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Lime Brokerage: "The Next 'Long Term Capital' Meltdown Will Happen In A Five-Minute Time Period."

Tyler Durden's picture


A recent Bloomberg piece that for some reason was made available only to terminal subscribers, provides a very interesting discussion on the dangers of sponsored access, how the associated pre-trade vs post-trade monitoring deliberations by "regulators" will influence short selling curbs, and not surprisingly, the desire by Goldman to not only dominate this yet another aspect of high-frequency trading, but to dictate market policy at will.

What is sponsored access:

In sponsored access, a broker-dealer lends its market participation identification (MPID) number to clients for them to trade on exchanges without going through the broker's trading system, to avoid slowing down the execution. That places responsibility on the broker-dealer to make sure the participant abides by securities regulations, and that its trading, which can involve hundreds or thousands of orders a second, does not run amok.

Is it thus surprising, that none other than Goldman Sachs is muscling its way into providing not only a sponsored access platform to its clients, but a new form of sponsored access that needs the blessing of regulators:

Wall Street heavyweight Goldman Sachs, now launching its own sponsored-access service to lend clients its identification to access securities exchanges directly, said last week it favors monitoring client orders prior to execution.

"Our view is that there is a real need for pre-trade checks in the use of sponsored access to fulfill [broker-dealers'] regulatory responsibilities," said Greg Tusar, managing director at Goldman.

Goldman's stand in favor of pre-trade instead of post-trade monitoring of sponsored clients' activity is one side of a debate in which regulators may choose a middle ground. The regulators' decision on how to monitor sponsored access may also influence their deliberations on restricting short sales.

What is the difference between pre-trade and post-trade monitoring? In brief:


  • Compliant with Reg SHO
  • Nip problems before they happen
  • View activity across exchanges


  • Faster order executions
  • Pre-trade systems still fallible

And another tidbit:

In traditional sponsored-access arrangements, a broker-dealer determines a client's suitability to access market centers directly and then allows the client to trade without monitoring its individual orders prior to execution.

In other words, the Goldman endorsed pre-trade approach will allow "monitoring of individual orders prior to execution." Whether or not pre-trade checks provide the capacity to observe not just wholesale exchange activity in the context of sponsored access but from a much broader market angle is a discussion for another time, although this could be one place where Sergey Aleynikov could shed an infinite amount of light, especially as pertains to Goldman's sponsored-access service. Conveniently, his gag order will prevent him from saying much if anything until such time as there is an appetizing settlement to keep him gagged in perpetuity. The bottom line is that with a pre-trade environment, the sponsored access providers will be able to have the potential to front run all those who use their platforms. The residual question of how far they go to comply with regulations to prevent this from happening, and remain true to their ethics standards is also a topic for another day.

Going back to the topic at hand. Here is why sponsored access could easily be quite a bother to capital markets sooner rather than later:

Unchecked errors or unintended repeat orders could deplete broker- dealers' capital, and potentially wreak havoc in the broader market.
Concerns have arisen, however, about whether all broker-dealers are able to fulfill that duty in today's electronic trading environment, and according to which standards.

And here Goldman chimes in to not only promote their proposed architecture but to expound on the virtues of pre-trade checking.

"In the case of high-frequency trading, in particular guarding against technology failures, oversized orders and other situations where there's potentially systemic market impact, we believe strongly that pre-trade checks are a prerequisite," Tusar says.

Nasdaq's proposal as well as Securities and Exchange Commission officials' speeches a few months ago appeared to lean toward bolstering the traditional approach.

"We don't believe that's strong enough or what the regulators want now, because of the potentially dire consequences, and because we-as broker-dealers-bear much of that risk," Tusar says.

Now the reason why this is very relevant in the context of not just potential front running, but also market structure is that Regulation SHO, which is the primary regulatory framework for short selling (and the purvey of potential Uptick Rule reinstatement, which will happen once the market is allowed to hit a bid) is a post-trade architecture.

