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Themis Trading's 5 Best Themes Of 2010
- Apple
- Citadel
- Commodity Futures Trading Commission
- CRAP
- dark pools
- Dark Pools
- Direct Edge
- Flash Orders
- Florida
- GETCO
- goldman sachs
- Goldman Sachs
- Greece
- High Frequency Trading
- High Frequency Trading
- Instinet
- Lehman
- Lehman Brothers
- Market Share
- Matt Taibbi
- Meltdown
- NASDAQ
- New York Stock Exchange
- Nomura
- None
- Private Equity
- Reuters
- Sergey Aleynikov
- Stop Trading
- TARP
- Themis Trading
- Turkey
- Volatility
- Wall Street Journal
Despite our relatively light coverage on the subject recently, we haven't forgotten that the US stock marketplace is broken beyond what some say, any chance of fixing. Unfortunately, it has become painfully obvious that between the corrupt SEC and CFTC, there will be no proactive regulation, no actual changes to a broken market structure, until the next, and far more serious flash crash takes place, and destroys the last trace of market credibility. In the meantime, looking back at 2010 market developments, aside form the one event that punctuated just how broken the market is, namely the May 6th flash crash, there were other notable events. Below we present Themis Trading's five best market structure themes of 2010.
Five Thoughts Revisited, via Themis Trading
The Year-End and New Year is fast approaching, and it is a time of
year when we often look back on our accomplishments and failures (well
ok… we look back on our accomplishments and lay blame for our failures,
but that’s not the point). Joe and I have been looking back on the last
two years this week, which have been a whirlwind for us and all of you.
For us it was two years ago that we wrote Toxic Equity Trading on Wall
Street, although it hadn’t caused any stir until mid-year 2009, when
Sergey Aleynikov was arrested on that July 4th weekend, and
HFT started its march into everyday vernacular. As we have been looking
back, we just wanted to let you know how much we appreciate all of you,
our clients, who are the most loyal and supportive client base any
business could ever ask for.
We have been writing Themis Thoughts for about a year, now, and to be
truthful we never realized how much we enjoy writing in general, and
writing about the business we love specifically. We have selected five
of our more entertaining, and perhaps informative, morning notes from
2010. We hope you enjoy glancing at them again.
Number 5:
Themis Thoughts July 23rd, 2010
Today we are going to do a little electronic trading history lesson.
Who remembers Sheldon Maschler? or Harvey Houtkin? They were the
original SOES Bandits. Sheldon headed up the infamous Datek
Securities. in 1989, with the help of two boy wonders, Jeff Citron and
Josh Levine, they created Watcher, a software program that allowed day
traders to take advantage of a weakness in the SOES system–relatively
slow updating of price quotes (sound familiar to anyone?). SOES was
intended for small orders but Datek was using the system for large
trades, buying stocks and then selling them again within seconds. Datek
was very successful at scalping trades and by 1996, they had 500
traders, many of them freshly out of Ivy League schools but already
making as much as $750,000 a year (hmmm, take the brightest minds out of
the best schools and have them perform a function with no economic
value so they can earn obscene salaries…again, sound familiar to
anyone?). In 1997, Citron and Levine developed the Island ECN and with
the strategy of paying rebates for posting of liquidity, Island grabbed
15% of NASDAQ trades by 1998. They tried to take Datek public but a
series of criminal and regulatory investigations prevented them from
doing so. Island was later bought by Nasdaq. The data feed that Nasdaq
now uses, ITCH, was originally created at Island.
Harvey Houtkin was another famous SOES Bandit. in 1998, his firm
All-Tech also created an ECN called Attain. in 2005, Attain was sold to
Knight Trading. Knight renamed it Direct Edge. Knight then sold
stakes in Direct Edge to Goldman Sachs, Citadel Investments and the ISE.
So where are we going with this? On Wednesday, Direct Edge
officially became the fourth stock exchange in the US. It is truly
amazing that an ECN that still employs pre-routed or “flash” orders was
granted exchange status. They can now compete directly with the other
big boys, NYSE, NASDAQ and BATS. They have set their sights on the
lucrative proprietary market data space. These data feeds are the
lifeblood of the HFT industry. Think of them as the fuel that runs the
Lamborghini. They said they will begin selling this data to industry
participants, most likely HFT firms, over the next few months. They
also have amped up their speed to 300-400 microseconds which should make
the HFT traders very happy. And one final thing, they have also
announced their intentions of a future IPO of the company.
The similarities between SOES and HFT are striking and history is truly repeating itself now.
Number 4:
Themis Thoughts July 28th, 2010
Bacteria
Last week we had a little history lesson on electronic trading.
Today, we wish to give a quick science lesson. Who knows what Binary
Fission is? Binary fission is the most common method of reproduction in
bacteria. It is a process in which a parent cell divides to produce two
equal-sized daughter cells. The daughter cells then separate from
each other and become independent. The repeating of the process results
in exponential multiplication of the bacterial population.
We bring up this science lesson because as of July 12th, a new venue,
the NYSE Amex, has just started trading NASDAQ stocks. The NYSE Amex
model of parity and priority will be in effect for NASDAQ stocks (http://www.nyse.com/pdfs/fact_sheet_nasdaq_utp.pdf).
