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Principal's McCaughan: "We Want To Be Able To Look Our Investors In The Eye And Tell Them The Market Is Fair" And Now That's Impossible
Some self-proclaimed pundits have repeatedly, and falsely, stated such a thing as cross-market arbitrage is impossible. They are of course, entitled to their opinions. In the meantime, here is Principal Capital's Jim McCaughan explaining in simple terms how cross-market arbitrage is not only possible, but happens constantly, and can serve as the basis of frontrunning by the HFT crew (the same group of "liquidity providers" that is now being investigated by FINRA for market abuse... presumably for a reason).
Some of the key quotes:
- Order to one trading venue get shared with others. The problem is there is very strong circumstantial evidence that it's front run in many places. And that is why both the SEC and Finra have been looking at who is doing the trading in order to get more forensic about trading patterns.
- I am talking when oreds get pinged out to multiple trading venues, there is at least circumstancial evidence that there's quite widespread use of that information to front-run trades... That's fraud.
- You have to be very careful about your trading metrics. We are combating issues in the market microstructure. These issues are making the market more volatile than it needs to be.
- There are traders who send out orders with no intention of filling them, simply to try and see what activity it provokes.
- It is getting to the point that the investors are put off by the volatility that these phenomena are causing, and that is actually quite dangerous. We want to be able to look our investors in the eye and tell them the market is fair, and unfortunately in the market it's quite difficult to do that.
The relevant section begins at 6:30 minutes into the clip.
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Well fancy that I,m gobsmacked ........................... Dangerous,fixed .......... must be daydreaming.
not even Tony Robbins is happy
http://weaselzippers.us/2010/08/23/things-have-gotten-so-bad-even-motivational-speaker-tony-robbins-says-he-cant-make-us-feel-better/
So what's the angle with all the MSM starting to talk about equity outflows and HFT? More regulation and stimulus? Election chatter?
It simply takes a while for the information to be investigated and researched, Tyler and/or the contributors to write the piece, the piece to be disseminated to the main stream media, then used as reference by CNBC.
Have you noticed the ramp job of Zerohedge on Google trends?
http://www.google.com/trends?q=zerohedge
I see my algo is able to front run the other financial bloggers in pushing up ZH on the world map...
Very interesting. Germany doesn't even make the top 10 on the country list. Clearly, as I have always suspected, they can't handle the truth.
Ahhh the entropy of the MSM accolade...
Be careful what you wish for.
Us Goldmans Sachs haters could become useful idiots.
Germans, as a group, don't dabble much outside of their own language.
Per the truth, one could argue that the Germans already know the truth, and are thus far less inclined to seek it.
Economically and politically, Germany are playing their cards VERY well.
LOL, you don't know what the fuck you are talking about.
Germans probably know the truth and clearly dont want to be fooled again....after all they have been done in by the bankers twice by giving them false hopes of world dominion and racial superiority
The Germans are consensus lovers, and would rather be wrong together, than right individually. And it is individuals that read ZH and contribute. ZH would be too subversive for many, plus would lead to too much cognitive dissonance. As for playing their cards well, the Germans have been waiting for the periphery to collapse since 1999 when the Euro was introduced. They knew what it would do for their exports intrazone. But thats politics, not individual decision making. My comment above referred to individual German behaviour.
Germans are often wrong but NEVER in doubt. The invented the very essence of dogmatism.
I live in Germany and I can paraphrase a quoute I hear hier constantly, being a libertarian and provoking it a bit too.
"Without taxes and government there would be ANRACHY!, and we can't have that"
this is the German way of thinking, so forget the germans on this 1
I'm married to a German immigrant and have worked for a German company for a dozen years and have been to Germany over 45 times.
I don't think the Germans have their shit together any more than the Americans do. The taxation is retarded, the cost of living is outrageous, Germans hate their politicians as bad or worse than we do (along with epic skepticism, like the US) and have ENORMOUS national debt per capita.
Most Wessies I know are deeply pissed at the Ossies. They despise the welfare system and the people on it. They are chronic hypochondiacs due to the free health care system (which abused to hell and back).
The only thing Germans have 'going for them' is that they are the least sick in the infirmary that is Europe. I'm not sure that's a resounding affirmation of just how 'great' they are doing in the current environment.
