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Dear SEC, This Is HFT "Cheating" At Its Most Obvious. Regards, Everyone Else

Tyler Durden's picture




 

While prosecuting the wrongdoers is clearly not part of the new normal (see Sokol et al.), what Nanex found this morning beggars belief - both in its method of manipulation and clarity that our regulators are clueless. As they note, the high frequency traders (HFT) are at it again. Contorting the spirit of the rules, because those who wrote the rules aren't technically savvy. On January 4, 2013, we found another instance of HFT morphing their manipulative and illegal quote stuffing strategy in an effort to fly under the radar. Why they don't just stop this manipulative practice altogether tells us a few things. First, this isn't some coding error, this is sophisticated cheating. And second, because they are spending valuable programming time on this strategy, there must be some real economic advantage. Which mean a disadvantage to everyone trading against them.

 

Via Nanex, Seconds In a Microsecond World,

The Strategy

Each exchange has been setting limits for the number of canceled orders allowed per second. We know that one exchange has a limit of 300 canceled orders per second per stock.. It's rare to find 300 or more canceled orders in one stock in any one second from that exchange. But you will find tens of thousands of seconds where a stock has 299 canceled orders.

In the charts below, we show a new strategy they have cooked up: send a blast of orders (all immediately canceled) over a very short period of time, 100 milliseconds (ms) in this case, and then silence for the balance of the second. They know that exchanges measure the number of canceled orders on a per second basis, so that blast of orders sent in 100ms will be diluted by another 900ms of silence. But networks operate on a much smaller time-scale, microseconds. A microsecond is a millionth of a second.

If an exchange sets a limit of 1000 canceled orders per second, these nefarious HFT will blast a 1000 orders in 100 milliseconds (ms), followed by silence for the balance of the second. The exchange will only see 1000 orders in a second, which is at the limit, so no problem. But the network that carries those orders to other participants won't see it that way.

A network that can carry 1000 orders in a second, can carry only 1 order per millisecond (1/1000th of a second) before latency (delay) occurs. Which means blasting 1000 orders in 100ms will begin overloading the network and causing delays after just the first 100 messages. Which means 900 messages will arrive late to other traders (competitors) computers. Which is the whole point of this high technology warfare.

1. GWR - Bids and Asks color coded by exchange and NBBO (gray shading)
Note the pattern of quote blasts followed by silence. What is this all about?



2. GWR - Trades color coded by exchange and NBBO (gray shading)

 



3. GWR - Bids and Asks color coded by exchange and NBBO (gray shading)

 



4. GWR - Bids and Asks color coded by exchange and NBBO (gray shading)
The blasts occur 1 second apart. This is to get around exchanges limiting HFT to X quotes per second. Networks operate on milliseconds.

 



5. GWR - Zooming out, showing Bids and Asks color coded by exchange and NBBO (gray shading)
The quote rate on a 1 second interval is somewhat modest. Spread out between 6 exchanges, means each exchange won't see a problem.

 



6. GWR - Zooming out, showing trades color coded by exchange and NBBO (gray shading)

 



7. GWR - Tick Chart

 



Nanex Research

 

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Fri, 01/04/2013 - 23:55 | 3124612 Atomizer
Atomizer's picture

 

 

Data Template on International Reserves and Foreign Currency Liquidity 

Old MacDonald had a farm,

E-I-E-I-O.

And on his farm he had some Pigs,

E-I-E-I-O.

With a oink, oink here,

And a oink, oink there,

Here a oink, there a oink,

Everywhere a oink, oink,

Old MacDonald had a farm,

E-I-E-I-O. 

United Nations Treasury - The United Nations Operational Rates of Exchange

Sat, 01/05/2013 - 00:01 | 3124621 Hedge Fund of One
Hedge Fund of One's picture

I do wish that SEC and the exchanges would get this HFT stuff under control - a limit of one cancelled order per second ought to make a difference. However, aren't these HFT cancellation blasts really just duking it out with each other? I mean, I'm not going to try fighting them. Knowing that I cannot trade between the milliseconds, I find a price that I think is right and enter my order. I do the same when exiting my trade, usually days or weeks later. I guess it could be seen like mob wars where we just let them kill each other -- how much collateral damage is there for those who don't play the game?

 

Sat, 01/05/2013 - 00:39 | 3124662 MsCreant
MsCreant's picture

Dear Lamb-i-kins,

How do you figure out if the price is right when there are no fundamentals? It is not a market. It is a series of machines rigged to rip you off. 

