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Larry Tabb Confirms Exchange-Based Frontrunning Is The Norm

Tyler Durden's picture




 

A funny exchange between a rather conflicted Larry Tabb of Tabb Group and AFL-CIO's Brandon Rees deserves a watch, as it highlights the latest fault lines in the market structure debate: watch for exchanges to increasingly blame dark pools, and vice versa, even as both do nothing but add to systemic market collapse risks in exchange for a marginal reduction in trading costs. Whether the trade-off of imminent market crashes at any moment courtesy of a market structure that nobody can make sense of any longer in exchange for a few cents per thousand shares is equitable is up to others to decide. It is certainly something that the industry will defend until its last drop of blood, although expect the SEC and the government to finally step in to curb the rampant abuse of front-running "privileges" by exchanges and secrecy and rent internalization by banks through dark pools.

In the clip below the AFL-CIO once again discloses its intent on bringing back a Tobin Tax by taxing HFT, a proposal we (well, not Marla) have long endorsed, as it will finally return some semblance of "investing" to a market that is nothing more than a speculative vehicle for churning stocks on steroids, in which collecting liquitiy rebates is the primary goal of 80% of market participants, without regard . If in the process of curbing HFT, liquidity has to go down and trading costs have to go up, so be it. Markets worked for centuries without causing the end of Western civilization, they will work again. At least the risk of instant market meltdowns will be fully eliminated.

The funniest bit of the exchange occurs at 3:35 into the clip, when Tabb publicly discloses that front-running is not only legal but occurs all the time on open exchanges. When Erin Burnett, who unfortunately still thinks that the Deutsche Mark is used in Germany, asks who is doing the front running, Tabb says "It could be anyone." And as retail investors tend to not have access to dark pools (in fact Reg ATS allows banks to singlehandedly determine who is allowed access to their dark pools without any appeal recourse),  now you know that every single time you put in an order, it is by definition frontran by everyone who has a million dollar collocated trading station: thank you Mr. Tabb for once again proving our breathless rantings. Which brings us to our question from early 2009 - when will the SEC finally look into this broken, criminal and endlessly front-running market?

 

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Mon, 05/17/2010 - 15:55 | 356887 buzzsaw99
buzzsaw99's picture

I wonder how they'd feel if I snuck in there and put my servers at the front of the line?

Mon, 05/17/2010 - 18:14 | 357165 Problem Is
Problem Is's picture

Like Jesse Says About Lloyd B. God

"I have a longer straw than you. I put it in your milkshake. I drink your milkshake."

"I drink it up..."

Classic Jesse...

Mon, 05/17/2010 - 15:56 | 356890 aint no fortuna...
aint no fortunate son's picture

"when will the SEC finally look into this broken, criminal and endlessly front-running market?"

Trick question there Tyler?

Mon, 05/17/2010 - 16:27 | 356951 Oracle of Kypseli
Oracle of Kypseli's picture

While I was having a pedicure, the pedicurist was asked a question by the manicurist and she answered:

"Like never?"  <valley talk accent added>

Then it dawned on me. That answers Tyler's question on when the SEC will investigate.

 

Mon, 05/17/2010 - 16:30 | 356964 Kat
Kat's picture

The problem is that the SEC never investigates the offenders because the offenders own the SEC and the politicians. 

Instead, the SEC will torture some guy who turned in the manipulators.  This is happening now.  It's absolutely unbelievable what's going on.

Everyone here begging for investigations is just asking for more competition to be knocked out so that the big guys can do anything they want to you.

What we really need to do is dismantle the SEC and the Fed.

Mon, 05/17/2010 - 15:58 | 356893 SheepDog-One
SheepDog-One's picture

When will SEC finally investigate the broken and criminal Batman villain markets? Only when the money is all gone and some chalk outlines need to be drawn...

Mon, 05/17/2010 - 15:59 | 356895 suteibu
suteibu's picture

I can't believe I was cheering for the AFL-CIO guy.  My world just got turned upside down.  I thought the unions were in the fix.  Who knew?

Mon, 05/17/2010 - 19:46 | 357296 ColonelCooper
ColonelCooper's picture

+1 from a card carrying member.  For a split second today I didn't feel like a complete whore.

Mon, 05/17/2010 - 16:02 | 356900 engine trouble
engine trouble's picture

who is the SEC??

