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When Even Goldman Complains About HFT

Tyler Durden's picture




 

For the past five years we have been complaining about the two-tiered, and broken, market resulting from the near-ubiquitous presence of HFT trading strategies, where fundamentals have been tossed into the trash, and where quote churning, packet stuffing and not to mention, momentum ignition, put on candid display just before market open today when the Emini was ramped in a vertical line straight up taking the S&P to new all time highs, have become the only trading strategies that matter. Why? Because algos were in a panic buying mode as other algos were in a panic buying mode, and so reflexively on. The SEC long ignored our complaints, even after the HFT-precipitated flash crash, which we had warned apriori would happen, in a market as broken and manipulated as the one the Fed and the algos have unleashed. This changed recently when NY AG Schneiderman finally decided to "look into things" following the release of Virtu's ridiculous prop trading profits when the firm, in its IPO prospectus, announced it had made money on 1327 of 1328 trading days. However, when even Goldman Sachs begins complaining about HFT, it may be time to fire all those 20-some year old math PhDs who program your "trading algorithms."

In an Op-Ed overnight, Goldman COO Gary Cohn reminds those who may have forgotten, that:

In the past year alone, multiple technology failures have occurred in the equities markets, with a severe impact on the markets' ability to operate. Even though industry groups have met after the market disruptions to discuss responses, there has not been enough progress. Execution venues are decentralized and unable to agree on common rules. While an industry-based solution is preferable, some issues cannot be addressed by market forces alone and require a regulatory response. Innovation is critical to a healthy and competitive market structure, but not at the cost of introducing substantial risk.

Odd - we have been saying this since April 2009.

Anyway, what does Cohn suggest? Here, via the WSJ, are his four proposal for eliminating the fragmented, broken markets that have resulted from the relentless incursion of vacuum tubes, which have also driven the vast majority of carbon-based traders out.

Regulators and industry participants, including asset managers, broker-dealers, exchanges and trading firms, have all put forth ideas and reforms. We agree with a number of their concerns and propose the following four principles:

 

First, the equity market needs a stronger safety net of controls to reduce the magnitude and frequency of disruptions. A fragmented trading landscape, increasingly sophisticated routing algorithms, constant software updates and an explosion in electronic-order instructions have made markets more susceptible to technology failures and their consequences.

 

We propose that all exchanges adopt a stringent set of uniform, SEC-mandated execution controls to reduce errors. In addition to limit-up, limit-down rules that prevent trades from occurring outside a specified price band, pre-trade price and volume limits should be implemented to block problematic orders from entering the market. Mechanisms should also be introduced to halt a firm's, market maker's or other entity's trading when an established threshold is breached, thus minimizing the uncontrolled accumulation of trades.

 

Second: Create incentives to reduce excessive market instability. The economic model of the exchanges, as shaped by regulation, is oriented around market volume. Volume generates price discovery and liquidity, which are clearly beneficial. But the industry must recognize how certain activities related to volume can place stress on a market infrastructure ill-equipped to deal with it.

 

Electronic-order instructions connect the objectives of buyers and sellers to actions on exchanges. These transaction messages direct the placement, cancellation and correction of orders, and in recent years they have skyrocketed. In the 2010 "flash crash," a spike in the volume of these messages exacerbated volatility, overwhelming the market's infrastructure.

 

According to industry analysis, since 2005 the flow of these order instructions sent through U.S. stock exchanges has increased more than 1000%, yet trade volume has increased by only 50%. One consequence of the enormous growth in order-message traffic is that increasingly the quote that an investor sees isn't the price he or she can transact, as orders often get canceled at lightning-quick speeds.

 

Currently there is no cost to market participants who generate excessive order-message traffic. One idea would be to consider if regulatory fees applied on the basis of extreme message traffic—rather than executions alone—are appropriate and would enhance the underlying strength and resiliency of the system. Regulators in Canada and Australia have adopted this approach.

 

Third: Public market data should be disseminated to all market participants simultaneously. Exchanges currently disseminate prices and transaction data to the SEC-sanctioned distributor for all investors, but exchanges may also send this information directly to private subscribers. While the data leave the exchange simultaneously, the public data are delayed because they go through the intermediary's processing infrastructure. The public aggregator should release information to all market participants at the same time.