Sat, 01/05/2013 - 00:20 | 3124645 WTFUD
WTFUD's picture

Am not too ashamed to admit that before i sniffed out Z/H i thought that Mises were them critters who nibbled your perishables as soon as your gun slid off your toe and onto the floor at the bottom of your bed!

The real vermin are at it 24/7!! At least the critters have an ounce of respect for us.

Sat, 01/05/2013 - 00:39 | 3124663 Yen Cross
Yen Cross's picture

Festering Carbuncles ?  Show me some trading skills!  OR BEAT IT!

Sat, 01/05/2013 - 00:47 | 3124676 MsCreant
MsCreant's picture

Thanks for the discussion. I wondered privately if this was possible. I am a no one and have no terms but I am going to try to ask some questions.

Knowing that these guys do this, is there a way to "set them up?" Con the con? 

Could an alternate stock market open up and make all bid/ask transparent and refuse to do HFT? Make it a clean market that may cost a little more to participate in because it does have stringent oversight? Hell, bring back the trading pits?

Sat, 01/05/2013 - 00:52 | 3124681 Yen Cross
Yen Cross's picture

Ms Creant, I have deep respect for Tyler. Reggie Meddle Town is a joke.  The trading/social platforms will be consolidated over the next few years.

    Tyler isn't stupid.

Sat, 01/05/2013 - 11:11 | 3125103 MsCreant
MsCreant's picture

If I understood you correctly, that is mind blowing for me. If you go that far, everything will be consolidated. The Borg have been here for a while it would seem.

Sat, 01/05/2013 - 02:42 | 3124757 nanex
nanex's picture

Dark pools like Liquid Net ban HFT and other nefarious behavior.  This is why dark pools are executing more trades (40% in Apple every day now). Dark pools are a symptom of the disease created by a regulator that is complcit in allowing HFT strategies like the one in this article to exist. 

 

nanex

Sat, 01/05/2013 - 10:41 | 3124855 Archduke
Archduke's picture

 that's one explanation for the existence of dark pools.

another is for corporates to defend or float up their stocks..

 

but then again, you would expect to pay a premium for hidden operations,

and in theory, you would have reduced liquidity and price transparency.

 

Sat, 01/05/2013 - 14:01 | 3125359 ekm
ekm's picture

Totally agree.

That's where MS sell stocks to BAC who sells it back to MS who sells it back to BAC and so on and on and on and on.

 

Nanex has been saying that 40% of BAC has been traded in dark pools. Who would buy that piece of rotten shit called BAC?

Sat, 01/05/2013 - 01:00 | 3124694 q99x2
q99x2's picture

Look on the bright side. This is helping the existing system to implode on its own. The required revolution may not be as severe.

Sat, 01/05/2013 - 01:14 | 3124707 Yen Cross
Yen Cross's picture

O K Snowball 777

Sat, 01/05/2013 - 02:01 | 3124735 tickhound
tickhound's picture

I'm not sure about your detective work, Yen.

Sat, 01/05/2013 - 02:48 | 3124758 Yen Cross
Yen Cross's picture

What ever/  The guy got Married and traded in his blue helmut. { wishful thinking}

Tick Hound/ what's yer thoughts on T-10's?

 

Sat, 01/05/2013 - 05:42 | 3124781 tickhound
tickhound's picture

Naw, sb777 is still smacking around those he deems too redneck.  I'll give you the secret signal next time.  I don't wanna out him-out him. 

I can't see the 10yr over 2% for any length of time.  Even with the debt ceiling raised, probable/possible downgrade... everyone knows the fed is gonna buy this paper.  S&P at 5 yr high, yeilds soaring... I think metals are signaling a reversal.  Its laughable the 10 yr actually looks so appealing right now.     

 

Sat, 01/05/2013 - 01:35 | 3124718 Element
Element's picture

I'm just wondering what any of this has to do with an institution that's supposedly providing a mechanism for capital resources to flow to companies for the aim of generating continuous new production and physical trading? Can someone please point me to where that occurs now, as it might be quite interesting. Thanks in advance.

 

Oh, btw, can someone make a list of all the scum at the SEC and the 25 or so other alphabet regulators who need to be lined-up and shot through the lungs when the revolution comes? - cheers.

Sat, 01/05/2013 - 01:43 | 3124726 Yen Cross
Yen Cross's picture

And Manufacturing/ Same shit different day/ Listen to Element!