Mon, 05/17/2010 - 16:12 | 356916 MarketTruth
MarketTruth's picture

SEC = Securely Enabling Criminals

Mon, 05/17/2010 - 16:36 | 356982 macfly
macfly's picture

Excellent!!

Mon, 05/17/2010 - 16:03 | 356902 BlackBeard
BlackBeard's picture

Cat fight! RRWAAAARR!!

Mon, 05/17/2010 - 16:03 | 356905 RobotTrader
RobotTrader's picture

They weren't front running UGA and USO today.

You can buy all you want now, nobody is front running those....

LOL.....

Great news for us motorcycle racers.....

 

 

Mon, 05/17/2010 - 16:48 | 357008 Mitchman
Mitchman's picture

Thank you for putting this heated debate back in its proper perspective.

Mon, 05/17/2010 - 16:54 | 357024 Sudden Debt
Sudden Debt's picture

Yamaha... Good brand. Pretty good bikes, build for speed and flexibility.

Mon, 05/17/2010 - 19:20 | 357267 SWRichmond
SWRichmond's picture

Those particular models bearing the Yamaha brand look to me like they're built to require a lot of expensive maintenance, while yielding relatively little riding time.

Kind of like a late 60's BSA.

Mon, 05/17/2010 - 19:48 | 357301 ColonelCooper
ColonelCooper's picture

Oh, but that five minutes of riding....... (okay 1:45)

Mon, 05/17/2010 - 18:03 | 357147 Cognitive Dissonance
Cognitive Dissonance's picture

Knowing myself, if I were a woman and built like that, I'd probably be a slut.

Mon, 05/17/2010 - 18:05 | 357152 Problem Is
Problem Is's picture

" nobody is front running those...."

Only My Mouth...
Tasteful work as always Mr. RT... I sit here stunned...
God save stacked blondes with indoor tans...

I wonder what my girlfriend is doing...

Mon, 05/17/2010 - 16:06 | 356908 Fraud-Esq
Fraud-Esq's picture

ZH has more in common with unions than you know.

Mon, 05/17/2010 - 16:32 | 356970 suteibu
suteibu's picture

Did I miss the memo about the dues?  Am I supposed to be on a picket line somewhere? 

Mon, 05/17/2010 - 16:55 | 357029 Sudden Debt
Sudden Debt's picture

Can I see your membership card please?

Mon, 05/17/2010 - 17:02 | 357043 baserunr
baserunr's picture

Soon you'll be allowed to ask to see his vote to become a member....

Mon, 05/17/2010 - 16:15 | 356922 Common_Cents22
Common_Cents22's picture

I saw that exchange too, he was saying your average retail guy is doing the front running !   what an idiot.

 

I violently disagree with any tax whatsoever.  Does our spendaholic irresponsible government deserve another penny from anyone?   Do you give an alcoholic a bottle?

Mon, 05/17/2010 - 16:19 | 356930 Fraud-Esq
Fraud-Esq's picture

I agree. Taxing will just make .gov their revenue partner. It has to be banned. 

Mon, 05/17/2010 - 16:54 | 357022 Common_Cents22
Common_Cents22's picture

Govt is demonizing everyone in order to tax them when the dirty little secret is govt is just as responsible for our problems.  Govt only knows how to collect money, not solve problems.

Mon, 05/17/2010 - 16:21 | 356939 JohnKing
JohnKing's picture

AFL-CIO wants to tax crime. I'm not surprised.

Mon, 05/17/2010 - 16:27 | 356953 Kat
Kat's picture

AFL-CIO IS  a crime

Mon, 05/17/2010 - 16:25 | 356946 Kat
Kat's picture

As soon as it's finished looking at porn on the internet - never.

What the SEC will do is collar some small fry and torture him out of business as an example of how the SEC is working for you.  None of the offenders will be touched.

The problem with this market is constant demands by people like you, Tyler, to launch endless investigations which dry up liquidity but do absolutely nothing about the problems.  The problems exist because the SEC is running competition out of business for the large investment banks. 

The taxing of HFT will lead to the taxing of market making in general and then you'll be wailing about the lack of bids. 

How about just loosening the trading restrictions and letting people trade.  Competition has a way of killing off manipulators because it's very difficult to manipulate a very liquid market.

