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NY Attorney General Probing HFT "Fairness & Predatory Behavior": Did He Just Kill The Virtu IPO?

Tyler Durden's picture




 

It seems the blatant unveiling of the HFT market's Holy Grail trading - Virtu (1 loss in 1238 days) - has raised some attention as Bloomberg reports, NY AG Eric Schneiderman has opened a broad investigation into whether U.S. stock exchanges and alternative venues provide high-frequency traders with improper advantages. As one European lawmaker noted, "the area of high-frequency trading is lacking suitable regulation," and Schneiderman warned "this new breed of predatory behavior gives a small segment of the industry an enormous advantage over all other competitors."  We wonder how this will affect Virtu's IPO given regulation is risk factor #1!

 

As a reminder, here is Virtu's trading record:

From the S-1: "The chart below illustrates our daily Adjusted Net Trading Income from January 1, 2009 through December 31, 2013. As a result of our real-time risk management strategy and technology, we had only one losing trading day during the period depicted, a total of 1,238 trading days. "

 

Let that sink in: one trading loss day and 1237 days of profits. And that, ladies and gentlemen, is the Holy Grail of the New Normal broken, manipulated markets.

 

How is this statistical anomaly possible? For those who have been following our narrative on the market-manipulating, endless crime that is HFT will know all too well. When you have a "strategy" whose only mission is to frontrun order flow, and scalp pennies from every market order - that would be billions of market orders in a period of four years - there is no risk, as confirmed by the chart above. Furthermore, since all HFT really does is accentuate momentum but making the bid chase NBBO ever higher, in a market that is manipulated top down by the Fed itself, all HFTs really do is simply enable the Fed's policy at the micro level, and thus such crimes are not only ignored, but welcomed by the New Normal overlords.

 

It also explains why fundamentals haven't mattered in years - the only thing that does matter is to quickly open one's own HFT stop, frontrun as much order flow as possible, and scalp pennies ahead of the bid and ask... billions and billions of times, leading to the statistically improbable chart pictured above.

 

This, ladies and gentlemen, is why retail has given up - when companies want to go public and no longer even hide the "secret sauce" which confirms beyond a reasonable doubt that there is a two-tier market: one in which the HFTs just never lose, and one for everyone else, well: who would want to play in a casino so explicitly rigged?

Simpy put - Virtu's boasting of its trading record was the final straw for regulators...

Via Bloomberg,

New York’s top law enforcer has opened a broad investigation into whether U.S. stock exchanges and alternative venues provide high-frequency traders with improper advantages, a person with direct knowledge of the matter said.

 

Attorney General Eric Schneiderman is examining the sale of products and services that offer faster access to data and richer information on trades than what’s typically available to the public, according to the person. Wall Street banks and rapid-fire trading firms pay thousands of dollars a month for these services from firms including Nasdaq OMX Group Inc. and IntercontinentalExchange Group Inc.’s New York Stock Exchange.

 

The attorney general’s staff has discussed his concerns with executives of Nasdaq and NYSE and requested more information, said the person, who asked not to be named because the inquiry hasn’t been announced. Schneiderman’s office is also looking into private trading venues, known as dark pools, and the strategies deployed by the high-speed traders themselves.

 

This new breed of predatory behavior gives a small segment of the industry an enormous advantage over all other competitors and allows them to use new technologies to reap huge profits based on unfair advantages,” according to a draft of Schneiderman’s speech delivered today at New York Law School.

 

...

 

The investigation threatens to disrupt a model that market regulators have openly permitted for years as high-speed trading and concerns about its influence have grown. Trading firms pay to place their systems in the same data centers as the exchanges, a practice known as co-location that lets them directly plug in their companies’ servers and shave millionths of a second off transactions. They also purchase proprietary data feeds, which are faster and more detailed than the stock-trading information available on the public ticker.

 

...

 

Schneiderman has previously voiced disapproval of services that cater to high-speed traders and give them a potential edge. When Business Wire, the distributor of press releases owned by Warren Buffett’s Berkshire Hathaway Inc., said last month it would stop sending the statements directly to high-frequency firms, Schneiderman called it “a tremendous victory.”

