Algorithmic Trading

'Commingle' hundreds of millions in client funds which are subsequently stolen rehypothecated as collateral by JPMorgan while your firm goes bankrupt as a result of your idiotic prop trading decisions, and what happens? Your toughest choice is whether to vacation in Fiji or St Barths. That said, being former CEO of the world's biggest TBTF hedge fund also known as Goldman, a former governor and senator, and most importantly bundler for the president of the "transparent" administration certainly helps. On the other hand, be a lowly algo trader and quant programmer working at the aforementioned hedge fund, and having dared to "steal" secret trading client code what can "manipulate markets" and what - you get the full wrath and anger of the FBI, the Federal Court System, and now the Supreme Court.

Capitalism may have bested communism a few decades ago, but exactly how our economic system allocates society’s scarce resources is now undergoing its first serious transformation since the NYSE’s founding fathers met under the buttonwood tree in 1792.  Technology, complexity and speed have already transformed how stocks trade; but As ConvergEx's Nick Colas notes, the real question now is what role these forces will play in long-term capital formation and allocation.  Rookie mistakes like the Twitter hack flash crash might be easy to deride, but make no mistake, Colas reminds us: the changes that started with high frequency and algorithmic trading are just the first step to an entirely different process of determining stock prices.  The only serious challenge this metamorphosis will likely face is a notable crash of the still-developing system and resultant regulation back to more strictly human-based processes.

Below are portions of a comment letter submitted by R.T. Leuchtkafer to the SEC on April 16, 2010, just 3 weeks before flash crash. The second paragraph in the excerpt below, unknowingly describes exactly how the flash crash was started. The letter goes on to alert the SEC on the dangers of High Frequency Trading (HFT), phantom liquidity and other concerns.

Today, the very orders that make HFT a beneficial trading strategy and one worth the massive capex, are controlled by the exchanges.  That's the difference between this form of "technological advancement" and those of the past, the direct ownership of the critical intersection between information processing and order execution.

While it will be no surprise to any ZeroHedge reader, academic research from ETH Zurich shows that not only are "commodity markets becoming very financialized and computerized... and more susceptible to minor shocks," but "at least 60-70% of price changes are now due to self-generated activities rather than novel information." In other words, only about a third of commodity price moves are caused by real fundamental news now (as opposed to 75% pre-HFT).

Fresh off the printers today comes a new release from Haim Bodek titled The Problem of HFT.

Does Wall Street really want a Romney Presidency? Or could Wall Street not care less, because they know that both sides will gladly do their bidding? After all it’s not like Obama has tried to jail corrupt bankers — Corzine, who after raiding segregated accounts is surely up there with the most corrupt guys on Wall Street — has been bundling for Obama as recently as April. Ignore the chickenshit donations. If markets fall significantly between now and November — 1300, 1200, 1100, 1000 — the powers that be on Wall Street want a Romney presidency. After all, it’s not only possible but extremely easy to deliberately crash the market. No S&P crash? They’re happy to stick with Obama.

Joe Saluzzi, expert on algorithmic trading -- also known as high-frequency trading, or HFT -- returns as a guest this week to explain how the players behind this machine-driven process act as parasites that are destroying our financial markets (and, increasingly, even themselves). Since Joe first spoke with us last year, HFT firms have only increased in size and share of market activity. Here are some staggering statistics on how influential they have become:

• HTFs make up between 50-70% of the volume seen across market exchanges today
• 2% of the traders on many exchanges (HFTs, specifically) represent 80% of the volume
• a single large HFT firm (referred to as a Direct Market Maker) can account for 10%+ of a market's volume on a given day
• Large HFT firms make between $8 to $21 billion a year
• HFT trades occur in milliseconds (i.e. a small fraction of the time it takes your eye to blink)

With such scale, speed and profitability, HFTs have turned the market away from being an efficient price-setting mechanism and perverted it into a casino where the clientele (i.e. human investors) gets fleeced. And our regulators are so outmatched by the scope, complexity and funding of these titanic HFT players that at moment, there are pretty much zero consequences for bad actors.