Also...not sure why this pisses you off so much but the fact that it is NOT illegal for politicians (who sit on powerful committees which are now in the business of picking winners and losers) to trade on material non-public information doesn't even merit a mention on your blog.  Why are you not upset about that?

 

Mon, 05/17/2010 - 18:08 | 357159 puckles
puckles's picture

"The problem with this market is constant demands by people like you, Tyler, to launch endless investigations which dry up liquidity but do absolutely nothing about the problems.  The problems exist because the SEC is running competition out of business for the large investment banks."

That's probably why they never seriously went after Madoff.  He had the appearance of a bigger fry than he was... 

Mon, 05/17/2010 - 20:04 | 357320 Kat
Kat's picture

Madoff owned Schumer and a couple of other politicians.  Schumer is a slut with a lot of power at the SEC.

Mon, 05/17/2010 - 16:29 | 356960 drheywood
drheywood's picture

Behold children, the legendary cursed blue planet. Mesmerizing, alluring and deviously fertile with potential, but held firmly in the clutches of testosterone. Banned elsewhere, as you know. But here, the life forms produce it inside their bodies. What a gruesome fate. You are wise to never come near it. Seen enough? Yes? Next up, Andromeda! and the planet of gold with a moon of silver, and then back home. "Yeey!" Ok, fasten your little tentacle belts...

Mon, 05/17/2010 - 16:42 | 356992 Tic tock
Tic tock's picture

I dare anyone serious to put forth a good reason for what went on today.

Mon, 05/17/2010 - 16:48 | 357009 Waterfallsparkles
Waterfallsparkles's picture

It appeared to me that many Stocks filled the gap from the huge take down on the HFT 1,000 Dow point meltdown.  Then they traded higher.  Unfortunatly I only closed 1/2 my shorts, even though I only have a very small position.

Mon, 05/17/2010 - 17:01 | 357042 Sudden Debt
Sudden Debt's picture

Well... I sound so stupid but here it goes:

I seems that "investors" noticed that the 750 billion from Europe to save Greece isn't spend yet. Only 20 bil. so far. So that mean at this rate, they can keep on buying bonds for 2 more months, pushing the Euro back to 1.36

But oil keeps dropping, gold is lost and currencies all over doing strange things.

There is one more thing that will bring the markets down in Europe. That will be shown on 14 june.

That is the date that Brussels will be split into 2 language pieces. Sounds stupid, but as a capital of Europe this is a extreme form of local government and anti European thinking.

Just watch and see. It's actually pretty bad.

Mon, 05/17/2010 - 18:13 | 357166 puckles
puckles's picture

The entire state of Belgium is pretty bad.  Speak French in the wrong spot--who knew--and you get cursed.  Try to speak Hollander in the wrong spot, same thing.  Speak English, no problemo anywhere.  Solution: bring Belgium in as the 51st State.  Obama would love it!

Mon, 05/17/2010 - 16:44 | 356998 Waterfallsparkles
Waterfallsparkles's picture

I like to place orders under where I think they will get executed in stocks I am Long.  That shows demand and the Stock rarely will meet my order and then Trades higher to avoid hitting my Buy orders. 

Two can play at the frontrunning game.

Mon, 05/17/2010 - 16:53 | 357021 ChevronSky
ChevronSky's picture

I read an article today that said one HFT interviewed said they averaged 80 million shares per day trading volume.  I cannot fathom how these frontrunning algo traders add any value except to their own account.  But silly me, of course there is no requirement of 'socially beneficial behavior' for any market participants.  Still, it is sad that the opposite of 'socially beneficial behavior' is highly rewarded if not highly respected.

Mon, 05/17/2010 - 16:55 | 357025 Common_Cents22
Common_Cents22's picture

How do you get started in HFT trading?  If you can't beatem, join em!

Mon, 05/17/2010 - 16:56 | 357032 Apostate
Apostate's picture

Yup. They set up the system to accomplish all of this legally.

I mean... the trouble may just be that they shoved all the public sector people into the market... plus a lot of people that shouldn't be in it through 401ks, IRAs and mutual funds due to the tax code.

Grandma and Grandpa should not buy securities to provide for their retirement. It's for professionals and crazed gamblers.

The Federal Reserve / FDIC banking system punishes people who would otherwise be very conservative with their money. It's a means of social control. It also causes fewer people to be outspoken about corporate practices or the legal system because their money is locked up in their "investments."