As the NYSE Amex release states: “The parity-based system enables the
DMM, any floor broker and the first order in the exchange’s order book
to have equal standing in terms of execution priority at a particular
price level.” This should make for some new and very interesting HFT
strategies.
While we have now 4 major equity exchanges in the US, each one has
been undergoing a “binary fission” process. The NYSE now has NYSE
“classic”, NYSE ARCA and NYSE Amex. NASDAQ has NASDAQ OMX, NASDAQ BX
and is pending the launch of NASDAQ PSX. Direct Edge has EDGA and
EDGX. BATS has its current BZX and is pending approval of the new BYX.
So, our 4 US exchanges are really 10 destinations. When you add the
smaller exchanges like NSX and CHX, and then throw in a few ECN’s, like
FLOW, we see how the number of “lit” destinations keep multiplying
like bacteria, and fragmenting the market. Lets not even get into the
more than 40 dark pools. Why are the exchanges doing this? If you ask
them, they will likely say to give the customer choice. We think that
they are all trying to create new hyper-trading arbitrage opportunities,
needs of investors be damned. This also creates an ever increasing need
to co-locate at the highest levels, buy increasingly expensive direct
feeds, as well as a need to keep buying new Cisco servers. We alsothink a
quote by an industry consultant, Sang Lee, sums it up best: “It’s a
hypercompetitive environment…You’re literally gouging each other’s eyes
out for a sort of single-digit market share.”
With that type of loss of perspective and “eat what you kill”
attitude, it’s no wonder that investor confidence is at all time lows.
Number 3:
Themis Thoughts November 26th, 2010
Breakdown of Turkey Day in Connecticut.
06:30am: Awaken and let three whining dogs out.
07:00am: Eat stale Mini-wheats and nurse old fat back in hot tub.
07:30am: Awaken Numbers 1, 2, and 3. Take them to DD for crap breakfast.
08:00am: Drive Numbers 1, 2, and 3 to Brooklyn to see my folks.
09:00am: Exchange emails with Joe in Florida about high freaks in Europe. WTF.
09:30am: Enjoy quality time talking with my dad while Number 1
and 3 shriek and fight on the living room floor. Number 2 quietly
socially networks on his iPhone.
10:00am: Number 2 calls Number 1 immature. Number 1 insults Number 2’s girlfriend.
10:30am: Embark from Brooklyn to Fairfield Connecticut, to
see other grandparents. Fairfield is the home of Wasps, Mimosas, and
Judgment.
12:00noon: Walk through in-laws front door. Comment on how great the food smells, and ask if I can help with anything.
12:05pm: In-laws show me the lawnmower, the rakes, the black
tarp on which to place 8,000 cubic tons of leaves, and the area out
front to which I must drag the tarp.
12:30pm: Walk inside and ask boys to come out and help.
Number 1 is happy to help. Number 2 is Meh. Number 2 nonchalantly pokes
leaves with rake in one hand while texting his gal, Nadia. Number 1
again insults Number 2’s girlfriend.
01:20pm: Father-in-law comes outside and asks when will we be
done, because he wants to drink the wine we brought, but Nancy said he
had to wait for us.
01:30pm: Father-in-law tells us for the 186th time
how his cousins called him Donnie when he was young, and he wanted to
be called Don. Pours second glass of Farniente Chardonnay.
02:00pm: Play hoops with Number 1. Number 1 is 6’2” and
210lbs. He hacks like Sir Charles and I hit pavement groaning in fetal
position.
02:15pm: Walk by some wasps house and my bride asks me why I
can’t dress distinguished like the handsome wasp in the khakis, button
down, and blue blazer who is my age and walking outside with his young
kids.
02:16pm: I ask my wife why her butt is so fat that she misses calls on her iPhone because she can’t feel it vibrate.
02:20pm: I lie down while Number 1 gets me ice.
02:30pm: A glass of wine warms my bones. Father-in-law tells us for the 187th
time how his cousins called him Donnie when he was young, and he wanted
to be called Don. Pours fourth glass of Farniente Chardonnay.
03:00pm: Watch some football! Catch a twenty minute nap that feels like heaven.
03:30pm: Father-in-law wakes me from said nap, asking me if I
want to look at his financial statements. Pours fifth glass of
chardonnay and starts again about freaking Don versus Donnie.
04:00pm: Eat an incredible meal. I admit I am less about the
turkey and much more about the beans, mashed potatoes, cranberry sauce,
apple sauce, and stuffing.
04:30pm: Drink coffee and embark on my drive back from
Fairfield to Chatham NJ in the rain, with Number 1, Number 2, and two of
my dogs in tow.
07:00pm: Write this note while it is fresh in my mind and prepare for the Jets. Wahoo!
By the Way, Just a Little High Freak For Y’all
Over the Thanksgiving Holiday, we see this piece in Reuters: Computerized trades in EU face tougher rules (Click Here To Read). While
high frequency trading in Europe is only running 30%, apparently they
don’t like what they see. French Economic Minister Lagarde, and
Britain’s Director of Markets at the FSA, Justham, both acknowledge that
while they are not there to turn back the clock, they need to be sure
that the cars can brake as fast as they speed. Some gems from the
regulators perspective:
- may need banning in some cases.
