HFT

Nothing like a little stick save in 20 minutes to prevent a, gulp, close at the day's lows. Fidel Sarcastro demonstrates how the HFT crew is now doubling also as SkyNet's goalie.

In a bid to preserve groupthink, and to finally let Getco off the hook from going chapter if GM's price were to ever drop below $33, JPM's Equity Derivatives desk led by Adam Rudd, who is recommending a trade based on Himanshu Patel's view that GM is massively undervalued, has just come out with a trade recommendation to buy GM March $38 calls funded by selling Ford $17 calls. After all can't let a government funded post-reorg story ever go to waste. And for JPM's functioning retard clients, here is the trade's explanation: "We believe that this trade may be particularly attractive for those investors who anticipate outperformance of GM relative to Ford." One quick look behind the scenes indicates that this call is nothing more than a less than glaringly obvious attempt to recreate the options trading frenzy seen in Ford stock in mid/late October in GM, now that Ford derivatives mania is over.

We have the perfect job for Designated Market Maker Getco: after the HFT firm did everything in its power to make sure GM's stock will never drop below $33 as long as HFT is the only dominant power in the stock market, the next logical place for the talents of the world's biggest High Frequency Trading powerhouse, is making markets in Brian Moynihan resignation odds. Because even though InTrade has just launched a contract on Brian Moynihan resignation odds by June 30, 2011, there is no markets and no bids and offers. Furthermore, we are confident that Bank of America, which has recently bought out all potentially embarassing domains of the www.brianmoynihanblows.com variety (although www.brianmoynihanswallows.com, .net and .org are still available), will demand a market maker who represents a "slightly" subrealistic outlook on Moynihan's chances of survival, and is willing to "internalize" all such risk, (unclear whether or not selling residual risk to the Fed would subsequently ensue). And in keeping with tradition, Getco should surely be paid using BofA's residual taxpayer-funded TLGP capital. Furthermore, Zero Hedge will work closely with Nanex to monitor the number of flash crashes in Moynihan "eats shit" contracts as they are already called in the street.

Robots everywhere are panicking as the NYSE has just announced it is experiencing "slowness" in disseminating trades and quotes. In a casino market now built exclusively for frontrunning the slower order flow, this means that millions of computers are suddenly clueless as to who should be scalped. And if they all move to the rickety BATS exchange en masse, a flash crash may be all but inevitable.

Today, in a 3,500 word oeuvre, the NYT's Louise Story has done an expose on some of the key development in the CDS market. For those who may not have the patience of reading the whole thing, we provide an abridged summary...

Have you ever heard of Section 747? No, it’s not where the government is hiding the aliens. And it’s not the secret area where The Bernank prints all the money. Section 747 is a small paragraph buried deep in the 3000 page monstrosity known as the Dodd-Frank Act. And Section 747 is causing a lot of folks in the HFT world to be very concerned.

The push back against the HFT market-propping travesty is finally starting to gain steam...but for now only in Europe. After all, the Fed realizes all too well that it needs all the resources it can get in its bid (no pun intended) to keep stocks as artificially high as possible, of which the HFT upward biased feedback loop is a critical one (the PD POMO monetization circuit being a second one... and when both fail, there is always the Citadel dark pool direct purchasing channel). Reuters reports thet "Britain and France flagged on Thursday a looming crackdown on ultra-fast share trading that featured in May's brief "flash crash" freefall on Wall Street, alarming regulators and investors globally. French Economy Minister Christine Lagarde said a
form of computerized trading known as high-frequency trading (HFT) may
need banning in some cases." Lagarde, who has recently shown a willingness to be seen as not part of the Bernanke mold, told reporters that her "natural tendency would be at least to
regulate, to oversee it very strictly and after a cost-benefit analysis
of these methods, maybe to forbid it." Elsewhere, a European Parliament November 16 report on MiFID "Calls for the practice of ‘layering’ or ‘quote stuffing’ to be explicitly defined as market abuse." This is something Zero Hedge has been demanding for about a year now, and obviously something that the corrupt regulators at the SEC, headed by the galactically incompetent Mary Schapiro continue to pretend does not exist. Lastly, in an attempt to make the life of the NYSE easier, whose primary source of revenue, now that Chinese IPOs have been uncovered to be a pathological, unauditable scam, has collapsed, the target has now shifted to dark pools: "The proliferation of dark pools was a tragic error and I would like us to come back to it" according to Bank of France Governro Christian Noyer. The latest onslaught against dark pools is not at all surprising: after all the NYSE is pushing hard to preserve some semblance of relevance (and EPS) as it is now attempting to create "a global network of as many as 40 "liquidity hubs" in data centers around the world." All in all, this smells like the role of HFT right here in our own back yard is about to get seriously curbed. Add the fact that Prett Bharara is about to open at least one criminal case against a domestic HFT outfit, and the robotic permabid behind the market may soon be very, very scarce.

