HFT

All you need to know.

The Santa rally into the year end was taken good advantage of by retail America. As ICI reports, in the week ending December 28, investors pulled another $3.988 billion out of domestic equity mutual funds (and $1.2 billion out of foreign equtiy funds). This represents the 19th consecutive outflow since a tiny inflow in mid-August, which if excluded would mean 36 consecutive weeks of outflows beginning in late April, or roughly the time when the market peaked. Altogether a whopping $140 billion has been redeemed from domestic equity-focused mutual funds, which compares to "only" $98 billion in 2010. Unfortunately for the permabulls, the rangebound market since then indicates that absent retail investors returning to the broken casino that is the equity market, the probability of another break out of previous high is slim to nil. In fact as the chart below confirms judging by how long the area chart has been negative (or in outflow territory), the only thing Joe Sixpack wants is to get his money out of the rigged ponzi scheme pronto. And the longer the market trades like an irrational, pustular (for all the 19 year old HFT Ph.D's out there) and outright rabid teenager, the more investors will just say no and park their cash in either taxable bond funds (another $1.2 billion inflow in the past week), in their mattress or in gold. And unlike the Fed, equity funds can not print their own money: given enough redemptions and the liquidation selling will be inevitable. It also means that following $140 billion in redemptions with the market ending unchanged, the leverage used by mutual funds, whose cash is already at record lows, must be at record levels. And we all know how "record leverage" situations end...

The once proud masters of the universe are going, going, gone, not with a bang, but a Billy Joel cover:

All I want to do is retire
Cause we're slowly fading
The machines are trading

All I want to do is retire
It's tough to be a broker
When the game is over

In yet another example of just what a farce our market has become, it appears that HFT algos, no longer able to freely frontrun the market courtesy of counter HFT-measures offered by major banks and an SEC which has started sniffing around illegal HFT activity, have stooped to the second-lowest rung in the ladder: scouring through momo trader tweets on Twitter, particularly those from the StockTwits network and somehow converting that into actionable "intelligence." Because while until now some amusing attempts at money management using the garbled noise of Twitter had been implemented, all of them relied on human eyes to translate content, going forward it will be robots doing the actual analysis, not to mention sarcasm translation. STM reports: "A Boulder, Colo., collector and redistributor of comment expressed on social media networks Thursday will launch a pair of streams of data from Twitter and the securities discussion site StockTwits that are 'normalized' and ready to be fed to computers for analytical processing. Gnip said it has prepared the streams as part of the launch of a product it calls MarketStream, that is designed for use by hedge funds and high-frequency traders. The move follows the launch in May of a social-media-based hedge fund in London. In that launch, Derwent Capital Markets said the fund it created would try to achieve consistent above-market returns from real-time analysis of comments on social data." Well actually if they really want above market returns they should also add Yahoo Finance message boads to StockTwits: that will really put the bind on Steve Cohen to come up with new and improved ways to generate information arbitrage. At that point the entire momo crowd in the whole world will be swaying the market like an explosive-laden boat full of news reactive lemmings, who believe they move the market, only to receive terminal margin calls within days. But, yes, the safety of the crowd is soooo nice.... Until it isn't. As for the algos, we can bet what side of the trade they will be vis-a-vis the prudent investor subsegment that chases market heatmaps in a market in which VIX 30 is the new normal.

For every seemingly irrational move in stocks, there is always an explanation. This time we look to Nanex who advises us that concurrent with the latest market surge between 11:35 am and 11:40am, there was a parallel spike in HFT quote churning. Traditionally, this has been associated with market drops in high volume days, although with volume in the past 48 hours nothing to write about, it appears that HFT quote surges tend to translate to market spikes when there is no coordinated high volume activity. Interestingly, this time it is a coincident if somewhat lagging indicator. We will observe how algos will react the next time there is a sharp move either higher or lower in stock to see whether robots are a cause or an effect.

BIS says HFT is not an issue. I think they're wrong.

On September 15, 2011, beginning at 12:48:54.600, there was a time warp in the trading of Yahoo! (YHOO) stock. HFT has reached speeds faster than time itself. Up to 190 milliseconds into the future, or 0.19 fantaseconds is the record so far. It all happened in just over one second of trading, the evidence buried under an avalanche of about 19,000 quotations and 3,000 individual trade executions. The facts of the matter are indisputable. Based on official exchange timestamps, there is unmistakable proof that YHOO trades were executed on quotes that didn't exist until 190 milliseconds later!

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.

