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Themis' Take: May 6, 2010 – The Day That Will Change Market Structure
May 6 market commentary from our friends at Themis Trading
May 6, 2010 – The day that will change market structure
Today’s action left us amazed, and we have been warning about this stuff since December 2008. Where do we even start? Yesterday afternoon and evening all the business programming focused on how the markets were in turmoil, and Greece this, and overdue correction that, and fat finger the other thing. They couldn’t even recognize the story, as even the business media doesn’t understand that the markets are a changed structure and beast. The story is not a key-punch error. The story is a failed market structure. The market failed today.
The market melted down and “liquidity providers” quickly pulled all bids. According to today’s Wall Street Journal, high frequency firm, Tradebot, closed down its computer systems completely, as did New Jersey’s own Tradeworx, who was so critical of our silly market structure comments in their SEC comment letter. By the way, if you don’t know who or what Tradebot is, it is the proprietary trading engine that used to be part of the BATS exchange. In fact the reason BATS was rolled out as an exchange to begin with was to lower costs and facilitate trades for Tradebot (Tradebot’s 1251 NW Briarcliff Pkwy Kansas City address is next door to BATS’s North Mulberry Drive address fyi). In the WSJ article Mr. Cummings said his Tradebot system was designed to stop trading when the market becomes too volatile, because he “doesn’t want to compound the problem.” Too bad he doesn’t understand that that was and is the problem. To make matters worse, while some high frequency firms shut down yesterday and pulled their bids, as we warned they would do for over a year and a half, other high frequency firms turned from being liquidity providers to liquidity demanders, as they turned around and indiscriminately hit bids like Randolph and Mortimer Duke.
We are just plain outraged, and think every investor and market participant in the USA should share this outrage. They were sold a lie. How many times over the last year have we all heard that HFT liquidity was a blessing that lowered costs and helped investors, and that it would be there in stressful markets just like the market makers and specialists they replaced were there? How many times have you read in the big media that HFT helped the markets perform brilliantly during the global meltdown in 2008 and 2009? We said it before and we say it now. Lies.
Not so long ago, if our markets experienced severe stress, and certainly a "fat finger", human wisdom would intervene. Reasons for the stress would be ascertained, trading in affected stocks would be slowed or halted, stabilizing bids would be initiated as needed, and severe volatility would be dealt with in a calm and reasoned manner. Today, the human specialist model has been replaced by an automated market maker model. Our market structure has evolved. It has evolved, not by design,?or a well-thought and reasoned plan, but it has evolved to cater to masters of expensive technology, deployed unfettered by participants whose only concern is to squeeze out every last picosecond and fractional cent before they move on to other countries’ markets and asset classes. The for-profit exchange model at every chance sacrifices the protection of long term investor interests for the profitability of serving hyper-leveraged intraday speculators. By the way FLASH orders are still utilized at Direct Edge, but that is here nor there.
Today's price swings in a great number of stocks highlight the inherent and systemic risk of our automated stock market, which has few checks and balances in place. Once the market sensed stress, the bids were cancelled and market sell orders chased prices down to the lowest possible point. Investors who thought they were protecting themselves with the prudent use of stop orders were left with fills that were far away from the closing price. In some stocks like our SAM example above, this was $0.01. We warned of the potential for HFT to behave this way when we met with and showed our regulators the NY Fed study that highlighted HFT's vanishing act around stressful news announcements in the currency markets.
We read this in a recent comment letter to the SEC about HFT and couldn't agree more: "When markets are in equilibrium these new participants increase available liquidity and tighten spreads. When markets face liquidity demands these new participants increase spreads and price volatility and savage investor confidence."
The EXCHANGES’s response late yesterday was to cancel trades that moved by more than 60%. Yes 60%. SO if you bought a stock at $21, put in a stop-loss market order at $20 (expecting to get filled in a market decline of somewhere less than but close to $20), and got filled at $10 (yes this happened and worse), your trade stands! And if you bought this same company’s stock (that fell from $20 to $3 before closing back at $18) at $3 and sold it at $14 thinking you made a big profit, your buy is cancelled, you are short stock at $14, you have a loss, and the futures are green this morning. Inspires investor confidence, right? With this wise remedy and redress by our exchanges, along with their other maneuvers (stay tuned for our coming Data Feed White Paper), one can’t help but be confident in playing ball on this level playing field. NOT.
