Responses To Proposed Dark Pool Regulation

Tyler Durden's picture

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buzzsaw99's picture

It is the SEC’s mission to protect long-term investors, who care about the valuations of the underlying companies, not those who quest for trading profits achieved in milliseconds... 

Bullshit! The job of the SEC is to hold down the pension funds while GS et al repeatedly rape them.

peterpeter's picture

> As a Commission staffer said at today’s meeting in response to a Commissioner’s question:  spreads have narrowed, but prices quickly move back and forth, and high-speed professional investors are better able than retail investors to take advantage of those price impacts.

Narrow spreads and faster changing prices go hand and hand.

Prices move more quickly now because the unit of change is a penny rather than a 1/16th...  This isn't rocket science, and to the extent that price movements are as a result of finer pricing granularity and their corresponding smaller spreads, retail investors are the biggest winners... and anyone who doesn't recognize this was likely not trading much in the pre-decimalization days.

Of course the professional investors are better able to take advantage of price swings than retail investors - they always have been and always will be.  They are by definition professionally involved in following equity prices and unwilling to overpay for shares by pennies as frequently as retail (and why is that wrong???  a doctor is better equipped to make a medical diagnosis, a professional trader is better equipped to make a fairly priced trade).

However, a retail investor overpaying 1 cent per share 90% of the time (due to HF market making and predatory strategies) is certainly an improvement over overpaying 1/16th per share 50% of the time....

> It is the SEC’s mission to protect long-term investors, who care about the valuations of the underlying companies, not those who quest for trading profits achieved in milliseconds. 

There are always going to be trading entities that facilitate trading for a profit.  Without market makers of the electronic or human variety, equity markets would have far less capital in them, much less liquidity, wider spreads and much less public confidence.

Someone is going to make a market for equities and capture the spread.  In the past, that was done by humans - and now it is done by computers.  The computers are far better at this work than the humans, and can therefore make a profit on much slimmer margins (spreads).

If the computers were magically shutdown - the average retail investor would most certainly pay more in spread to a human market maker... and I continue to be amazed that most of the folks here (who are not out of work floor traders and specialists) think that would be a good thing.

Yes - I know it is a matter of moments before CB calls me a troll... but I just don't understand what you are all thinking.  How does retail benefit from shutting down HFT?

Markets are not "fair" in that the smartest and best equipped always have and always will win... and yet there is a mob out to turn off the machines that have been responsible for making trading costs lower today than they have ever been in history (as measured in real commissions, fees and spreads).


Veteran's picture

That cross sure gets heavy to bear, doesn't it

Anonymous's picture

You said recently that you are a software engineer. Trading is intuitive . Computer programming for profits isn't. Get off your high horse. Markets are about psychology not granular statistics.

Anonymous's picture

Yes, of course markets are about psychology. That doesn't mean that statistics can't be used to predict market behavior.

Human beings are very predictable. That's why computers and statistics work so well in markets.
And that's why software engineers are so valuable to hedge funds, banks, etc..

So I think he's very secure in that saddle. :-)

Anonymous's picture

I think that your claim regarding how well computers statistics work in the marketplace will be discredited
. Investing and trading has always been an art and no amount of mathletes and computer horsepower will change that.
I believe that the great Jim Simons himself has described his world as a "crowded space " . There is no edge left in software engineering. Intuition is a human quality. Try as you may, you can't distill it into code. I realize that runs counter to what you have been taught to believe , but then again I suppose your model has already predicted my response.

