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On Lewis and HFT
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.
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What about the possibility the exchanges themselve will take responsibility and set rules for HFT trading protocols. What about the possibility the exchanges will require testing and validation of algo effectiveness and market safety before they can be used? You know, like new drugs must be validated for effectiveness and risks before they can be marketed and sold? What about the possibility that ………
Stop laughing. I mean it, I’m not kidding. This isn’t funny. I’m serious…..
(Self Regulating Market - my A$$)
My memory of events is suspect but here goes, This was all vetted by Shapiro before the SEC authorized HF Trading. All comers were invited to provide written commentary within a small window of time. Those of us who were against it and did write in protest had figured out it represented a faster version of the trading desk books and the continuation of abusive naked shorting in combination with the collusive dealings taking place inside the private NYSE MMakers' lounges. Front running was considered de rigueur and many suspected it was tied into the SOES system well before HFT. We had no idea how insideous HFT really was though. Nobody fully understood it.
Naked short selling originally started when MMs were allowed to sell more shares than they held in inventory in order to be able to provide liquidity during normal business hours. Where have we heard that before? They were allowed so many days to buy to cover (13. We traders have 3). It got so bad some companies' PPS were driven to zero and their shorts were never covered, just buried in bankruptcy, but nobody went to jail, lol. Why should they have? Because they shorted more shares than actually had existed. Remember they were selling other people's shares and getting cash. When no one was punished the broker/dealers just got bolder.
When the NYSE announced HFT had been approved and the NYSE closed the MM lounges we should have sensed a sea change was taking place. Now everything's conducted remotely far away from the exchanges. This won't be reviewed by anybody IMO. Either it ends up in court or it doesn't.
The way the exchanges diversified how they made money on data feeds was to charge for information first and everything associated with location and signal transmit time (co-location) so they are in the HFT business up to their necks as partners and 'co-inventors.'
SO, you suggest they regulate it themselves unprovoked by the illegaity not resolved yet seems highly unlikely.
IF the HFT's are "regulated out" of the equities markets they will simply scuttle like cockroaches to other markets where their influence has yet to be felt.
Already HFT players are showing up in the markets for index and commodities futures, and in forex.
Forex, IMHO, would be an HFT's wet dream - many venues, widely dispersed, and fragmented regulation totally overmatched in even attempting to regulate or even influence them.
Just Sayin'
I thinlk they should scurry over to forex. Maybe they can do for the dollar what they have done for stocks.
The algos have dominated FX for years.
SEC to take a break from slapping their over-wanked cocks to slap HFT wrists.
DOJ and SEC didn't give two shits about the HFT issue until 60 Minutes programmed it. Even then, Ma and Pa Kettle only heard ' the stock market is rigged '....and the rest of the HFT stuff went way, waaay over their heads. So Ma tells Pa to cash out and bury the fiat under the mattress.
Now, the institutionals...especially the yield starved public pension funds .... are a far different matter . They need to hit 7.5% annualized returns and most are grossly underfunded already in the Trillions ! Fed and .gov know this. Consequently, I see fines and wristslaps and a few tweaks to the machines. Too much devious energy has been devoted to nurturing this ponzi to collapse it by getting honest.
My 2 cents
Where are the rest of the investigative jounalists? Not allowed on TV. Give Matt Taibbi a half hour opposite Meet the Press every Sunday and let's see what happens.
Tiabbi, LOL. Between him and Knuslter they don't know if they should shit or go blind, they are still in denial that their party could be so, so, well.... like the republicans....eeeew.
Nothing will change, the market rigging will continue apace.
The usual pattern for our society is that the name will be changed to a euphemism, something like "Savings Optimization Liquidity (S.O.L.)" or "Smart Sequencing of Digital Data (S.S.D.D.)".
There will be a lot of talk in .gov with committee's formed, catered lunches, press conferences, hearings, and hollow pronouncements, and more catered lunches.
Goldman Sachs will cut CONgress in on their front-running operation which they will call "Binary Solvency (B.S.)".
After all, it's legal for CONgress to do inside trades and front-run their constituents.
No expert on how the exchanges really work but is it really impossible to go back to how they worked circa 2000? I used to buy stocks on the basis of what the newspaper showed the day before's closing price was. I remember how happy I was when I could see streaming 'real time' prices on Yahoo. A tickertape in every home and I could make a trade for $12 on Ameritrade. Is that so prehistoric that the market would collapse if trading was done in the open with a bid and offer price, trading volumes and the size of trades all done on an 'exchange' in plain view.
they are halfway done dialing back QE and the SPY is just below ATH's. 10yr yield at 2.75% and stable currency. minor EM blip and now all is well.
They even went ahead and popped the momo bubble just for shits and giggles. bow down and pray to your overlords for they are truly supreme beings.
As long as they rest of the world puts up with us shitting on them forever this can keep going. They won't mind, right?
As long as the 1% that rule over the rest of the world are hooked up by our system I am guessing it can keep going.
