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On Tomorrow's Secret Meeting To Plot The End Of High Frequency Trading
The SEC's "definitive"(ly worthless) report on what happened on May 6th was a dud, and was nothing more than a distraction-based smear campaign against Waddell and Reed (an experiment in which we can only hope W&R participated involuntarily): a firm which did something that was completely in its right to do. But is this unexpected? After all had the SEC confirmed that it is indeed HFT who is responsible for a broken market structure, it would have effectively destroyed itself: if and when the SEC does indeed confirm that the entire market topology over the past 5 years has been hijacked by young and pustular math Ph.D.'s with fast computers, the implications to fair markets would be orders of magnitude worse than the fallout associated with the Madoff scandal, and could serve as grounds for the unwind of the SEC itself, which would have to explain why it has been avoiding calls against HFT impropriety for years. So in a sense Mary Schapiro's conclusion is nothing less than a lass desperate act of self preservation. Which however means nothing in the grand scheme of things. Tomorrow, as the WSJ reported a week ago, the Investment Company Institute, better known to Zero Hedge readers as the guys who track the now permanent weekly outflows from capital markets, is holding a secret meeting in which some of the participants "are determined to push for a plan to restrict high-frequency trading" (furthermore, the ICI was rather pissed about this particular leak, implying that things are really serious). While the SEC may have declared a market structure truce, and is peddling its usual worthless solution of circuit breakers (more on this below), actual market participants have had enough of seeing their profits plunge and HFTs extracting more capital out of the market than the much maligned ten years ago market makers and specialists ever did.
More from the WSJ on the dilemma facing the "whales" -traders who trade in blocks which are orders of magnitude larger than the typical (lately) trade size of 100 to 300 shares:
Using powerful computers and data feeds, high-frequency trading firms typically hold stocks a few minutes and sometimes only a few seconds at a time, churning roughly half of total stock-market volume. Whenever you—and your mutual fund or pension plan—buy or sell a stock, one of these fast-trading firms is likely to be on the other side of the trade.
The problem? While some fund leaders have praised high-frequency trading for making markets more efficient, others contend that the profits earned by fast traders may come partly at the expense of ordinary investors.
Mutual funds and other giant investors are often forced buyers and sellers. When money comes in they must buy stocks; when it goes out they must sell. Their typical buy or sell order is roughly 185,000 shares. Yet the average trade size on U.S. exchanges is only about 100 to 300 shares.
So institutions trade in dribs and drabs. A giant buy order would push up a stock; a huge sell order would knock it down. "Would you leave $100 in cash on the street corner and hope nobody takes it, or would you hide it in your pocket?" asks Andrew Brooks, head of U.S. equity trading at T. Rowe Price. "Information about our order flow is valuable, and we need to protect it."
Yet order flow leakage and anticipation is precisely the key issue behind the great battle currently raging between HFTs and slow money: algorithms constantly seek and find new ways to predict if a small block is isolated or if there are millions of shares lying in wait behind it, forced to transact at any price. Themis Trading's Joe Saluzzi has discussed this issue extensively before, for example in this article in Advanced Trading magazine, in which he notes that implicit costs associated with constant order frontrunning by HFTs, "have been rising and hurting pension and mutual fund performance. Even the most sophisticated buy-side quantitative funds are also experiencing higher trading costs, as their models are also being spotted and taken advantage of by their highspeed, high-frequency trading cousins."
The WSJ explains this phenomenon as follows:
Any institutional order for a couple hundred shares can have thousands
or even millions of shares behind it. A fast trader that can infer which
orders were placed by a big institution gains an insight into how stock
prices may be about to change. Whoever gets there first stands to make a
tiny profit on each of those trades.
Some of the larger exchanges are now fighting back with all they have - starting tomorrow the NYSE is now instituting a small way to throw a wrench in the HFT spokes: selective order ID elimination.