 

Removing the possibility of differentiated channels for market data also reduces incentives that favor investment in the speed of one channel over the stability and resiliency of another. Instability creates and compounds market disruptions. Stable and accurate market data is one of the most important elements of market safety; it is the backbone of the market that must weather the most extreme periods.

 

Fourth: Give clearing members more tools to limit risk. A central clearing house with strong operational and financial integrity can reduce credit risk, increase liquidity and enhance transparency through enforced margin requirements and verified and recorded trades. But because clearing members extend credit, the associated risks must be recognized. Tools like pre-trade credit checks and being able to monitor positions and credit on an intraday basis are essential. Clearing firms use various tools like margin and capital adequacy to manage their risk, but exchanges should also provide uniform mechanisms for clearers to set credit limits and to revoke a client's ability to trade immediately upon request, when necessary.

Once again, all suggestions we have banged the table on for the past five years to the point where we simply don't care.

Why? Because we realize that the HFT-parasite system is so embedded in the market structure and "New Normal" levitation topology that serves the failed status quo system, that there is no hope of ever extricating the algos from the market without crashing the market outright. And the regulators know this all too well.

 Which is the definite paradox, because the only thing that will revert the market back to some semblance of normalcy, is precisely a crash that wipes out the false sentiment that things are stable, which as everyone who traded securities in the old normal, knows they are anything but.

In other words, the best thing one can do is to cheer on the increasing incursion of idiocy in stock trading, which inevitably will self-cannibalize itself. As, incidentally, will the Fed's final attempt to centrally plan the "wealth effect" to all time highs.

So do your worst, Mr. Chairmanwoman and Virtu, we, for one, are rooting for you!

 

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Fri, 03/21/2014 - 11:39 | 4577143 More_sellers_th...
More_sellers_than_buyers's picture

PISS OFF! Goldman is singularly responsible for eradicating human trading.  They, and they alone back-doored every deal to destroy it.  Now I have one thing to say to GS...Embrace the SUCK

Fri, 03/21/2014 - 11:49 | 4577191 Thought Processor
Thought Processor's picture

 

 

Yeah, call me crazy but isn't HFT like 90+ percent of trading volume?

 

If so then HFT is the market.   Period.  End of story.

 

Goldman's been doing it from inception so.............

 

Who's mad at who here?

 

Enough with this shit show.  Everyone knows the market is synthetic, ie: not real.  Has been for a long time now.

 

We're just waiting for the big reset.  

Fri, 03/21/2014 - 11:55 | 4577214 Divided States ...
Divided States of America's picture

Glad GS and Lord Blankfiend finally know how it feels to be a muppet aka stuffed up the ass.

Fri, 03/21/2014 - 11:56 | 4577218 More_sellers_th...
More_sellers_than_buyers's picture

Once speed became more important than price, (late 90's) because every trade had another side to it.  It was game over.  They wanted 2 things.  Instant execution and the ability to trade blocks in house(off exchange) >Well when they got instant execution, what they lost was any ability to trade size.  So they had to enter all of their institutional orders via algos to interact with the HFT.  As thier customers got younger and younger they no longer demanded a trade done on an exchange. This gave them the ability to fuck their own customers in house.  Setting prices without any market discovery or their buyers and sellers being able to get a better price from someone else.  They fucked everyone so they could jam commisions on both sides of the trade and fuck the public at the same time.  The public was left in cold.  (why no one trades any more.) So to fuck everyone they destroyed fairness and price discovery.  Fuck em.  The public will never trade again.

Fri, 03/21/2014 - 11:49 | 4577193 Gaius Frakkin' ...
Gaius Frakkin' Baltar's picture

Did GOD run out of tasks for Goldman?

Fri, 03/21/2014 - 11:40 | 4577151 youngman
youngman's picture

Goldman does not like the other competition.....they have a HFT computer of their own..I remember seeing an interview several years ago about a building GS was buying right next to the NYSE computers where they were building a computer base...faster if closer they said...

