NYSE Going After "Algos Gone Wild", In Other News Joe Francis Thinking Of NC-17 Monetization Schemes Involving Underage Algos
The whole rigged computer dominated stock market casino is just getting plain silly (trust us, we are getting tired of writing about it). At least in Vegas they break your hand when they catch you ripping off the house. Yet maybe there is hope. The NYSE is now saying it is aggressively looking into rogue "algos gone wild." Errant algos, which pump and dump individual stocks (a process that has become particularly acute now that there is minuscule volume driving the general market), are about to be put under the microscope as the NYSE gears up to restore some of its profitability, lost to the trifecta of disappearing investor confidence, dark pool transitioning, and declining trading spreads.
At a recent industry conference, John Malitzis, an NYSE Regulation
vice president in charge of market surveillance, told attendees the
regulator is taking a hard look at how much firms involve their
compliance and legal professionals when deploying algorithms.
NYSE Regulation is worried that firms are throwing algorithms into
the market without enough oversight. "We've seen a number of instances
where algos have gone wild."
Malitzis told the crowd at the Investment Company Institute's
capital markets conference last month. "When we call up a firm to find
out what is going on, they can't tell us."
A stock price that shoots up suddenly on several times its average
daily volume, for example, would cause the regulator to question the
firm, Malitzis explained.
Oh but wait, didn't HFT defendants claim that rogue algos don't exist? Or was it that dark pools and HFT are mutually exclusive... So how about when you have HFT strats within dark pools? But that is a topic for another day (yet one which Barron's dissects quite well). In the meantime, algos are getting more and more aggressive when it comes to full frontal valuation nudity, that drives stocks up purely on gambling sentiment, technicals, and momentum. The topic of rogue algos is particularly sensitive in the context of sponsored access, which has been receiving a lot of press attention lately, as it is one of the main revenue streams for Goldman, and as such will receive a ton of lobby efforts from the 85 Broad behemoth. As Advanced Trading notes:
Schapiro noted that the risks around sponsored exchange access are
driving the commission's work. "It will focus on arrangements that
enable unfiltered access to non-regulated entities " in many cases,
high frequency traders " to exchange systems," said Schapiro.
She explained, "I liken it to giving your car keys to a friend who doesn't have a license and letting them drive unaccompanied."
"I recognize some markets have been seeking to address this issue, but
I also worry that competitive pressures could delay an effective
solution " one that would apply across all markets to assure a level
playing field for all investors," Schapiro said.
To sum up: rampant flashing: check; algos gone wild: check; drinking and driving: check; the cash cow and guaranteed, certified ways to make money, just buy a couple of i7 Cores and you are up and running: check. These are all the makings of yet another massively lucrative Joe Francis business venture. And while Mary Schapiro can not prevent the illegal downloading of late night soft porn including fully frontal rogue algos (by the very same 19 year olds who hold the market hostage with their low-volume, hi-vol, straight line higher algos), she seems to be finally getting some understanding of just how pervasive the risk is if she does not make the right market structure decisions:
Schapiro also pointed out that one of the gaps the SEC is looking to
fill is in the area of hedge funds, which "have flown under the
regulatory radar for far too long."
"The administration has recommended- and I support " a requirement that
advisers to private funds register with the SEC. And I will work with
Congress to avoid creating broad new carve-outs of exceptions that
could come back to haunt investors years later," she said.