 

Taking his concerns public may help Schneiderman push the exchanges to alter practices, as Business Wire did, even without enforcement action. Among the powerful tools at his disposal is the Martin Act, an almost century-old law that gives him broad powers to target financial fraud in the state.

 

...

 

Targeting the exchanges could be the most straightforward way to deal with any ill effects of speedy trading, said James D. Cox, a securities law professor at Duke University in Durham, North Carolina...“They have a broad statute to maintain orderly markets and to do so in an ethical manner.”

 

“The SEC wants to protect investors, but also strengthen and promote U.S. capital markets,” Cox said. “These twin functions conflict with each other, which is why they have so far turned a blind eye on this issue.”

Of course, the big headline will be the effect this has on Virtu's "Holy Grail" IPO - their #1 Risk Factor is...

In addition, certain market participants have requested that the U.S. Congress and the SEC propose and adopt additional laws and rules, including rules relating to restrictions on co-location, order-to-execution ratios, minimum quote life for orders, incremental messaging fees to be imposed by exchanges for "excessive" order placements and/or cancellations, further transaction taxes, tick sizes and other market structure proposals. The SEC recently proposed Regulation SCI, which could impose significant compliance and other costs on market centers that may have to pass such costs on to their users, including us, and could impact our future business plans of establishing a market center to avoid or reduce market center costs for certain of our transactions. Similarly, the consolidated audit trail, which the SEC is requiring SROs to propose a plan for and implement, is expected to entail significant costs both on market centers, which may pass these costs along to their users, and broker-dealers directly.

 

Any or all of these proposals or additional proposals may be adopted by the SEC, CFTC or other U.S. or foreign legislative or regulatory bodies. These potential market structure and regulatory changes could cause a change in the manner in which we make markets, impose additional costs and expenses on our business or otherwise have a material adverse effect on our business, financial condition and results of operations.

Seems "lobbying costs" might be about to become a much bigger line item...

It appears Virtu really does have a problem!

This also explains why the gigaHFT firm has finally stepped out of the shadows and its founder and equity owners are finally willing to cash out - the music is slowly ending. Even for those who have discovered the Holy Grail of the New Normal market.

 

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Tue, 03/18/2014 - 09:59 | 4562798 digitlman
digitlman's picture

About.  Fucking.  Time.

Tue, 03/18/2014 - 10:04 | 4562825 sunaJ
sunaJ's picture

Eric Sneiderman's other lamdmark "inquiries":

- Is the sky blue?

- If you don't eat, do you get hungry?

Tue, 03/18/2014 - 10:16 | 4562860 gmrpeabody
gmrpeabody's picture

But..., all the pretty bimbos are telling me we need HFT for price discovery..., <sarc>

(I have little faith in any AG named Eric)

Tue, 03/18/2014 - 10:53 | 4563055 Pure Evil
Pure Evil's picture

So.....on that one day they had a loss did the robots become sentient and start feeling guilty about their criminal behavior only to be rebooted the next day before any more losses were incurred?

Tue, 03/18/2014 - 11:10 | 4563158 NotApplicable
NotApplicable's picture

Schneiderman gonna whitewash that fence for Vinnie.

Amirite?

Wed, 03/19/2014 - 00:38 | 4566533 Vice
Vice's picture

Why am I not surprised to see Buffet's involvement of data distribution to HFT firms. . . .

The oracle strikes again!!!!

 

Tue, 03/18/2014 - 11:26 | 4563231 Groundhog Day
Groundhog Day's picture

Eric better be careful before he finds himself on a ledge

Tue, 03/18/2014 - 16:38 | 4565031 daveO
daveO's picture

Eliot Spitzer and client #9, all over again.

Tue, 03/18/2014 - 10:07 | 4562834 Gringo Viejo
Gringo Viejo's picture

After all the chumps have been played and bled out. 'Natch!

Tue, 03/18/2014 - 10:37 | 4562949 Ident 7777 economy
Ident 7777 economy's picture

... and bring back trading in eighths ... no more of this penny-stuff ...

