Update: within minutes of publishing this article news hit that the FBI is launching a probe into HFT. QED
For all the talk about how High Frequency Trading has rigged markets, most seem to be ignoring the two most obvious questions: why now and what happens next?
After all, Zero Hedge may have been ahead of the curve in exposing the parasitism of HFT (anyone who still doesn't get it should read the following primer in two parts from Credit Suisse), but we were hardly alone and over the years many others joined along to expose what is clear market manipulation aided and abeted by not only the exchanges but by the regulators themselves who passed Reg NMS - the regulation that ushered in today's fragmented and broken market - with much fanfare nearly a decade ago. And yet, it took over five years before our heretical view would become mainstream canon.
One logical explanation is the dramatic and sudden about face by none other than Goldman Sachs, which from one of the biggest proponents of quant trading strategies including algo trading, and which used to make a killing courtesy of HFT (who can possibly forget Goldman's charges against Sergey Aleynikov's code theft which alleged "there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways"), has in recent weeks unleashed a de facto war on HFT, first with the Gary Cohn HFT-bashing op-ed, and then with the implicit backing of the IEX pseudo dark pool exchange, whose employee just mysteriously also is the protagonist of the Michael Lewis book that has raised the issue of HFT to a fever pitch.
So does Goldman know something the rest of us don't that it is now ready to give up on the HFT goldmine which lost money on just one day in 1238? Why of course it does. And one would imagine that judging by the dramatic turnaround exhibited by Goldman that said something is very adverse to the ongoing future profitability of the HFT industry. The amusement factor only rises by several notches when one considers that Goldman also happens to be lead underwriter on the Virtu IPO offering: one wonders what they uncovered and/or what they know about the industry that nobody else does, and just how the VRTU IPO will fare now that Goldman is so openly against HFT.
But what does all of that mean for the big picture? We hinted at it yesterday, on twitter when we had the following exchange.
@LongOnlyTrader Only until market crashes. Then HFT will be the torches and pitchforks scapegoat. Not the Fed.
— zerohedge (@zerohedge) March 31, 2014
Could it indeed be that the only reason why HFT - which has constantly been in the background of broken market structure culprits but never really taken such a prominent role until last night, is because the market is being primed for a crash, and just like with the May 2010 "Flash Crash" it will all be the algos' fault?
This is precisely the angle that Rick Santelli took earlier today, during his earlier monolog asking "Why is HFT tolerated." We show it below, but here is Rick's punchline:
Are regulators stupid when it comes to high frequency trade? Well, i think that there was a time where they were a bit slow to the party. But i don't think it's stupidity or ignorance or not paying attention. So let's wipe that off. So the question i'm asking is, why do they let it continue?
Why is it that anybody would want HFT to be unchallenged or at least not challenge it now? My reason, this is just my reason, when i look at the stock market it's basically at historic highs. When i look at what the federal reserve is doing, it's mostly to put stocks on all-time highs. When i look at all the debt and all the programs that don't seem to be making a difference except for putting stocks on all-time highs, i see that you have this tower of power with regard to the stock market. And nobody wants to challenge or alter hft because it is good to go that many days without having a loss. So my guess is when the stock market eventually deals with reality and pricing, which will come at a time when there's not a zero interest rate policy and we're long past QE, I think they'll address it.
Rick's full clip:
Precisely: when reality reasserts itself - a reality which Rick accurately points out has been suspended due to 5 years and counting of Fed central-planning - HFT will be "addressed." How? As the scapegoat of course. Because since virtually nobody really understands what HFT does, it can just as easily be flipped from innocent market bystander which "provides liquidity" to the root of all evil.
In other words: the high freaks are about to become the most convenient, and "misunderstood" scapegoat, for when the market finally does crash. Which means that those HFT-associated terms which very few recognize now, especially those on either side of the pro/anti-HFT debate who have very strong opinions but zero factual grasp of the matter, such as the following...
- Frontrunning: needs no explanation
- Subpennying: providing a "better" bid or offer in a fraction of penny to force the underlying order to move up or down.
- Quote Stuffing: the HFT trader sends huge numbers of orders and cancels
- Layering: multiple, large orders are placed passively with the goal of “pushing” the book away
- Order Book Fade: lightning-fast reactions to news and order book pressure lead to disappearing liquidity
- Momentum ignition: an HFT trader detects a large order targeting a percentage of volume, and front-runs it.
... will become part of the daily jargon as the anti-HFT wave sweeps through the land.
Why? Well to redirect anger from the real culprit for the manipulated market of course: the Federal Reserve. Because while what HFT does is or should be illegal, in performing its daily duties, it actively facilitates and assists the Fed's underlying purpose: to boost asset prices to ever greater record highs in hopes that some of this paper wealth will eventually trickle down, contrary to five years of evidence that the wealth is merely being concentrated making the wealthiest even richer.
Amusingly some get it, such as the former chairman of Morgan Stanley Asia, Stephen Roach, who in the clip below laid it out perfectly in an interview with Bloomberg TV earlier today (he begins 1:30 into the linked clip), and explains precisely why HFT will be the next big Lehman-type fall guy, just after the next market crash happens. To wit: "flash traders are bit players compared to the biggest rigger of all which is the Fed." Because after the next crash, which is only a matter of time, everything will be done to deflect attention from the "biggest rigger of all."
So, dear HFT firms, enjoy your one trading day loss in 1238. Those days are about to come to a very abrupt, and unhappy, end.