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On Lewis and HFT

Bruce Krasting's picture




 

 

I'm amazed at what's happened since the Mike Lewis/60 Minutes interview. It's like the book has unearthed some heretofore unknown information. As a result of these 'revelations' the Press has gone mad (it's a global story), and the FBI, SEC and DoJ have announced they are looking into the evils of HFT.

 

WTF? This is a very old story. Did the world forget about the Flash Crash? That was 4 years ago! Anyway, my hat is off to Lewis; he's stirred this pot big time. So how might this turn out? My guesses, presented on the probability of the outcome.

 

#1 - Nothing happens at all. In a week or so the HFT headlines will die and people will quickly forget about something they have no clue what it is about. The SEC/FBI/DOJ inquires are just noise intended to calm public nerves because of the 'news' that the stock market is 'rigged'. The D.C. response is at least four years late, and the stock market has always been rigged. Those investigations will go no where.

 

Note: The process of how Wall Street allocates the shares of hot IPOs (and secondary offerings) to friends (AKA "Big Customers") is a much bigger deal for small investors than HFT. 'Club Deals' have been around for, well, forever.

 

#2 - Something Small from Washington. There could be steps taken to restrict some aspects of HFT. However, the rebates the exchanges currently pay are not going to end, so HFT will not only survive, it will get a blessing from the regulators.

 

#3 - Something Big from D.C. The SEC and FBI may scare the HFT crowd to death - but the DoJ could kill them. If the lawyers in blue suits find an avenue that concludes that HFT is in restraint of trade (or something of the same legal ilk) then it is cease-and-desist - ASAP.

 

#4 - Something from the HFT side. Consider the position these folks are in:

-They have the Feds up their asses! Every email/doc is coming out. Who really owns what, and what side deals exist will be disclosed. The investigations will make the player's lives miserable.

-They have a terrible public image.

-Investors in these outfits (especially the big institutional players) must be getting cold feet.

-The legal bills for the Federal probes will be huge.

-They will get sued. It costs next to nothing to file a suit, it costs bundles to defend against them.

 

What might the owners of the computers do? They might offer some concessions; limits on certain types of activity, opening up some channels to level the playing field - All bullshit steps, but the bluff of cooperation might work.

But the HFT folks are potentially facing extinction. If they believed they were holding a bad hand, they might consider some desperate measures. They could gamble it all with a challenge to the market. A few of the players in this sandbox could 'temporarily' shut down their computers, and let the chips fall where they will. Given the well publicized attack on HFT by the D.C. polices forces, I think there is a case to made for those in charge of the computers to limit the scope of their activities until the dust settles.

 

Me? I would love to see #4 (long shot). What might happen if the computers went into snail mode? I think it has the potential to blow up the markets. Volatility might spike as trading volume is cut in half. This kind of outcome would have the regulators (and the exchanges) crawling on their knees for the HFT crowd to get back to work. What a bizarre outcome that would be.

 

HFT is a bit like QE. It has been around for so long, and is now such a big part of the market structure that it's not feasible to dial back the clock without consequences.

 

NYSE

 

 

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Sun, 04/06/2014 - 17:48 | 4630466 kurt
kurt's picture

The first HFT center was a set of wires to New Joisey, Soprano country. A wire. A wire racket. The mafia used to "front run" the horse races, delay the results, bet accordingly against the marks.

How is this different?

When are we going to see the gangsters clad in Armani, hiding in servers, routers, and fiber optic cables BROUGHT DOWN. 

Somebody needs to go in and clear the vipers and drain the swamps.

Sun, 04/06/2014 - 18:15 | 4630613 Absinthe Minded
Absinthe Minded's picture

Bruce, good to see your posts. You have a way of cutting through the BS. I'm with you, lets see them shut it down. Then we'll see exactly what kind of market we really have.

Sun, 04/06/2014 - 17:04 | 4630454 resurger
resurger's picture

I agree with you Bruce.