Sat, 01/05/2013 - 01:53 | 3124733 tickhound
tickhound's picture

And all this time I thought it just a 'profit' mechanism.

I know not of these other THINGS you speak of... they sound ancillary.

Gary Gensler deserves trial.  I bet he'd fold like a cheap suit under proper questioning.

 

Sat, 01/05/2013 - 03:19 | 3124783 Yen Cross
Yen Cross's picture

 The dog is walking the tick?  Gary Gensler? WTF? Lay off the Trim Tabs. That new puke is even worse/

 http://en.wikipedia.org/wiki/Bart_Chilton  That fucktard banned hedging and CFD's!

Sat, 01/05/2013 - 03:36 | 3124791 tickhound
tickhound's picture

So the list is endless.  I was just offering up who I thought was the biggest pussy in the room that not every jerk-off would be in line to say.  Trim Tabs?  You trying to hurt my feelings dude? 

Sat, 01/05/2013 - 01:51 | 3124729 Widowmaker
Widowmaker's picture

Nanex = chart porn from the threshold of hell.

more, plz.

Sat, 01/05/2013 - 02:07 | 3124736 IridiumRebel
IridiumRebel's picture

The house is on fire and everyone is just looting it before it crumbles at this point. The SEC could care less. If you still got valuables in the pyre, remove them if you can. If not, kiss them good bye.

Sat, 01/05/2013 - 02:55 | 3124762 Radical Marijuana
Radical Marijuana's picture

After stating that "prosecuting the wrongdoers is clearly not part of the new normal" all the rest of this article only proves that point!

The entire system is based on runaway triumphant fraud, since the Fraud Kings have seized control over everything from the puppet politicians, to the mass media, to the masses of muppets, who have been brainwashed to believe bullshit. The end game is genocidal wars, along with democidal martial law, because NOTHING else is able to stop this fascist plutocracy juggernaut, being powered by electronic, automatic, fiat money, made out of nothing, to gamble with, in ways that no longer are subject to any enforced rules, because those playing the game have taken control of the cybercasino.

Welcome to science fiction becoming fact, in the dystopian nightmare of greed and stupidity, astronomically amplified by all the most intelligent technology possible, where what is "possible" has become self-evolving programs! First people let tiny ruling elites take control, and screw them silly. Then elites developed technology that is surpassing everybodies' abilities to understand, or reign it in, because self-evolving systems worked too well. From militaristic patriarchy, to fascist plutocracy, step by step, systems that did NOT care about human beings have now been transferred to automatic systems, that ARE NOT HUMAN.

In this new Ouroboros of Incorporated Robbery, it is now old-fashioned to believe there are some evil human ruling classes that are still in control. Sure, they built it, and still own a nice little piece of it. However, it is leaving them behind in the dust too.  Sure, their position in the dust is a lot nicer than those who were left way, way behind, long, long ago. However, the same runaway insanities are now operating against everyone. The insanities that developed atomic energy, have already driven the actual electronics to become utterly irrational, from any humanitarian point of view!

The same process of relative dumbing down of the masses is now working its way relatively through upon the ruling classes. What goes around, is coming around. Too bad, so sad, that this seems so OUT-OF-CONTROL that not even the human ruling elites appear able to understand the ways in which they are destroying their future too! However, anyway, this runaway system seems to already have been allowed to get beyond any group of them being able to stop it doing to them what they have already been doing to everybody else.

Sat, 01/05/2013 - 03:04 | 3124769 ebworthen
ebworthen's picture

SEC says:

"We see no boobs, coochie, or penis; what do you want us to look at again?"

Sun, 01/06/2013 - 13:03 | 3124770 rufusbird
rufusbird's picture

In the early days of electronic (online) trading, I first had an account at Etrade. They had a limit order of 5,000 shares for flat price. When building positions I would use multiple orders of 5,000 shares. Never had a problem. Then Ameritrade came along and when I did the same thing with them, out of habit, a trader called me and told me to stop because it was not legal it was considered "Painting the Tape". So I quit doing it and used larger orders. So what happened to oversight?

New rules, "We don't need no stinking regulators?"

People started asking me years ago, (5 or more now) if I was still trading. I always told them "No, The big banks are running the country now."

Every week that passes proves my comment more than I ever would have dreamed. None of my aquaintances trade anymore. They all buy real estate or physical prescious metals.

My point is, Do we have different rules for individuals that don't apply to investment banks and hedgefunds?