Income Tax in Germany
total wage per year: 50.000,00 Euro minus the amount of the deductible health insurance+ 3.98% of the wage as deductible pension contributions: - 5.962,00 Euro minus fixed deductions related to the tax category 1: - 956,00 Euro remains as taxable income per year (lump sums deducted and rounded) : 43.082,00 Euro (income) tax for this amount per year : 10.142,00 Euro Wage Tax : 10.142,00 Euro Solidarity Surcharge : 557,81 Euro Sum of the Taxes 10.699,81 Euro 9.95% Obligatory Pension Scheme: 4.975,00 Euro 1.4% Unemployment Insurance: 700,00 Euro 7% Health Insurance (+ 0,9% from the Employee alown): 3.555,00 Euro 1.225% Disability Insurance: 551,25 Euro Sum of the Social Security Contributions 9.781,25 Euro Net Salary: 29.518,94 Euro
Slap a 21% VAT on everything else and you get the picture + the company pays another 10000 so the sum is 60000 net income 29.5 - indirect taxes = 70% taxation
"I don't think the Germans have their shit together any more than the Americans do."
Completely disagree with you there. We shall see...
Every country has it's problems. I will take DE's problems over the US's problems every day of the week and twice on sunday...
OMG, that was profound, and scientific to boot!
But hey, let's give you an even better second shot before even responding.
Jeff Lebowski
It is better to use Zero Hedge as two words...here:
http://www.google.com/trends?q=zero+hedge&ctab=0&geo=all&date=all&sort=0
Now Singapore is just behind the US. OK, who's using a proxy server in the Island state?
Why is Singapore the number one location? More hits frm Singapore than the USA? Is that a glitch?
When does this country wake up? If it's one person at a time we're fucked.
It doesn't. It promises to wake up. The people in the herd state are probably going to remain in the herd state. The people who are allowed to invididuate or just have a braveneness of charicter that allows them individuate are immediately tought that it's wrong to herd the people in the herd state. Because well they are already being herded. Just like it's not wrong to steal. It's just wrong to threaten the monopoly on stealing. It's not wrong to shepard it's just wrong to threaten the main shepards monopolies. If the wake up they'll look to the msm shepards for answers and they'll sound reasonable enough.
The people who have woken up will likely be put in a concentration camp for people who resistant to illusory spells. We'll be happy as shit there and have a great time. And when they say it's time to come back we should probably start blasting. Or just keep moving.
US$ Index pushing though resistance, confirming H&S bottom. Euro shows the converse. Gold looking shaky upon break of 1217. Oil heading to 70.
Of course everyone knows this, that's not the news. The news is suddenly some people feel they have no other out but to change their official opinion in the matter. Interesting.
truly hilarious how "surprised" by this info the CNBC folks are....
I guess this is no news now the general public knows this is going on, the rigged market media has to disclose it so as not to look like they are in collusion with the front runners.. No volume in the market as usual today.
I am talking when orders get pinged out to multiple trading venues, there is at least circumstancial evidence that there's quite widespread use of that information to front-run trades... That's fraud.
I have more than circumstantial evidence. I have proof. When I followed the paper trail of an order I put through there was proof (acknowledged) that this technique is not only employed but is itself a ruse to delay filling an order on terms favorable to the customer. An order can get routed through 5 exchanges. And even when an exchange doesn't route the order, they can delay their fill with no recourse.They just need to say they were "overwhelmed".
It provides critical cover for the HFT frontrunning shell game: If you receive an order from a customer at the NBBO, you can delay filling it by critical nanoseconds or as long as you require by simply putting it into an "order overflow" category which transfers the order to another exchange. That provides enough time to frontrun by switching the NBBO before the order can be filled at the original quoted NBBO. That's how your bids at the quoted offer don't get filled but instead the offer gets raised.
McCaughan was fairly circumspect considering the subject and yeah, Becky Squick was the tell with her "serious face" on...."wait a minute.... Are you suggesting that..." etc
Is that the genius of modern media, not to inform, but to verify public opinion?
Is that the genius of modern media, not to inform, but to verify public opinion?
Yes! Serving up mirrors, 28 billion at a time.
They have stolen from me. On my last buy, there was only a penny between the bid and ask, so I put in a market order; the price I got was ten cents higher, amounting to about $100 on the buy. I am fully aware that I was robbed by a criminal conspiracy, but I regard that as the cost of doing buisness with criminals. All retail investors should be aware that they will have some money stolen from them in each transaction and make their decisions accordingly.
