This page has been archived and commenting is disabled.
Toxic Equity Trading Order Flow On Wall Street
Lots of readers interest yesterday following Joe Saluzzi's Bloomberg interview. I present a White Paper by Themis Trading in which Joe elaborates on many of the concepts that may have flown over the heads of some of the more "beginner" readers. Additionally, I recommend readers search for specific concepts within Zero Hedge - we have covered the topic of program trading and liquidity extensively here over the past 3 months.
»
- 6220 reads
- Printer-friendly version
- Send to friend
- advertisements -
I am still curious about the prior post that CS' trading in etf's is setting the company, and country, to fail. Any explanation of that post?
It seems odd that buying the etf and shorting the underlying presents such danger!
I'm somewhat dubious to the overall impact of these programs. The author cites days where moves are greater than 3-4% as potentially serious problem days. But, those days were a result of collapsing fundamentals just as the same days were in 1929.
I'm big into full disclosure and transparency and I believe no new technology should be introduced into the markets until regulators have had at least a year or some lengthy period to quantify impacts and systemic risks. ie, I think we should ban all of this baloney including derivatives. Yet, day traders don't have a meaningful impact on the long term movement of the market so I'm not sure program trading around pennies has any impact at all. And, couldn't I really argue that day traders impact price discovery or prices paid in the exact same manner as the program trading cited?
What it does do, is likely create another point of systemic risk that is not well understood. And it shows that the financial industry is still well out of control.
Thoughts?
You are still thinking on a linear basis. Markets have never been more non-linear.
Problem with a small drop in prices is that several players are holding billions of S&P futures. When a strong downturn begins (began). They will suddenly all unwind their positions and there won't be any takers on the other side.
The market cabala, PPT, RenTec, GS or whatever you want to call it, killed the market. Everybody and their mother is by now aware of the ongoing market manipulation. Now who are they going to sell to?
I can tell you are an Albert Einstein. Your remark shows you are completely clueless.
A) Very rude answer to a well intentioned comment. You Sir, have no manners
B) I am no Einstein, but you make me look like Sir Issac Newton. If you are incapable of understanding the implications of the Themis article, then you have no place managing money. Actually, I doubt you do, your comments make it obvious. How about you go back to Yahoo and let us boys play in peace?
Hey EQ, if you claim remarks are clueless, please provide data to back it up. Same with calling someone an Einstein.
In the real world, people throw sticks and stones. Especially if you post ridiculous remarks about the market running away from you based on the Themis constructs. If you don't like sticks and stones, go back home and play in your sandbox with your puppy. You don't have a clue as to what you are talking about.
"Especially if you post ridiculous remarks"
Such as you posting that we should eliminate all derivative products?
You sir, have the financial education of a cab driver (no offense to cab drivers). Please stop taking up valuable blog space and return to whatever profession you have as a day job.
I'm quite happy to wallow in the mud all day long. Are you game? Why don't you tell me how derivatives have helped the underlying economy in the last fifteen years. Maybe you could compare that to when the U.S. was the most dynamic economy on earth and how the economy of that time would have been even better had we used derivatives. Especially since Myron Scholes, one of the Nobel Prize-winning founders of mainstream derivatives has basically said they don't work and he was wrong. That after he personally blew up two hedge funds which used derivatives. Maybe then when you quantify the benefits, I'll fawn all over you.
The bad thing for you is I'm not going anywhere. You see, in a free society I can say damn near whatever I want. And, you have no choice but to listen. Or plug your ears.
I'm just a childish little boy and I am really good at throwing stones.
First, you may not realize it, but not every person in the universe is American. I am not and I do not care a whistle about US dominance. I do however care about the stability of the world economy and about trading for a profit.
Second, you continue to show your ignorance in front of the forum. Derivatives were invented by the Sumerians. They have been around for about 4,000 years. The hedge fund you are referring to is Long Term Capital, and pretty much anybody who has read a single book in finance has heard the name. That only goes to show your audacity to post despite having absolutely no knowledge on the subject.
Third, even in free societies there are limits to free speech precisely because there are people that abuse it. You indeed are showing you are a childish little boy, by not having consideration for your peers on this website.