Sun, 04/06/2014 - 17:11 | 4630459 mccvilb
mccvilb's picture

I had no idea dark pool positions were now embedded and hidden from view during regular trading hours within the public marketplace. That explains how I've been able to execute 5000 lot trades when only a few hundred shares were posted on the board, lol. No matter how they couch this, it can only be characterized as outright fraud. Thanks for the link, TW.

Sun, 04/06/2014 - 15:55 | 4630340 mccvilb
mccvilb's picture

And Thompson merged with Reuters in 2007.

Sun, 04/06/2014 - 15:10 | 4630240 tlm596
tlm596's picture

Great interview with Michael Lewis: http://www.npr.org/2014/04/01/297686724/on-a-rigged-wall-street-millisec...

Now that Lewis's book has come out and it has attracted the attention of the small investors, the Exchanges have convinced the financial regulators to protect them.

Approximately 40% of all trades now happen away from the major exchanges to avoid the HFTs. It is starting to seriously effect the New York Stock Exchange, NASDAQ, London stock Exchange, and others. So, instead of getting rid of HFT, the SEC, EU, China and Japan are making new rules that will limit the amount of trades that can be made away from the exchanges to only 8%.

They have already limited certain trades to very small amounts, 200 to 750 shares per block.

They are being very proactive in taking care of their own. Again.

 

 

Sun, 04/06/2014 - 15:34 | 4630289 mccvilb
mccvilb's picture

Dark pools have also been around for decades. Thompson's is well-known. Ameritrade allows its customers to trade outside of market hours with each other. There are many types of dark pools; they are a story unto themselves. How can anyone prevent two willing dealers from executing the swap of a million share block of stock as long as they register it with an exchange at the close of business?

I don't think they are avoiding HFTs. I think the purpose of them is hiding their underlying intentions from the general public.

Sun, 04/06/2014 - 16:46 | 4630423 The Wedge
The Wedge's picture

"I don't think they are avoiding HFTs. I think the purpose of them is hiding their underlying intentions from the general public".

Price discovery.

Sun, 04/06/2014 - 15:53 | 4630306 tlm596
tlm596's picture

That's true, they have been around, but they were only 16% of the total trades until the last few years. Now they are almost half of all trades and it's cutting into the profits and control of the markets by the exchanges.

The regulators are complaining that it's removing transparency from the markets. What they really mean is that the exchanges cannot any longer front run every trade. The regulations I'm talking about have already been announced and are supposed to take effect at the end of 2016.

Here is a Reuters article (that only came out in the UK) that discusses the rules proposal.

http://uk.reuters.com/article/2014/04/04/uk-markets-exchanges-darkpools-...

And another, that gives the public reasoning about them:

http://uk.reuters.com/article/2014/04/06/uk-analysis-dark-markets-idUKBR...

Sun, 04/06/2014 - 13:33 | 4630032 Yen Cross
Yen Cross's picture

  Where's the "Brodie knob", on that steering wheel?

Sun, 04/06/2014 - 15:17 | 4630260 mccvilb
mccvilb's picture

We used to call it a suicide knob. Sounds like it could make a comeback.

Sun, 04/06/2014 - 11:39 | 4629802 mccvilb
mccvilb's picture

I hope Michael Lewis and Mark Cuban read the posts here. If they did then they know the crimes being committed with high frequency trading have been the total and absolute control of the prices of ALL THE EQUITIES ON ALL OF THE EXCHANGES.

The real illusion perpetrated by HFT is that it is a system designed to function in microseconds only, the cost to the public at most is fractions of a cent per share and that as an electronic middleman/distributor HFT provides much-needed liquidity to the public.

Those are the three biggest lies HFT has been built around to sanction its existence. Looking under the hood this is sum of the mythology and those are merely HFTs secondary functions.

The real purpose of HFT has been to hold dominion over the accumulation and dispossession of equities while enjoying simultaneous and absolute price control across multiple exchanges.

