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,
Having gazed ominously at the extreme monetary policy smoke-and-mirrors intervention in bond markets, and previously explained that "the stock market is to important to leave to the vagaries of an actual market." While the rest of the world's central banks' direct (BoJ) and indirect (Fed, ECB) manipulation of equity markets, nobody bats an eyelid; but when PBOC steps on market volatility's throat (like a bull in a China bear store), people start complaining... finally. There is no difference - none! And no lesser Asian expert than Stephen Roach warns that we should be afraid, very afraid as he states, the great irony of manipulation, he explains, is that "the more we depend on markets, the less we trust them."
"In some instances, malfunctioning algorithms have interfered with market functioning, inundating trading venues with message traffic or creating sharp, short-lived spikes in prices as a result of other algorithms responding to the initial erroneous order flow."... "If liquidity is as bad as it is now, what’s going to happen when things really get adverse?” said Richard Schlanger, who co-manages about $30 billion in bonds as vice president at Pioneer Investments in Boston.
As noted earlier, with equities now a barren wasteland of volume (and liquidity), the last remaining HFT master (of whale order frontrunning) has been forced to go to those asset classes where organic flow is still abundant such as FX, courtesy of central banks engaged in global currency wars. However, HFTs realize it is only a matter of time before FX order flow also dries up as central banks take their trade away from public venues (and dark pools) and as such are always looking for new, untapped markets. One place where they are about to land according to the WSJ, with hilarious consequences sure to follow, will be the one place that HFTs should have felt at home from the very beginning: bitcoin.
"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.
Back on June 3, 2013, following what was merely the latest observation of how broken the market is thanks to central banks manipulation and HFT rigging, we wrote some snarky commentary. And as happens with nearly 100% regularity nowadays, our snarky commentary on what takes place behind the scenes was once again almost 100% accurate. Because earlier today we learned precisely what happened...
Spy 1: You can ask about ETF. . . . E-T-F. E, exchange.
Spy 2: Yes, got it.
Spy 1: How they are used, the mechanisms of use for destabilization of the markets.
Spy 2: Aha.
Spy 1: Then you can ask them what they think about limiting the use of trading robots. . . .
US Treasury Warns Investors Underestimate "Potential For A Market Reversal", Take "Low Volatility For Granted"Submitted by Tyler Durden on 12/04/2014 14:26 -0400
"Investors may have taken low volatility for granted and underestimated the potential for a reversal. While quantitative easing policies are intended to encourage investors to buy risky assets, there is also a risk that the perceived reversal of such policies will lead investors to turn the other way, triggering market instability.... Similarly, investors may have become too sanguine about the availability of market liquidity — the ability to transact in size without having a significant impact on price — during both good times and bad. Accommodative global monetary policy, coupled with the Federal Reserve’s purchases of large amounts of low-risk assets and changes in risk sentiment, helped to compress volatility and risk premiums. "
While VIX pumped-and-dumped (in a manner never seen before in its history), 'real' volatility of the day to day moves across the major stock indices remains extremely elevated. For the Nasdaq and Dow Transports, the average true range over the last few weeks is the highest since the post-Lehman collapse...
"If you like your broken markets," it would appear you can keep them... but this time in bond futures. June 2015 30Y Futures prices are surging today (up a stunningly fat-finger-esque 7.4% (or 10 points)). This, however, is being traded... there is volume being exchanged... and at 151-19/32, it implies 30Y Bond yields will be below 2.4% by the middle of next year (from 2.99% today).
"The HFT Act will add the following clarification to the rules specifying the prohibition of market abuse: The placing of purchase or sale orders to a market by means of a computer algorithm which automatically determines the parameters of the order could be considered market abuse provided the placing of orders occurs without a trading intention, but (a) to disrupt or delay the functioning of the trading system, (b) to make it more difficult for a third party to identify genuine purchase or sale orders in the trading system, or (c) to create a false or misleading signal about the supply of or demand for a financial instrument."
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."
The person in charge of navigating the "transition" from the old fixing mechanism, of which he was part as recently as April, was a person who was, drumroll, supervising said transition. Surely, his "consulting" was fair and impartial. Naturally, Mr. Spall is no longer at gold-rigging Barclays, a bank which is for all intents and purposes, falling apart but at GCubed Consultants: enjoy perusing the company at the following link.Said another way, one of the Barclays guys who was accountable in the Gold Market Fixing Company for the price manipulation of his trader (the infamous Daniel Plunkett) is then rewarded by the LBMA to conduct an independent review of the applicants to run the Silver fix!
- Ukraine, Russia Fail to Reach Deal in Natural-Gas Talks (WSJ)
- Boko Haram Kidnaps More Girls in Nigeria (WSJ)
- Déjà vu: echoes of pre-crisis world mount (FT)
- Money market rates hit new low as ECB moves gain traction (Reuters)
- 'Dark Pools' Face New SEC Probe (WSJ)
- Buffett Ready to Double $15 Billion Solar, Wind Bet (BBG)
- White House-Congress rift over Bergdahl deal deepens (Reuters)
- Taxpayers Face Big Medicare Tab for Unusual Doctor Billings (WSJ)
- Lean Retirement Faces U.S. Generation X as Wealth Trails (BBG)
- Employers’ skills gap claim does not show up in US wage data (FT)
- He is holding out for the Zuckerberg overbid: Donald Sterling says LA Clippers not for sale (WSJ)
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.