The administration is doing everything it can to make sure that the worst IPO in history, that of Government Motors of course, will not be DOA. The latest news is that Getco has been appointed to be a DMM for the year's most important IPO. As Bloomberg reports: "The Chicago-based firm will be tasked with helping trading go smoothly when the auto maker returns to the New York Stock Exchange after a 16-month absence, expected to occur Thursday. NYSE Euronext (NYX) spokesman Christiaan Brakman confirmed that Getco was selected from among the exchange's five designated market makers, who are responsible for buying and selling shares, smoothing trade imbalances and providing liquidity in designated symbols in return for incentives paid by the exchange." Well, by now it should be all too clear what "providing liquidity means."

Since it appears that the majority of the American public is receptive to understanding moderately complex economic and financial topics only when presented in cartoon format (as in QE2) here is extranormal with the latest, this time making high frequency trading comprehensible to even those with a 2 minute attention span.

But taking into consideration the somewhat disquieting news from China, I am wondering just how fast is a petaflop, exactly how fast is a high frequency trade (take automated scalping for example) and how does one visualize it in comparison to the processing speed of the average SEC porn surfer.

Now even the CFTC is blasting High Frequency Pirates: Bart Chilton, a commissioner with the futures regulator, said "mini-flash crashes occur all too often" following a surge in high-frequency trading. Please someone finally wake up the Rip Van Widiots at the SEC and hold them accountable for not only scapegoating innocent parties, but perpetuating what is essentially a criminal market in which front-running by computers is not only allowed, but encouraged. More from Chilton: "They don't cause as much of a disruption as that of May 6, but more than once this year, runaway algos have disrupted markets. By that I mean, cost people money." So if even the CFTC is all too aware of who is responsible for what has now become a daily stock crashing farce, when will Mary Schapiro and her 9 million pieces of silver finally get the memo?

A recent speech by Interactive Brokers' CEO Thomas Peterffy at the World Federation of Exchanges may just be the watershed insider conversion event that finally opens the eyes of all those who have been living for years with the delusion that modern markets are fair, honest and transparent. As the Interactive Brokers head says: "It is not so much anymore that the public does not trust their brokers. They do not trust the markets, the exchanges, or the regulators either. And why should they, given our showing in the past few years? I must confess to you that I was an ardent proponent of bringing technology to trading and brokerage. Unfortunately, I only saw the good sides. I saw how electronic trading and recordkeeping could be used to force people to be more honest, to make the process more efficient, to lower transaction costs and to bring liquidity to the markets. I did not see the forces of fragmentation and the opportunity for people to use technology to keep to the letter but avoid the spirit of the rules -- creating the current crisis. It is vitally important that we bring an end to this crisis of trust before it spreads any further; that we bring back order, fair dealing and trust in the marketplace." And if there is anything that the 23 sequential outflows from equities demonstrate, it is precisely that the average investor no longer has any trust in either the markets, or its regulator. Furthermore, the latest piece of evidence from Nanex, definitively confirms that not only was the Waddell & Reed's order not the catalyst for the May 6 flash crash, but it was the HFT buyers of this sell order, that "transformed
a passive,  low impact event, into a series of large, intense bursts of
market impacting events which overloaded the system. The SEC report uses an
analogy of a game of hot-potato. We think it was more like a game of dodge-ball
among first-graders, with a few eighth-graders mixed in. When the
eighth-graders got the ball, everyone cleared the deck out of panic and
fear." At this point, to the SEC's chagrin, there is nobody left to watch how this particular game of dodgeball, or the latest propaganda scapegoating campaign for that matter, will end.