Today's severe market drop should never have happened. The US equity market had at been hailed as the best, most liquid market in the world. ?The market action of May 6th has demonstrated that our equity market has major systemic risks built into it. There was a time today when folks didn't know the true price and value of a stock. The price discovery process ceased to exist. High frequency firms have always insisted that their mini-scalping activities stabilized markets and provided liquidity, and on May 6th they just shut down. They pulled the plug, as we always said they would, and they even admit it in the papers this morning. We need a new mousetrap. This is not an isolated incident, and it will happen again
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Yeah its annoying I guess. But - if you figure the market exists to serve the average guy to Invest in stocks then its a big fat so-what? The problem is most average guys want to pretend to be hot-shot traders. In and out - out and in - in days or even intra-day. Well - if you want to play at being a trader - perhaps you should don some rubber flip flops and challenge the Miami Dolphins to a football game.
If all you want to do is Invest - ie. buy philip Morris Intl or P&G to get a growing stream of dividends over the next several years - then is all this HFT trading etc an issue? Sure if the computerized tarding allows you buy your favorite stocks dirt cheap - it provides an opportunity. At those time that the computer is in the depressive phase no one is forcing you to sell your P&G or Philip Morris cheap. Just hold it for the growing stream of dividends. make sure you do enough fundamental analysis so you have a rough idea of the valuations.
I dont have much sympathy for the little guy day trader types - the market does not exist to serve them.
Eventually, as the market crashes, stocks will be priced at their true value, as you mention, their ability to pay a dividend on their income.
We has got a long way to go before the illusion is disillusioned.
There are plent of great busisnesses in the US . Businesses that have been around a few decades, make money and have been paying a growing dividend over decades. Would I like to buy them cheaper? hell yes. But even at today's prices there are a lot of solid stocks. Just stay clear of the entire Finance sector - no need to tear our hair out trying to figure these out.
I can get as pissed off aas anyone abou all the bailouts etc. But iam not going to cut my nose off to spite my face. I can choose to ignore all the BS and just focus on doing some homework and picking up solid companies at decent prices - with Real Money!
There are plent of great busisnesses in the US . Businesses that have been around a few decades, make money and have been paying a growing dividend over decades. Would I like to buy them cheaper? hell yes. But even at today's prices there are a lot of solid stocks. Just stay clear of the entire Finance sector - no need to tear our hair out trying to figure these out.
I can get as pissed off aas anyone abou all the bailouts etc. But iam not going to cut my nose off to spite my face. I can choose to ignore all the BS and just focus on doing some homework and picking up solid companies at decent prices - with Real Money!
There are plent of great busisnesses in the US . Businesses that have been around a few decades, make money and have been paying a growing dividend over decades. Would I like to buy them cheaper? hell yes. But even at today's prices there are a lot of solid stocks. Just stay clear of the entire Finance sector - no need to tear our hair out trying to figure these out.
I can get as pissed off aas anyone abou all the bailouts etc. But iam not going to cut my nose off to spite my face. I can choose to ignore all the BS and just focus on doing some homework and picking up solid companies at decent prices - with Real Money!
There are plent of great busisnesses in the US . Businesses that have been around a few decades, make money and have been paying a growing dividend over decades. Would I like to buy them cheaper? hell yes. But even at today's prices there are a lot of solid stocks. Just stay clear of the entire Finance sector - no need to tear our hair out trying to figure these out.
I can get as pissed off aas anyone abou all the bailouts etc. But iam not going to cut my nose off to spite my face. I can choose to ignore all the BS and just focus on doing some homework and picking up solid companies at decent prices - with Real Money!
Because dividend yields are just exploding, right? And what happens when you get blown out of your blue-chip stock at a 50% loss because of a stop order?
The rise of the machines show that the market has evolved not to serve buy and holders, but computers.
"And what happens when you get blown out of your blue-chip stock at a 50% loss because of a stop order? "
well, then you need to go back to trading school and learn how to properly use stop orders. i think that was PRECISELY his point.
Kudos to Themis Trading and the Zero Hedge for pounding the table on faux market liquidity. This article alone is more financial journalism than CNBS will do all year.
So what are the chances that we are going to see a mutlitude of class action suits over this? If investors got stopped out of their positions due to a dysfunctional trading system, which chances are, can easily be proven by a lawyer with the IQ of a hub cap, is the NYSE in a for a world of hurt? Just wondering.
Well - my view on putting in stop orders in general is - its stupid - makes you a sitting duck for any clever little squidlet to make a few bucks for lunch by running your stop.
But on a bigger scale - I wonder if all the credit deflation has resulted in a shortage of "real Money" to account for all the stock holders. ie. Of the 14 Trillion or so market cap - how much is actually held by "real Money"? Is it posible that maybe, say , only 70% is held by "real Money". In which case the other 30% of Demand for stocks is not real - it is just wall street borrowing very short term money from the Fed to buy stocks. That is not real money. If this is what is going on - we may be in for a huge decline in stock values if anything happens to disrupt the Fed - WallStreet - Ficticious fast money game.