Wedbush [Morgan] routinely tests clients' systems to ensure they are compliant with Reg SHO. In addition, he says, the brokerage sets limits on clients available locates-as well as credit and trading limits--before the start of each trading day that its system tracks, prohibiting shorts without locates and providing a type of pre-trade check.

Or as has recently become the case, seeing rolling buy ins in the middle of the day as borrowable shares in even the most liquid stocks mysteriously disappear (look at today's market action for yet another blatant example of this practice). The benefits of seeing major short blocks crossing the tape ahead of other participants are too many to mention.

Anticipating the regulators' likely response, one should not be surprised to see them siding with Goldman and against shorters:

As the SEC also seeks to appease investor concerns over rampant short selling, especially naked short selling, new sponsored-access standards may provide part of the solution. Given that day-traders may be the last remaining culprits of such activity,, increasing and standardizing scrutiny over their trading may reduce uncovered (and
illegal) shorts even further.

How about appeasing concerns over rampant, unjustified buying? When will the downtick buy rule be implemented? But we jest.

And I digress again. Why should all this be concerning to advocates of stability of high-frequency trading:

The mother of all concerns is a sponsored firm's algorithm going awry and executing thousands of problematic trades across a range of securities and market centers.

Well, this is not really a problem when it happens to the upside as has been the case for months now - it is only a threat when Joe Sixpack's 401(k) may be impacted, i.e., to the downside.

And here is where a SEC Comment submitted by broker Lime Brokerage is a very troubling must read by all who, with unfathomable naivete, claim that High-frequency trading is a boon to an efficient market (which doesn't provide . Well, yes and no - it is, until such moment that it causes the market to, literally, break. I will post a critical excerpt from the Lime submission, and leave the rest to our readers' independent analysis:

Lime's familiarity with high speed trading allows us to benchmark some of the fastest computer traders on the planet, and we have seen CDT (Computerized Day Trading) order placement rates easily exceed 1,000 orders per second. Should a CDT algorithm go awry, where a large amount of orders are placed erroneously or where the orders should not have passed order validation, the Sponsor will incur a substantial timelag in addressing the issue. From the moment the Sponsor’s representative detects the problem until the time the problematic orders can be addressed by the Sponsor, at least two mintues will have passed. The Sponsor’s only tools to control Sponsored Access flow are to log into the Trading Center’s website (if available), place a phone call to the Trading Center, or call the Sponsee to disable trading and cancel these erroneous orders – all sub-optimal processes which require human intervention. With a two minute delay to cancel these erroneous orders, 120,000 orders could have gone into the market and been executed, even though an order validation problem was detected previously. At 1,000 shares per order and an average price of $20 per share, $2.4 billion of improper trades could be executed in this short timeframe. The sheer volume of activity in a concentrated period of time is extremely disruptive to the process of maintaining a “fair and orderly” market. This shortcoming needs to be addressed if the practice of Naked Access is going to be permitted to continue; otherwise, the next “Long Term Capital” meltdown will happen in a five-minute time period.


And here is the punchline: our wise exchanges and broker-dealers have already set the stage for an outcome that will be extremely disadvantageous to anyone who is not a member of the "club." The strawman is total market collapse (which will happen sooner or later regardless) - just look at this chart from the CME indicating the phenomenal growth in prop trading across clients and the increasing domination of computerized trading:

So in essence the forced choice to regulators and traders by the likes of Goldman and exchanges it the following: pre-trade clearance, i.e., seeing ahead of all trades for entities who use sponsored access, a platform that all will soon need to be used be everyone who wishes to remain competitive in this day and age where one extra milisecond of latency over a long enough timeline renders a speculator (or basically trader, now that "buy and hold" is dead) useless, or the threat of complete market collapse. In other words: do what we want or the repercussions will destroy the free market.

It is time to call the bluff on all these alternatives by the administration and by Wall Street that have the apocalypse as one of the two options.


