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.

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dracos_ghost's picture

Dark Pools are fucking evil and that's all I have to say about that -- Forrest Gump

But seriously, why not tax the hell out of Dark Pool -> Exchange crosses. The Exchange is supposed to be the "system of record" for transactions with price discovery and all that. Stop letting the Dark Pools block the trade from being put into play on the Exchange.

I think this ZH post may have hit the nail on the head why NYSE volume is whack. The Exchange is irrelevant in modern order flow. All the action is in the back alley Dark Pools.

hannah's picture

we already have ghost exchanges. welcome to the future...

Itch's picture

Another sad part of the problem is that all the people who would otherwise have been involved in taking risk and adding to the genuine process of price discovery have jumped on the band wagon and just decided to rape people instead, believing that it's a risk free way to make money. But how can anything that kills a market be risk free...the risk no longer comes from calling the market vectors, but whether there is going to be a market at all. Its happening now; while they are busy looking at what algo's are doing what, or the consequence of another flash crash, the market is literally melting in front of their eyes. This is hiding in plain sight.

Abrick's picture

Imagine a giant 'algo' cock flying towards you face, and there's nothing you can do about it. You're like " Oh man, I'm gonna have to suck this thing" , and you brace yourself for the ensuing degradation. At the last moment it changes trajectory and hits you in the eye.  You think "Well that was terrible, but at least I didn't have to suck it, and I'll know to just duck next time".  The giant cock however keeps hitting you in the in the eye every millisecond until it has penetrated into your brain and destroyed your motor functions. Then it slaps you across the face, knocking you out of your chair and lodges itself uncomfortably into your anus.

Some helpful people find you in this terrible state and try to get assist you in getting back on your feet, and to a hospital. You try to warn them that this vicious cock in your ass is dangerous and needs to be destroyed before it does the same to others.  In spite of the fact it has destroyed your eye socket, and is clearly visible to your helpful pals, they insist that a crowded hosptial is the best place to take this vicious giant cock. At the hospital the doctors and nurses actually remove the giant cock and notice that it has been scratched up a bit in its violent attack on you.

Everyone decides that looking after the injuries sustained by the giant cock is much more important than your destroyed eye socket, anus and now wheelchair bound body.  The whole time the cock is convalesing, it keeps repeating the same routine on all but the sickest patients throughout the hospital.  The sickest patients, defend the lack of security on the giant cock because they are gettting more attention from the doctors and nurses, now that no one else will or is allowed to go to the hospital.  Meanwhile all of the people who may have had a cold or broken finger on admission are now vegetables and are will never leave the hospital.

Kind of like that.

FreedomCostsaBuck-o-Five's picture

Can you post a YouTube narrative of this? ... Do it à la force, the way Walstreetpro2 used to rant. Or do it Gangnam Style... Whatever, it would really penetrate deeply the bored, somnolent statist mind sets out there.

Itch's picture

Get your metaphors right man, you'll find that a lot of people wont get past a "giant algo cock flying at their face". 

Right-on Left-off's picture

What do we now have here?

It used to be front running.  Do we now have front run phony bid/ask to entice the entire trading public into a wrong positioned order???

ebworthen's picture

"Liquidity providers"; worst and most misleading verbiage ever, unless to explain turning a healthy bowel movement into diarrhea like some rogue rotavirus.

Downtoolong's picture

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

Or as I like to say, we’ll be watching the liquidity providers, Internalizers, and a handful of Zombie Institutional Investors all playing with themselves. I’ve already discovered, that’s not nearly as funny to see as it first sounds like it might be.

LawsofPhysics's picture

This only strengthens my committment to stay long black markets. 

Dr. Sandi's picture

How about we end all of this thieving horseshit and go back to telephones and e-mails with NO COMPUTER TRADES.

Until we return to the old system of  covert theft by the brokerages being the main profit center, there is NO MARKET.

How long are we going to let people steal our stuff and pretend it's OK?

lewy14's picture

How about... require all brokerages and exchanges to release the code of their matching engines under an Open Source license.

You should be able to go to GitHub and browse the code for BATS.

Don't make lots of rules - just require complete transparency. The ability to hide scam order types will be gone.

Western's picture

How about... all the money in the world won't save your soul, so leave.

lewy14's picture

Après moi, le déluge.

IamtheREALmario's picture

A real biblical flood, or just another simple revolution with guillotines, whether here in America or globally, it sure seems that something is coming.

rocker's picture

The real Crime is the HFTs which now "Include Your Banks".   Goldman with their special software. WFC with their Trading Desk using Depositors money. That's why they made a mininum 1500.00 cash balance.  JPMorgan, which like Goldman, get POMO money on a regular basis.  Citigroup, which is just plain shitty.

Deutche Bank and Barclays which maniplates foreign markets using American trading desk. 

Then there is the Super Computers owned by the HFTs plugged in to the exchanges before your trades go off and "knows all", which is the bad part.

As this HFT Firm said on CNBC, "We spent all this money on these fast super computers and intend to win. The average guy has No Chance Against Us." We will push them into trades and out of them.  We use the spy software to even know when you bring up a chart of XYZ and run programs to intice you. Then bomb you, if you bite.