Direct data feeds supplied to fast traders by several major exchanges have customarily included an "order ID"—a kind of tag that, according to several traders, may assist a fast trader in deducing whether a large institution lurks behind a small order. Starting Oct. 4, the NYSE Arca exchange will give customers the option of having these IDs removed from its direct data feeds on orders they don't want displayed to the whole market.
Traders say the absence of the ID may itself alert rapid traders to the presence of a large, hidden order. "Without the order ID, we don't think anyone could map the order to any other information to divine that it is part of something larger," responds Ray Pellecchia, an NYSE Euronext spokesman.
Another exchange, recently known for doing pretty much anything to win order flow, and thus permitting all sorts of allegedly shady practices to take effect on it is BATS, which chimes in on another practice known as "partial post only at limit."
Or consider a type of trading order called a "partial post only at limit." Here, if a fast trader's small buy order is rejected instead of executed, the firm can deduce that a large block of shares may lie hidden in reserve, poised to sell at a given price. Thus a trader may be able to get information without executing the trade. Clever use of this order type can increase the trader's odds of being in the right place at the right time—capturing a splinter-thin, lightning-fast profit before the institution can move.
Chris Isaacson, chief operating officer at BATS Exchange, the third-largest U.S. stock market, downplays such concerns. "This order type is rarely used and would be very complex to implement for the purpose of detecting a large order on the other side," he says. Such a trader "would have to be willing to take considerable risk."
Which is why, since the SEC refuses to get involved, starting tomorrow, all readers should immediately notify their brokers to stop allowing their orders to be Flashed (a topic extensively discussed last summer and which is still continuing with the SEC's blessing) if they have not already done so (as this implicitly allows non-qualified orders to be front run), and to stop trading with any exchange with either has no idea what this is, or refuses to comply. More importantly, brokers should also be advised to drop all order IDs tagging each and every individual order. Since the HFTs front run stock blocks based on a statistical distribution of tagged versus untagged orders, the only hope of equalizing the playing field is if every single order is now untagged, thus fooling HFTs into believing that there is large money sitting in the bid behind the order. Granted, this may force prevailing prices higher for the time being, but the end result will be a faster divergence from market equilibrium, which eventually, when the balance inevitably reasserts itself, will force the vast majority of HFTs to be blown up once there is a market correction and the computers are caught with artificially dollar-cost average inflated prevailing prices. In other words: open war on HFTs has been declared, and since regulators refuse to stand on the side of the small and long-term investors, it is time to form a unified block against the HFT scourge.
And while we are once again (as always) discussing the SEC's terminal incompetence, we wish to present for one last time just what happened on Friday in the LQD flash crash, courtesy once again of Nanex. Note the dubious absence of Waddell and Reed:
Chart 1, which demonstrates what exchange(s) the rogue algo originated from: note the PACF repeater and BATS stubbing all the way down:
Chart 2, which shows the actual LQD trades:
Chart 3, which confirms that the PACF had the BBO all the way down. Once again, no W&R
Is it thus any wonder the industry itself is now ganging up against HFT? We believe that now that HFT is scapegoated by real money accounts for all P&L problems (and otherwise), its days are effectively numbered. Which is why as the HFT world enters its death rattle hours, expect markets to be even more unpredictable and volatile than ever... and of course, to ultimately break as usual.
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HFT is like the drug gang violence in Mexico. It's scaring all the tourists (traders) away to the point the government (SEC) needs to finally act.
Good analogy.
Imagine no HFT... Maybe we can then have a society with PhD's that do something productive with their time.
Whoa there! That's just too much all at once. One miracle at a time please.
No HFT = Dow 7000, or worse.
That is why HFT will not be banned...at least until after the election.
Establishment Jackasses and Dumbos will unite to trick the electorate into keeping them in office for another 2 years.
After the November elections, then and HFT ban is possible, but not before.
No surprise here. When they run out of sheep, they turn on each other.
(me, paraphrasing the SEC quotes):
OMFG. What do you think all those math PhDs, top-of-the-line racks, and dedicated fibre pipes are for?
We're merely seeing skimming, on all sides. Since retail withdrawals continue to be high (and will continue to be high in the future), these guys are figuring out that they actually need to provide some kind of business model that delivers *value*. Weird, I know.