Yo dog we heard you like winning so we put some losing in your winning so you can lose while you win. And when you lose you can lose even more because it's a monopoly. It's all or nothing. So let's get extreme and act all stupid.
http://www.youtube.com/watch?v=lBC-QwKRXdg
Shame on you for putting in a market order.
A market order clearly identifies you as a sucker and you will be duly fleeced.
You should be happy that it only cost you $100 to learn this lesson.
Be aware that you can't avoid the rip-off with limit orders. On those, they either won't execute or they will execute at the limit price even though the actual price is lower at the time of execution. You can actually get ripped off worse with these because there can be a long delay before execution.
Dr Evil's Virus stealing on the old pickpocket's diversion play. Meanwhile I'll take the middle card for $20 please.
Its a relief to listen to somebody with a Scottish accent that doesna crack his voice of flay off tha handle.
I remember ZH's Miles Kendig suggesting late last year to me and others here on ZH and in private that there might come a point in time when the members of the economic structure who while powerful, are not powerful enough to dictate policy (such as Bill Gross) and thus are being blown about in the wind and might rebel and force the system to change from the inside.
At the time I dismissed the idea after some thought as unworkable. I felt that those who have been captured by the system would never let go of the daily sugar pop they're fed. I'm not saying they're evil or corrupt, just conflicted and thus they'll never give up their seat at the head of the table (at their level) without someone else going first.
But as more and more PM's retire or "go dark" as Todd Harrison pointed out in his missive the other day (and which was guest posted here on ZH the other day) and those that remain are becoming more vocal, I'm revisiting Miles's idea. We all should.
http://www.zerohedge.com/article/guest-post-seeking-solutions-uncertain-world
Motive enough for HFTs to show their power by staging a flash crash?
Otherwise I would have bet it was the Fed checking out what panic looks like.
Perhaps the 'flash crash' was unintended consequences. The algos didn't want their 'order ping radar' to actually fill anything, but for some reason the market microstructure was vulnerable and it actually amounted to something.
HFT butterfly wings flapping and making a full-on Crash-icane, essentially.
Like any tool, the inventors don't know how far-reaching the effects can be. I don't condone any front-running by the high frequency gang, but it just could be that they didn't realize a yawning chasm would open up due in part to their combined activity.
My takeaway from HFT in general is be wary on low-volume days, that is where the HFT sharks are the thickest just below the surface.
What is odd though is that one house had a perfect 100% sell order ratio.
Unheard of.
I have to give Bubblevision credit; it was a solid interview when he was allowed to speak to the subject. Kudos to you guys for that discussion. And it is a real threat to the markets, Tyler has been warning for ages now that you can only execute these types of trading strategies for so long before the "Greater Sucker Theory" runs out of participants willing to be suckers.
Maybe I can help them explain the volatility we are seeing "for no apparent reason" - something called a topping process.
Frankly, anytime I see more than two faces on my CNBS screen, I hit the mute button.
Watched the guy in question live this morning on CNBS. I find it interesting that ZH is getting validated, albeit a few weeks behind what the readers here at ZH already know.
They concluded the interview with "fascinating stuff" which if I want to over-parse, is a way of acknowledging the comment, suggesting it might be possible, but still is a bit on the fringe. It's a nice way to say "I can't overtly disagree with you, but your viewpoint isn't in my worldview, so let's move on."
What did you expect? Rending of garments and tossing of ashes?
Can some1 tell me, if the forex market is less riged than stocks?
I know it's easy to mainpulate stocks or futures , but what about forex?
I've always figured that, because of its sheer size, the Forex markets can only be manipulated through direct, central bank actions.
Which they are.
I pulled everything out this morning. I can no longer create even a razor-thin case for staying in, at any level. I wonder whether the future holds any improvement.
If I had a boat, I'd go out on the ocean....
http://www.youtube.com/watch?v=B-_W18CWypE
Remember when ECNs were being touted as populist alternatives competing with the big boy exchanges? Well, friend, that was itself the biggest lie in the history of finance, and arguably the smartest and the most lucrative. It fed the whole dot com frenzy!