Finally, a little tip to culture you up a bit. A requisite for freedom is knowledge (basic Ethics and Philosophy). You are very much a captive individual because you wallow in your ignorance and because you are a slave to your underdeveloped emotions.
I and most of the forum will proceed to ignore your comments, just as we would a child.
Hey EQ. I noticed your replies here are generic enough to be applied to pretty much any site about any topic, which leads me to believe you are a bot. As a test, I pasted your retorts here word-for-word onto a Star Wars fanboy site in a thread about who stronger, Darth Vader or Qui-Gon Jinn. So far, Kashyyyk517 has proven you wrong by quoting parables from chapter 4 in Jedi Technical Manual.
It's funny how posters resort to tactics that make them appear as though they are stupid when they can't discuss the topic at hand. I'm sure you aren't stupid. You just know nothing about the topic at hand. Is this specific enough to prove I am not a bot?
void AutoBotReply()
{
printf("Is this specific enough to prove I am not a bot?\n");
}
I may be wrong but my understanding of etf's trade is different. Bid up ETF causing underlying to lift off (added benefit that others will arb this). Such engineered upward momentum forces institutional argos and ideally retail / day traders to buy too (institutional bit was nicely illustrated in the article). Offload into raising demand. Rinse. Repeat. The strategy can be amplified by rolling and not offloading one's ETFs portfolio which is probably the case with CS - they can get murdered if and when the market turns significantly.
Yeah, it would seem likely that holding a whole bunch of anything can be dangerous if the price declines. Is that what this blog is claiming, that there is no offsetting short?
I suspect this is a popular opinion here. Why else would people bitch about pure arb?
For the same reason no one ventured that opinion originally and instead complained. People like to complain.
Fair enough. But let's investigate facts from the other end. What is so attractive in a hedged position that CS is disclosing being 100+% long of the total IYR out there? Surely it invites all sort of conspiracies...
"Zero Hedge is compiling materials to demonstrate the phenomenal gamble CS is taking by being the largest holder of the ETF-underlying pair trade. The ensuing implosion, once the market loses the invisible futures bid, will likely destroy Switzerland's second biggest bank and likely take down the country with it."
http://zerohedge.blogspot.com/search?q=cs
That is a strong comment, especially when no one can explain exactly what is being implied.
Perhaps a letter to CS is warranted?
I think a letter to Tyler Durden would be more logical.
We have been slowing our frequency down for a while and I have to say that our program trading has gotten the best fills ever because of many of the things stated in the paper. Our broker is co-located as well so we have the ability to do a FOK or EOC orders in .01 second intervals. So when we do a buy or sell or market open, we tell the computer to place the order at 9:30 and cancel at 9:30:25. Over the last few months we have always either set the open or gotten the opening or close to the exact tick.
What is the difference between this as what the SOES bandits where doing? The only thing that bothers me is that as a market maker or SLP you should have a fiduciary responsibility to the market (the specialists where sons of bitches but at the end of the day, they would perform their duty). No one with a direct co-locate should be able to ping or perform latency arbitrage. That's my .02.
"No one with a direct co-locate should be able to ping or perform latency arbitrage. That's my .02." Fully agree. The difference between HF and day traders is that day traders do not have an advantage over others - HFs do.
Makes me wonder if pinging or latency arb evolved in some places into something more sinister like totally engineered buy signals. Quant-this, is it possible or am I talking rubbish?
Somewhat; what sometimes happens - and this is from a friend managing a co-located operation out of the CBOT/CME - is that they will ping and then create momentum in the direction of the volume - especially if you can see the depth of the book. That is why the author wants to place program trading curves after 2% moves.
It's fascinating stuff and most of it should be allowed if you dont have an unfair advantage in having no commissions, more information than others, and much faster execution than anyone else. And let's get one thing straight, if the market starts craping out then these guys often turn the computers off and stop making markets or providing liquidity. If they do then they exacerbate the moves in a way that is not beneficial. Granted as a MM, if you get stuffed with paper, you should be able to have an edge to trade your way around it. But they dont just drop the bid, the help create the downward momentum to a place that would be below where than new normal bid should be. Again, my .02.