 

Sat, 01/05/2013 - 03:51 | 3124802 jmeyer
jmeyer's picture

I am a day trader. I fail to see how any of this HFT bullshit affects me. It happens in a fraction of a second but nobody can know the actual FUTURE, a few picoseconds, a few minutes, or an hour away. The old trading rules still apply: wait for a LOW RISK ENTRY, however YOU define it and then take a freaking position. And then, go for your target while decreasing your risk. WTF ? Is this new ? Is it affected by HFT or anything else ??,  NO ! Look at the freakin' charts; use Ninjatrader, Tradestation or any other trading software you want. Nothing has changed except maybe your perception that something may have changed even tho' it hasn't. Occasional fat fingers, flash crashes or computer fuck-ups just don't matter; look at the freaking charts and see for yourselves. HFT increases liquidity; fear decreases liquidity.

 

Buy low, sell high; Buy high, sell low.

Sat, 01/05/2013 - 09:58 | 3125025 Absinthe Minded
Absinthe Minded's picture

Your trade gets held up by algorithmic thugs which cannabalize pennies off of every share you buy. If you don't mind this you should invest in KY.

Sat, 01/05/2013 - 11:00 | 3125090 Non Passaran
Non Passaran's picture

If your bid is met and you buy at the price you wanted, why do you care whether you purchased from an HFT bot or some dude who wanted to sell?
He did not say he places market orders in which case your argument would hold.

Sat, 01/05/2013 - 04:04 | 3124809 AgAu_man
AgAu_man's picture

If you're looking for a private network backbone, look at HP. Back in Carly Fiorina days, when they were into HDTV Video-Conferencing, they bragged about having the largest internet backbone and at the lowest latency. They also have a large segment of blade servers. Of course their HW and that of Cisco is all made in... China, right? In theory this should help the super-sleuthing. In theory.

Sat, 01/05/2013 - 04:46 | 3124840 Me_Myself_and_I
Me_Myself_and_I's picture

Tyler you amateur.

 

The SEC only hires bored lawyers who start looking for their "real" corporate jobs the moment they are hired.

Data scientists?  Ha!

Algorithmic investigators?  Ha!

The SEC craves not these things.

Sat, 01/05/2013 - 05:10 | 3124851 Tom Green Swedish
Tom Green Swedish's picture

Perhaps their business ethics classes failed them. Although the SEC really doesn't care anything about ethics, unless it is a broken Ponzi Scheme.  Lets not forget Graham was the "basis" for Enron, was it the basis for the banking collapse too?  I think we have a conflict of judgement and interest possibly on our hands here. Well at least we know the banks don't feel like competing with Wal-Mart.

 

 

Sat, 01/05/2013 - 06:56 | 3124899 Inthemix96
Inthemix96's picture

Dont know how significant this is, but I have been informed Switzerlands oldest bank has been shut.  For good.

Could be the start peeps

Sat, 01/05/2013 - 07:57 | 3124946 Inthemix96
Inthemix96's picture

The bank is called Wegelin and was established in 1741.

It has agreed to pay the US authorities a fine of $57.8m before shutting its doors for good, tax evasion I believe.

One down, more to go, you hear that JPM??

Sat, 01/05/2013 - 10:55 | 3125080 Non Passaran
Non Passaran's picture

Only in the US as far as I can tell and this was their intention since 2009 because of the harassment by the US government.
http://www.swissinfo.ch/eng/business/Wegelin_bank_to_pull_out_of_US.html

Sat, 01/05/2013 - 07:06 | 3124906 Papasmurf
Papasmurf's picture

The solultion is very obvious.  Pass all server connections through a randomized digital delay line.  Introduce a random 10-20 second delay for all connections.  Investment rather than sclaping would return to the markets.

Sat, 01/05/2013 - 09:14 | 3124999 Benjamin Glutton
Benjamin Glutton's picture

this will not end until the FED's emergency powers to distribute new money(welfare) for the financial sector has expired.

 

forward comrade neocons!!!!

Sat, 01/05/2013 - 09:16 | 3125001 Downtoolong
Downtoolong's picture

There ought to be a law that says it's illegal to post quotes that have no reasonable chance of being filled. Simple as that.

Oh wait, there already is one.