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Thu, 07/23/2009 - 11:32 | 12817 Ruth
Ruth's picture

I heard recently, don't know where, who and how relevant, that trades should require a 1 minute hold on price.  Seems that would slow down the process.  Also seems unlikely or impossible.

Thu, 07/23/2009 - 12:11 | 12860 bchbum
bchbum's picture

I heard that even just 500ms would do the same.  I think nyse just lowered the time to 5ms (from what I'm not sure).

Thu, 07/23/2009 - 17:56 | 13374 dnarby
dnarby's picture

That would be Joe Saluzzi - Search this site and you'll find lots of stuff by him.  Unfortunately, he's clearly in violation of being awesome without a liscence.

Thu, 07/23/2009 - 11:36 | 12822 Anonymous
Anonymous's picture

Why would it matter if someone (cough GS) can see it before it happens? It's little agreement with the NYSE makes sure that they will profit off it anyway.



Thu, 07/23/2009 - 11:37 | 12824 Anonymous
Anonymous's picture

As long at the market is going up they won't care

Thu, 07/23/2009 - 11:37 | 12825 Anonymous
Anonymous's picture

Why does Lime Brokerage's logo exactly the same as the limewire filesharing logo?

Thu, 07/23/2009 - 11:50 | 12833 Anonymous
Anonymous's picture

" Mark Gorton is the founder of several financial and technological companies under the Lime Group umbrella, including Tower Research Capital, Lime Capital Management, Lime Brokerage, Lime Wire, and The Open Planning Project. Mark is currently the Managing Director of Tower Research Capital and the CEO of Lime Group. "

Tue, 09/29/2009 - 15:47 | 82735 ZeroPower
ZeroPower's picture

Oh wow, nice find! Never though p2p and being a baller at a brokerage went hand in hand.

Thu, 07/23/2009 - 11:38 | 12826 Anonymous
Anonymous's picture

This 'free money' machine will fail like all the others attempted throughout history, and most spectacularly. The greedy fools believe that everything is under control and that they can't lose. Hahahaha!

Thu, 07/23/2009 - 12:26 | 12873 cougar_w
cougar_w's picture

You sound confident. Keep in mind that they might eventually control the mechanism that serves out failure itself. At which point, they don't. Ever.

Thu, 07/23/2009 - 11:46 | 12830 Comrade de Chaos
Comrade de Chaos's picture


  1. A robot may not injure a human being or, through inaction, allow a human being to come to harm.
  2. A robot must obey any orders given to it by human beings, except where such orders would conflict with the First Law.
  3. A robot must protect its own existence as long as such protection does not conflict with the First or Second Law.
Now the law # 3 according to GS must be: A robot must protect its own existence, period. 

Thu, 07/23/2009 - 11:47 | 12831 Miles Kendig
Miles Kendig's picture

One day the gas that is fueling order flow will backwash sewer gas via the DTC flow access systems.  I suspect that a leading indicator will be a big spike in order fails with the natural results.  In other words these folks will choke on their own "product".

Thu, 07/23/2009 - 11:49 | 12832 KidDynamite
KidDynamite's picture

so are you against GS installing a filter in the sponsored access pipe that checks short sales against a "borrowable securities" list?


it sounds like that's exactly what the plan is - to prevent guys from shorting and then buying back impossible to borrow securities intraday (and thus ending the day FLAT, which would cause no settlement issues, and would go undetected by post-trade compliance checks, but would violate Reg SHO)

Thu, 07/23/2009 - 11:54 | 12836 SDRII
SDRII's picture

another day dollar down stocks up. Is this the blow off the top?

Thu, 07/23/2009 - 11:58 | 12839 Anonymous
Anonymous's picture

This is the new bubble.... but this time all the companies have big losses and that's 'good', had no earnings...

now it is less of a loss and rally to the moon

Thu, 07/23/2009 - 12:17 | 12865 Anonymous
Anonymous's picture

Good lord the company making money EBAY a world wide garage sale . Everyone else hoping the next quarter may work out. I am buying more SDS SRS FXP i will buy every day until the market drops 1% and i will make money. This is just a not stable market. In fact as i type i am starting a large position in QID 12 days in a row are you kidding this QID is easy money.