Just tell the sheeple what they want to hear: "Hey kids! We got ourselves a pirate hip hop rock n' roll stock trading system here! It runs on rebellion and you can beat the big boyz at their own game! It's not even about the money.....buuahaha"
Proliferating the trading pipes and tunnels just provided further dark cover for fraud. More shells to hide the pea under. And lots more in fees.
Next time we have a generation with some money, let's spin it to them that they can play the market as a video game with avatars, special effects, cool weapons and role playing.
Specialists are no better. They are crooks. I remember the days when my orders were routinely ignored on the NYSE. Then after I was raped they would offer to split the difference. Screw the NYSE and their specialist system. As bad as this electronic stuff can get, knowning some ahole is purposely sticking it to you because he has complete control is worse.
True, there is some comfort. But I'm saying that's part of the new scam: make people "feel" it's more honest, even though it ain't. People feel more comfortable with an "electronic system", but the ruses are the same.
ECN's came in as a result of electronic trading, but also as a result of switching to the decimal system. So specialists could still cheat you but they needed to become more devious.
A giant step would be one simple rule:
Every quoted price on any exhange must stand for 5 seconds.
It'll never happen, though. Would pull the rug out from under the algos.
ZackAttack,
Spot on.
Mind, given the figures quoted by Nanex of 10,000 (and more) quotes per second even making a quote stand for 1/2 a second would see a dramatic change.
DavidC
Too bad the rest of the stuff they said was totally bullshit: "The economy is looking good, earnings are good"... Well hell, they're long only so wtf.
Spot on.
These guys are wired to not tell the truth for longer than a few minutes. Yeah baby, all three Jim's agree, the economy is getting better. Buy, buy, buy before you miss the boat and stay long. Utter crap.
And so another bunch of poor unknowing sheep are lured into the giant ponzi scheme casino...
Almost all of my ITM or NTM puts are getting fucking hammered today.
What the fuck is that all about?
Suggesting that the recovery is moving ahead and that we're in what could be called a "soft spot" is nothing more than complacent denial.
There is just so much shite
COLOCATION
http://williambanzai7.blogspot.com/2010/08/market-colocation.html
Hey, that's some scary shit...I mean, on the very day I told Jesus that the Dude runs a co-location on the ZH compound. I mean, what are the odds ... I'm getting this weird feeling that I might be a frontrunning HFT Bot.
by LMAOon Mon, 08/23/2010 - 11:56
#537195
Skynet has caught shorts in a trap. Time for short covering. Countdown 10,9,8,7,6,5,4,3,2,1...Lift off ! :=)
It's pretty fucking obvious that there is no way in hell they are going to allow a negative close today. They continue to jab it with a sharp stick every time is meanders into negative territory.
This shit is so fucking old now...unbelievable garbage and, of course, with vapors for volume.
Boilermaker,
Market was down (on my charts) Wednesday, Thursday and Friday. It's showing oversold so we could have a move higher short term (this is not trading advice and I've been wrong before!).
When we had the BIG move own in 2008 some of the biggest daily moves were UP (for whatever reasons).
It's going to be interesting in the run up to the mid-terms.
DavidC
This has been going on as long as we have been trading electronically. It used to be mis-representing you order via "advertising" 100 shares bid shown when you are trying to bid 50,000 shares. That type of activity was approved by all the "regulators", everything else that followed was due to lack of regulator understanding, or not caring!
I was playing golf when the "flash crash" occurred but, I did own some vxz with a trailing stop of five points. During the flash crash vxz went from ninety something to $395.00 and then back to the nineties. (Check out the chart.) So, was I stopped out at $390.00? We all know the answer to that one. You have a better chance playing craps in Vegas.
Yep - same thing over here at DKM.
I pulled the plug this morning on all of the "market neutral pairs models" we were running as the returns on them for the last five weeks have gone to (-3.7%).
The "frontrunning" and "sub-pennying" that we were running into EVEN ON LESS FREQUENTLY TRADED ISSUES just made the whole thing uneconomic.
There was some objection on the part of the "Senior Partners" but I spent the whole weekend detailing all the negatives.
Basic "support and resistance" is still working but we have to watch spreads constantly where as previously we could almost autopilot these things.
So, we're going to quit taking new $$$ and refund investors cash as their anniversary dates come up until further notice.
And I was going to start interviewing some trader trainees next month too.
Updated S&P500 chart:
http://stockmarket618.wordpress.com
Thanks for such a great post and the review, I am totally impressed! Keep stuff like this coming!...
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