Fri, 03/21/2014 - 11:40 | 4577152 Atomizer
Atomizer's picture

Only when IB's are getting skimmed from profits. Boohoo Goldman Slacker's. Better yet, FUCK OFF cunts! Tit for Tat.

Fri, 03/21/2014 - 11:41 | 4577154 bagehot99
bagehot99's picture

Matt Levine says we shouldn't read anything into their 99.99999% success rate, becasue they are only really a market-maker providing liquidity to buyers and sellers, so their win rate is just a reflection of them earning a slice of every transaction.

So, how did they lose on that one day?

Fri, 03/21/2014 - 11:46 | 4577179 Tyler Durden
Tyler Durden's picture

From our report on Virtu:

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.

Fri, 03/21/2014 - 12:38 | 4577431 Atomizer
Atomizer's picture

Thank you. You need to chime in a bit more!

Fri, 03/21/2014 - 12:56 | 4577519 disabledvet
disabledvet's picture

he forgot to thank Goldman for the 24/7 365 coverage of the plane they blew up.

Fri, 03/21/2014 - 11:42 | 4577158 madcows
madcows's picture

Take it up with Feinswine.  A$$holes.

Fri, 03/21/2014 - 11:42 | 4577159 williambanzai7
williambanzai7's picture

Fri, 03/21/2014 - 11:44 | 4577166 williambanzai7
williambanzai7's picture

Fri, 03/21/2014 - 11:46 | 4577180 taketheredpill
taketheredpill's picture

 

GS sees the writing on the wall and are getting ready to shut it down.  They've made enough.

Fri, 03/21/2014 - 11:47 | 4577182 PlusTic
PlusTic's picture

Bring back the specialist monopolies...at least then you knew which guy was fucking you and he was the only one that could fuck you

 

 

Fri, 03/21/2014 - 11:48 | 4577188 DavidC
DavidC's picture

"In other words, the best thing one can do is to cheer on the increasing incursion of idiocy in stock trading, which inevitably will self-cannibalize itself. As, incidentally, will the Fed's final attempt to centrally plan the "wealth effect" to all time highs. "

Hear hear.

DavidC

Fri, 03/21/2014 - 11:50 | 4577196 Dr. Engali
Dr. Engali's picture

What's wrong squiddy? Not enough skimming and control? Are you tired of spending money on cap-ex to stay ahead of the curve so you want to regulate the competition out of existence? I hope you choke on your own poison.

Fri, 03/21/2014 - 12:14 | 4577298 Unknown Poster
Unknown Poster's picture

When GS calls for more regulation, everyone should worry. They wouldn't want to write the rules, would they?

Fri, 03/21/2014 - 11:53 | 4577208 Thorny Xi
Thorny Xi's picture

Tax the data streams - a penny per packet into the NYSE.  That would relocate things.

Fri, 03/21/2014 - 12:18 | 4577289 Mentaliusanything
Mentaliusanything's picture

Yes that was point two.

make them pay to play, then you monetarily hobble the excessive gambling.

I would make it just enough so its a small fee bid and offer for a single order but if the algos go full retard hit them for every hit. It is the main tool to use and it will make them think... pennies become pounds. At the rate the algos play you could pay off the deficit in 25 years

Fri, 03/21/2014 - 12:58 | 4577530 disabledvet
disabledvet's picture

too late. "pays for Ukraine Sanctions Regime."

Fri, 03/21/2014 - 11:54 | 4577210 q99x2
q99x2's picture

At least they are fleecing Thing Lear Soros. Senility is expensive.

Fri, 03/21/2014 - 11:56 | 4577222 i_call_you_my_base
i_call_you_my_base's picture

The exchanges make money on HFT access. It's a pay to play market scheme. They'll never end it.

Fri, 03/21/2014 - 12:06 | 4577265 BabylonDeer
BabylonDeer's picture

Oh man, when the big crack will come to the stock market?. I miss daytrading and "human-level" HFT. I'm tired of runing from one asset to other running from the algos.

Fri, 03/21/2014 - 12:11 | 4577284 spekulatn
spekulatn's picture

Once again, all suggestions we have banged the table on for the past five years to the point where we simply don't care.