Thu, 07/23/2009 - 12:00 | 12843 Anonymous
Anonymous's picture

If the market continues on its way at this rate Dow will be about 20,000 by the end of the year

Thu, 07/23/2009 - 11:55 | 12837 Anonymous
Anonymous's picture

Regarding the recent stock rally.... too bad all the pension funds and lexus liberals own treasury bonds now.

Thu, 07/23/2009 - 12:02 | 12838 JohnKing
JohnKing's picture

I don't know, it sounded like Obama green-lighted bad Wall Street behavior last nite. He made it sound like what is for Goldman the financial industry is good for USA. I Expect the theft to continue, his only good metric right now is the stock market, all other #'s are in collapse.

Thu, 07/23/2009 - 11:58 | 12840 Anonymous
Anonymous's picture

If high-frequency trading is done away with how the hell are GS and Stevie Cohen's SAC Capital among others supposed to make money? HFT is their most powerful market manipulating tool. You can't just take it away from them. It would mean they would have to invest $million$ if not $billions$ into legitimate old school style due diligence platforms to make up for the shortfall of revenues and they would never get the same kind of returns for their money, not to mention that legitimate due diligence investing is not nearly as fun and rewarding as manipulating and cheating.

Thu, 07/23/2009 - 12:02 | 12848 Anonymous
Anonymous's picture

And looking at fundamentals such as earnings, valuations and yields and forward looking earnings of course.

But all that is just tooo complicated

Thu, 07/23/2009 - 12:03 | 12842 Chumly
Chumly's picture we move, day-by-day, toward the Mother of All Collapses and make way for the "reset..."  (I'd like to see the blueprints for that scenario - hell help Barry if he doesn't have a working teleprompter nearby)

Thu, 07/23/2009 - 12:00 | 12845 pinkboxtrader
pinkboxtrader's picture

Why don't we all (from retail to large fund) insist that every entity involved in the path from our client software through back office clearing be audited to not be engaged in any principle account activities?

Thu, 07/23/2009 - 12:02 | 12847 ShankyS
ShankyS's picture

does this sound like the beginning of a real Matrix? Nothing will be real soon. Like Rhom said - don't let a good crisis go to waste. GS is taking this to the extreme and the pace at which they are forcing issues is overwhelming an already overloaded disfuncional system. Carpe Diem GS! 

Thu, 07/23/2009 - 12:02 | 12849 Anonymous
Anonymous's picture

hey look, Tyler is posting more anti cpu trading stuff. Hmmm, I wonder who could be funding him? Will we ever see Zero Hedge balance their reporting? Next report will be on the power that these servers use and how thats so bad for the environment. Then, I anticipate we see some articles on how electronic trading should be banned and we should go back to open outcry. Then, in his final act, a push for full removal of the internet from society.

Thu, 07/23/2009 - 12:06 | 12853 Chumly
Chumly's picture

Okay, which one of you is it?  Is that you: Dennis, Larry, Cramer?

Thu, 07/23/2009 - 12:08 | 12858 lizzy36
lizzy36's picture

You want fair and balanced reporting head to Fox.  They defined the misnomer.

Thu, 07/23/2009 - 12:17 | 12863 Anonymous
Anonymous's picture

Look, I just want bloggers that are smart enough to be able to consider different opinions and are open to new lines of thinking. CNBC/FOX/most doom and gloom websites are narrow and unwilling to change opinion. Zerohedge started off with what seemed and open mindedness....but is now just droning and droning the same crap every day - JUST LIKE KUDLOW...who sucks arse

Thu, 07/23/2009 - 12:22 | 12869 Tyler Durden
Tyler Durden's picture

Just for you, I will start a parallel website praising the benefits of program trading, which of course will cost you. Shoot me an email so I can send you our (offshore) bank account ABA and #: you will be Zero Hedge's first sponsor!

