High Frequency Trading: Why Now And What Happens Next

Tyler Durden's picture

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.

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.

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cbaba's picture

Its a huge Casino, the wall street/ fed owns this casino and they decide the rules.


ArkansasAngie's picture

This isn't a casino.  It's skimming pure and simple ... well ... and of course ... market manipulation.

1200 some odd days of winning isn't speculation ... it's cheating.

Troll Magnet's picture

With two more years remaining on the job, Holder's just looking for his next gig.

James_Cole's picture


Seems a stretch to think this is all to cover up the feds involvement, when a partial audit of said institution came out some years abck and proved beyond a shadow of doubt the entire US economy was a) glorified ponzi scheme b) engineered purely for benefit of the elites / detriment to everyone else, how much did the public / news media react?

I get the sense it's more about convincing the public to get back into stocks.

See? Evil HFT is gone! The casino is safe again!


insanelysane's picture

The Establishment needs a boogey man for when it all crashes and HFTs will be one of the potential boogey men.  You don't want to take them out before the big crash because then it isn't as easy to blame them.

johngaltfla's picture

Nothing happens to any HFT firm or major bankster as long as adequadate funds are donated to either or both political parties and selected candidates in unmarked bills.

weburke's picture

401k's are headed for trouble.

SheepDog-One's picture

Yep, the 401K bathrobe brigades are about to get robbed big time, and what better fall guy than a machine with initials? Can't even arrest it.

caShOnlY's picture

Yep, the 401K bathrobe brigades are about to get robbed big time, and what better fall guy than a machine with initials? Can't even arrest it.

awesome thought there.  Like Greenspan's "self regulating" markets.  The perfect scape goat.

Oldwood's picture

Who would have ever thunk it? I know I sure didn't see this coming! If I could just get the sand out of my eyes and mouth.

knukles's picture

Linda Green signs off on a settlement where the regulators reprimand a junior clerk whose porn bandwidth kept the topic from being properly anal-ized.  Said clerk will be transferred to the SEC's Enforcement Division for Tran-ning while his on line privileges will be limited to working hours, only.

Aside from that, nothing since computers are not people.

DeadFred's picture

Dave found out what 'Hal' thought about being shut down. What will all those cute little algos do when they read in the WSJ that their lives are going to end? 

old naughty's picture

Keeping the sheeples in check (eh, entertained)...

The bad guys are gone (real-ly?), good guys finally won...ha, ha again!

What about the ugly ones?


Still have the war bonds to sell, no?

Grom Hellscream's picture

They were already in trouble.


401k buying has inflated the market, and 401k selling, once all the babyboomers are ALL retired, will crash it. The next cohort of potential 401k investors are all barristas with 100k student loans, or unemployed and in their parent's basements ... the same parents who need to cash out their 401ks.


HFT will just make them crater harder and faster.

stocktivity's picture

It's all Bullshit!!!   All Bullshit today...All Bullshit 3 years ago!

toys for tits's picture



Quit beating around the bush and evading the question.  

What do you really think?

Philalethian's picture

"Why HFT exposure now?"

Distraction number 13,418,742.13 in progress.


Subject matter:







Georgia_Boy's picture

Another question (in addition to why now) might be why HFT was chosen to take the fall ... sounds like it's because others are now beating Goldman at their own game.

Christophe2's picture

You can't beat them at their own game because true HFT requires co-location at the exchange.  Only the most connected players get that, and that co-location *guarantees* that they have the ability to not only receive each data point sooner, but also to respond faster in addition, FOR ALL the market's data points.

It is highly likely that they will NOT get rid of HFT before the crash, because that co-location time-advantage gives TPTB the opportunity to get out of crashing markets faster than everyone else: they will catch ALL sells or buys before anyone else does, when the time comes, to completely maximize the fraudulent gains.

They did the same thing when they triggered the Depression: at the time, these same crooked banks operated the wire houses, and they used that control to be the first to exit when they crashed everything...

It is a rigged casino designed primarily to trick and fleece anyone dumb enough to participate.  Good luck saving up for your retirement!!!

Vendetta's picture

No he's not, he's looking for his payoff.... perhaps a series of speeches and being paid a chunk of change for each speech that have no significance whatsoever.

agNau's picture

Ladies and Gentlemen,
I present to you,
To quell your fears and uncertainties.
Much safer.
Guaranteed return.