How well enginered....pop the momo bubble without so much as a 2% drop in tbe SPY
Well done.BenYellin
Double post.
DoJ will “kill” them Bruce.
It’s a done deal. It’s over.
Reg NMS will be replaced with something far, far more convoluted, and a new skirting industry will flourish, for the short time markets have left to function (5 – 10 years).
We are moving towards a post-capitalist system, and this actually may signal the transition to full-on managed markets, risk and return elimination, and conversion of financial assets to insurance products.
Non-sense.
It sure would be weird to see the DOJ of attorney general Eric "Place" Holder actually do something about Wall Street. So far those guys have been trying to reach zero prosecutorial degrees Kelvin, the absolute lack of any motion whatsoever.
who uses steering wheels anymore?
"all about the joystick" now.
"now just point the nose of the plane skyward and hit the fuel."
You think this technology looks old, wait 20 years, 3D printing will make everything we think of as state of the art look as old as this 1960's representation, release the Kracken...still chuckling over that.
"it's not feasable to dial back the clock without consequences"
It's not feasable to move forward with the existing hft structure without consequences either, faces with what we know and how Wall Srtreet operates the least costly would be to do what is right and stop letting certain players at the table peak at your cards, how about that option. But nope, the regulators will fold like a cheap lawn chair.
Love the steering wheel....what could it have been for?
To provide the illusion of control.
Looks like a submarine simulator.
I think it's an old nuclear sub navigation simulator. That particular picture has some other elements photoshopped into it (I think the television, keyboard/printer, and the guy) for a photoshop contest on Fark.com. Can't remember the theme of the contest.
Yep:
http://urbanlegends.about.com/library/bl_rand_home_computer.htm
I like the Kracken idea.
I would guess a hydroelectric station, inner and outer wheels controlling inlet and outlet of water flow.
Sounds good to me.
It's a static display of a submarine maneuvering room, with the pin-stripe/printer/monitor photoshopped in:
http://www.snopes.com/inboxer/hoaxes/computer.asp
Good catch.
Sub-simulator trading platform would return sanity. You have to evade depth charges and sink a Carrier before you can make a trade. Run silent, run deep; one trade per day! Why not?
Kill-joy. =)
To release the kracken.
It's a hydraulic muppet juicer, fashioned from a 10 ton press. There's nothing like fresh muppet juice in the morning.
Controls the Fed printing presses
If one HFT company has two accounts (A and B) run on two different computers and both of them are nearly always guaranteered to be the fastest (via the speed or special/secret order type) then they can dictate the price level. Hence the price is rigged. It is not just scalping/frontrunning.
They can move up (or down if needed) SP500 at their will because they will execute their trade before anyone else gets their chance. In this case two accounts trade between each other (AB, BA, AB, etc.) and they always get their trade executed between themselves leaving all other orders behind. Sorry muppets.
I suggested this scenario almost two years ago but this HFT twist makes it even more probable. How could anyone refuse such temptation?
What if it is the Fed or UST? They can manipulate the market to the upside with very little funds involved. I always thought that they do it but it takes a lot of money. Given these revelations (some of it was new to me) they can do it on cheap. This would explain how regular uptrend we have.
I am pretty sure that .gov is involved so they will make some noises but nothing will happen. Don't worry - Eric Holder is on the case :-)
But the trend would still have to be supported by volume infusion- otherwise sellers into the trend would eventually overwhelm the AB-BA-AB setting on the margin. After all, someone has to buy the shares from the sellers. You would have to have a buyer with essentially infinite buying power.
"You would have to have a buyer with essentially infinite buying power."
Which is exactly what the cenral banks are - money creators with infinite buying power. Commercial banks, too, for that matter thusly explaining why HFT has become far more disruptive due to the fall of Glass Steagal. But my point is that it is through HFT algos that the global central banking cartel rigs equities higher and gold lower. The multitude of independent HFT firms know full well this is happening because they can see it in their analyses (check out Nanaex, for example...they illustrate the algos with precision). The independent HFT operators know when the central banks are in the market and they go along for the ride, thereby making the central bank operation massively more effective. THIS is the big story that needs to break into the mainstream. Everyone with an ounce of trading sense knows this is happening but it's still denegrated as conspiracy kookiness in public. Humanity's present inability to think critically and speak the truth is nothing less than astounding and, frankly, terrifying.
So long as you can keep the illusion of a market then on the way up it wouldn't take too many real buyers.
It's when the market starts falling that the lack of real buyers becomes critical.
If a car dealer sold you a car (and there were several front runners trying to skim a few dollars ahead of you), there is still only one car sold.
You've basically outlined how the S&P is levitated and gold is suppressed - HFTs front running among themselves. With enough capital they can create a price trend and sustain it. THIS is the elephant in the room, not the fractions of pennies scraped from the front running of everyone's individual trades. This limited hangout by Lewis does not focus on the direction setting nature of HFT and so won't go anywhere.