How many people in the financial services industry understand how the financial system works?
We've all experienced it, we are dealing with someone who has all sorts of masters degrees, PhD's, and doesn't know the Federal Reserve is a private corporation, and even doesn't know the product their company is selling.
In the spirit of professionalism, we must keep these quotes anonymous, but certainly if you have survived long enough in Finance or read the Financial news regularly, you will not need any references because you've probably heard it before.
Having discussed market microstructure and the parasitic impacts of high-frequency-trading for the last 5 years, it comes as no surprise that the block-trade-sniffing algos have had very significant impacts on the way institutional investors trade now. As WSJ reports, in fact the big boys are conducting more "upstairs trades," in which deals are executed among big institutions, bypassing the broader market, because the proliferation of algorithmic trading and other structural issues, including the fragmentation of the market, are hurting their ability to get the best prices and execute large trades quickly. While the concerns aren't all new, big investors say the cat-and-mouse games are growing more elaborate - and counterproductive - by the day.
Another 2 Year Old Zero Hedge Story Goes Mainstream, And A Glimpse Inside The BLS' "Frontrunning" Data RoomSubmitted by Tyler Durden on 08/12/2013 08:16 -0400
Those who did not read Zero Hedge in March 2011 will be shocked, shocked to learn that yet another "news" service, one owned by Deutsche Börse, was merely disguising as an HFT-facilitating, instanews disseminating, speed roadblock removing provider, who just happened to charge $375,000 per year for its frontrunning services. The firm in question, as the WSJ reports today, was "founded by an investment firm and now owned by the Deutsche Börse stock exchange, Need To Know News has operated with an overriding mission: sending data directly from the government through high-speed lines to financial firms that are able to trade on it instantly. Some have paid $375,000 a year for the service." Of course, those who did read Zero Hedge in March 2011 will already know all about Deutsche Boerse's "news dissemination" strategy which was covered here first with "Alpha Flash: For All Your Nanosecond, Collocated, Algorithmic Frontrunning Needs" in which we tongue-in-cheekly asked "Ever feel like your nanosecond algorithmic frontrunning skills are becoming obsolete? Unable to scalp even a few extra pennies from illiterate orphans, widows and kittens armed with REDIPlus 9.0? Despair not, for Deutsche Boerse [and Need to Know News LLC] has Alpha Flash just for you."
"I am going to hit on some of the landmines that you can encounter within order-matching engines, and then I am going to give a forecast on, at least from my perspective, what’s going to happen over the course of 2013"
Ever feel like you can't put that math PhD to good use anymore and make money scalping ahead of order flow, sub-pennying and frontrunning retail in normal and dark pool markets because volumes are just off 1929 levels? Then the Chicago Fed has an offer you just can't refuse. And since money printers can't be choosers, the Fed may also have a spot for those who tried their hand at the New Media (i.e., churning slideshows): "Develop presentations and clarify complex issues for broad audiences." Yet what is most interesting is the following requirement: "Interact with highly informed and technically skilled outside stakeholders while preserving the reputation and credibility of the Reserve Bank." We'll just let that one slide...
'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.