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More Observations On HFT's Tyranny Of Stock Markets
Anywhere one turns these days, bashing HFT is the new market normal. Having written 150 articles on the topic, beginning in April 2009, we are happy to have brought the world's attention to this most dangerous of market aberrations. Yet until the SEC finally bans the practices of micro churning, quote stuffing, positive feedback loop chasing, flash trading, subpennying, DMA accessing, and all other aspects conceived merely to provide some market participants with an unfair advantage over everyone else, the fight against HFT must continue. Which is why we draw your attention to two items: the first is a paper by Bluemont Capital "The Marginalizing of the Individual Investor" in which the authors question if HFT has distorted true market valuation (yes) and to what degree. Some relevant soundbites: "Unfortunately, high-frequency trader interaction with computerized algorithms of large-cap financial institutions is providing opportunities for high-speed, virtually undetectable market manipulation", "At a minimum, computerized high-frequency and algorithmic trading are undermining traditional value investing strategies. Short-term liquidity and data movements are distorting information on real business performance", "Essentially, high-frequency trading platforms function as positive feedback loops. Engineers treat positive feedback loops as inherently unstable, as each positive response generates stepped-up repetition of the same actions. Positive feedback loops result in an ever- expanding balloon, but like all balloons, the risk of bursting increases with the balloon’s size", and concludes that the "continuing advances in computerized trading pose challenges for regulators throughout the world—and leave individual investors marginalized... Regulators should not only seek to assure that markets are able to continue to function under stress, but they also need to devise remedial actions that protect individual investors who have fundamentally different objectives from the high-turnover objectives of high frequency traders and computerized algorithms." The other notable item is the appearance of our friends at Nanex on ABC radio over in Australia, where firm founder Eric Hunsader discusses the previously highlighted concepts of latency arbitrage as a potential progenitor to the May 6 crash, as well as possible ways that the NBBO arbitrage could have provided for unfair and illegal mispricing opportunities for a select few.
Bluemont Capital "On the Marginalizing of the Individual Investor":
Full August 29 interview with Eric Hunsader on Latency Arbitrage courtesy of ABC Radio (full radio interview).
And some other interesting HFT tidbits, again thanks to ABC:
Algo's Gone Wild by Bernard Donfer
High-frequency Trading: Where are we and how did we get here? by Paul Wilmott
h/t Themis Trading
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HFT Tranny!? That is a some porn I don't want to see.
There will millions of shares of NYSE Order Imbalances (covering about a dozen stocks) that print at 3:45 EST.
Simple but painfully slow solution, go back to only manual on the floor transactions.
When the S&P goes back to 500 that solution will probably work.
S+P 50, rotary phones and no facimile machines. Did I mention $3,000 xerox machines weighing 3 tons?
Mimeographs, Bitchez!
When can I join the class action?
U.S. Citizens v. Ruling Class(less) sounds good.
outlaw it now
I think that if the HFT Computers could not see the orders before everyone else that would substancially change things. The HFT's trade knowing what the upcomming trade is. What would they do if they did not know what the upcomming trade is. Even Computers without advanced knowledge would be at a disadvantage like most of us.
I would like to sqeeze them in a perpetual wedge and see what they do.
S&P is already in a perpetual wedge. Did you mean wedgie?
Like this? http://www.break.com/index/asian-girl-gets-hanging-wedgie.html
Front Running used to be Illegal, Price Fixing used to be Illegal, Market Manipulation used to be Illegal.
Yet, it appears that if a Computer does it there is no penaly and is perfectly acceptable.
No wonder everyone is getting out of the Market.
Exactly, HFT is not a market failure. It's the exploitation of a failure in the human-designed exchange infrastructure.
What we need is a stock exchange that seeks to remedy the flaws of the current system and doesn't allow latency arbitrage. ie: good ol' fashioned competition.
Barron's piece on Hunsader:
http://online.barrons.com/article/SB500014240529702043044045754499309203...
Very scary.
I have to:
HFT bear trap, bitchez!
What is this magical thinking that puts faith in regulators?
We have a highly regulated market right now, and HFT is not something that happened *despite* regulation. It is something that grew up in the regulatorium!
So let's look at the ideal regulator, and see what clues there may be as to how they will somehow, magically, assure markets, prevent HFT and other "undesirable" stuff that is not in the "good of the public":
- regulators use force. when they tell you to do something, it is not a request.
- regulators ideally are not a revolving door for employees to/from industry. This means the regulators are expected to be smarted than the people who do the things that they have never learned to do.
- regulators write hundreds of thousands of pages of rules. These rules are keenly important to the regulated companies. Imagine how many members of the public have the time, energy, and grasp of the details, to participate through years of rulemaking. Yup, regulations are written as a collaborative process between the regulators and the regulatees.
- regulators are conservative. Like Maginot prior to WWII, their gaze is firmly on the rearview mirror. At best (see capture, above) they will write the perfect rules to perfectly prevent last decade's disaster. But the disaster on the horizon in front of us is different.