I don't see them providing value for at least another decade. They will continue to eat each other, because the Boomers already have, and will increasingly, conclude there is no reason to pay these bozos for anything (e.g., they do not deliver any sort of value).
Secular shift. These wall street jobs will go away, and they won't come back, because they do not have a business model.
"These wall street jobs will go away, and they won't come back, because they do not have a business model."
Wall Street has a business model... It is called FRAUD...
Reminds me of one of thos Animal Planet specials: the water hole is drying up and getting smaller, but the number of crocodiles stays the same. Risky business to wander down for a drink.
Flash Crash According to SEC
Don't you really feel like crying for the people who want to trade in unlit dark pools?
Banzai7 - so nice to see you have picture posting abilities now...love the humor.
Much better than a RoboTrader post...
+1
That's like comparing apples and CANTALOUPES.
these pictures were good.
however robotrader is what keeps me coming back to zerohedge. My only complaint is he needs more pictures and more posts.
pluss the guy has good analysis.
Robotraders posts can be stimulating
cool pics, lol
That last one is perfect! :)
They should run a serie about that one
Tnx everyone.
Any image I post here, will also be posted on my Blog as usual. If you want a larger (printable version) just click the image on the Blog.
WB7
Agreed. This is one thing retail investors like myself don't trust.
You don't need an HFT algorithm to crash the markets, just 5 billion dollars and a market order...
ONly 10% margin on futures contracts??? So, $500 million?
Originally the term "free" in "free market" meant access without having to pay rent, rentiers or gatekeepers. The more things change....
The solution for this is so simple, have no idea why they have not done it. $1 tax on each buy or sell order, which is paid when the order is placed and not refunded if you cancel the order.
They haven't done anything because the big money guys control the HFT.
I put in a plug to Eric King to do a Saluzzi interview. We'll see if anything comes of it. I would love to see Joe become a regular on Eric's podcasts.
Don't feed the beast. The last thing we need is a transaction tax. The Looter in Chief would love that.
Your identification of the beast is incorrect and shows that your mind has been shall we say "properly" socialized. You really might consider educating yourself on the modern uses of psychologically based propaganda. The "Welcome to the Insane Asalyum" series published here would be a good start.
HFTs get a volume rebate from the exchanges, (the opposite of a Tobin Tax), it is their bread and butter. HFTs buy co-location access. Remember when Grasso was the bad guy. They were the good old days.
This isn't some aberration, this is exchange policy. Good luck.
Has anyone witnessed a flash rally lately?
CSCO, July 29, 10% up. These bastards are on all sides of the trade...
To late to stop the machine. The machine has implanted its tentacles inside the spinal cord of Wall Street and like Doctor Octavius, transformed it into Doc Ock. The machine radiates like a thousand perpetual suns and will destroy anything that tries to disconnect it. This looks like a job for Spider man, Not the SEC
CONTRIBUTORS: Please consider a post inviting folks to voice their good wishes to the newly wedded Mr. and Mrs. Durden? Pics, poems, whatever.
I'd do it . . . but I don't have no access.
What you takin' about, Willis?
http://www.youtube.com/watch?v=Qw9oX-kZ_9k
Was it not Tyler who said Friday morning in one of his own posts that he was to be married to his sweetheart--Emily, iirc--this weekend?? Only a couple people commented on it in the thread.
Going back to find it, I don't find it anywhere. I can think of alot of possible reasons for this, from retrospective modesty to fiance-driven poster's remorse to a management team prank, but--help, did anybody else see what I swear I saw!!??
This is funny if you are punishing TD for being slow (once?) to include an article's attribution...but I tol' you Emily loves Elliot, not Tyler. All the best to the newlyweds.
Ooopsie!!!
Well, at least I'm not crazy . . . or at least retain my plausible deniability. Yes, here's to Elliot and Emily!
