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High Frequency Trading: Why Now And What Happens Next
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.
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"HFT provides liquidity"...until you really, really need liquidity.
May be true. But I think HFT may be set up as the next scapegoat for the crash to come. HTF may have rersulted in who gets thw profits on the climb of S&P to 1880, but is it responsible for the S&P being 1880 -rather than 1680 or 1580-or less? If so, someone explain how.
Oops. I meant to say "financial markets security fee"
i get it, now all we need is a symbol for HFT in handcuffs so during the perp walk it can yell "I'M JUST A PATSY"
I think Goldman saw the momentum building against HFT in the DOJ, FBI, SEC, etc. and is just trying to take the moral high ground before someone fingers and fines them for being one of the original and most flagrant HFT perps that they truly are. Do you really think they didn’t get tipped off even before the press about all this? Once a front runner, always a front runner, even if the gains are only to their public image.
As for the Virtu IPO offering, they’re probably planning to short it at some point and make a real killing off that too. Hey, what are clients for?
So, HFT's are being set up as the fall guy for the next crash to deflect attention away from the FEDm the real market riggers. How does Michael Lewis fit in to this? He just decided to write abook about it at a very beneficial time? I love his books, but this is a little ponderous.
Exactly, this is it guys!!, sell !, SELL EVERYTHING !!
I said it before and I will say it again...dtcc that settles all the trades has deemed itself a gatekeeper...at least in the microcap and small cap world (those without the7 or 8 figure legal resources to hold em off).... Anyways they can "chill" a penny stock when there is dubious trading or "out of the ordinary" volume or trading...the. They can do the same on all the markets...
Incredibly effective....yet for dtcc and regulators it's a cafeteria where they can pick and choose who they deem a threat yet cast a blind eye to real offenders who truly are a detriment to fair and efficient markets...
but when the shit hits the fan I'm going after dtcc... Fuckin monopolistic fed owned piece of garbage...because they have proven themselves capable of stopping this crazy trading dead in its tracks...
Seriously what's the difference between hft manipulating the market and a couple of traders controlling "the box" on the bid and ask of a small cap penny stock?
Same shit manip is manip
Bring back Bart Chilton. He's the one that came up with that catchy "cheetah" handle to describe HFT. Who needs Brooksley Born when we have Breuerian ripple effects and the Himpton Doctrine.
Please people can't even play a good game Call of Duty without Fucking cheating with special codes...People will always find a way to cheat with money...always.
The public will remain apatheic until there is a face to tie to HFT. Tell them Kony is behind it or something.
No worries,5 years after the HFT con was published the FBI are on to it now! ...they just had to wait for Goldman Sachs to give them the nod. which it has recently publicly done.
That looks somewhat like a KT-88 tube you're using on the front page.
Someone in the wheel house is going to throw a stinker algo in the mix and make the HFT shit go bannanas and bust the system. It's reset time boys, clear the assets off the table. Granny take a seat your pension is gone.
Freaking yes, Rick!
Left a seeker of truth wanting moar truth to power!!!
But if the man is pulled from behind the curtain and kicked to a pulp by steel-toed boots, who will keep the plantation from falling into ruin?
obama bunders get a pass. this will show who on wall street didn't pay off.... doj, a criminal joke of the highest order... obama's extorsionist... ahhhh wont prosecute mahhhhh peoples... impeach
Very clever Tyler.
Can I have a salami with that!?