As the major benefactors, the GSCOs and JPMCs et al, acquire or jettison huge blocks and baskets of stocks OVER DAYS, WEEKS AND MONTHS. They have no need to be directly involved, but they damn sure want to be gone from the scene when public outrage reaches a crescendo.

Sun, 04/06/2014 - 13:23 | 4630013 moneybots
moneybots's picture

"The real illusion perpetrated by HFT is that it is a system designed to function in microseconds only, the cost to the public at most is fractions of a cent per share and that as an electronic middleman/distributor HFT provides much-needed liquidity to the public."

 

Does front running really provide liquidity?

The cost to one person on a particular transaction may be a fraction of a penny per share, but to the public it adds up to billions of dollars going into the pockets of slight of hand HFT's.

Sun, 04/06/2014 - 15:11 | 4630213 mccvilb
mccvilb's picture

No it removes liquidity at key moments. The point being that coupled with having microsecond advantages, HFT provides much moar than fractional gains. In addition to the millions it skims it serves the dual purpose of CONTROL, in other words through the wizardry of creating the right side of the trade for the big dollar gains, sometimes for weeks at a time.

How can I explain this better? The HFTs have the equivalent of an NFL playbook. There is no one play.

Sun, 04/06/2014 - 10:46 | 4629744 Comte d'herblay
Comte d'herblay's picture

Since this has 'gone viral', methinks it's the old "building set on fire, a mile away from the banks".

Sun, 04/06/2014 - 10:29 | 4629725 elwind45
elwind45's picture

Socialized losses groundwork

Sun, 04/06/2014 - 10:09 | 4629710 cowboybob
cowboybob's picture

Front running, price fixing, and trading on superior information are as old as the Buttonwood Agreement. HFT is nothing new, only the means and the winners. I would agree with those arguing for no real change if not for the fact that Goldman Sachs opposes HFT and is supporting the IEX.

When the elephants fight the grass gets hurt. -African Proverb

 

Sun, 04/06/2014 - 02:21 | 4629418 q99x2
q99x2's picture

The FED is not putting the brakes on HFT because it is the right thing to do. They have to do it now.I believe HFT represents a problem for FED software. The FED must have total control over the markets should a geo-political disturbance arise. Therefore the uncertainties HFT represents to the indexes must be removed beforehand. How they will do this is how they are doing it.

The reason the FED is stopping HFT has to do with the demise of the petro-dollar.

Sat, 04/05/2014 - 23:21 | 4629276 lasvegaspersona
lasvegaspersona's picture

The wheel just controls the direction of the market....

Sat, 04/05/2014 - 23:20 | 4629275 lasvegaspersona
lasvegaspersona's picture

Do NOT touch the wheel until Mister Peabody gets here!

Sat, 04/05/2014 - 22:42 | 4629241 Soul Glow
Soul Glow's picture

WTF is with the huge steering wheel?  lol

Sun, 04/06/2014 - 08:52 | 4629632 SolarSystem1932
SolarSystem1932's picture

Found the image!

http://tonova.typepad.com/thesuddencurve/2004/12/how_to_fool_an_.html

Turns out it's a doctored photo from an exhibit in a museum.

Of all things, it's the control room of an old submarine.

The wheel was the clue...

Sun, 04/06/2014 - 14:34 | 4630097 Iam_Silverman
Iam_Silverman's picture

"Of all things, it's the control room of an old submarine."

Well, close.  It is part of "maneuvering" a room where the reactor and engine room components are controlled.  The large wheel is for answering "Ahead Bells", and the smaller one for "Astern or Backing Bells" - that is the SPCP (Steam Plant Control Panel).  The next panel to the right is the RPCP (Reactor Plant Control Panel) where you could shift RCP speed, latch rods and drive them IN/OUT, etc.  The last panel in the EPCP (Electric Plant Control Panel) where the SSTG's and MG's are controlled, as well as major breakers and the EGD or Shore Power.  It looks like it could be from either a 688 or 637 mockup, but certainly not from one of the prototypes that were in Idaho (S5G, A1W or S1W).