The person announcing his marriage was our guest poster
So it was an initially unattributed piece that was quickly remedied once I'd closed it. I was rather surprised that you were tying the knot . . . and not with Marla! It's been disturbing my sleep all weekend thinking about you kids . . .
Thanks for standing up for my sanity, Tyler!
I trust you'll let us know when you and Marla work through your issues and take it to the next level, then?
PS You realize you'll have to return all the gifts, right? Especially the silver . . .
:)
The Poster Child of Hi-Fi Bot Trading....
Citigroup.
Over 775,000,000 lotto balls traded on Friday.
Weren't they supposed to buy something that made them a lot of money. Or is that cover for we're going to dillute everybody's ass to death with IPO's. Everybody bait your hook with big stock dividends.
http://wallstcheatsheet.com/breaking-news/economy/jim-cramer-and-thestre...
Ahhh come on Hep...we will be paid off in stock just like AIG proposes.
Odd that I haven't seen any new Chrysler or GM shares show up in my account just yet...and the buying power of my dollar is plunging like a rock...but audacious hope springs eternal...LOL.
Audacious? Don't they make musical instruments?
http://video.google.com/videoplay?docid=2942922314315974986#
LOL.
Congatulations !
I was wondering when the big money losers would figure out that HFT isn't a plus. The zero-sum game of it doesn't always feel like a wash I imagine.
OT: 8 private security firms banned in Afghanistan - CNN
Afghanistan has banned eight private security firms, including the company formerly known as Blackwater, a spokesman for President Hamid Karzai told reporters Sunday.
Who's going to shift the opium/heroin for the oligarchs then? The US military is busy shooting up Pakistan right now.
Unemployed Greeks.
Unemployed Census workers...
Unemployed airline pilots...
Dare I mention a Tobin Tax for stock trades e.g. a tiny tax on a per-trade basis? It shuts down HFT and causes buyers and sellers to consider for a minute before making a trade. Perhaps the proceeds could be applied to small business loans.
More tax will only make them steal more to pay it. How about they enforce the law, something that doesn't happen these days, as this article points out all too well. As long as corporations are in control, you can forget any thought of a thriving small business environment, no matter how much "money" is available to borrow. Let's have a 20% Tariff. NO MFN! That will kick start small business!!
Tariffs are good but disguise it as a VAT. Also, talk free trade and quietly use armies of bureaucrats to stop imports the same way the mercantilists do to us.
An open call to war, that's what I like to see. I'll pass this along to everyone I know.
Does this mean I'll get my phone clerk job back? If the good guys fight back we can eliminate the scourge. This has a 'road to roota' feel to it.Blow them up good...real good, boys.
".....will force the vast majority of HFTs to be blown up....."
I've been on that road a while now. Been patiently waithing for the destination to present itself on the horizon.
What caused the flash crash? The SEC report is a joke. All I know is that the HTF shops hit the kill switch, and suddenly there was no liquidity. So I take it that almost all the liquidity is coming from them... and any time they decide to step away from any security, we get another (undocumented) flash crash?
Waddell says Reed did it. Reed says it was Waddell.
Obummer says Boehn(Bone)-er did it.
Boehn(Bone)-er says Obummer did it.
YUP!
Check out an intra-day chart of AAPL on 28 Sep, 2010
Tobin taxes don't solve the problems you've identified.
The exchanges have essentially created a buffet where people can fill up on salad and veggies and now they are crying when a football team shows up and eats all the beef. On behalf of people with rudimentary software development skills everywhere, to Exchanges and pension funds: we're sorry you are so retarded.
There are three easy fixes to the HFT "problem" that you can learn from the Internet:
- randomly drop orders at random volume thresholds and cause them to be retransmitted so that execution is more probabilistic than deterministic.
- create a "source quench" message that tells a customer to reduce the volume of orders for a period. Basically allocate an order cache of a certain size to each customer and if they fill it, start dropping their orders.
- use "dampening", which will drop all incoming orders from a source for a randomized penalty period if they ignore quench messages or if cancel messages reach a moving threshold, a la google and poker site systems.
