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SEC Exposes HFT Churning, Or How 27,000 Trades Result In 200 Buys
The SEC's entire worthless report, which is nothing but a failed attempt to distract the general public from the fact that the primary reason for the collapse on May 6 is HFT... and the SEC itself, of course, for having allowed HFT's encroachment to the current levels of market dominance, does probably the best job we have seen of exposing High Frequency Trading for the hollow stock churning operation it is. From the report: "Still lacking sufficient demand from fundamental buyers or cross-market arbitrageurs, HFTs began to quickly buy and then resell contracts to each other – generating a “hot-potato” volume effect as the same positions were rapidly passed back and forth. Between 2:45:13 and 2:45:27, HFTs traded over 27,000 contracts, which accounted for about 49 percent of the total trading volume, while buying only about 200 additional contracts net." In other words, the ratio of "volume" to actual liquidity was about 135 to 1. In other words, all HFT does, is provide volume, and actually take away liquidity as HFT's illegal sub-pennying practices pull limit bids and offers that otherwise would exist. It is time to pull the bloody plug on all the computers already.
For all those who look at the market volume each and every day and believe that high volume is equivalent to liquidity, and thus stability, you are all in for a rude surprise then next time some fund decides to trade on an algorithm that is actually perfectly normal, but suckers in the HFT piranhas to jump in a frenzy of forward feedback loops and bring true liquidity to a halt.
And here is Themis Trading's Initial response to the Flash Crash:
Today the staffs of the CFTC and SEC issued their report, “Findings Regarding the Market Events of May 6, 2010,” [1]
to the Joint Advisory Committee on Emerging Regulatory Issues. We want
to commend the CFTC and SEC staffs for their work in dissecting the
events of that day.
Our initial takeaways:
- While we believed the report would include a beefy section outlining
how regulators will fix market structure weaknesses, the report appears
to be a first step, and as such, is only an analysis of the events of
May 6th. - There were two crises in liquidity on May 6th. The first started in the E-Mini futures, and the second was the spillover into the equity markets.
- The crisis in the futures markets started with a large sell order
that was executed by an algorithm, which accelerated selling by design
as liquidity and bids diminished. It continued and accelerated to the
downside as HFT firms, who originally supplied liquidity by buying,
turned around and became net sellers in a game of “hot potato.” - The crisis spilled over into equities, as HFT intra-market arbitrageurs laid off risks in ETFs and the equity markets.
- In the equity markets, HFT market makers, who typically internalize
order flow, reversed that pattern and instead routed nearly all, if not
all, equity orders to the public system, rather than take the risk
internalizing. - Differences in data feed speeds between the public tape and the
co-located tapes exacerbated the issues and created a cycle of selling
downwards. - Differences in halt/slow-down practices between exchanges also
exacerbated the decline, as many market makers shut down due to the
uncertainties surrounding:
- The tape speed delays.
- The lack of clarity on whether trades would be broken, and which ones.
8. The SEC is intent on the first line of defense being the circuit
breaker program, perhaps modified with limit up/limit down collars.
9. The staffs also go out of their way to state that “fair and
orderly markets” require a standard for robust, accessible, and timely
market data. Going forward an area of focus will likely be market
centers’ data processes, especially those involving publishing trades
and quotes to the public consolidated feeds.
10. We had anticipated in our most recent white paper released last
week that the core of any fixes would be coordinated circuit breakers
with a limit up/limit down feature, and that is in fact where the staffs
are leaning in this report.
11. We see no mention at all of order cancellation fees, or
addressing the validity of rebate maker/taker model, or fiduciary
language, and that indeed leaves us all something to strive for in
making our markets the fairest, most robust, and the envy of the world
again.
We believe that with their actions, the SEC and CFTC has signaled a
realization that certain regulations enacted over the past decade may
have had some serious unintended consequences.
We encourage the SEC to go further with their reforms in order to
restore our equity markets to their principal purpose of helping
companies raise capital. These will also protect investors and the
public interest in connection with market trading activity.
Maintaining the integrity of this market is of the utmost importance
to Themis Trading. Our current market structure has unnerved
traditional long term institutional and retail investors who are at the
core of a fair and balanced market.
As the SEC stated goal says, “Where the interests of long-term
investors and short-term professional traders diverge, the Commission
repeatedly has emphasized that its duty is to uphold the interests of
long-term investors.”
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Pull the plug, I couldn't agree more. The fascists will look the other way though.
Farcists.