Tue, 03/18/2014 - 10:16 | 4562851 Colonel Klink
Colonel Klink's picture

Don't get your hopes up.  Eric "place" Holder will tell the NY AG to bury the investigation, just like everything else.  Well except, the reverse racism knock out game, but only when the perp is white.

Tue, 03/18/2014 - 10:17 | 4562875 gmrpeabody
gmrpeabody's picture

And only if said white perps are not contributing monies to his boss.

Tue, 03/18/2014 - 10:24 | 4562898 Colonel Klink
Colonel Klink's picture

Those perps don't play the physical knock out game.  They play the financial one.

Tue, 03/18/2014 - 10:55 | 4563078 Pure Evil
Pure Evil's picture

Oh Holder, me holder of me Scrotum Bag Holder.

Tue, 03/18/2014 - 10:27 | 4562914 yogibear
yogibear's picture

The Just Us department  takes a lot of it's instructions from the banksters.

Tue, 03/18/2014 - 10:13 | 4562856 whatsinaname
whatsinaname's picture

Is Virtu eating a bigger share of the profits than they need to be ? 

Tue, 03/18/2014 - 11:01 | 4563113 Pig Circus
Pig Circus's picture

This would be good news if you think in the end it will lead to anything. At best it will lead to more money into this guys campaign coffers or a infinitesimal tax on HFT's.

I first was excited when I read this news but my mind was playing tricks on me. It was longing for a time when we had the Rule of Law in this country.

Tue, 03/18/2014 - 16:40 | 4565037 daveO
daveO's picture

Yep, he has aspirations, like Spitzer. 

Tue, 03/18/2014 - 10:02 | 4562809 LawsofPhysics
LawsofPhysics's picture

People want "Fairness" in pushing paper promises and financial "products" of mass destruction?!?!?

LMFAO!!!!

Please people, only one rule applies now; When  fraud is the status quo, possession is the law.

Tue, 03/18/2014 - 10:41 | 4562957 Ident 7777 economy
Ident 7777 economy's picture

Investing, it's supposed to be INVESTING; weighing a company's worth, and potential earning power/growth going forward ...

 

By providing needed capital, I SHARE in their success. 

Is this a completely lost principle?

 

Tue, 03/18/2014 - 11:33 | 4563270 LawsofPhysics
LawsofPhysics's picture

"Is this a completely lost principle?" -  LMFAO!!!!

Where the fuck have you been?  Yes, it has been lost, especially if you are going force the taxpayer to backstop all the RISK by FORCING TAXPAYERS TO BAILOUT PRIVATE COMPANIES/EQUITY!!!!!!!!!!!!!!!!!!

If you take that risk and share in those profits, good for you, but don't force me to bail your ass out if the company fails.


Tue, 03/18/2014 - 12:53 | 4563848 Ident 7777 economy
Ident 7777 economy's picture

Look, 'sugar', this has to be put on the table ... not everyone is as street-smart (or stupid) as you ... there are new posters/readers/lurkers who may not even be AWARE of this concept, like, the SEC ... 

Tue, 03/18/2014 - 12:05 | 4563414 mccvilb
mccvilb's picture

The 1st mythology of "investing" - prices correlate with a company's real net worth, ability to earn a profit, and or pay a dividend.

Fact - there is no actual correlation that can be truly depended upon, other than two end times - at the introduction of the IPO and the time the company goes belly up or private. The PPS is a fiction, and a constant re-invention of Wall Street.

 

The 2nd mythology - HFT merely shaves pennies from each trade.

Fact - HFT enables absolute price control of an equity over given periods of time and depending on the programmers' long term objectives. Not only through front-running, but by instantly duplicating incoming orders on parallel electronic exchanges and executing them 1st hierarchally.

 

The 3rd mythology - investors should always hold equities of good companies in downdrafts.

Fact - "investors" rarely if ever sell stocks they've researched. Downdrafts are a major tool of the predatory factions. We have been Pavlovically conditioned to accept that prices of good companies can open below where they closed yesterday. It has been reinforced in trader's minds for decades with the opening bell. This is changing with HFT now that the squid knows it can move entire sectors and markets in thousandths of a second. With HFT we now are conditioned to accept offers made at lower prices than the previously executed sale during mid-market hours. Why would an investor want to sell a stock for less than what the market has been willingly paying for it? Because it's no investor. It's a divestor who's shorting of course, or a program designed to make it look like a shorter while Blackrock or JP Morgan Chase buy millions of shares at below market prices.