" If this is what is going on - we may be in for a huge decline in stock values"
gee, ya think ?
sorry double post, the site is funky today........
" If this is what is going on - we may be in for a huge decline in stock values"
gee, ya think ?
This article is bogus. I am afarid that if people believe this crap-trap ; welfare for the Island Owners might be effectively curtailed. That would be a tragedy of epic poorpoortions. We the people allow those who are better than us certain privliges.
In summary, cut TANF - Get off GS's back!
Bitch's
The world would be a safer place if the board of GS were in prison.
as long as you call "market makers decided to force the government to cement dow 10k as a low forever after with their longs below it" a failure
According to WSJ,
Now, guess who was livid when Tyler posted a few articles that were critical of algorithmic HFT - a poster with the moniker MrKansasBasketball. A HFT Firm based in Kansas City that is supposed to "provide liquidity", and a poster called MrKansasBasketball, who is passionate about the merits of algorigthmic HFT. Coindidence indeed.
(S)He, along with a few other posters, were mad at anybody questioning the efficacy of HFT. And when the SHTF yesterday, instead of providing liquidity, they pulled the plug on the server. You can read that individual's comment by visiting the following posts.
http://www.zerohedge.com/article/more-free-publicity-irene-aldridge-jon-...
http://www.zerohedge.com/article/another-defense-hft-promptly-refuted-ne...
Some of his/her comments.
Somebody should ask those folks if "speed of the market brings higher liquidity" and HFT "allows for more efficient arbing and therefore a more efficient market", why were the plugs pulled when the market tanked yesterday?
Economics 101. Taking spreads from 1/4 to 1/8 to pennies eliminated the fee charged for making a market and providing illiquidity. HFT replaced that economic rent and liquidity with algoss that exploit price innefficiencies and happen to provide liquidity in 'ordinary' markets. OF COURSE THEY GO AWAY IN VOLATILE MARKETS. They are not being paid to make markets. HFT algos get paid for liquidity, and when market action makes that uneconomic they go away.
God Love ya Joe -great call (from almost a year ago) - hope you are wearing your "I %^$#)#& told you.." shirt today..
http://www.youtube.com/watch?v=V4cRYI2x60Q
I TRADING ROBOT:
http://williambanzai7.blogspot.com/2010/05/i-trading-robot-3-rules-for-r...
I don't understand what the problem is.
If you think other investors are making errors, then you should capitalize off of them.
If you feel you can't compete with HFT bots, then invest in someone who uses them or create your own. Or ignore them, and invest longer-term than 1 minute. My understanding is Warren Buffet invests for long periods of time. And he's done rather well.
If you don't like an exchange, then go to a different one, or create your own.
The main point Themis is making is simple and correct. The market broke, the market died yesterday. Market makers failed to uphold an orderly market in PG and several other stocks. For a moment in time, nobody on the planet was willing to pay more than 1 cent per share. How can anyone argue this is orderly? Confidence in the market ought to be gone. Talk about socialism. How can they cancel only 1 of 2 transactions? The loss is simply being passed around
"your buy is cancelled, you are short stock at $14"
Hey, so lets put in buy orders at -59% of todays price!
Just joking.
Posted May 1st - a week before the crash.
'11,250 / 300 is an area of significant resistance and if this level can’t be breached it should signal the end of the March 2009 bear market rally - the weekly DOW chart shows an expanding wedge indicating a significant move is probable - this remains an overbought bear market rally and the uptrend could falter at any time - the VIX index continues to give bullish warnings which is bearish for equities - long term charts of key equity indexes continue to give bearish warnings and the March 2009 lows will be breached in my opinion - USD Index bullish warnings since 2009 on the weekly and monthly chart have not changed and further USD strength and thus EURO weakness is still expected '
http://www.zerohedge.com/forum/latest-market-outlook-0
http://stockmarket618.wordpress.com
Well there are a couple of comments about efficiency in this thread - but I guess ZH'ers would be the last to mourn as another nail is hammered into the coffin of the Efficient Market Hypothesis (EMH). It only goes to show you:
can't trust the market
can't trust statistics or probability (unless you are betting *against* the EMH by placing bets on the outliers *against* the market!!)
can't trust your handy-dandy algo...
I guess that means you will have to put your trust in:
The orbits of the Stars, or at least in orbit of one planet: Uranus!
(from the Groove Tube)