Tyyyyyylr you're forgetting that without HFT and the SLP the markets will crash due to lack of volume. And the PPT doesn't like that.
Ahhh, the parasite is keeping the host alive. The movie "Alien" comes to mind. The next part of the story gets kind of ugly. Not looking forward to that.
Could fix this by putting a captcha on each trade?
LOL
The most original idea to "fix" the HFT problem that I've read in months.
I immediately thought of the thousands of (minimum wage) jobs that could be created with the addition of a simple captcha IF it's in the "wavy" form that's unreadable by machines. Think of all the people (with calculators) trying to keep up with the HFT computers. Or should I say slowing down the computers? :>)
Yep, Captcha on each trade is the simple yet 100% guaranteed cure to rid all markets of this pack of insane criminals.
Can a million indian call centre workers solve captchas quicker than HFT can trade?
This is their whole game. When volume disappears they step in and the big banks trade the same 10k shares to one another on baby volume to mark up prices.
Merrill buys 10k BAC at 13.30
JPM buys it from them at 13.31
GS buys it's from JPM at 13.32
Merill buys the same 10k shares at 13.33
Rinse repeat and after 5 days of low volume mark ups it ll gies away in an hour of trading the moment a sucker steps in the buy or sell on actual volume.
All these prices are false.
And that's a specific violation of SEC10b-5:
Meh, that's just words on paper. If they meant anything, we'd never arrived where we are today.
Those rules are for you and I. Not for the insiders. The skids are greased nicely.
John, I think you could be right. What you describe is the "internalized market" mentioned above in #5, whereas the "public market" is the REAL market, and is almost nonexistent at this point. The "internallized market" is slowly offloading all it can to any "sucker" that steps up to the "public market".
Could this actually be happening?
Once again I am nowhere near the level of sophistication most have on here regarding finance since I have never worked a desk and am still a student but we watch it every single day. If these banks are being protected together by the Fed well than Insider trading does not apply to them and they all have a Gentlemans agreement amongst themselves.
Four of us here if we are the only ones in the market can pretend there is an unending supply of buyers who keep raising their bid but it is the same shares over and over and over and over. When you have all the wealth that remains, a line to the Fed and Uncle money bags backstopping you what is the risk?
3 choices:
1-Let all the crazy executions stand
2-Return to 1/8s and 1/4s
3-Ban algorithmic trading
So where is the online conversion of reported volume to real volume? I suppose it's $75,000 for a look at that too.
Suck it in, buddy. Civilization would have ended.
i was thinking that SEC would blame Al-Qaeda....sophisticated software running on servers in caves, capable of destroying our way of life ( stock market)
W Bush would have, don't be so sure that there aren't Speak-n-Spells in Saudi Al-Qaedastan
So in the report, they admit that HFT gives only an illusion of liquidity. This is getting great.
This article made me go back to a classic moment in ZH, Tyler on Bloomberg's Taking Stock with Pimm..for old time's sake: http://media.bloomberg.com/bb/avfile/Markets/Analyst_Calls/vrT.qGWIoYPk.mp3
The illusion of liquidity and healthy market. Doesn't feel much different for the little guy. The bigger players just need to stay in line and avoid those little buggy parts of the system wherein specific algo feeds send the HFT 'puters into an infinite loop!
No matter what the truth is here, the SEC just helped put another nail in the coffin. 22nd weekly outflow coming up!
Fools always ALWAYS trip themselves up in their own documents. Lies and deceit can not hold together under examination because only truth remains. In this case, absolute mathematical truth.
SEC = !!!!!!!
It is really ok at this point, but in the bowels of the netherworld there is a nice place getting toasty.
El Hots'Foot!
Luckily for the SEC, the MSM sound-byters only dwell on the large font headlines, with the exception of Erin Burnett looking for silver linings.
Gosh, The HFT wizards are computer geeks with human controls. Human meaning, mistakes will happen, and we see it happen daily almost with blowups on the ALGO gun slingers, and with that, they shall and have burdened the system for all to see, but the SEC. Hey, HFT geeks, I won't say anything either for a fee. Just kidding, I hope you bastards burn in hell for the mess you have created and the grandest flash crash of the future just around the corner. God have mercy on your souls. God will have an answer for you and you won't like it one bit. You make hard working peoples' life hell, and I am sure God will make your life hell eventually. I can only pray for retribution. Don't worry, I pray for it every single day. The more damage you do, the more I pray, and God will answer prayers. In God I trust, HFT's abusers can kiss my ass....