 

 

Sat, 01/05/2013 - 09:53 | 3125018 tuku2400
tuku2400's picture

Don't forget the high frequency traders are allowed to see everyone else orders before they reach the server and get in front of them or out of the way

That is the same as having tomorrows newspaper

Sat, 01/05/2013 - 10:02 | 3125030 Implicit simplicit
Implicit simplicit's picture

They create an artificial time warp for the scam. Their speed allows them to rip holes in othes accounts'  money bags without even an apparent cut. Eventually, after they get quarks to do their bidding, they will defy time/space totally by having the same order on two different exchanges during the same millisecond time period

Sat, 01/05/2013 - 10:17 | 3125046 philosophers bone
philosophers bone's picture

If this is the way HFT works, then it should not only be banned, but anyone involved in writing the code or using the programs should be punished severely. The entering of an order with an intention or plan to have the order withdrawn has always been regarded by regulators as abusive and manipulative practice as it creates a false impression. The securities regulators have lost their way. Self-regulation model does not work particularly with the Wall Street types. Also "for profit" stock exchanges are in an irreconcilable conflict. Time to rethink everything, but start with vigorous and aggressive enforcement of all HFTs. Heads should roll at the HFTs, the stock exchanges and the SEC. Do your job and follow your public interest mandate.

Sat, 01/05/2013 - 14:35 | 3125429 Archduke
Archduke's picture

I'm coming out. I write algos for a major investment bank.

this is the brokerage arm -not program trading, mind.

 

say you have a client that places an order.  it's quite sizeable.

the instrument is multimarket, offered on ENX, CHI-X, LSE.

now even a liquid stock doesn't have a full order book all the time,

you can't create matching size orders out of thin air,  so you have

to take a bit here, another there, and slowly fill up as commissioned.

but as it does the price moves. so you have to probe around,

send feelers, wait passively a bit, and then cancel them.  if that

doesn't work eventually you switch to a more agressive mode

and cross the spread.

 

none of this is predatory speculation.  this is just you trying to

get the best execution for your client.  note that the cancels are

not immediate. you would prefer to be hit by the passive orders,

but as markets move a lot, you can't afford to stick around forever

to be caught off guard.

 

It's clear there are some brillantly devious immoral algos out there.

It's not so clear how to identify them, and it's not always clear what

can be done to fix it.

 

Now there are huge structural imbalances like latency, but imho there's

nothing can be done about that.  That's just how normal commerce works.

For example you expect prices to be better in a metropolitan hub Costco

than a general store in the remote badlands.

 

So if urban players, ie big market maker algos pick each other off in fast

real time markets, but in slower end-of-day or average quotes there are

stable prices with a small token fee, that's expected and normal. it should

actually be more efficient.

 

however, it's clear that quote stuffing is harmful.  that duplicitous alpha

strategies not meant to ever actually trade, or to facilitate a derivative

to trigger on some other completely unrelated deal levered on a falsely

priced underlyer are clear cases of cheating.

 

In this case, it's in everyone's interest to penalise and possibly prosecute.

Imho, there should be skin involved in cancels.  same as naked shorting.

That and/or there should be a holding delay before cancels or some other

mechanism to discourage gaming.  But I would leave that to the smart folks

to figure out.

 

maybe nanex has some suggestions?

 

 

 

 

Sat, 01/05/2013 - 14:44 | 3125452 ekm
ekm's picture

.

Sat, 01/05/2013 - 14:44 | 3125453 ekm
ekm's picture

On the moral side, do not worry about it. Your job is quite moral and deserves appropriate income.

Why?

Because your customer HOLDS INVENTORY, where as HFTs HOLD ZERO INVENTORY, hence it's PREDATORY.

I am absolutely NOT against electronic trading, for people who hold inventory.

 

HFTs should be banned because NONE OF THEM holds inventory and rely on your customer and you to be PREYS. You are the victim, not the predator.

Sat, 01/05/2013 - 15:42 | 3125523 nanex
nanex's picture

It is almost trivial to identify the bad algos. Look up at the charts in this article - there's one right there. We published the article within hours after identifying it. In our spare time. Here are thousands (THOUSANDS!) of others: http://www.nanex.net/aqck/aqckIndex.html These represent about 5% of what we've seen, and probably 1/1000 of 1% of those we haven't.

As for suggestions on how to improve things: http://www.nanex.net/Research/Proposal/NanexProposal.html

What we really need is someone like Former Senator Ted Kaufman to be the next SEC Chairman. Someone who can't be bought.

 

nanex

Sat, 01/05/2013 - 16:24 | 3125589 Archduke
Archduke's picture

thanks nanex. that's brillant.