You're way less likely to speak against a crazy municipal construction project, for example, if you own munis for that state. 

Mon, 05/17/2010 - 17:02 | 357045 Dr Hackenbush
Dr Hackenbush's picture

Hey kid, you with a dark pool?  I wouldn’t be caught ‘out here’ without a dark pool kid.

Mon, 05/17/2010 - 18:37 | 357212 Problem Is
Problem Is's picture

LOL. Kids these days...

Mon, 05/17/2010 - 17:48 | 357103 baserunr
baserunr's picture

 

The Mid-Day ride of Lord Blankfein...

Listen my children, and you shall hear,
Of the decades long sleep of the SEC.
On the 12th of Never, in Two Thousand Ten,
They’ll arise from their slumber, and once again,
Prosecute those who steal all we hold dear.

 

He said to his friend, "If the SEC march
By land or sea from the town to-night,
We'll flash-crash the market
Because we are never wrong--always right!
The first trade by hand, and two if they don't see;
And I on the opposite side of each trade shall be,
Ready to cash in and spin a tale with my smarm,
Through every agency, village and farm,
For I am doing God's work; I'm surely doing no harm."

Mon, 05/17/2010 - 17:54 | 357129 newyorker
newyorker's picture

I'd really appreciate an article on whatever steps we can take to protect ourselves as individual traders.

It might be as simple as trading less often, since we're going to have a slice stolen from us each time we trade. It might mean never placing a market order, but instead always placing limit orders, since liquidity is now a false concept, and 100 traders get to see our transactions and act just ahead of them.

I dont know enough about the problem to come up with even the most meager of stopgaps.

Could someone even explain what data the HFT guys have, and how far in advance they have this information? Then readers could propose practices to minimize the damage from HFT.

Mon, 05/17/2010 - 18:54 | 357230 Common_Cents22
Common_Cents22's picture

put limit buy orders in for stocks you'd like to own 50% off during the next flash crash.   Anything 60% or over will be reversed.

Mon, 05/17/2010 - 20:57 | 357383 puckles
puckles's picture

The general idea appears to be that they have information three minutes ahead of the pack, which in HFT time is centuries.  Forget stopgaps, and never trade individual stocks in  this market.  As one HFT trader recently was quoted on this blog, after identifying the ticker he'd traded, "huh?--never heard of them," or words to that effect. They don't know and they don't care.

I hate to admit it, but the market as it is currently constituted is one for speculators and the aforementioned deep pools only.  All of my holdings are currently in cash, except for the market positions. I belong to the prior category, and am currently short roughly $1m SPY.  I have been burned before, after having made a fair amount during the '08 crash, but I feel that this is the true horrific Elliott plunge of Wave III; I lost the cost of a good meal for a few friends today, but made more than the equivalent of a year's salary in previous trades.  BUT BE EXTREMELY CAREFUL, and never bet more than you can afford to lose--this is a casino, not an investment platform.  Use the old Vegas formula, and bet your gains...

 

 

 

Mon, 05/17/2010 - 19:35 | 357283 Pedro
Pedro's picture

So, it is okay for them to front run us, but, the institutionals form dark pools so they don't get front run.  I don't know if my understanding of it is accurate, but, this would be another instance of one set of rules for them and then another for the rest of us.

Mon, 05/17/2010 - 19:40 | 357290 SWRichmond
SWRichmond's picture

If you sit down to play poker, and look around and can't figure out who the mark is, chances are it's you.

Mon, 05/17/2010 - 23:36 | 357592 whiteshadow
whiteshadow's picture

hey tyler...m kinda novice but i read somewhere that dark pool trading (pooling,,something like that) doesn't really distort the prices much ..if i remember,,it said pooling was something more similar to swaps...is it like that???

 

about robot trading (HFT),...was reading this book called The Money Game...by adam smith (not the real mr.smith),,,and came across this quote ..

"All the robot portfolios do well at first, but then they begin to go a little bit off, as soon as people find out how they work"

Tue, 05/18/2010 - 04:04 | 357695 Grand Supercycle
Grand Supercycle's picture

 

EURUSD / EURJPY continues to show buying support on intra day chart.

EURGBP daily chart gives mild bullish warnings.

http://stockmarket618.wordpress.com

http://www.zerohedge.com/forum/latest-market-outlook-1

Do NOT follow this link or you will be banned from the site!