Last night on 60 Minutes, Steve Kroft, finally brought mainstream America's attention to the topic that has been the primary scourge of efficient markets over the past 5 years: High Frequency Trading (not to be confused with Signing, aka RoboSigning). In Wall Street: The Speed Traders, Kroft spoke to such advocates of a robot parasite-free as Themis Trading's Joe Saluzzi and (now ex) Senator Ted Kaufman, as well as some other individuals who stand to benefit by computerized feedback loops making a mockery of price discovery, and which have now caused something like ten mini flash crashes in as many days, not counting the Flash Crash itself. Of course, the only defense the HFT lobby continues to use is that it provides liquidity. Which is why, once again falling back to scientific literature, this time a study by Andrei Kirilenko of the CFTC et al (which is also obviously biased as the CFTC, just as the SEC, stand to lose what last credibility they have if it is indeed discovered that it was precisely SEC and CFTC endorsed HFT, and not Waddell and Reed, that was the cause of the Flash Crash, something we refuted flatly last week), which demonstrates just how fallacious any claims that HFTs provide liquidity are. In a word: "HFTs traded over 1,455,000 contracts, accounting for almost a third of total trading volume on that day. Yet, net holdings of HFTs fluctuated around zero so rapidly that they rarely held more than 3,000 contracts long or short on that day." Said otherwise, Liquidity-to-Volume ratio: 0.00206%.

The SEC's entire worthless report, which is nothing but a failed attempt to distract the general public from the fact that the primary reason for the collapse on May 6 is HFT... and the SEC itself, of course, for having allowed HFT's encroachment to the current levels of market dominance, does probably the best job we have seen of exposing High Frequency Trading for the hollow stock churning operation it is. From the report: "Still lacking sufficient demand from fundamental buyers or cross-market arbitrageurs, HFTs began to quickly buy and then resell contracts to each other – generating a “hot-potato” volume effect as the same positions were rapidly passed back and forth. Between 2:45:13 and 2:45:27, HFTs traded over 27,000 contracts, which accounted for about 49 percent of the total trading volume, while buying only about 200 additional contracts net." In other words, the ratio of "volume" to actual liquidity was about 135 to 1. In other words, all HFT does, is provide volume, and actually take away liquidity as HFT's illegal sub-pennying practices pull limit bids and offers that otherwise would exist. It is time to pull the bloody plug on all the computers already.

One of the key underreported news from yesterday was this tidbit by the WSJ, which highlighted that the head of Interactive Brokers Group Inc. said that his firm's market-making unit may withdraw from some options markets or even convert into a high-frequency trading firm because of what the company views as an unfair regulatory regime. In other words, the current regime rewards HFTs and punishes standard prop traders. (As a reminder IB's Timber Hill market making algo is precisely what two Norwegians gamed in 2007 and 2008 to make enough profits to get them in court and facing a 6 year prison sentence). To an extent this should answer Michael Lewis' rhetorical questions posed yesterday in Bloomberg, as to why Wall Street firms are voluntarily eliminating their prop trading divisions. The simplest answer: everyone is entering the scalping business, with some already having a material advantage over others. As to what this means for the market, the answer is another virtually assured flash crash: "If [regulators] do not make it sufficiently attractive for us to continue as market makers, then we will probably selectively deregister," Peterffy said in an interview. "Potentially we could even become a high-frequency trading firm ourselves, and provide liquidity when it is in our interest." And it gets worse.