- regulation cannot compensate for distortions elsewhere. For example, the Fed has pumped untold amounts of money into the banking system, the rules have been modified to let banks mark to fantasy. Coordinated "policy response" around the globe is all directed towards higher stock prices. And HFT may have the net effect of causing stock prices to rise also. Regulating HFT does not eliminate the cause of prices rising beyond any rational value.
- regulators are not innovators (neither are populists). Most innovation is defamed when it is new. For example, in the early days of the emerging market for shares in the London coffee houses of the 17th century, the "jobbers" were reviled and resented. What kind of crook would simulatenously make an offer to sell and a bid to buy?? They evolved into market makers, whom today are the class that regulators are to protect from HFTs! Can you be absolutely certain that you are not doing harm to outlaw HFT? The populists (and stock market players) in London would have said they were certain. Prior to that, of course, the Church and all good people agreed that charging interest was a sin. They had 1500 years of stagnation and poverty. Regulation is enforced at gunpoint; you had better be careful what you enact!
I could go on, but I think this is long enough for now...
Here is some "positive" deregulation for you http://www.wsws.org/articles/1999/nov1999/bank-n01.shtml
And we are living the effect of this causation.
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It was nice to see such an orderly market today!
The Dow, Nasdaq and S&P all moving lower in perfect unison? great work BOTS, all the TIC's marched in tandom nobody fell behind or ran ahead.
military style.
I think all of the HFT Bots are trading the ETF's. That way they can affect the entire Market.
In my opinion the other problem with the Market is all of the ETF's. Shorting a Financial ETF can take down the entire market. The same goes for Buying that ETF. Or Energy ETF's. Double that if an ETF is a Tripple short fund.
Market is nothing but a huge Casino where Individuals will never win.
Nice nugs
I need a shorter cable.
A problem with science fiction movies that no one that I've heard of has identified is the following. There is all this picosecond technology firing weapons and tracking targets, only to have the final firing decision made by millisecond human synapses.
In reality, space battles should be over before anyone can blink.
The same comment on HFT algorithms. Their host processors are placed as close to exchange processors as possible for noanosecond advantage over their rivals. To what advantage when human operators - if there are any - may take minutes to figure out what the hell is going on?
The art of the algorithm will be to build increasingly sophisticated ones that can defeat an oponent or sieze an advantage in time intervals so small, the enemy firm will be in chapter 11 before the CEO can hiccup.
and that's another major problem with HFT -- the latency involved with just the TCP/IP mandates that you have servers literally on the floor of the exchange if you want to be a player. In a sane market, with sane regulators, you wouldn't be disadvantanged because your trading operation is located on the west coast. Heck, even a Philly operation would be playing with ankle weights on.
Maybe, just maybe, the SEC should clamp down on practices that allow for a thousand transactions to hit the tape from servers on the floor before the server in Cali even gets the print. I still don't understand why quotes shouldn't be good for some minimal duration, even a tenth of a second.
The best part? This is now main stream. Getting something done will be a lot easier now that the scam has been well publicized. Don't expect to see it any time soon in People Magazine, but...
At least they were already invited to DC to talk about it. Unfortunately what really has to happen is for more MSM headlines to raise public awareness and outrage. Without that fire you can't expect much to change.
HFT trading will be hard to make illegal because in my opinion it is only doing what sell side traders have been doing forever, only much much faster.
I am a huge fan of dark pools, where buyers and sellers can meet in private to make a transaction without alerting other buyers.
Imagine if you were trying to buy a house and your offer was made public then seconds later a bunch of people came in and offered a higher price, purchased it and minutes later offered it to you at a profit to them. Sell side baby!
You want to put an end to HFT, offer it to retail investors and let it get really whacky.
1 US exchange.
1 bid, 1 offer.
Problem solved.
I would make it so that any bid had to stand for at least one Minute. All Bids and Asks would have to be posted to all before anyone could act on them. Maybe have the Bids and Asks go thru a Satalite first. I would now allow sub penny quotes. The only Traders that can trade in sub penny's are the Computers. Or, open sub penny bids and asks for the public. Ever try to put in a bid for .9989 or 31.0979? You cannot. This is what allows them to frontrun trades and unfortunatly steal the trade from someone already in line for that trade.
Sub penny trades can also manipulate the Market. The can keep the Ask from being taken out by continuing to step in front by .0099 cents. Or, they can keep a stock from going down by jumping in front of the Bid by .0099 cents. This actually steals the trade from someone already in line for that fill.
Being the Market now runs with Bids and Asks right at the current pricing there is no debth to the Market. No one wants to show their hand, so the watch and trade around the strike prices. When a HFT wants to push a stock down they withdraw bids. When they want a stock to go up they withdraw Asks.
Nothing but Price Fixing, Market Manipulation, Frontrunning. Yes, these things are supposed to be Illegal. Yet, it is allowed with the HFT Computers. WHY? I guess because it is the Big Boys stealing from the Peon Middle Class Americans and they do not matter to the Elites.
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