Sat, 01/05/2013 - 15:42 | 3125525 Archduke
Archduke's picture

somebody here mentioned random delays as a possible equalizer...

I want to talk about latency a bit and suggest an alternative...

 

I think what's wrong is the mixing of trades across different densities instead of letting

it trickle through by inertia.  if you picture big algos in highly liquid markets and large

nexus hubs like a violent trashy sea, and small players like inland lakes with nigh a ripple,

what's not making sense here is that tinformation is actually being sent more equally and

symmetrically than it actually should.  it's normal for big boats to react to big waves.

it's not normal for those waves to rock skiffs used to mere ripples.  so prices shouldn't

be available equally and instantaneously.  there has to be a cost proportional to the

latency and information density, propagating spreads to slower pools.  the inertia needed

to be overcome to send messages upstream, if you will.  gravity.  you need more localised

satellite markets in the slower periphery, managed by big market makers serving as locks,

and connected by high speed trunks like canals to their peers.  that way big manowars can

trade cannon with each other and the oxbridge boat race may proceed as normal, but the

two won't be playing with each other.

 

I can't believe I'm arguing for more intermediation, but if you look at the watershed analogy,

that's how nature works.  seas don't usually flood lakes and puddles don't cause sudden crests.

what keeps it sane is gravity.  in our case that gravity has to be enforced be in the form of fees

or spreads.

 

Sat, 01/05/2013 - 11:00 | 3125065 dvsteenk
dvsteenk's picture

Most will agree that the price at which a stock is trading most of the time doesn't reflect any longer its true price, as evidenced by the usual return to VWAP levels later on. But the VWAP-mechanism has its limits in understanding HFT's influence in the markets, as it doesn't account for Beta-chasing strategies, which I think are what HFT were designed for. Nanex does great work in exposing the direct manipulations, i.e. the Alpha effects. Next steps should be to (1) connect the manipulations to a physical player (will this ever be possible?) and to (2) detect the indirect targets of the HFT entities (because we see only Alpha now, not Beta). 

I think the HFT target price is the price that is needed to squeeze a maximum of profit out of a highly leveraged derivative position that is placed completely out of sight (while everybody is shouting about the "relatively small" manipulation of a stock, sometimes highlighted by flash crashes or flash spikes, one doesn't see the beta effects that really matter). In this Beta-based strategy it doesn't matter that 5$ is added to AAPL's closing price in a split second, sometimes just before markets close or in after-hour trading (like happened last week). What really matters is the profit taken from their leveraged bet on options, ETF's and futures that move up or down 3x, 10x, 20x, 50x or more when AAPL's stock price moves. By taking virtually 100% control of the bid and ask through quote stuffing, they can theoretically bid a stock very easily 0.1%, 0.5% or 1% up or down to the desired target level, requiring only minimal volume, then let let it drop or take it back to VWAP. In the meantime, they could wipe out distant positions or cash-in on the derivative trade...

People saying HFT doesn't affect the market participants much, because prices always return to their VWAP (i.e. seemingly small Alpha-effects) are ignoring the cumulative losses incurred by "less-informed" market participants who thought that they had safely chosen their stop-losses 5-10% up or down the current price, or thought they were safely hedged by buying a put or call, while the HFT machines fraudulently searched, found and stole the hidden stop positions in common stocks with their algo-trading rape, scalping small trades along the way to their target, and ultimately by the organised killing of the hedging positions in options, ETF's, etc.

This game is rigged and rotten to the core. Moreover, there are no chinese walls anymore, when financial institutions sell leveraged derivatives to their clients and at the same time use this information to take completely opposite positions in their proprietary trading, or pass this information on to a "befriended" third party, perhaps an HFT entity...

If the SEC is not addressing this manipulative practice, maybe deliberately ignores it, one can only think there are hidden interested parties that prevent them from altering the rules. Does this mean the HFT entities are directly connected to central banks, primary dealers and other banks - i.e. the algos were designed to keep full control of the price formation on exchanges, as long as is needed to hide the obvious bankruptcy of the economy and financial industry - and that the SEC plays along? Or does it mean the SEC doesn't understand what is happening under their eyes?

I sincerely hope it is the first, because then they can be held accountable one day, and that will be when Nanex will be able to answer the two above questions.

Sat, 01/05/2013 - 12:52 | 3125242 nanex
nanex's picture

Nice post.