Do you know all about the naked short scandals reported and uncovered by deep capture? After reading what they have found, i am convinced that there is no end to the lengths that people who are unscrupulous will go to gain advantage and i am beginning to think that the majority of people are unscrupulous. Maybe the 80/20 principle applies here-- maybe the new financial regulatory system needs to have a proper way of screening for people with strong scruples.
http://www.deepcapture.com/the-story-of-deep-capture-by-mark-mitchell/
That explains the pattern one can see in the SPX.I and DJI and other charts.
They now looked the same for at least two days.
http://zeropointfield.wordpress.com/2009/07/02/more-odd-things-happen/
That's certainly due to program trading as explained here.
it's funny how people are complaining about this technology that has DRASTICALLY lowered everyone's execution costs. Instead of having the specialist or the crowd scalp you for an eigth (12.5c!!) we're now complaining that we have fantastic algorithms that allow us to execute more efficiently, but that someone else may be able to take advantage of to scalp us for a penny or a fraction of a penny...
you don't have to use the algo's - see if your local sell side trader can beat them: the answer is, he can't.
I agree with you. My fills have been fantastic lately. I think the only real bothersome thing is how some the of operations with an unfair edge are taking advantage of the situation. I truly think that anyone with a co-locate relationship should have some fiduciary duty towards the integrity of the market. There are enough ways for these guys to make money other than latency arb and pinging. All other things for me are fair game and part of the trading game. No different than what was done before and at the end of the day if you are truly an investor (which really in my mind are the only ones who need to be protected) - it doesnt matter so much.
why don't you give a 30 second tutorial on latency arb and pinging...
we're talking about mils here right? tenths of a penny... and yes, i understand that over the course of the year they add up - i don't think that's the point. If someone rapes me for a tenth of a penny every time i execute, i'm not going to the poor house. I'll pay that vig to have the narrower spreads.
If you don't like getting picked off for 1/10th of a penny then hey - write a better algo - or trade less!
i do think limiting the co-locate advantage is an interesting argument though.
So pinging is well described in the paper so I wont go into that other than it's basically fishing to see where the orders are.
Latency Arbitrage - I put a market order to buy, your computer sees that and because it's faster than mine or my brokers lifts the offer ahead of me and then offers it back up to me either at the same price for the rebate or at a penny higher. Sure we're talking about pennies but it's still front running.
i don't want to get into a semantic debate here, but i don't know if i'd classify it as "front running" - that's called TRADING! actually, i am assuming you don't really mean that it front runs your market order do you? you mean that it lifts the offer when you post a bid right?
i am not aware of your computer being able to front run my computer's MARKET order - if that's really the case then I think it sucks.
I know it's hard to imagine but I believe that is what is happening. When they see an order trigger, they get right in front of it. I didnt believe it myself until I went to see my friend's operation in Chicago. The computer guy they stole from the lesser known G, made himself $15m in 6 months. Mind boggling.
Common frustration expressed on this board is that people are afraid to short because of this and that, conspiracies, skewed market, CNBC clowns etc. Could as well be. In fact most likely is true...but... How did it feel shorting QQQ in 99? Does anyone remember Henry Blodget (in his former life) or Frank Quatronne? What is going on right now is a child's play compared to back then.
Note to above commenters - please continue - this is highly interesting conversation. Thanks for the discussion and insight. Us outsiders don't get to hear this stuff everyday. Thanks.
I think it will...there are so many angles to come at this for various types of traders. This was a nice supplement to prior vidoe clip and the ongoing discussions about this topic.
Look, if its so easy as this article suggests, then more would be in the space. It costs a small fortune to set up these algo operations and the return on that money is consistent but for most not mind blowing. These high frequency guys all have flaws too, and you can find ways to trade against them and make money on their strategies. Its no more a game now than ever...its just different. Adapt as always and stop complaining. Re commissions - TOTALLY agree with Kid Dynamite- - - you want to go back a few years to $15 minimum ticket charges and 3 cents per share commish? Is that better than long term investors options now - all in?
g
To me the problems aren't that there is manipulation, high frequency trading, new age portfolio insurance, direct government intervention or anything else. That's always been part of the market. The issue it the market ecology is seriously flawed, it trades like a very thin market because there isn't a sufficient diversity of participants and opinion in the market. All predators is a guarantee of a doomed ecosystem and that's basically all the market is at this point.
First of all Saluzzi gets an A+ for excellent oral and written communication skills.
