HFT

Committees, investigations, concerns... but no actions. The SEC's Mary White spoke about market micro-structure this morning but mereley asked a lot of questions - as opposed to answered any. Two things she did mention of note: increased transpraceny for dark pools and internalizers; and forcing more high-frequency traders (and prop shops) to register as broker-dealers (and thus come under closer regulatory scrutiny). However, by the time any of this becomes 'law', we suspect the lobbyists will have created loopholes the size of Draghi's ego for HFTs to walk through. As WSJ reports, the SEC's enforcement division is investigating whether some high-speed traders are using order types - commands exchanges provide that determine how traders' buy and sell orders will be handled - in ways that can give them an advantage over less-savvy investors. We apologize for not seeing this 'investigation' as a positive but we've been here before with every other regulator... vested interests remain strong.

Two weeks ago when news broke about the first confirmed instance of gold price manipulation (because despite all the "skeptics" claims to the contrary, namely that every other asset class may be routinely manipulated but not gold, never gold, it turned out that yes gold too was rigged) we said that this is merely the first of many comparable (as well as vastly different) instances of gold manipulation presented to the public. Today, via the FT, we get just a hint of what is coming down the pipeline with "Trading to influence gold price fix was ‘routine’." We approve of the editorial oversight to pick the word "influence" over "manipulate" - it sound so much more... clinical.

As the rest of America began to relax last Monday with a patriotic beer in their hand and a never-forget-hotdog stuffed in their mouth, the machines that run the gold manipulation market appeared to forget that the world was on vacation. The WTF moment that we described here, appears - thanks to Nanex detailed analysis - to have been the actions of yet another rogue HFT algorithm roller-coastering through an after-hours order book in gold futures. Un-rigged?

Friday's latest resignation of yet another former Obama administration faithful - that of White House press secretary Jay Carney - got us thinking: how many people have jumped off the USS Obamic? The answer is, in short, a lot. Below is a list (by no means complete) of the most prominent officials and advisors who have quietly exited the Obama administration stage left over the past 6 years.

in the past year it has became very clear that the asset class where the growth of HFT has been most pronounced is not in equities but in FX - perhaps linked to the tidal departure of all carbon-based FX traders all of whom it now appears were engaging in gross "chat room" mnaipulation - and to a lesser extent, options. But one place that seemed somewhat immune from the ravages of the constant millisecond back-and-forth churn and quote stuffing known as high frequency "trading" were bonds.

No longer.

There are over 40.7 million foreign-born residents living in America. Iceland, Bermuda, and Samoa have the lowest level of foreign-born population in the United States but it is Mexico that is head, shoulders, and torso above the rest with 28.2% of the foreign-born population from just aross the border. Russia, interestingly, is 20th (just ahead of Iran in 21st place). We can only hope not all Russian immigrants are currently HFT "traders."

"Unbridled faith in financial markets prior to the crisis and the recent demonstrations of corruption ... has eroded social capital. An unstable dynamic of declining trust in the financial system and growing exclusivity of capitalism threatens.... Capitalism must reassess bankers' sense of self."

The recent public outcry over high frequency trading is pointless. Solutions exist. Virtually every comparable market in the world uses them already. But, some electronic exchanges may not willingly adopt them. Doing so may disrupt their current business model. The incentives are misaligned, and competitors or regulators may need to force the issue to see change. Luckily, the issue to be forced is far simpler than most think. It’s time to add quality to the matching process.

Long before Virtu was forced to pull its IPO due to the backlash against HFT frontrunners in party due to being stupid enough to post its perfect trading record of 1 trading day loss in 5 years which could only be the result of a grossly rigged market, we pointed out that another entity, one having little in common with your garden variety HFT parasite, namely JPMorgan, had a 2013 trading record which could be summed up on one word only: perfection. Yet while one could simply attribute the same kind of market rigging to JPM as one can (and should) to the average hi-freak, it seems there may be more here than meets the eye so used to seeing manipulation everywhere it looks. According to Australia's Sydney Morning Herald, "a technical support person who worked for JP Morgan in Australia claims the bank regularly misled its New York parent and the US Federal Reserve by failing to report losing trades."

Remember the legend of the great rotation? Neither do we. But we do know that a Treasury fund inflow of $3.06 billion, the largest since at least 2010 according to Bank of America, coupled with an equity fund outflow of $7.1 billion, means just one thing: the great unrotation is raging. It does beg one question, however, with equity funds dumping in the past week, just who is actually left BTFATH? (Don't worry, that's rhetorical - we all have Kevin Henry and the HFT crew to thank for the ongoing endless manipulation of the rigged market).

Curious how and why commercial bank traders manipulate the price of gold? The following detailed narrative from the FCA should answer most lingering questions.

While the defenders of HFT continue spouting their usual platitudes (with the latest piece of "anti-hyperbolic" fluff coming from "Mr. Quant" (but don't call him an HFTer) Cliff Asness himself who said overnight that "markets are "rigged" in favor of, not against, retail investors"... so - rigged?) the reality is that while one can debate the ethics of HFT frontrunning orderflow until one is blue in the face (or until Goldman tells the DOJ to slam the hammer on the high freaks once and for all), the biggest adverse impact from HFT continues to be the inherent instability that algo trading creates in the market. For empirical evidence of just this, we once again go to the usual source which everyone ignores until months after the fact is seen as having been right about everything, Nanex, which looks at one particular aspect of market instability, namely Limit Up, Limit Down circuit breakers and finds something very disturbing.

"You’re picking up pennies on a train track. You are not getting paid much but you are sure that there will be a very negative surprise at some point. The risk / reward profile is as bad as ’07." - Portfolio manager speaking to Citigroup

One allegation about price manipulation was made by the German regulator BaFin. That proves it, right? Not so fast.

When obnoxiously wealthy pricks with the ability to bribe stock exchanges to place their trading computers on the floor of the exchange and financially induce the Wall Street banks to funnel trades through their dark pools in order to know what is happening a nanosecond before everyone else, and use this information to front run unknowing investors to generate risk free profits, it’s wrong. It really is black and white. I don’t care that it is supposedly “legal”.  By complying with Regulation NMS the smart order routers of institutional investor firms like Vanguard, Fidelity and Schwab simply funneled naïve investors into various snares laid for them by the unscrupulous high frequency traders. The bad guys always win and the good guys always lose on Wall Street. And no one does anything because they are all on the take. Lewis puts it in terms the average person can understand.