- After a cost benefit analysis of HFT methods, maybe it should be forbidden outright.
- The proliferation of dark pools was a tragic error.
One high frequency firm, who incidentally recently hired away a
regulator from the FSA to be on their legal staff (regulatory capture
strikes again. YAY), had a director, comment:
- “High frequency trading firms are market makers who utilize
technology to provide liquidity to the market in a more efficient way
than pit or phone trading.”
Sigh. We had not heard that defense before.
Number 2:
Themis Thoughts May 7th, 2010
The Emperor Has No Clothes; We Need A New Mousetrap
15 Stocks fell more than 50% from high to low.
61 Stocks fell more than 20% from high to low.
Exchanges solution: Bust Trades > 60%
Some Thoughts:
In my personal portfolio I own Phillip Morris (PA) and Boston Beer
(SAM), makers of Marlboro smokes and Sam Adams beer. I was feelin’
allright when I stepped outside to grab a smoke and a brew (I do my best
trading after a few Sam Lights and a few Marlboro Reds). OK. I really
didn’t do that. And I don’t really own those two stocks either. But if I
did, then yesterday afternoon I would have smoked a pack and drank a
case.
Phillip Morris High/Low/Last = $48.92/ $16.74/ $46.75
Boston Beer Co Inc. High/Low/Last = $63.17/ $00.01/ $55.43
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.
Number 1:
Themis Thoughts November 12th, 2010
A recent paper titled “Relativistic Statistical Arbitrage” (http://www.alexwg.org/publications/PhysRevE_82.pdf)
tackles the subject of how HFT’s can best optimize their co-location.
The authors recommend that, to maximize profits, HFT’s should try to
locate their computers at the midpoint between two exchanges. So, if
you were trying to arbitrage prices created in London vs New York, then
the best place to locate your computers would be somewhere in the middle
of the Atlantic Ocean. We were wondering where the best place to
locate a computer would be if you were trying to arbitrage price between
Beijing and New York. Since these two cities are on opposite sides of
the earth, what if you simply drilled a hole from one end of the earth
to the other and located your computer in the center of the earth. Some
people believe that the earth’s core is where Hell is located. So the
best place for HFT to colocate is Hell. Go to Hell, HFT.
.
Speaking of HFT, according to the WSJ, this week Nomura Securities,
“launched the linchpin of its new U.S. high-frequency trading
operations: a super-fast platform designed with its most sophisticated
electronic trading clients in mind. Behind the platform’s creation is a
host of former Lehman Brothers employees who spent more than a year
building a new system from the core of what once powered Lehman’s
fastest trading.” Back in 2008, Nomura purchased some assets from the
bankrupt Lehman Brothers. Put the words “Lehman” and “high frequency
trading” in the same sentence and you got the making of a great Matt
Taibbi style piece. Words like blood-sucking, bubble machine come to
mind.
After we read this, it did clear up a piece of news that we received
earlier in the week that was quite puzzling. Each month Nasdaq
publishes its top 10 liquidity providers
(http://www.nasdaqtrader.com/Trader.aspx?id=topliquidity)
. Most of the time you will see names like GETCO, Citadel, and Wedbush
on this list . But last month, we noticed a new name on the list. None
other than our ex-employer, Instinet. There is still a special place
in our heart for Instinet. There is quite the alumni network of
Instinet employees and we still keep in touch with many of them. We
were initially happy to see that they were doing so well. But after
thinking about it, we wondered how they could have broken into such a
list that included some of the biggest HFT firms on the street. But
then we saw the Nomura/Lehman high frequency trading story and it all
made sense. If you recall, back in November 2006, Nomura also purchased
Instinet from a private equity group.
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No such thing as a down stock market. Everyday is an up day.
Here's a thought- the US is already insolvent.
http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2010/12/22_J...
Like I said.
Hi-Fi Bots will be old news soon.
The new news will be a 1 - 2 years from now, when the public is trading stocks en masse on their smartphones, and Joe Six will once again become infatuated with stock speculation.
Lay off the crack.
Great ... we have had every kind of 'rally' there is this year ... now here comes the 'Droid Rally', the 'iRally' and the 'Motorola Meltup'
.
yep
30.68
It's time to question the dogma that the government can coerce free markets to be free, that the CFTC, SEC, FDIC, The Fed, and other intrusions of force into what might otherwise be free markets can "help" (as in "I'm from the government and I am here to help."
The government /is/ helping. They are just helping the wrong people.
+1
Isn't a simple solution to install a transaction speed limit slow enough to be the lowest common denominator for the entire market so everyone is on the same page?
who really needs liquidity every .0000000000000000000000000000001 micro seconds? Isn't a tenth or hundreth of a second plenty?
How about entering limit buy orders for 59% or less off the current price of a stock to capture a flash crash in a bottle? That would avoid a trade reversal. Sell it later when things are a bit more orderly.
I have updated my long term gold chart...
Yikes.
http://stockmarket618.wordpress.com
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