Sure did bring back some memories.  Not all of them good though.

Sun, 04/06/2014 - 09:14 | 4629659 Bruce Krasting
Bruce Krasting's picture

I went looking for the 'right' image for this, so I typed in "old mainframe computers", this was one of many images, I liked this one.

 

At the bottom of the original was this description:

 

randcorp.jpg
.
So this was 1964, and what they thought the computer would look like in 2004.
Sun, 04/06/2014 - 10:31 | 4629728 elwind45
elwind45's picture

Got BATTELLE history going NIIIICE

Sun, 04/06/2014 - 08:54 | 4629634 SolarSystem1932
Sun, 04/06/2014 - 09:06 | 4629649 SolarSystem1932
SolarSystem1932's picture

Man, am I late to the party.

Remind me to read the entire thread before posting info repeats...

Any, all hail the mighty machines!

Sat, 04/05/2014 - 22:42 | 4629240 Soul Glow
Soul Glow's picture

WTF is with the huge steering wheel?  lol

Sat, 04/05/2014 - 21:12 | 4629112 Palladin
Palladin's picture

Another thing that none of the pinheads in the MSM grasp is the scope of what is going on. While they put up an octo-box of people prattling on and on about transparency, level playing fields, and all that other Wall Street techno babble they like to use to impress the clueless viewers.

The simple fact of the matter is that Wall Street has entered the Matrix. Eric over at Nanex has done the best job of anybody pointing out the nonsense that is HFT. He made a video of 1/2 second of activity of one stock, Johnson and Johnson that another person took and made it a great video. All he did was to speed up the action in real time, then slow it down by a factor of 10,000, until it was ticking 1/1000 of a second at the end of the video.

If you take this activity for 1/2 second, and do the math 2*60*60*6.5 you get 46,800 instances of this 1/2 second of activity, and then mutliply that by the 3,000 or so stocks you come up with something like 140,000,000 of these 1/2 second segments going on every day.

As you watch the first part of the video, ask yourself what happened? Then as you see it slowed down to 10,000 times, then 5,000 times and watch the co-ordinated activity, only then can you begin to grasp that no humans are involved, only machines.

As you watch the latter part of the video, pay close attention to the very left hand digits in the counter located at the very bottom center of the screen. That is 1/1000 of a second ticking off. Watch and see how much happens before one second ticks to the next. The original video begins at 1:40 and runs for 6 minutes to display 1/2 second of HFT activity.

Skynet is truly self aware, and you can watch it here:

http://www.youtube.com/watch?v=B_k_elbBz8c

Send this to your friends, make them aware of what's going on over on Wall Street. And oh, by the way, the SEC knows all about this. Note the date on this publication. April 21, 2010.

https://www.sec.gov/rules/concept/2010/34-61358.pdf

 

.

Sat, 04/05/2014 - 19:27 | 4628902 Palladin
Palladin's picture

 

 

I think an easy start would be:

1.) Eliminate exchange rebates

2.) Eliminate sub penny pricing

3.) Charge for all transactions, buys and sells and cancels

4.) Require capital and/or margin to cover any trade

There's nothing complicated or weird in these four suggestions. Easy to implement, easy to monitor. Try it for 6 months and see what happens.

 

If you haven't already seen these, take a look at the current pricing schedules from some of the exchanges. Does this make any sense?

 

Bats:

http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&u...

NYSE/Arca

http://usequities.nyx.com/markets/nyse-arca-equities/trading-fees

Nadsaq

http://www.nasdaqtrader.com/Trader.aspx?id=PriceListTrading2

Direct Edge

http://www.directedge.com/trading/EDGXFeeSchedule.aspx

.

