This page has been archived and commenting is disabled.
SEC Report On May 6 Meltdown Discusses HFT, Has Not One Mention Of The NYSE's "Supplementary Liquidity Providers"
The SEC has released its Preliminary Findings Regarding the Market Events of May 6, 2010, which find nothing, and just bring the promise of further investigations. The to-date proposed solution to the problem is laughable - more curbs, which do nothing to address the underlying issues at hand, which are that the modern version of market makers, HFT algos, pull liquidity away on a whim, and which can destabilize the market in an instant once "momentum ignition" strategies take over. As we have speculated, the SEC will find nothing material until such time as the next flash crash wipes out not 10% but puts the market into indefinite hibernation. One thing the report does do is provide an extensive analysis of High Frequency Traders, a concept that was barely known as recently as a year ago.
High Frequency Traders
Highly automated trading systems have helped enable a business model for a new type of professional liquidity provider that is distinct from the more traditional exchange specialist and over-the-counter (“OTC”) market maker. In particular, proprietary traders now use high speed systems by submitting large numbers of orders that can result in more than 1 million trades per day by a single firm. These proprietary traders often are labeled as engaging in high-frequency trading (“HFT”), though the term does not have a settled definition and may encompass a variety of strategies in addition to passive market making.
HFT traders can be organized in a variety of ways, including as a proprietary trading firm (which may or may not be a registered broker-dealer and member of FINRA), as the proprietary trading desk of a multi-service broker-dealer, or as a hedge fund (all of which are referred to hereinafter collectively as a “proprietary firm”). Other characteristics often attributed to proprietary firms engaged in HFT are: (1) the use of extraordinarily high-speed and sophisticated computer programs for generating, routing, and executing orders; (2) use of co-location services and individual data feeds offered by exchanges and others to minimize network and other types of latencies; (3) very short time-frames for establishing and liquidating positions; (4) the submission of numerous orders that are cancelled shortly after submission; and (5) ending the trading day in as close to a flat position as possible (that is, not carrying significant, unhedged positions over-night). Given the competitive pressures to maximize their speed of trading, HFT firms typically will attempt to streamline the code for their trading algorithms. However, every check and filter in that code reduces its speed, creating a tension.
HFT is one of the most significant market structure developments in recent years. Estimates of HFT volume in the equity markets vary widely, though they often are 50 percent of total volume or higher. By any measure, HFT is a dominant component of the current market structure and is likely to affect nearly all aspects of its performance. In addition, though the term HFT implies a large volume of trades, some of the concerns that have been raised about particular strategies used by proprietary firms do not necessarily involve a large number of trades. Indeed, any particular proprietary firm may simultaneously be employing many different strategies, some of which generate a large number of trades and some that do not. Conceivably, some of these strategies – for example, if they dampen short-term volatility or promote efficient pricing by narrowing spreads – may benefit market quality and long-term investors and others could be harmful.
What is hilarious is that the SEC, as demonstrated by footnote 88, gets its information from Jonathan Spicer of Reuters and Scott Patterson of the WSJ: See, e.g., Jonathan Spicer and Herbert Lash, Who’s Afraid of High-Frequency Trading?, Reuters.com, December 2, 2009 (available at http://www.reuters.com/article/idUSN173583920091202) (“High-frequency trading now accounts for 60 percent of total U.S. equity volume, and is spreading overseas and into other markets.”); Scott Patterson and Geoffrey Rogow, What’s Behind High-Frequency Trading, Wall Street Journal, August 1, 2009 (“High frequency trading now accounts for more than half of all stock-trading volume in the U.S.”).
One thing that there is no mention of anywhere in the report, is the NYSE contraption known as Supplementary Liquidity Provider, a program created to give Goldman dominance over the DMM-parallel liquidity rebate system at the NYSE. One would think that the SEC would be aware of this program that was supposed to expire in early 2009, yet continues to be extended and provides Goldman and Getco with, arguably, unprecedented forward-looking information on order flow.
»
- 6195 reads
- Printer-friendly version
- Send to friend
- advertisements -
Because who in their right minds would want to tell first cousins that they're not allowed to sleep with eachother?
Those of us not from West Virginia
Did they mention the constant downloading of torrents (p0rn) at the office?
dude, you need to change your icon cause it keeps fooling me into thinking you are wanger! I generally enjoy your comments but I think I am skipping some of them thinking they are from you know who.
Yes..i thought of that also but I aint giving in to that wanker in any way.
Well at least they are consistent in their refusal to investigate and produce results. Thanks SEC for wasting more taxpayers money and catering to the financial institutions. Go catch those big fish like Cuban and Martha. You rival the corrupt politicians in hypocrisy.
Mr. President... the SEC has been compromised it appears...
Obama is a bigger farce than the SEC.
Ah, yes.
That would be the same SEC that couldn't find Madoff's scam for ten years even though Harry Markopolous spoon-fed them the details.
Yes of course. It all makes sense.
Rule number one in the insane asylum. When discussing the problem, one never discusses the problem.
Customer Service's first job is to handle the customer, not "the problem".
Appendix a-14. Where were the DMM and LRP's on May 06?
