"... you can bet that whenever an earthquake like this happens, especially when it’s triggered by two invisible tectonic plates like put gamma and call gamma and then cascades through arcane geologies like options expiration dates and ETF pricing software, both the media and self-interested parties will begin a mad rush to find someone or something a tad bit more obvious to blame. So you end up getting every investment process that uses a computer – from high frequency trading to risk parity allocations to derivative hedges – all lumped together in one big shotgun blast"
Goodbye to "fat fingers" being blamed for flash crashes, and welcome to the Heisenberg uncertainty market: you can have your 1 cent bid/ask spreads... but you can't have any real market depth at the same time.
This is the story of a veteran NYSE specialist who noticed manipulation in the NYSE market open Imbalance, loudly complained to the NYSE, was ignored, then decided to profit from said manipulation himself... and got busted. And that's where the story begins...
A quick summary of the latest HFT market-rigging scam: mysteriously, and "erroneously", a change in Latour Trading's code was made, which the firm lacked "direct and exclusive control" over, and which was non-compliant with Reg NMS requirements, yet which mysteriously ended up generating "gross trading profits and rebates by stock exchanges" amounting to $2.8 million. Where have we seen this? Oh yes...
When a digital dickweed exposes the reality "the equity markets are broken," it can be shrugged off as the rantings of a kid in his mom's basement.
Dear Investors, The last few weeks have exposed that our equity markets are not as liquid as we have long claimed mainly due to market fragmentation and the lack of diverse liquidity pools...
One of the fallacies being propagated about yesterday's flash crash, is that somehow HFTs came riding in as noble white knights and rescued the market from a collapse instead of actually causing it. This particular lie is worth a few quick observations and explanations of what really happened.
The following map lays out the embedded, and regulator blessed, latencies between the three big New Jersey exchange centers: Mahwah (NYSE), Secaucus (BATS), and Carteret (Nasdaq) for everyone but the top tier exchange clients, the HFTs, who are greenlighted to frontrun everyone else, and generate quarter after quarter of perfect trading records.
Since the market is once again on the verge of a terminal liquidity seizure with its associated side-effects (see China for details), the authorities needed to remind the "market" just who the scapegoat will be when the next crash finally does come. Which is why earlier today in an unexpected "preliminary second quarter guidance" release, ITG, owner of the Posit dark pool, was just busted with a $22.6 million potential SEC settlement for what appears to have been blatant frontrunning of company clients in its own prop trading pod. But what is particularly amusing in this case is that while everyone knows that when it comes to HFT's, it is never called "rigging" - the proper nomenclature is "glitch", so now we learn a new term to use instead of "criminal frontrunning" - drumroll... trading experiment,
"When an HFT that is not a member of an association executes an off-exchange trade, the HFT’s identity is usually not reported to the Financial Industry Regulatory Authority, or FINRA, which is the only association currently in existence. This frustrates FINRA’s surveillance efforts as it cannot quickly link trades to the HFTs responsible for them. This is a serious problem because, according to FINRA’s current Chairman, certain market participants disperse their trading activity across multiple markets in an attempt to hide various forms of market abuse, including layering, spoofing, algorithm gaming, and wash sales."
- SEC Commissioner Luis Aguilar.
As HFT shops begin to turn on each other, it seems appropriate to reflect on the impact that Michael Lewis' Flash Boys book had on exposing the ugly truth that many have been discussing for years in US (and international) equity (and non-equity) markets. As Lewis concludes, after explaining the attacks he has suffered from the HFT industry, "If I didn't do more to distinguish 'good' H.F.T. from 'bad' H.F.T., it was because I saw, early on, that there was no practical way for me or anyone else... to do it. ... The big banks and the exchanges [have] been paid to compromise investors’ interests while pretending to guard those interests. I was surprised more people weren’t angry with them."
That markets are rigged, at both the macro level, through central banks, and micro, through HFTs, dark pools and purposeful market fragmentation, should be painfully obvious to everyone by now. But when even the regulators engage in "jury rigging", or in this case blocking prominent HFT-critic Joseph Stiglitz, a Nobel prize winning economist (a prize which doesn't count for much on these pages but should - at least on paper - impress such statist cronies as the SEC), has been blocked from a government panel that will advise regulators on issues facing U.S. equity markets, it becomes clear as day that the rigging is not just in the markets: worse, it is openly involves the market's "regulator" and "enforcer."
As regular readers are well aware, when it comes to "more than arms length" equity market intervention in New Normal markets, the New York Fed's preferred "intermediary" of choice to, how should one say, boost investor sentiment aka "protect from a plunge", is none other than Chicago HFT powerhouse, Citadel. Yet one question had remained unanswered: just how does Citadel manipulated stocks? We now know the answer, and perhaps more importantly, it also links in to the true culprit behind the May 2010 Flash Crash, no not Waddell & Reed, but quote stuffing. Most importantly, the revelation that for Citadel quote stuffing is not just some byproduct of some "innocuous" HFT strategy, is that none other than the Nasdaq has now stated on the record, that the most leveraged hedge fund (at 9x regulatory to net assets), and the third largest after Bridgewater and Millennium, used quote stuffing as a "trading strategy."
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.
“Flash Boys” is a book written for Hollywood instead of the history books or policy makers. Stay tuned for the movie.