Exchanges need to referree trading. This is distinct from regulating it. Tobin taxes are for ignorant hippies. A good way to tell that Tobin taxes and broad regulation are stupid ideas is, for the people who suggest them, it tends to be their solution to everything.
Retail investors are as speculative if not moreso than fast traders since at least the latter have some empirical sense of what they are doing. For example, unless you are a geophysicist, you are pretty much taking a wild, blind bet on minerals or rare earths. This false dichotomy between fast traders and "regular" investors is disgusting. Are these so called regular, normal every day investors a bunch of earnest, lumpen palookas who need the government to run their lives? I doubt it. If I had a pension, I would want the people running it to work for a living.
I think it's time to cowboy-up, cupcakes.
"Don't buy into a business that you do not understand." -- Peter Lynch
In simple terms, all the SEC needs to require is that all automated trading systems must be coded on a different network. Based on an algorithm of trading pressure, the SEC can then engage a circuit breaker to shut off the coded network until a moving market autopsy can be completed to determine selling pressure. By doing this it will not allow the cascading (self-fulfilling prophecy) effect that is inherent in all programmed trading systems.
HFT trading technology will spread globally. There needs to be issuance of a world wide ban on such otherwise the fuse keeps getting shorter. At this point in time, a ban on HFT would likely crash the market as they are the only market participants! There is no way in hell Obama is going to let a market fall right before midterms...
By the time they "fix it" there will be not Market. Their Host "Retail Investors" will be long gone. Who will be left to scalp. Only the Government with their Printing of Money. Yep, we pay for it thru Higher Taxes and are not even in the game.
It no longer remains as a Stock Market, just a Market of Computers passing a ping pong ball back and forth for a penny a share. This is not something some one can "Invest" in. Better to play games on your I Phone because at least there you cannot lose Money to some Too Big To Fail Bank.
All of the QE II will accomplish is to transfeer more of America's wealth to the Banks. The Middle Class can suck it up and become the Poor.
+1
+1
Until big money gets annoyed enough by HFT hackers we can peace off...
Until big money gets annoyed enough by HFT hackers we can peace off...
How else can the control the 401k wealth of the sheeple? Ramp it up, bring them in, and them suck them dry...little by little they skim the top. They want the money and they will stop at nothing to get it. The HFT'S are only a small piece of the largest heist in American History. With no way to defend themselves, most 401k'ers are going to get slaughtered. They want their money, that don't want Americans to have any wealth, they want to own each and every one of us.
"We believe that now that HFT is scapegoated"
I think that HFT gets taken away from the private sector and is used by the public sector.. for QE-2 thru infinity... to stabilize the market(s) as needed...
or....
Licensed / SEC approved Black Boxes only... with algos that are as well approved or set to perform within a bracket system. Only the big boys.. as the little guys are messing the whole black box world up... as described by the SEC report. No more little guys, just the big boys with Government 0% windows doing God’s Work! Now that’s America operating at its best! Free Markets for anyone who can afford the Beltway Gang Toll / Protection Money.
Big Business is squeezing the little guys, again... the little guys should have pooled their Lobby Monies, they would have gotten better protection.
Lobby Dollars ='s Protection Money to the Beltway Mob / Gang!
If HFT is 60-70% of volume, and is stopped, how do the exchanges stay in business?
Perhaps a new model in which they provide value to investors, as markets are supposedly supposed to do?
TPTB know that the cat is out of the bag about the equity market being totally rigged, and they have lost the illusion of fairness and integrity that they once had. Now that the sheep are running from the rigged casino in droves, TPTB have to do something to restore some illusion of integrity to eventually get the sheep back in . HFT was just another way for the big boys to shear the sheep and to hide / mask the huge positions that they had to either unload or obtain. My guess is that HFT is about to get shithammered and seriously restricted, the equity markets will crash, and there will be a flight to quality and returns. PM's will see a big bump up when this all goes down. Yours, Maverick
Can lv1 just be banned instead of junked?
This is a test, please ignore.
WB7
Updated GOLD monthly chart:
http://stockmarket618.wordpress.com