Sun, 04/06/2014 - 08:56 | 4629619 tunetopper
tunetopper's picture

Start the debate again in regards to Immobilization and Dematerialization of securities- these two concepts were ushered in back in the 90's by the Wall St crowd in order (theoretically) to facilitate more rapid trading. But the reality is that they take the shareholder two steps away from ownership and communication with the companies whose shares they own. This also allows the Feds a type of Capital Control that most folks don't realize.

Who truly owns your securities? Cede and Co
Can you open a foreign brokerage account and transfer your shares to it? No

How accurate is the vote tally the corporate boards need in order to make shareholders rights decisions? Not at all

What are the true trading volumes of the exchanges, ex-HFT? Do the true owners get their votes counted when corporate actions are requiring a shareholder vote? No
Is that not the same as cheating the true long term investor? Yes

These are serious questions that deserve an open and honest debate!

Sun, 04/06/2014 - 08:54 | 4629612 tunetopper
tunetopper's picture

Start the debate again in regards to Immobilization and Dematerialization of securities- these two concepts were ushered in back in the 90's by the Wall St crowd in order (theoretically) to facilitate more rapid trading. But the reality is that they take the shareholder two steps away from ownership and communication with the companies whose shares they own. This also allows the Feds a type of Capital Control that most folks don't realize.

Who truly owns your securities? Cede and Co Can yo open a foreign brokerage account and transfer your shares to it? No

How accurate is the vote tally the corporate boards need in order to make shareholders rights decisions? Not at all

What are the true trading volumes of the exchanges, ex-HFT? Is that not the same as cheating the true long term investor?

Why not let humans trade with humans? If you did that- you would find that machines always come out to a zero sum when trading with themselves- unless there is a first-mover advantage. But that just makes way too much sense, I guess- let Pat White- SEC chairwoman or man explain it to Congress & on CSPAN no less.

These are serious questions that deserve an open and honest debate!

Sat, 04/05/2014 - 20:40 | 4629043 mccvilb
mccvilb's picture

That was sobering.

Sat, 04/05/2014 - 19:42 | 4628947 kaiserhoff
kaiserhoff's picture

Those pricing schedules are an eye opener.  Thanks.  No legit trader or investor needs that shit.

Sat, 04/05/2014 - 18:37 | 4628758 Mediocritas
Mediocritas's picture

IEX will take market share, (or firms using IEX's method), securing the largest % of institutional order flow. HFT shops that relied primarily on revenues from front-running orders due to latency deltas, or on selling low latency, will then have a dud business model and start disappearing.

All other HFT operations will continue unchanged. Regulation to stop the form of scalping described by Lewis isn't necessary given that there's already a market solution. Anything that does end up coming from the regulators will be late, clueless and gamed into meaninglessness faster than an HFT bot can scalp a muppet.

Sat, 04/05/2014 - 17:59 | 4628687 the grateful un...
the grateful unemployed's picture

whats good for wall street is good for america, the referees pick up the flag

Sat, 04/05/2014 - 15:54 | 4628477 b_thunder
b_thunder's picture

If you want less of something - tax it!

A small tax on every bid and offer, whether executed or cancelled, will wipe out PARASITIC HFT algos (front running, quote stuffing, etc) in one day, while genuine market-makers will operate without major issues.

 

Sun, 04/06/2014 - 14:32 | 4630150 Clowns on Acid
Clowns on Acid's picture

Oh yamean like Healthcare ?

Sat, 04/05/2014 - 19:01 | 4628736 kaiserhoff
kaiserhoff's picture

Exactly the wrong approach.  It would quickly destroy the markets as the government steals everything.  Think about what happens in poker parlors, if the house takes five bucks out of every pot.  No one else wins.

AND THE TAX WOULD NOT STAY SMALL!

Require all bids or offers to be good for a brief but significant time period, say five minutes.  The algos will get killed on the market swings, because they would be legit market makers,  and they will go look for another scam.