 

We've recently added options to our monitoring tools which have already turned up some examples of the beta effects you write about. My feeling is that the top players have very sophisticated models that also take into account futures, options and spreads on futures, ETFs and indexes and options on ETFs and indexes. In other words, their models know how a move of X  at a rate of Y in a stock, ETF, future or index, will impact the price of everything related. On a very small time scale. I forgot to add currencies and trading on exchanges outside the US to that list.

As for your 2 questions at the end. These are questions that we talk about almost daily at the office (and with anyone who will listen) since first meeting the SEC/CFTC in Washington in July 2010. In a nutshell:

The SEC is not a monolithic beast. There are at least 2 distinct factions - 1) the enforcement division would like to enforce, but being lawyers and not traders, have a very difficult time of recognizing high tech fraud, and are easily duped by mountains of gobbledygook from the HFT industry. 2) The markets and trading division, which is a radically different place:  we think they are probably outright complicit with the HFT industry. There is just too much evidence to believe they don't understand at least some of what is going on.

We believe that the SEC, one major exchange, one or more major news organizations,  and one or more larger predatory HFT are connected in a way that, in some contexts, can be thought of as one entity. This isn't a hard conclusion: it simply is the best logical explanation for mountains of evidence we've assembled from years (YEARS!) of dealing with Wall Street.

We approach this topic like scientists: we have a working model of how Wall Street functions at this level, and when we get another piece of evidence, it either fits our model or it doesn't. If it doesn't fit and the evidence is significant, we will change our model to accommodate it. For example, when the NYSE was recently fined, it changed our model. After many emails/phone calls, we came to understand about the 2 separate entities at the SEC (it was no longer a monolithic entity). We also run experiments all the time - for example we'll write a paper, but only disclose it to certain entities, and then see how it percolates around the street. We've learned a bit from that technique.

nanex

 

Sat, 01/05/2013 - 13:41 | 3125324 ekm
ekm's picture

Quote from this post:

We believe that the SEC, one major exchange, one or more major news organizations,  and one or more larger predatory HFT are connected in a way that, in some contexts, can be thought of as ONE ENTITY.

 

Priceless, ABSOLUTELY FREAKING PRICELESS. May God bless Nanex.

This is no different from the Treasury + Fed + Primary Dealers being ONE ENTITY.

Sat, 01/05/2013 - 14:19 | 3125409 Element
Element's picture

I'd love to see more on how the link to media works ... but, all in good time.

Sat, 01/05/2013 - 14:25 | 3125423 ekm
ekm's picture

News are incorporated into the software

Imaginably, that media outlet gets the request from the HFT ally to put a certain spin with few KEYWORDS.

The competing HFT that has no connection to the media outlet but its software includes reading from that outlet, falls for it.

 

Survival of the HFfitTest.

Sun, 01/06/2013 - 12:58 | 3126794 dvsteenk
dvsteenk's picture

Thanks for your insightful reply, Nanex. Interesting to read that some of my wild-guess assumptions are perhaps not that far off after all...

Some of the passages that made me wonder on:

"In other words, their models know how a move of X at a rate of Y in a stock, ETF, future or index, will impact the price of everything related. On a very small time scale. I forgot to add currencies and trading on exchanges outside the US to that list."

Their models must also include currencies and probably bond rates and commodities, as well as their derivatives, and very likely also they control pricing in (part of) the European and Asian markets, as everything seems to be so tightly correlated these days. It's like one giant arbitraging network, continuously monitoring and tapping money out of an intricate chain of serial and parallel carry trades. I got the feeling though that certain machines are switched on only during certain periods, they don't work 24/5. With very limited means, I try to model pricing of a major stock index as a function of some currency pairs, commodity values and bond rates, on a minutes time scale. Although this must seem like a millennium time-scale to you, I can regularly observe clear regime changes in the response generated by my model, like a switch is turned on or off, sometimes things turn completely chaotic then (probably because of a parameter not included in my model). I think their models require some adjustment time (perhaps they use dynamic training algorithms?) before they start interfering in one or several markets; for instance, a clear regime change typically occurs at 09:40 (15:40 GMT+1), about 10 minutes after US open.

The fact that they seem to know exactly how an Alpha move in a traded security will affect Beta moves in other, may imply that their model is not passive. It must actively control the response mechanisms, dynamically steering them, and probably requires a coordinated action of several players chasing one common agenda, with a guaranteed win-win for every participant.

"We believe that the SEC, one major exchange, one or more major news organizations, and one or more larger predatory HFT are connected in a way that, in some contexts, can be thought of as one entity."

