders that persisted for weeks. Through the miracle of self interest, the exchanges have learned how to protect themselves, their customers, and the system as a whole with a number of safeguards. As long as the orders are flowing without unusual delays, the scenario you're worried about just doesn't happen.

Wed, 07/15/2009 - 22:26 | 7640 jm
jm's picture

I could press further, but I won't.  I do appreciate you taking the time to reply to umpteen people.

Wed, 07/15/2009 - 20:27 | 7570 Anonymous
Anonymous's picture

Oh brother, like I said earlier.. a HFT system does not sit in a stock like AIG and try to make a few pennies or even collect rebates. That stock has dropped 60% and then ralled 50% in a week. If you're trying to prop up this stock you're playing a dangerous game and will get stuffed with shares without being properly hedged and wipe out any of that .0025 rebate.

I've got some tin foil for you if you'd like.

Wed, 07/15/2009 - 21:39 | 7604 Anonymous
Anonymous's picture

Why create a false illusion of demand and volume in a stock unless the motives are not sinister ?

Wed, 07/15/2009 - 21:00 | 7583 SloSquez
SloSquez's picture

Honestly, isn't HF trading just the next evolution?  Yes it's capital intensive, but so are a lot new technologies.  I have more of a problem with a hedge fund being classified as a bank than I do with "pitch axis thrust vectoring".

Wed, 07/15/2009 - 21:22 | 7593 Anonymous
Anonymous's picture

Real interesting clip. I like this Saluzzi guy.

Wed, 07/15/2009 - 21:35 | 7601 rahbii
rahbii's picture

skynet

Wed, 07/15/2009 - 22:00 | 7618 3Gonads
3Gonads's picture

 They have simply replaced the time and place edge the floor trader and specialist used to have with a computer.  

 

  That in itself is not so bad, but  this co-locating and gaining an edge simply not available to anyone without very big bucks and infrastructure is heinous.

 

   It's a form of bribery, paid to the exchange , to allow them to get first crack at the data .

   Just because they are clever enough to have pulled this off, does not mean they should be allowed to get away with it in perpetuity.

 

Wed, 07/15/2009 - 22:12 | 7631 Anonymous
Anonymous's picture

p7. (as in, puuullleeeeeze, on a scale of 1-10).

do you think randoms off the street used to be specialists? that took a lot of investment, and so does co-location. *Someone* has got to be a professional in this business, and as in every single business on earth, the professionals, defined as those who make money at something, know more about the business than the amateurs. Here, the "amateurs" are people who can buy and sell stock, every weekday, between 930am and 4pm Eastern, at prices that are incredibly accurate with respect to what's known, by simply picking up the phone or connecting via computer. Gee, I wonder how that miracle came to be? Well, professionals get paid to provide that miracle to Joe Average. If you don't like that circumstance, are really *pissed* that it's so easy to buy stock any time you want at an accurate price, then mess with the system like Saluzzi suggests. Don't worry, you'll eliminate that "problem".

Thu, 07/16/2009 - 14:13 | 7911 Anonymous
Anonymous's picture

Snotty. Newsflash. HFT fucks up the market. If you have any experience trading you can easily see it's effects, prices flatline, the spike up or down, flatline again, spike again, that's not a market. It makes the charts look like an illiquid equity chart looks, just with more ticks. This is not progress.

Seems to me that this is Joe's main beef, the robots make the markets illiquid for people who need to get trades done, IE it's fake liquidity.

Do the markets exist to be traded for human reasons and purposes, or to skim pennies with robots?

Which makes a market? (This is a repost, seems you hft guys don't wanna answer, surprise, surprise)

Fri, 07/17/2009 - 10:32 | 8624 Anonymous
Anonymous's picture

Saluzzi and his ilk have large size to move, that's their business. They try to move it deceptively, which is just part of the game, expected, legal, no big deal. I'ts an acknowledgement on his part that large size will move the price, if anyone knows about it. So he tries to hide it. He just sucks at doing it, because he's using an information technology that's antiquated, and he cries about it. The HFT guys easily sniff out what he's trying to move, adjust the price accordingly (which has the effect of preventing the screwing of the sheep that Saluzzi depends on). Since you're clearly an experienced trader (though conceptually off base regarding the actuality of HFT), would you rather trade at prices that reflect the true size of the big icebergs floating around in the water, or would you rather buy and sell without any information about those hidden orders? The HFT crowd prevents mispricings, and can make ZERO money unless they provide that service, I mean REALLY provide that service, i.e., on average, move prices correctly with respect to the knowable, or they lose all their money. The market is a self-organizing system and it only pays for what it needs to survive, provide liquidity, provide accurate prices. If you're any good, you can get paid by the market to do this.

Thu, 07/16/2009 - 00:15 | 7686 Anonymous
Anonymous's picture

How can the NYSE, NASDAQ, and friends afford to be paying out so much in liquidity rebates?

We're talking about a lot of cash here, right?

Thu, 07/16/2009 - 00:37 | 7691 FischerBlack
FischerBlack's picture

Yeah, take a look at the stock chart for NYX since the start of 08 until now. They've underperformed the S&P500 by like 25% over that period .They can't afford it, but they have no choice. The market is *broken.* Everything depended on fast liquidity of the smart money. With prop desks blowing up, hedge funds shuttering their doors, and everyone else's accounts down by a third, they have to pay people to trade. It's completely bass-ackward.

Thu, 07/16/2009 - 00:43 | 7692 FischerBlack
FischerBlack's picture

My question:

 

Now that NASD is FINRA, will NASDAQ change it's name to FINRAQ? If we can get them to change it, and get everyone to pronounce it 'fine rack', they might be able to build a great, sexy ad campaign on it. With a bunch of fine racks selling the service the liquidty will beat down their door.

Maybe Michelle Caruso-Cabrera will be spokesmodel?

Thu, 07/16/2009 - 13:48 | 7908 Anonymous
Anonymous's picture

The people in this video really have no idea what they are talking about. I love that a guy who "doesn't believe in algos" and "doesnt use algos" is talking about algos. I agree that an algo whose strategy is rebates will not provide liquidity when the stock is volatile and there is a difference between volume and liquidity. Is Joe going to provide the liquidity when he is "reading the tape"? Furthermore, an old institutional VWAP algo, that moves the VWAP price 4 cps and costs 30 mills is still cheaper than his 5+ cps commission.

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