And the whole point of this show for the much greater number of sheep than I ever expected.
Come on. They expose the casino for the reality that it is, but leave the real root of the systemic problem unexposed behind the curtain?
Watch in awe as the herd is redirected to aid the FED.


Ignatius's picture

"It's a huge Casino, and you ain't in it."

George Carlin said something like that.

James_Cole's picture

I think the point is more you're in the casino whether you want to be or not with a caveat that the VIP lounge is strictly off limits. 

Ignatius's picture

Well, someone's gotta park them damn cars.

logicalman's picture

A big club.... and you ain't in it.

George - a very clever man.


Watch it twice. It's not comedy.

rainingFrogs's picture

brutal.  no, its not comedy.  I don't think the audience knew quite what to make of it, and that was 2004.  I think a similar audience today would be less clued in, but more afraid. Programming must be working.

- "... they are coming for your retirement money.  They want it back, so they can give it to their criminal friends on Wall Street." 

- "... that's why they call it the American Dream, because you have to be asleep to believe it."

daveO's picture

Well, the market had to be pumped up in order to save the Big Banks. Now that they've been saved, the air can be let out of said bubble. Baby Boom suckers are gonna have to work till they drop.

TheReplacement's picture

WWGCD?  Tell jokes to idiots until he dies.

WWJD?  Go into the temple, upset the money changers' tables, and chase the money changers out.

Who you gonna believe in?

Pumpkin's picture

At least the Casino calls it gambling.  They even tell you that the house has a slight avantage.  They give free drinks too.

daveO's picture

Yep, the 60 Minutes 'set-up' piece is the most definitive Sell Signal since Janet Reno sued Microsoft 14 years ago. It means they have taken all the bad garbage off of the banks' books and are going to Taper, no matter what.  

rubiconsolutions's picture

Just curious...any chance of class action lawsuits being filed over this? It seems that there are a lot of people trading routinely that have gotten hosed including myself. I know the chances of any lawsuits succeeding are nil but does anyone think they will be filed in the coming weeks? I have roughly 2,500 trades over the last 6 years and now wonder how much this HFT / front running thing cost me. "Sure honey, I'll have another scotch."

TheReplacement's picture

Why don't you call an attorney and look into it yourself?

Tom_333's picture

The head-line and the article are interesting. But frankly speaking I can´t really find a ggo answer to the question why this is happening now. Not in the article nor in the comments. The ideas and the comments all border on the unlikely or asinine.

Question remanins. Why now? Someones gotta know.Please share.

Offthebeach's picture

Well obviously some other racket, scheme is going to have to be allowed to make up the profit flow. I mean, like not steal, cheat, scam, hustle, rob? Seriously? WTF! Where's the gelt supposed to come from from near zero cost honest trading? There's no money in that.

By the way, EBay seems to do the same. I poke around for a week for a common auto part, deciding on real chinese junk or fake name brand chinese junk, and then Ebay seems to know and the liw price stuff doesn't show up anymore.

Winston Churchill's picture

So its not Colonel Mustard in the library, just the HFT in the boilerroom, that did it.

You spoiled the ending Tyler.

ArkansasAngie's picture

I, personally, will be dancing in the street on that day.

These yahoos have made a mockery of markets.

And by golly whoa be on any stinkin politician who even suggests bailing out these shats.

NotApplicable's picture

Better be a short dance, cuz your're going to have to deal with even more "bailout" shit from fedgov in the aftermath.

Sabibaby's picture

I think you're missing the point that this is a side show. The corruption will continue but any negative happenings in the market will be blamed on HFT. HFT might be bad, it might be corrupt, and it might create flash crashes, but the big players will still be in shadows pulling the strings.

TheReplacement's picture

Don't forget the political angle.  George W. Bush invented HFTs. 

ebworthen's picture


"Yeah, it's a big ponzi, a rigged casino; but it's OUR casino!  U.S.A.!  U.S.A.!  U.S.A.!"

agstacks's picture

It won't let me up arrow this more than once! Awesome..

NOTaREALmerican's picture

As long as the top 10% are happy, I'm happy.