Anonymous's picture

I have watched this Peter dude cry about anything that is shutting down his little algo program that puts food on his table at night way to many times. Due to the program/computer/algo/quant/rocket science/physics/mathematical genius "market makers" these markets have turned to utter absolute trash. I trade professionally for a living. I used to trade Nasdaq and now trade FX. No one trades anymore, no one. Every single day, the exact same people hit and lift me all day long. You know who they are? They are hedge funds (quant geniuses) that are using either RBS, JPM, MS, Citi, etc. etc. etc. I will do 5 trades in a row with JPBL, DEDT, CITV, etc. Its all trash, and when the market actually does do something when liquidity is needed, all those pikers aren't even there. You know why every single asset class moves in lock step together, because that is the only way the MIT physicist makes their money. They developed the program that said if the dollar goes down, every single time spoos go bid and commodities get taken. My dad got a masters in physics from MIT, I understand what all of these people think like, I have dealt with it my whole entire life. The only thing that these people have done is say that this is the way it is. They have huge unbelievable amounts of money doing all the same things, and have literally totally taken the human being out of it totally. If you do not stop this absolute nonsense, not only will you lose untold hundreds of thousands of jobs, but you will literally make approx. a handful of people so wealthy it is beyond imagination. If you want that, keep crying for it, if you don't then come over to a cleaner side that wants a fair playground for all. Also, I don't want to hear how it doesn't affect you, how in any market your algo still pounds out 5 a day. In the end, the only winners will be the largest ones.

Anonymous's picture

You seem to be confused - You say that you know exactly how these algos work - ok, then making money shouldn't be a problem for you if they are so predictable.
I seriously doubt that you "trade professionally for a living" - your whining exposes your lie.

Anonymous's picture

This is a straw man. If the retail investor is "overpaying 1 cent per share 90% of the time (due to HF market making..." then I agree. But if the retail investor overpays by 50 or 100 basis points as stocks oscillate throughout the day when market makers reliquify in one direction or another - without price or size continuity obligations - then the retail investor is getting clipped.

It's important for everyone to understand that HF market makers add liquidity moment-to-moment, and only when they want to. Since they finish flat at the end of the day, they don't add any liquidity day-to-day. Intraday, they can easily demand as much liquidity as they provide, depending on when and how they rebalance, and without constraints on their rebalancing activity "prices quickly move back and forth."

Anonymous's picture

The rebate model is a failure. The economic incentive to make markets must be restored. Transaction speeds beyond the physical limits of human comprehension must be made illegal. Any entity wishing to participate as a market maker must have an obligation to make markets and post trade worthy liquidity. Risk taking, capital commitment and displayed interest must be rewarded. HFT must meet the same standards of scrutiny as old fashioned order flow. Public securities must trade on public markets.

Ruth's picture

ok, I'm not in your 'trading' profession, but just think how AI affected AUS systems, approving everything that breathed and abled the pigs to skim and scam everything that moved.  Not exactly what I wanted to say, but you get the picture.  We thought the same thing too when things got out of control in underwriting mortgages, now look where we are.

I'm glad there are still live brains we can count on to think through the processes to make it safer for everyone....just too bad they're all here at ZH.  I heard Washington is hiring.

Anonymous's picture

to anonymous who said I don't trade for a living??? What, you think that JPBL is hitting me on my ameritrade account??? Are you really serious??? Also, I am not whining about anything. I am telling Peter the genius to quit the crying about the backlash on trash program trading. You are correct, I don't trade algo, and I don't care to, literally ever. If you don't think that I have enough ability to correlate trash against trash, then my friend, you are mistaken. For some unknown strange reason, these unbelievably smart geniuses have decided that things can only work their way. Just amazing.

Zippyin Annapolis's picture

Why don't we just pass a law mandating that every order be on a Central Limit Order Book (CLOB) and mandate an auction every 15 minutes?

We Can call it the Mary/ Duncan CLOB. 

That way no one has an advantage. Very Fair no?

Anonymous's picture

discretionary traders underperform systematic traders. screen trading is very inefficient. dark pools are a good complement to limit order books. please don't ban them. that's not a free market and you know it.

please ban the "trading psychology" chapters from every retail trading book. replace it with more on math and software engineering. then you can all design your own market mechanisms to compete with dark pools and stop complaining.

Anonymous's picture

How can you say dark pools complement limit order books when there is no displayed interest ?

Anonymous's picture

As an aside, how did your models hold up last year ? You think psychology is worthless. I think the same can be said for your math and software. The arms race we have witnessed over the last few years has produced a marketplace where people have built their business on the basis of a perceived edge measured in milliseconds. This regulatory loop hole is now closing . So long mathletes !