The 4th mythology - trading is a zero sum game. Fact - trading is a negative sum game affected by commissions, exchange fees, back door discounts, margin requirements, hidden black psych-ops, and data feeds privy to a select few.

There is no morality in trading or investing. All we ever needed to know about investing in stock markets is stated in the second law of thermodynamics - from Wikipedia, The second law of thermodynamics states that the entropy of an isolated system never decreases, because isolated systems always evolve toward thermodynamic equilibrium— a state depending on the maximum entropy.

 

For those who prefer a visual explanation, http://www.youtube.com/watch?v=KTyoFVmKPO0

 

Tue, 03/18/2014 - 12:54 | 4563867 Ident 7777 economy
Ident 7777 economy's picture

-1; jumping WAY too far ahead ...

Tue, 03/18/2014 - 10:04 | 4562813 PlusTic
PlusTic's picture

nothing will happen...these fukks will get paid-off and this insanity will continue...just tax the prikks per transaction, it will go away on its own

Tue, 03/18/2014 - 10:03 | 4562819 Dr. Engali
Dr. Engali's picture

Five years later and they are just now recognizing the fact that HFTs have an unfair advantadge? Some how I have a hard time believing that.

Tue, 03/18/2014 - 10:07 | 4562835 Winston Churchill
Winston Churchill's picture

Election year.

Big noise until after November ,and then quietly buried in the Meadowlands.

Tue, 03/18/2014 - 10:16 | 4562871 valley chick
valley chick's picture

+100   Schneiderman still takes contibutions ?

Tue, 03/18/2014 - 10:08 | 4562839 pods
pods's picture

They haven't even said that Doc, merely it needs to be investigated. My guess is that story ruffled some feathers and a token fine is called for.

Same as it ever was.  Quick fine, back to business.

pods

Tue, 03/18/2014 - 10:10 | 4562848 A Lunatic
A Lunatic's picture

Any of us would have been sentenced to prison long ago.......

Tue, 03/18/2014 - 10:21 | 4562888 El Hosel
El Hosel's picture

..... They are just know recognizing the opportunity to share in the proceeds, thats also hard to believe but more likley.

Tue, 03/18/2014 - 10:03 | 4562820 Kaiser Sousa
Kaiser Sousa's picture

bullish...

hell everything fucking else is for these rigged fuicking debt coupon dollar denominated Fraud Markets....

Tue, 03/18/2014 - 10:04 | 4562824 GolfHatesMe
GolfHatesMe's picture

We are going to need a bigger Rug to sweep this under!

Tue, 03/18/2014 - 10:44 | 4562980 Ident 7777 economy
Ident 7777 economy's picture

There is more wisdom in your observation than you may realize ...

Tue, 03/18/2014 - 10:06 | 4562829 Whoa Dammit
Whoa Dammit's picture

Those HFTs taking unfair advantage are only the small shops, never the  completely honest never have a losing trading day TBTF HFTs.

Tue, 03/18/2014 - 10:07 | 4562833 Billy Shears
Billy Shears's picture

I hear the NY AG will be interviewing for a position at JP Morgan in the not to distant future.

Tue, 03/18/2014 - 10:18 | 4562879 GolfHatesMe
GolfHatesMe's picture

Jump School?

Tue, 03/18/2014 - 10:45 | 4562988 Ident 7777 economy
Ident 7777 economy's picture

Cut to the chase: "Burial vault work"

Tue, 03/18/2014 - 10:07 | 4562836 Rainman
Rainman's picture

Back to the future. Schneiderman is about to become Client # 10

Tue, 03/18/2014 - 10:15 | 4562869 El Hosel
El Hosel's picture

...... HFT will be fine as long as the Casino gets their VIG on the transactions, here come the taxes. Organized crime is /will be allowed as long as the Federallies get their fair share of the proceeds.