Why? Because we realize that the HFT-parasite system is so embedded in the market structure and "New Normal" levitation topology that serves the failed status quo system,that there is no hope of ever extricating the algos from the market without crashing the market outright. And the regulators know this all too well.

 Which is the definite paradox, because theonly thing that will revert the market back to some semblance of normalcy,is precisely a crash that wipes out the false sentiment that things are stable, which as everyone who traded securities in the old normal, knows they are anything but.

In other words, the best thing one can do is to cheer on the increasing incursion of idiocy in stock trading, which inevitably will self-cannibalize itself. As, incidentally, will the Fed's final attempt to centrally plan the "wealth effect" to all time highs.

So do your worst, Mr. Chairmanwoman and Virtu, we, for one, are rooting for you!

 

 

Nuff said. Well said.

Fri, 03/21/2014 - 12:27 | 4577367 dot_bust
dot_bust's picture

Ha ha ha. The pirates are finally fucking each other. There truly is no honor among thieves.

Fri, 03/21/2014 - 12:44 | 4577444 GoinFawr
GoinFawr's picture

Regulators getting the old 'gun-to-the-head-self-fulfilling-prophecy' routine

Frontrunners <wagging finger>: " Ah ah ahhhh, Take away our retail/mom and pop skimming HFT punchbowl and we'll crash the system." At which point they'll creech "See?! See all the liquidity we were adding?"

OTOH, if you wanna make an omlette...

Fri, 03/21/2014 - 13:03 | 4577552 disabledvet
disabledvet's picture

ummm "the dagger at the heart" is insider trading prosecutions.

that means the Media itself is right in the crosshairs of the Pentagon "and they're not too worried if their aim is a little off."

Fri, 03/21/2014 - 12:44 | 4577458 I Write Code
I Write Code's picture

Charge a penny to post a bid.  Oh screw, make it a dollar.

Charge a dollar to cancel a bid.

Charge a dollar to complete a trade.

AND ENFORCE RULES AGAINST NAKED SHORTS.

And - clear all trades on listed stocks only on listing exchange.

Actually, building in a ten-second delay on ALL transactions, might be appropriate too. 

Maybe 37.5 baud lines and ticker-tape was the best technology after all.

Fri, 03/21/2014 - 13:41 | 4577724 withglee
withglee's picture

Delay all transactions a random number of seconds. All HFT advantages ... and problems ... go away. Trading becomes trading again.

Fri, 03/21/2014 - 14:42 | 4577935 I Write Code
I Write Code's picture

A *random* delay!?!  Interesting, ...

Fri, 03/21/2014 - 14:07 | 4577825 Offthebeach
Offthebeach's picture

Why can't the Fed set share prices and put to sleep this antiquated, barbaric relic? What are we a come to market Sunday rural English villige in the 1500's?
Prices should be set by a elite, bringing scientific stability and facilitating economic planning.

V.I. Ulyanov

Fri, 03/21/2014 - 14:21 | 4577873 Rising Sun
Rising Sun's picture

HFT are complex elaborate systems that create liquidity and reduce bid/ask spreads.

 

GS/JPM and all the other old guard wouldn't mind, but their COMPUTER SYSTEMS, particulary their back ends are dated and shit - they can't keep up.

 

So the fuckers get online and play the media card, because they are too fat a bureaucracy to compete with the HFTs.

 

Can't go backward boyz!!!!  In conclusion, FUCK YOU GS and FUCK YOU JPM and FUCK YOU all you old fossil dead weight.

 

MARKETS MOVE ASSHOLES!!!!!

Fri, 03/21/2014 - 15:05 | 4577955 dizzyfingers
dizzyfingers's picture

Warlocks in charge.

Fri, 03/21/2014 - 16:28 | 4578387 buzzsaw99
buzzsaw99's picture

That explains this: http://www.zerohedge.com/news/2014-03-19/cftc-investigates-secret-hft-ex...

 

and we all knew it. the sec, the cftc, the doj, all work for the squid.

Fri, 03/21/2014 - 18:10 | 4578699 swedish etrade baby
swedish etrade baby's picture

"women and men of all ages should workout naked  together at the gymnasium" says Socrates in the Republic by Plato

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