A few days ago we learned that the SEC was either objectively going after every single HFT shop by demanding frontrunning blueprints, or it was merely pandering to the requirements of GETCO, which is in dire need of eliminating some of its more profitable competitors. Now, the WSJ informs that the same porn-addicted regulators are going after ETFs: yet another market product that the enforcement regulator, in its multi-year long career-enhancement focused hiatus, has totally forgotten about and is finally starting to realize has more of an impact on the market than virtually anything else currently in the trading domain. The skeptics will say that this is nothing but ETF giant Blackrock stretching its wings and making sure it doesn't have to share the spoils of frontrunning war with anyone. Whether that is the case, we will find out soon enough, in the meantime we learn that the SEC is "looking into whether turbocharged exchange-traded funds amplified August's topsy-turvy swings in the stock market." Apparently years, because it is no longer months, after the flash crash, the SEC has realized that the convexity and gamma brought about by HFTs in the ETF space merely adds leverage upon leverage, sending the market into spasms of unnecessary but inevitable bouts of momentum chasing: "SEC officials are zeroing in on "leveraged" ETFs, which amplify investor bets, often through derivatives. Derivatives are financial contracts with values linked to another asset. The funds typically offer double or even triple the return of an index, such as the Standard & Poor's 500-stock index." Soon enough, we dread to think, the SEC may also realize that it has absolutely no clue about market topology and structure, nor how anything actually works in modern markets. But since the response by the midget porn fanatics will take years if not decades, we doubt anyone is too concerned. After all Keynesianism itself has at best one, maybe two summers left. Max.

The crusade against High Frequency Trading which Zero Hedge started well over two years ago, is now coming to an end. Reuters reports that U.S. securities regulators have "taken the unprecedented step of asking high-frequency trading firms to hand over the details of their trading strategies, and in some cases, their secret computer codes." As everyone knows, the only thing of value within the sub-penny scalping HFT universe are the odd nuances in computer code. Which is why its supreme and undisputed secrecy is sacrosanct. As soon as anyone, especially a regulator, has a whiff of understanding how any given algorithm works, it becomes the equivalent of collapsing the wave function: observing the HFT theft-scalping duality in action eliminates the Schrodinger equation associated with any simplistic algo and collapses its "wave function" to a worthless series of ones and zeros. Said otherwise, this is the end for HFT.

On August 25, 2011 at 15:45:48, in a one second period of time, there were more than 10,000 quotes and exactly zero trades in DELL. Close inspection of these quotes reveals something very disturbing. This cannot be dismissed as a computer problem or glitch. This can't be explained as stupidity or some oversight. It is not pinging for hidden liquidity. And it's certainly not price discovery. As far as we can tell, it's not adding liquidity or narrowing the bid/ask spread. There are approximately 4,000 stocks that quote during active trading. Which means 40 million quotes/second if just one of the 9 exchanges allow this nonsense to spread to all 4,000 symbols. You would need 40 gigabits per second of bandwidth to receive data at that rate. Unfortunately, we think it's just a matter of time, because events like this one in Dell are no longer isolated or rare. And it doesn't look like there are any grown-ups in charge. 

Now that we can directly monitor the amount of quote stuffing in the NYSE courtesy of Nanex (an ability that the SEC apparently never will have), we know that every time there is a massive spike in hollow trade (as in without intentions to cross bids or asks, something everyone but the SEC and the HFT lobby believes should be a felony offense), the market is programmed to either rip of plunge. Sure enough, at just after 3:19 pm we saw an epic spike in empty packets on the NYSE, which set off red flags and immediately prompted us to observe the move in ES, which naturally confirmed that an HFT driven coordinated buy order (no block) was going through and pushing the ES well on its way to VWAP. Market manipulation no longer needs anything more than a coordinated packet stuffing dump, as what happened on May 19. Keep in mind: these work on both the upside and the downside- the reason why suddenly everyone hates HFT after loving it for over 2 years, is that while it provides volumeless levitation, it just as easily can serve as quicksand in a downmarket. That, however, does not make it right, and just as two years ago, when we first brought attention to the matter, so today, we claim that HFT should be abolished immediately by the imposition of a minimum active quote latency. That would eliminate all quote stuffing in a millisecond.

There are daily lies by the HFT defenders that all little innocuous HFT does is provide substantial liquidity for capital markets. Then there is reality. Courtesy of this latest catch by Nanex, we have now witnessed a $10 bid/ask spread (!) on a $14 stock. And with that we can cross out the assumption that HFT is i) beneficial for stocks and ii) tightens bid/ask spreads.

Lately, readers have sent us links to a few research papers extolling the virtues of HFT, namely, that they provide liquidity, reduce spreads, and probably cure cancer. At first, it appeared that some of these papers were written based on data from another planet, but, upon closer inspection, we realized that they were simply based on very old data. You see, as HFT races towards zero, the data it generates decays just as fast. In other words, any research paper written just 6 months ago, or one that does not take into account recent data, might as well have been written for people on another planet, because it won't accurately describe what is going on in the market today. Take a look at the images below, which show just how much, and how quickly trading has change since 2007. We plot U.S. equity quote and trade data for each minute of the trading day, from the beginning of 2007 through August 16, 2011 (about 1165 trading days). Note the significant changes from late 2009 (light green to aqua-marine). That was a year that many Pro-HFT research papers are based on. If the research paper predates 2011, or worse, ignores recent data, it's probably not worth the paper it's printed on.

HFT Update after last week's volatile trading sessions.