High-frequency trading became so competitive that on a truly level playing field no one could make money operating at high volumes. Starting in 2008, there had been a frantic rush into the high-frequency gold mine at a time when nearly every other investment strategy on Wall Street was imploding. That competition was making it very hard for the firms to make a profit without using methods that Bodek viewed as seedy at best. And so a complex system evolved to pick winners and losers. It was done through speed and exotic order types. If you didn’t know which orders to use, and when to use them, you lost nearly every time. To Bodek, it was fundamentally unfair—it was rigged. There were too many conflicts of interest, too many shared benefits between exchanges and the traders they catered to. Only the biggest, most sophisticated, connected firms in the world could win this race.

All you need to read.

When it comes to open questions and general issues surrounding the gold market, The Thunderroad Report's Paul Mylchreest is among the leading contrarian voices who always injects a dose of reality in an otherwise nebulous topic, and one which has been a great disappointment for central bankers over the past century, because as Chris Martenson explained yesterday, "Gold is an objective measure of the degree to which fiat money is being managed well or managed poorly" and never has fiat money been managed as badly as over the past 4 years. In his latest report, Mylchreest focuses on a topic that is near and dear to many precious metal fans: manipulation, and specifically capturing it in practice. In an extended overview of what he dubs various "repeating algorithmic trading programmes" Mylchreest is confident he has enough evidence to demonstrate a recurring pattern of blatant gold manipulation. And he very well may: at the end of the day price merely express the relative confidence of buyers versus sellers, but at the end of the day, we once again go back to the one question we keep on repeating, and one which Martenson also picked up on: if gold is manipulated, so what? Not only so what, but thank you! Because what keeping the price artificially lower does is provides a cheap entry point to pick up physical. As a reminder, those who buy gold, at least so they claim, are not doing it to flip it higher in some fiat equivalent, unless they are merely speculators of course, and instead preparing for the period that follows the collapse of paper money, in which only sound currency, such as gold and silver, will be relevant. In this context, we can only say - bring on the manipulation, in fact send gold to zero if possible please. Frankly neither we, nor anyone else, should be that much concerned with day to day gyration of the value of gold. The long-term trajectory is well-known, however the only question is- does one buy gold to sell it (in dollars, euros, rial, or dong), or to have a true backstop to a failing currency when point T+1 finally comes?

As long-term readers recall, the observation of Goldman's dominant presence in the NYSE's weekly program trading reports by Zero Hedge back in early 2009 was one of the key drivers that set in motion the backlash against algorithmic trading and HFT which back in 2009 was the pinnacle of fringe topics and has since become a daily talking point and market scapegoat du jour on days when stocks are down (but never up). It also drew attention to Goldman's prop trading division which Zero Hedge was the first and only vocal opponent of, and has since been demolished courtesy of the Volcker Rule, an event which both Moody's and Alliance Bernstein now say could cost the bank dearly in top and bottom line, yet which Goldman told us on the record "represents approximately 10% of this year’s reported net revenue." Guess it was more, huh... Yet the same NYSE weekly program trading update indicates that Goldman, up until now a monolith in NYSE program trading, has just lost its crown in that field as well. The new king. A firm called Latour Trading, which in the last week traded 484.6 million shares in principal strategies. Which begs the question: just who is this Latour Trading which dares to upstage the firm that does god's work on earth. Alas, their website has been less than forthright. Inquiring minds certainly want to know.

The first of what is likely many. "Due to technical disturbances, Oslo Børs' Equity and  Bonds markets are temporary halted. Members may  delete their orders in this state.  Further information will follow. "

After over two years of over 200 posts discussing the dangers of High Frequency Trading on Zero Hedge, the mainstream media (and its comedy-finance fusion Comcast offshoot) has finally made its goal in life to destroy HFT. The only reason for that, of course, is that HFT, by definition, tends to accentuate moves. And while it did so to the upside, nobody but Zero Hedge and a very few other blogs, most notably Themis Trading, cared (and a whole lot of other "experts" ridiculed our views of HFT as liquidity extracting, because yes they are, rebate chasing, sub penny frontrunning parasites). Now that the tables have turned, everyone, up to and including that caricature Jim Cramer can't get enough of bashing it. Which is why for anyone still relatively new, and thus unjaded, to the topic, we present this informative and succinct six-part videoclip series just released by Securities Technology Monitor titled "High Frequency Minutes" discussing all the latest paradigms in the world of modern cutthroat, nanosecond trading.