Tue, 03/18/2014 - 10:15 | 4562868 Danno Anderson
Danno Anderson's picture

In other words NY AG Eric Schneiderman and the Democratic needs some fresh political contributions from Wall Street......or else. 

Tue, 03/18/2014 - 10:23 | 4562884 Colonel Klink
Colonel Klink's picture

Eric Schneiderman being a member of the club, of which we cannot speak, will do nothing.  The other members will instruct him to find no wrong doing.  He'll then be given his payoff in the form of a high paying job working for those whom he's supposed to be prosecuting, instead of protecting the public as he has sworn to do.  His law enforcement background means absolutely nothing because I haven't seen one (maybe with the exception of Arpaio) who actually honors their oath of office, and thwarts the Federal governments edicts.

Tue, 03/18/2014 - 10:30 | 4562927 Winston Churchill
Winston Churchill's picture

Amazing work(not) he has done on the Federal task force on RMBS fraud, also announced in

an election year.

Tue, 03/18/2014 - 10:32 | 4562933 Seize Mars
Seize Mars's picture

It would be funny if it weren't lethal.

Tue, 03/18/2014 - 10:23 | 4562893 RockRiver
RockRiver's picture

Bet he wishes he kept his mouth shut....

 

I highly doubt anything comes of this. Way too much money behind HFT on Wall St.

Tue, 03/18/2014 - 10:25 | 4562901 Bryan
Bryan's picture

HFT "fairness"???  About 10 years too late there, slick.

Tue, 03/18/2014 - 10:27 | 4562913 nathan1234
nathan1234's picture

What were the earlier Attorney generals doing?

I have been raped, graped, groped, had by behing kicked and my bank balance removed by these HFT programs.

All the concerned bureaucrats who permitted HFT should be at the very least put behind bars.

 

Tue, 03/18/2014 - 10:29 | 4562920 yogibear
yogibear's picture

Ezactly! It's an election year and those being re-elected want to appear they care about the masses rather than enriching themselves.

Tue, 03/18/2014 - 10:47 | 4563007 Ident 7777 economy
Ident 7777 economy's picture

Yup. Like review time. Need to show some 'accomplishments' for the KPA (Key Personnel Assessment) meeting ...

Tue, 03/18/2014 - 10:29 | 4562923 replaceme
replaceme's picture

This is just about getting some palms greased - no way these guys care about fairness in the markets.  Or, this is how Judgement Day starts, when the machines see all of us as threats...

Tue, 03/18/2014 - 11:17 | 4563188 Ariadne
Ariadne's picture

It if moves, tax it. If it keeps moving, tax it more... what, what? What is this HFT? Tax it! Tax it!! Its getting away!

Tue, 03/18/2014 - 11:35 | 4563310 PlusTic
PlusTic's picture

how about a criminal probe, one that requires an ass rape on rikers island :O

Tue, 03/18/2014 - 11:51 | 4563426 vachon
vachon's picture

"Hi! I'm a thief and a damn good one!  Don't believe me?  Then listen up as I tell you how I fleece every single investor out there.

So, wanna join me?  Line up and sign up today for free lunches forever!"

This guy deserves every year he gets put behind bars for ego-based stupidity above and beyond.  Then trash the key.

 

Tue, 03/18/2014 - 12:56 | 4563877 kchrisc
kchrisc's picture

"Did He Just Kill The Virtual IPO?"

LOL, No.

This is how it works:

He wants a bigger pol job and/or a cushy Wall St./bankster position. So he threatens to pull the rug out from under the scoundrels. Not too forcefully, as who wants to be thrown out of a sixth-floor window. The offers flood in and bada-bing problem solved and he's living the good life.

See Dodd-Frank, etc. for references.

Tue, 03/18/2014 - 16:40 | 4565027 Mandel Bot
Mandel Bot's picture

HFT is, by definition, theft. It is skimming cash without giving anything in return.

Regulating HFT is a farce. It should have been outlawed before it was ever implemented.

We all know this. The fact that the 'regulators' have allowed it for so long is absolute proof of their corruption.

Pitchfork and torches time is long overdue.

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