BINGO! This is exactly what I said on my post on the W&R SEC blame thread.
W&R was trying to ACTUALLY sell /es contracts and exposed the truth - there WERE NO REAL SIZE BUYERS at bid!
There is ONLY algo fluff between the current quote and where we crashed to. Where we crashed to represents the place at which there are any legitimate size buyers.
And, the nature of this futures beast (implied correlation near 1) means that every goddamned stock goes down with the ship. You'll see gold-plated pipeline MLPs yielding 15% and shit. I scored some coal LP shares during that flash on a stink bid.
In reality, shit like SPG should crash 50%, 60%, probably 100%, the entire IYR complex should implode while a long-lived royalty trust paying a steady dividend should not move. But with correlation near 1, they all shit the bed the same. Welcome to hell.
And that is why even P&G traded down to 44.00 instantly
There are NO BUYERS just fluff as you put it.
eventually, one would expect yields to normalize, but in a historical sense, P&G's div is pathetic.
Weren't we always taught the only reason to own a stock is for the dividend? The wall street machine has been so decimated by retail brokers and the loss of commisions they had to get Glass Steagall reppealed so that they could turn paper into gold by securitzing everything that moved. The shark always looking for yield. Ben has killed the yields in Treasuries, sovereign debt is imploding, municipal certainly on the horizon .
Now stocks have become their last resort and when that blew up in they turned to the only thing that remained...Trading debt for cash from the Fed and fake accounting rules. What has emerged is some zombie market forever poisoned but still the stock market is all the got and eventually this Thing will die as well
"I say we blow the fuckers up" (Booger- Revenge of the nerds)
The SEC report is pathetic.
It is like blaming the broken camel's back on the last straw that happened to fall on top of the powerful beast.
Nevermind the many, many bales of hay that were already on the camel.
A camel can comfortably carry 330lbs, and up to 990lbs maximum.
Let's just focus on that one, little, feather-weight straw that fell on last, on top of the incredible weight already put on.
PATHETIC!
I've said before volume in today's market is worse than meaningless, it's harmfully misleading.
Very Disapointed but no supprised. They did the same thing with Naked Shorting. The SHO list was a joke. Companies were only supposed to be on the list for 3 days but some companies were on the list for 3 years.
Yet, I think the Majority of the Street were disapointed also. They cannot make money in this Market. Most traders have to get a greater spread than 1 cents or .0101 cents to survive. That is how the HFT's are taking out all of the Traders from the Market as no one can make a living Trading Stocks anymore.
Yep, time to get out of the Market and stay out forever. Leave it to the Crooks to sort out. Keep your Money from being GS's Traders 24 Billion in Bonuses.
I think things should just run the course. If people haven't gotten out of the market since the last crash then they never will. If people fear trading on the market because of computers, then so be it, other forms of stock exchange might arise.
Regardless, in a recessionary economy, the market should eventually begin trending downward....
Pull the plug, and all of the lights will go out. They know this. HFT is the only set of hooks holding the curtain up.
I long for the days of, once again, trading with you my brothers and sisters.
High Frequency Trading Trend Injection Attack:
http://revolutionnot.com/2010/10/01/high-frequency-trading-trend-injecti...
Updated GOLD monthly chart:
http://stockmarket618.wordpress.com
The HFT argument may be valid, but sub-pennying complaint is just nonsense! Using the same logic, you'd still be complaining at people who use penny increment as opposed to 1/16. How dare those fkers use penny increments! that's illegal!
So if you pull the plug on machines, do we go back to using people who don't use machines? Yes please, I would love that.
Here's a rule: If it can't pass a Turing Test, whack it.
(maybe something along the lines of, "You are in the desert and you see a tortoise lying on it's back...")
The poker sites use bot detectors that are more sophisticated than the algo trade bots. The real danger to ibanks is that with fully automated trading, 4chan will dominate the market. They already replaced Rahm Emmanuel with that guy who loves cats. It has begun.
google finance doesn't seem to show anyone trading under the symbol "PWN" yet.
A really stupid question (from a dumb engineer): has anyone ever thought about the mathematical stability of HFT systems? I do not mean a single system, but multiple systems working with each other. I have a nasty hunch that given the right kind of excitation the "Flash Crash" could be recreated anytime simply because automated trading systems are nothing but amplifiers: they "follow" the market, so once a move exceeding critical parameters is initiated the system becomes self-exciting and crashes (a sort of resonance if you will).