HFT

Per a letter disclosed in the WSJ earlier, it appears the torch that Chuck Schumer picked up for a regulatory response on Flash orders is now being carried up by Senator Ted Kaufman over a much broader set of market issues: in fact Kaufman seeks a neutral review of virtually every aspect of modern equity capital markets.

The challenge before regulators, politicians and anti-trust commissioners with regard to all these very salient issues is greater now than it has ever been in the history of a "free and fair" equity capital market. Whether the approach taken is one that will perpetuate the dominance and the increased profitability of a select few or will bring back a sense of democracy and remove the highly speculative element Mr. Merrin discusses, will be critical for the future of US capital markets, and the participation of retail investors in what was once the only way to reward success and punish failure. But then again, the last two seem to be no longer a key concern for the administration, which has taken a sharp detour from the primary tenets of the capitalist system that over the past 200 years managed to make America the greatest country in the world. We hope the right choice is made for the sake of continuing America's greatness, even if it means one quarter where a company like Goldman Sachs has more than 2 trading days of capital loss.

Arthur Levitt on a crusade to prove just how innocuous HFT is, first in the WSJ yesterday, now on Bloomberg. This begs the question, if it really is so wonderful, why defend it so vociferously? Which, of Arthur's conflicted interests, has pushed so hard for this PR campaign?

Arthur Levitt, former chairman of the SEC, writes an Op-Ed in the WSJ on HFT, titled "Don't set speed limits on trading" providing the usual justification for the phenomenon, claiming it "contributes significantly to market liquidity, a critical measure of market health and something all investors value." What ensues is a less than objective defense, with no disclosure of his existing substantial conflicts of interest.

HFT 101

"All that being said, I'm pretty proud of my own 100-day accomplishments. So how have things changed? Before I joined the Division in March, the Dow was struggling around 6500 points. Now the Dow is over 9200. So am I really responsible for a 41% increase in the Dow? I am, and I'd explain it, but it's very complicated. It involves algorithms, and calculus, and a black box and other … stuff. Now, when I ran this speech by my wife, she looked (kind of like some of you out there) a little incredulous. She said, "you're not claiming credit for the stock market, are you? While you're at it, are you also taking credit for the mild hurricane season or the sharp decrease in lethal shark attacks world-wide." Well I am, and I'd explain it, but it's very complicated. It involves algorithms, and calculus, and a black box and other … stuff." - Robert Khuzami, Director Of Enforcement, SEC.

From the creator of Citadel's HFT desk for options: "You have multiple HFT trading firms and sometimes their agendas are complementary and sometimes they’re not. There could be a time where these HFT programs unintentionally collaborate and you have a two- or three-minute period where the markets are going crazy. Then other traders respond to it and it simply gets out of control."

"This is not to say that we are always willing to trade against HFT, but our job as an agency broker is to determine the right price and liquidity opportunities with which to interact in executing trades onbehalf of our clients."

Impressive how much more informative Joe can be when he is not caught avoiding the book pitches of assorted blonde HFT "specialists" on CNBC.

Hey Ron, didn't realize your new position as a contributing editor on CNBC came with the contributing title of "Portfolio Manager." Didn't Stevie put a one year kibbosh on that? But I digress... And in all honesty I am surprised that you seem to have the correct spin on things (as per letter below from Jim Cramer's failed media experiment TheStreet).

Great recap piece in the New York Times on whether or not Wall Street is picking the pockets of "non-club" investors (read - the guys who do not generate 80% returns with a Sharpe > 5.0 - can someone explain how risk/return works again). The consensus sure looks good for class action lawsuit lawyers.

The piece also recognizes the tremendous contribution that Zero Hedge's readership has had in this ongoing debate, once more highlighting the interactive nature of new media and how crowdsourcing is the new dominant paradigm for Media 2.0. 

Here is the link.

Additionally, should it be odd that Direct Edge, the company in the eye of the Flash hurricane with its ELP program, has the following reported ownership structure:

Yes. Direct Edge is an independent broker-dealer owned by a consortium that includes the International Securities Exchange (“ISE"), Knight Capital Group, Inc., Citadel Derivatives Group, The Goldman Sachs Group, and J.P. Morgan. Knight Capital Group was originally the sole owner of Direct Edge and the firm was spun off in the third quarter of 2007 when Citadel and Goldman made investments. With a 31.54% stake, the ISE is currently the largest shareholder of Direct Edge, followed by Knight, Citadel, and Goldman, each with 19.9%.

And here are the latest ruminations out of Max Keiser, who takes on a curious angle in his most recent Goldman Sachs attack

The three HFT horsemen are C, BAC and CIT.  These three stocks traded 860 million shares today which is 10% of all US Equity volume.  Think about that: 3 stocks in a universe of over 5000 U.S. stocks represented 10% of the volume.  How could this be?  Look at the intraday chart of all three of these stocks and you will see a something in common: an early morning move followed by a flatline with a very tight range (around .05).  Meanwhile, while these stocks were flatlining the market was heading higher.  The S&P 500 gained around 10 points in the afternoon (or 1%) but these 3 stocks did not move.  There was a constant bid to these stocks yet anytime they wanted to lift there seemed to be a constant offer just a few pennies higher.  This is what HFT looks like.  The HFT’s made a killing in these 3 names today – in addition to the .01-.02 spread, they collected about .005/share in liquidity rebates.  Not a bad day for a supercomputer.