Sneaky Exchanges And HFT

CalibratedConfidence's picture

The debate around HFT has been morphed ever since it went mainstream.  The anger that is being heard from day-traders and other market participants is not focused on automated trading on its purest level which is strict code of statements regarding when to buy how much of what at what price given some input.  The anger is focused on the "expert-networks" that offer certain individuals access to order types that are not public information.  The anger comes from "Hide and Light" and the abilities select groups have.  That very connection is what drove Haim Bodek into a frenzy at Trading Machines and surely many others. 

Haim's event is hard to imagine prior to what we know now about HFT, market structure, etc.  Imagine scanning lines and lines of code looking for a specific error which was causing a constant hemorrhage of money through bad trading executions.  Now imagine having a cocktail at a party and discovering through the aid of a napkin drawing exactly what type of order was causing your firm to destroy its Alpha over a consistent 6 month period.  That's the reason we're hammering the table, because it's not merely about reading the information wrong, its about inside connections to the exchanges.  These connections have helped many firms skirt the REG-NMS rules and Rule 610 as exchanges cater to the HFT in an effort to garner the most fee's possible. 

We're hammering the table because Mom and Pop have become unwilling participants in what has become an internalized order-flow through brokerage house.  There are only so many times Retaul can be filled ona buy order at the sub-penny only to have the stop-hunt algo's go on a tear and turn P/(L)'s red.  The whole process of trading or investing in a company has become unnecessarily complex, and it's hurting us.  The following image comes from the TABB Group and is part of an article from Simone Foxman over at Quartz on the power struggle between exchanges and brokerages over HFT.  Readers can see just how broken down the process of matching buyers and sellers has become.

 

Order Flow Diagram

The dark pool issue is for another time but the article does address a critical point which is that while regulators proclaim their ability to produce transparency, we have discovered this is not the case and that furthermore our regulators are clueless as to how little they actually understand about the relationships of the pillars of our financial asset market centers.  What once was our exchanges, have become for profit and have been fragmenting the market further and further as each one of them creates their own Retail Liquidity Program (RLP) in the chase for fee's and that ever pervasive "volume". 

And we wonder why Mom and Pop won't come back to the market.  Soon we'll just have ghost exchanges.