Thu, 07/23/2009 - 23:40 | 13656 Anonymous
Anonymous's picture

Tyler, for the last time, Program Trading and HFT are not the same thing. Not even remotely.

Mon, 07/27/2009 - 07:19 | 15809 Anonymous
Anonymous's picture

"cpu trading stuff" however, most likely is equal to Program Trading - which was the accusation. For us argument connoisseurs, however, the real bite was in the "electronic trading should be banned" statement, which seemed rather inclusive. HFT is - from what I can tell - a subset of Program Trading.

Thu, 07/23/2009 - 12:47 | 12889 Comrade de Chaos
Comrade de Chaos's picture

I don't see the relation between the cancellation of free market practices & Doom & Gloom. I mean, look at China, they seem to be doing well in the last ten years as long as disproportional rise in inequality could be called prosperity of the nation. However do we really want that our success be defined by our connection and not our talents?

Describing none ethical business practices has little to do with preaching the END.  

p.s. the original anon is the CNBC intern # 2; the #1 is more sophisticated; the #3 is more aggressive. 

Thu, 07/23/2009 - 13:20 | 12938 Gordon_Gekko
Gordon_Gekko's picture

The issue is not computers but humans (mis)using them to rig/f--k up markets.

Thu, 07/23/2009 - 17:31 | 13340 Anonymous
Anonymous's picture

Apocalypse Now- Excellent, straight to the heart of the matter as usual GG. We have lost our way and intrinsic value does not currently exist - in this environment of uncertainty capital decisions are being delayed and costs (employees) are being cut because the cost side of the equation is the only known variable. The stock markets are the cheapest to rig for consumer confidence, since the last transaction price changes how every shareholder thinks of their wealth (could be 100 shares at a premium of $2 at the close- simplified I know). Computers are working through equations related to networks (6 degrees of separation) and correlation with earnings that solve which politicians and how much $ to lobby as an ROI. When political influence is the only fundamental, the market is a banana republic. I prefer a different yellow.

Thu, 07/23/2009 - 12:07 | 12854 DebtorShredder
DebtorShredder's picture

I love how the stock market is running on the fallacious thought:

"Rising prices are a signal to buyers."

What if they couldn't buy?

What if they wouldn't buy?


Thu, 07/23/2009 - 12:08 | 12856 KidDynamite
KidDynamite's picture

like how Kudlow was trumpeting an hour ago about how "all of the indicators are lining up, INCLUDING the stock market"


oy vey

Thu, 07/23/2009 - 12:30 | 12877 Gordon_Gekko
Gordon_Gekko's picture

They're definitely lining up for something - but it ain't pretty.

Thu, 07/23/2009 - 13:48 | 12993 Anonymous
Anonymous's picture

Or my favourite: 'oil prices are up on stock rally' followed underneath by the headline 'oil prices rally on stock gains'.

Thu, 07/23/2009 - 13:49 | 12994 Anonymous
Anonymous's picture

Whoops f***ed that one up. I meant:

Or my favourite: 'oil prices are up on stock rally' followed underneath by the headline 'stocks rally on oil price gains'.

Thu, 07/23/2009 - 12:47 | 12898 cougar_w
cougar_w's picture

There is NO MONEY. There hasn't been real money moving through the pipes for a decade, everyone just noticed recently. Without real money there are few real players and a lack of systemic strategies as a result. TD is probably correct; there are likely a dozen Spark machines trading with each other across a fiber switch at some co-lo, the wavy line you watch all day that serves as a market indicator is just a 5 minute moving average of their combined algorythmic outputs. Twice a day, technicians tweek the algos to try and overcome/anticipate/undo the tweeking taking place in the next rack over; strategic "thinking" is reduced to getting another 0.5% return by end-of-day, then they rebuild the whole smoking, steaming engine in preparation for another day of trading.

Someone might need to pull the plug on the entire system and start over... with Turing tests for everyone at the outset.