Which financial institution or cartel could be holding a smoking gun (equipped with a perfect silencer) here? Perhaps answering some of the following may narrow the search?

  • Which entities have access to all required data and may dispose of most powerful models, with "potentially" market manipulating capacities?
  • Which have the money power to control pricing of virtually every asset class on a global scale?
  • Which have connections to and insiders in major Central Banks, financial supervisors (both factions in SEC), perhaps rating agencies?
  • Who holds huge interests in derivatives, with nominal values in the trillions of dollars?
  • Who has had - statistically nearly impossible - perfect trading quarters, with "unusual" daily profit distributions (overweight portion of days over $50-100 million)?
  • Who or what, if not by some internal time-bomb triggering auto-destruction, wiped out Knight Capital?
  • Who has kept a rather low profile on mainstream financial media in recent months: pointing to complicit news media?

Eagerly looking forward to reading more posts from Nanex!

Sun, 01/06/2013 - 21:29 | 3128336 nanex
nanex's picture

I only have a few minutes - nice list of questions though. Similar to our internal list.

 

Here's a great example of "regime change" 

 

http://www.nanex.net/aqck/2715.HTML

 

Our best guess of the who which could answer yes to all your questiion - has 10 arms.

Mon, 01/07/2013 - 03:00 | 3128884 dvsteenk
dvsteenk's picture

Didn't dare to drop a name myself, but I think I got it... Thanks again, keep it safe and continue the good work.

I couldn't access your link though; nor your homepage

Sat, 01/05/2013 - 11:55 | 3125151 DarthVaderMentor
DarthVaderMentor's picture

How can you have an honest market when you allow cancellation of orders?

The answer to HFT is the ban of cancelled orders. If you execute an order, the money comes out of your account. If you want to cancel it, then execute an opposite balancing order and take your chances in their execution. Orders don't show up in the markets until the money has changed hands. 

Honest accounting has no "transaction cancellations". Once the accounting transaction is in the books, it stays there. I guess the equity markets have the same accountanting geniuses and frauds that have ruined everything else.

No wonder honest people are moving out of the equity markets and only those to be fleeced are still in them..... 

 

Sat, 01/05/2013 - 15:18 | 3125500 Archduke
Archduke's picture

accounting has no notion of prices moving randomly in time.

it has only expected price moves from discount or accrual.

Mon, 01/07/2013 - 00:52 | 3128769 AGORACOM
AGORACOM's picture

You can't take away the ability to cancel orders without hurting the little guy.

Best solution is to simply charge 25 cents per cancelled order. Little guys won't care ... HFTs wll go bankrupt in 10 minutes.

George ... The Greek ... From Canada

Sat, 01/05/2013 - 12:09 | 3125167 SubjectivObject
SubjectivObject's picture

Certainly,

"... And second, because they are spending valuable programming time on this strategy, ..."

is sufficient to show "intent" to defraud? ??????

 

Sat, 01/05/2013 - 13:12 | 3125281 Venerability
Venerability's picture

This may or may not be related to the topic of this article.

But I wish to state categorically - since I know this site is well-read by various government entities - that my computer has been under siege since I dared to state at Seeking Alpha that I preferred reading Haaretz to the Jerusalem Post for news about what was actually going on within Israel.

Over 50 percent of actual Israeli citizens feel the exact same way.

But apparently, an American citizen just cannot! express that he or she prefers Haaretz - i.e. is not enamored to the point of idiocy with the ruling Likud Party - or he/she will be harassed via Malware by a horde of Likud operative-hackers, possibly under the direction of the Evil One - Bret Stephens - himself.

I am getting really sick of this malicious silliness.

US citizens who are also active Market participants NEED to read a wide variety of news from a wide variety of sources to compete successfully against the Big Boyz.

It is bad enough that if we try to read anything from Malaysia's Bernama, various Latin American sources, or any publication with even the most remote link to Iran, our computers suddenly flash There Be Dragons warnings in lurid purples and pinks. (OK, I am taking poetic license.  Only a little, however.)

But now we can't even read Haaretz without being hit with a Malware blitz?

Horrid, disgusting behavior. And whoever is behind it should be drummed off the Internet.

 

 

Sat, 01/05/2013 - 22:15 | 3126304 Carnegie_IB
Carnegie_IB's picture

the question is, how to profit from this information? 

 

I have come across a couple posts giving some insight into accomplishing this. 

Where in this is....the avoidance of pain? 

Do NOT follow this link or you will be banned from the site!