On to this fascinating topic…
As a discretionary retail trader (not a quant for sure)and having kept informed about this subject, yet having my butt kicked in the markets during the course of the last few months, I either have to quit or adjust.
I’ve settled down and returned to the principled basics of discipline and patience first and foremost before doing anything else, because this has been frustrating. I think the most important thing that came out of Saluzzi’s interview and white paper was that, yeah, this is a rigged game that probably will end badly but their strategy would be to “work around” this - discipline and patience (something that gotten away from me recently). These programmed trading and liquidity issues (SLP, Dark Pools, etc.) aren’t going to be changed soon. That is not to fault anyone for attempting, because this has become a very dangerous game. I think we all appreciate the relentless press by ZH to get to the bottom of this.
As for me, I won’t be purchasing or programming any algo machine to co-locate on an exchange, so what are my options? I’ve been slowly developing a work around strategy of my own, and it is beginning to work and that is some consolation to having a pretty bad net loosing streak this year (the wins have been small and hard to achieve). I’m bloodied and bruised but a better fighter. The end result of this dangerous game might be zero (from the world economy down to the discretionary retail trader) for most, but I’m in for the fight to the end. Let’s see who is standing then.
The first example of Saluzzi's paper - buying and immediately selling for the same price - looks like a wash trade to me. I thought a wash trade does not comply with SEC rules.
Any comments?
Cheers,
Markus
so big size comes in, shreds it algorithmically into small pieces in an attempt to deceive the sellers how valuable their shares are, since big size wants to buy. the hi freq guys are able to detect this and effectively raise the price to be more in line with the big size that's trying to buy. seems to me that the net effect of their actions is to make the final sales price more in line with the information that's available. Saluzzi wants his side to make all the dough, and when they are detected, he cries foul. Baloney. There's no market of anything anywhere where big size doesn't move the price. Of course big size wants to conceal itself and prevent that. but the market ecosystem, fortunately, works to prevent big size from stealing from the uninformed sellers. and guess what? hi freq gets paid a small amount for their valuable service of achieving fairer prices for the otherwise hoodwinked sellers who can't afford to buy the infrastructure to detect they are getting hoodwinked. "best execution" to Saluzzi means "trick the sellers into letting us buy cheaper than our size warrants". It's a trivial observation and it's simply amazing that so much time is wasted listening to self-interested arguments from one side of the equation, especially arguments claiming a conspiracy or foul play. What's happening in the electronic world is the very epitome of fairness and a testament to how well the markets can work when information is available to all.
Not such a surprise, a bit routine here. People love to worry about things they don't understand, much easier than fighting a real fight. Just like that movie, where the credit reporting agency buildings are blown up...
Excellent point. I was coming to the same conclusion. In sum HF trading brings in certain goods and bads depending which side of the trade you are on (as any new tech does).
Buyers and sellers need to be aware that HFT may act as an amplifier for crowded trades. However, they are NOT the proverbial invisible hand which may be accused of lifting the market. Look somewhere else.
"Whoever had been selling to the institutional investor at $20.00 is likely to sell to the rebate trading computer at $20.01."
So some other institution got an extra 'penny' thanks to the 'computer', I wonder why they're not complaining?
here are 6 markets moving in synch. http://twitpic.com/94xpy
that toxic trading article is garbage. every trader is on a continuum of latency, analytic ability, processing power, the differentiating factors go on and on. I am not exactly horrified that the rebates for liquidity providers might indeed result in gasp - more posted size in the book. I am neither shocked that people are making money uncovering hidden information in the market. Algos try to bury traders' (and "investors'") intentions, but why should they remain hidden? The authors of the toxic asset paper seem qualified to work as sales reps, but nothing more. the shorter your time horizon the more capital you must spend, it is not free money, but there is no difference between high frequency traders and "investors" but their time horizon and perhaps their models. welcome to the twentieth century.
So who'll be the first to write the predator program to "attack" the other predator programs? Someone will write a program that looks like an institutional algo that has discretion to buy anywhere from 20.00 up to 20.10, letting the first predator program front run him and then short to the first predator program at 20.09. Then someone else will write another predator predator program and it will short at 20.08, then 20.07 etc, etc until this anomaly is squashed, assuming it hasn't been already. There's no honor among thieves… and thieves can read articles too.