Liquidity Replenishment Points
:
NYSE utilizes a hybrid floor/electronic trading model, unlike most other markets today which are fully electronic. In attempting to meld the traditional open-outcry floor-based auction model with today’s technology, NYSE’s trading system utilizes what are known as "liquidity replenishment points" ("LRPs").96 LRPs are best thought of as a "speed bump" and are intended to dampen volatility in a given stock by temporarily converting from an automated market to a manual auction market when a price movement of sufficient size is reached. In such a case, trading on NYSE in that stock will "go slow" and pause for a time period to allow the Designated Market Maker to solicit additional liquidity before returning to an automated market. This "speed bump" occurs even when there may be additional interest on NYSE’s book beyond the LRP price point.LRPs are calculated by NYSE automatically throughout the trading day. Specifically, the LRP is calculated upon the opening trade of the day in the security or, if there is no opening trade, on the opening quote, and is recalculated (i) every 30 seconds thereafter based on the last sale; (ii) after a manual trade by the DMM; (iii) when automatic executions resume after an LRP is reached; and (iv) upon the first sale or quote after automatic executions resume following an LRP. The precise LRP value varies according to the security’s share price and average daily volume within specified ranges. LRPs are calculated by adding or subtracting the LRP value to the last sale price or quote as appropriate on the exchange in the relevant security.
:
97
When an incoming order on the NYSE would result in an execution [at or] outside an LRP or the stock is quoted outside an LRP, automatic executions in the security are suspended on that side of the market. In addition, NYSE will suspend automated quotations in the security, and will identify its quote on the consolidated tape with a "non-firm" indicator. This is referred to as a "slow market" or "going slow" in the security. NYSE will resume automated quotations and automatic executions as soon as possible after an LRP is reached, once the DMM manually determines the reopening price. In many cases, this occurs in a fraction of a second, but when the market is particularly volatile, it can take a minute or more. Upon resumption of automatic executions, a new LRP is calculated for the security. On days of major market volatility, stocks with significant and continual declines may cause NYSE trading to remain in the "go slow" mode for extended periods or to intermittently return to automated execution status before quickly again hitting another LRP and thereby "going slow" again.
LRPs pretty much worked. But the algos were hunting for bids, not just NYSE bids. The ATSs don't need to follow NYSE rules.
Let's go back a couple of weeks and try to remember those stock tickers that we at the heart of this "flash"
meltdown.
PG and ACN.
Hmmm... these aren't NASDAQ listed. They're NYSE listed.
Did anyone bother to measure the degree to which these two stocks were traded by Goldman and Getco... up to the point of bid collapse? If it was 10%-15%, no problem. It was probably well north of that.
Tyler is right the highlight the NYSE Supplemental Liquidity Provider Program in this instance. The stated purpose of this program is to provide essential liquidity to the markets-- and we got a real test of that this month. The result here is not just "fail", but "major fail".
One would think that in such an instance, the NYSE should have frozen the program-- THEN launch a thorough investigation to determine the source of the problem. The exchange has operated over 100 years without SLP, where's the harm in halting the program for a week or two?
Well... that when investors should wonder whether there are more sinister forces at work. The SEC is asleep at the wheel-- perhaps because they are incented to sleep at the wheel.
NYSE worked. Orders sent for NYSE execution were not routed out and filled somewhere else, they went into the auctions. PG fills in question were not filled at NYSE. I don't have Bloomberg in front of me right now, but you can call up the trades & quotes and find the fills.
Thanks for the insight...
Pat, given my recollection of events, the NYSE worked up the point where the NYSE "went slow"... so you are certainly correct from that standpoint. I will certainly concede that point.
But that is exactly where the process started breaking down. I guess at issue is whether the NYSE should shoulder some responsbility for essentially encouraging the dominant HFT algos to go "full bore" with its volume rebates-- only to hide behind the shadows when things "go slow" and the algos are left searching the next bid.
You'd think at the very least, there'd be some corrdination here. Any thought of requiring the SLP players to stay "on exchange" as part of the deal... you know, since it's a duopoly?
151 pages of nothing.
SEC report = flash trash.
Next week's report: Newsflash! How Wall Street can smash your cash to ash with a whiplash flash crash.
Balderdash!
excuse me, but let's keep in mind that the report was probably sent over to Goldman for edits and approvals before issued to the public.
Wait. You're giving the SEC a bit too much credit here. I'm guessing Golman wrote it for the SEC, who then put their rubber (ducky) stamp on it, threw a few drops of Hopey water on it and bada-bing, 100+worthless pages from what used to be a beautiful living tree.
I don't mean to sound like a tree-hugger, but geez, with all these enormous bills coming out via congress and the regulatory agencies it's no wonder timber prices have been soaring!
You can't see The Matrix if you're plugged into it.
The SEC guys simply view HFT antics as normal. Self-referential algos, derivatives of derivatives, all normal.
In the final phase before the Matrix crash, the machines will carry HFT trading algos to the inescapable conclusion: they'll re-discover the Heisenberg Uncertainty Principle, figure out that you can't simultaneously set AND discover equity prices, and meltdown in an ever higher-frequency self-reinforcing loop. The End!
Posted this late last night on another thread, but can't resist re-posting. Was watching "Wall Street" last night and Gordon Gekko's birthday is May 6th. Money never sleeps.
Gordon Gekko's birthday is May 6th. Money never sleeps.
+1
Market will now attempt to test the SEC solution.
Kleptomaniacs. This is a dyslexic fx-trader's dream scenario
Maybe if it had a different name it would get more SEC attention? The Repo'd Asset Notional or Instant Providers Operational Rebate Network, aka TRANIPORN.
I want to make this absolutely clear:
Every single equity order (whether it be a mkt or limit) is being front run.
This is unfortunately true.
Does any investor need millisecond liquidity?
Govt is pushing transaction tax because they are jealous that Goldman already has one. Keepin up w/ the jones and blankfeins.
HFT is here to stay unless it unambiguously creates an enormous crash. How can any politician be critical of a parasite that creates the illusion of liquidity and lower volatility? No HFT = no meltup = higher volatility = angry Joe Retail pulls more money out of the casino. All bad things. Learn to profit from HFT and prosper.
is there a "setting up HFT for Dummies" book yet? If I can't beatem I'd rather join'em.