Sun, 04/06/2014 - 00:28 | 4629349 dracos_ghost
dracos_ghost's picture

I agree with you but I don't think 5 minutes is even necessary. If IEX is right about 350ms, use rule of thumb 10x period to reject noise, 3.5s would probably suffice. Sad thing is they are concentrating too much on front running in the MSM. HFT is a much bigger beast. Dark pools, the root cause of all this, in general would have to be audited for procedures and policies and I don't see that happening anytime ever.

Sat, 04/05/2014 - 15:25 | 4628432 geno-econ
geno-econ's picture

Reasons nothing meaningful will happen to block HFT;
Constitutes 60 % of trade volume
Great for stock exchanges
Keeps asset values buoyant
Provides tax revenues for gov.
Provides jobs for displaced traders
Provides sales and jobs for software techies and computer communications
Hedge funds now involved along with hungry pension funds
Laws and regulations not written to directly attack HFT---lawyers paradise
HFT does not threaten US dollar as reserve currency or petrodollar status

Just another bubble not to be taken seriously along with QE, ZIRP, College loans, derivatives, shadow banking, etc.
Suggest Bruce write about a more serious threat to global financial/ trading system---what is happening in Ukraine, Crimea, EU, energy, IMF. Understand Lady in Red Dress is vacationing in Crimea where there is a lot more action

Sun, 04/06/2014 - 14:08 | 4630112 Iam_Silverman
Iam_Silverman's picture

"Reasons nothing meaningful will happen to block HFT;"

Hey, you forgot to mention that it "adds liquidity to the market".  Oh, unless that's not true.  They would lie to us, would they?

Sat, 04/05/2014 - 17:04 | 4628591 DeadFred
DeadFred's picture

Reason why something will be done
Goldman seems to be behind this move. At least the all-knowing Tyler implies such. Why else did this issue magically appear? It's been around for years but suddenly it's hot news. When a move comes from the throne room of Satan and the shadow world government it won't just fade away.

Sun, 04/06/2014 - 16:35 | 4630401 tlm596
tlm596's picture

The dark pools are taking 40% of all trades and 50% is commonly thought to be the market breaker for the exchanges. That's why Goldman is getting it out in the news now. They want the SEC to come up with rules to limit anonymous trading to 8% of the market share. They're pushing "transparency" as the big issue, not limiting HFTs.

Sat, 04/05/2014 - 17:19 | 4628623 geno-econ
geno-econ's picture

Possibly. Charles Shwab also came out with strong condemnation of HFT, no doubt spurred by distrust of individual investor in buying in a rigged market. So far Fidelity is silent but suspect they too will need to decide if HFT constitutes a threat to their business model. Nevertheless, without a huge public outcry, politicians in Wash. will waffle for best fund raising offers and advantages for local business constituencies. Same old, same old

Sat, 04/05/2014 - 15:18 | 4628426 ebear
ebear's picture

#1 - Nothing happens at all. In a week or so the HFT headlines will die and people will quickly forget about something they have no clue what it is about.

That may be true of small investors, but institutions such as pension funds have review commitees, and while fund managers may blow this off, I doubt their newly informed overseers will, since they now have no excuse to plead ignorance.  Wait and see how many go over to IEX now that the cat's out of the bag.  If enough make the switch, it will force other exchanges to install speed bumps in order to compete - an actual market solution, for once.  

 

 

Sat, 04/05/2014 - 14:57 | 4628375 NoTTD
NoTTD's picture

The only thing that could conceivably slow them down would be a crash not of their own making but which could be blamed on HFTs.   Handy scapegoat which the politicians doing the scaping don't understand.  Like voodoo.  Or basic math.

 

Other than that, look for the Feds to take years to study the system and then declare everything is great. 

Sat, 04/05/2014 - 20:07 | 4628995 dexter_morgan
dexter_morgan's picture

I suspect that the scapegoat angle is what is being created suddenly after 4 years. Many indicators point to market crash, and the FED and Banks are not going to take the blame, so what can they live without? HFT trading.

Sun, 04/06/2014 - 11:11 | 4629766 Yancey Ward
Yancey Ward's picture

It is an interesting thought.

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