Thu, 07/23/2009 - 12:08 | 12855 Anonymous
Anonymous's picture

Why is the VIX going up?!

Thu, 07/23/2009 - 12:16 | 12862 Anonymous
Anonymous's picture

Gosh, the market was just a horrible place to buy at dow 6500, but now that it's 33% more expensive, I know it's a good deal!! All in!!

Thu, 07/23/2009 - 12:18 | 12866 erich
erich's picture

Wow!  So we have already had several LTCM quality trading blowups?  Most people don't even know!  Remarkable!  Glad the system is robust enough to handle it!

Thu, 07/23/2009 - 12:18 | 12867 Anonymous
Anonymous's picture

"We'll never see dow 10000 again!" LOL

Thu, 07/23/2009 - 12:31 | 12879 Miles Kendig
Miles Kendig's picture

With the dollar index at 72 what does Dow @ 10K really mean but just one more worthless make believe data point.

Thu, 07/23/2009 - 12:28 | 12874 Veteran
Veteran's picture


Thu, 07/23/2009 - 12:28 | 12875 Veteran
Veteran's picture

same shit different day by the crony GS/SEC/entire fucking Government crew.  We are living through the end of the American Empire.  Burn it down and start over says I

Thu, 07/23/2009 - 12:31 | 12881 Miles Kendig
Miles Kendig's picture

Colonial scrip anyone...

Thu, 07/23/2009 - 12:32 | 12882 Gordon_Gekko
Gordon_Gekko's picture

Yeah, the quicker the better. Burn Rome, BURN!

Thu, 07/23/2009 - 14:45 | 13079 Anonymous
Anonymous's picture

where are we gonna get all the slaves and goofy wigs?

Thu, 07/23/2009 - 14:30 | 13058 Milton
Milton's picture

Why can't the software simply cancel all open orders once the Firms buying buyer is reached. No need to pre-screen anything.

Thu, 07/23/2009 - 16:50 | 13280 Anonymous
Anonymous's picture


Thu, 07/23/2009 - 21:27 | 13564 Anonymous
Anonymous's picture

Lime is talking their book. Their entire business depends upon clients trading through their servers which previously were very fast. The exchanges, via sponsored access, offer the "speed bumps" or risk checking tools to prevent these orders from going through. If the SEC mandates that a highly regulated entity such as an exchange become the only purveyor of sponsored access, Lime is out of business.

Fri, 07/24/2009 - 09:44 | 13912 Anonymous
Anonymous's picture

When Warren Buffett buys a stock and sells at a profit he is a 'sage' and an 'Oracle of Omaha'.

When High Frequency traders buy a stock and sell at a profit they are evil, manipulative and a systematic risk.

Can someone tell me why?

Sun, 07/26/2009 - 14:10 | 15543 Anonymous
Anonymous's picture

"Sponsored Access" is simply another way for large brokerages maintain their control over the markets. If they are allowed to continue to act as market gatekeepers for everyone else, then they will also have the largest profits.
That's why GS likes the idea of pretrade monitoring. It gives them a chance to secretly pass on that information to their prop trading group.
The straw-man that they setup is that without pretrade checking, some runaway algo could cause severe damage to other participants - which is obvious. But the solution is not to encourage sponsored access, but to simply ensure that there will be economic consequences for anyone with a runaway algo.
For example, when I make a trade, I am charged $0.01 commission per share. But these algo traders are essentially trading with zero commissions. If I tried to send thousands of orders in a few seconds to the exchange I would be out of business in less than 10 minutes.
But these companies, that have essentially free access to the markets, also have no downside consequences.

So, I suggest that every market participant should get their own unique MPID. And if something goes wrong with someone's algo then the economic consequences should be severe enough that they will never do it again.

Is that too simple for the SEC to consider?

Mon, 07/27/2009 - 23:32 | 16471 Anonymous
Anonymous's picture

So then they would buy algo failure insurance from AIG and everything would be right with the world.

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