Presenting The Next Market Rigged By High Frequency Trading

Tyler Durden's picture

Almost a month ago, we wrote "This Is The One Financial Product Now Targeted By The HFT Swarm", in which after briefly perusing the Virtu S-1 filing, we concluded that "one product stood out. It is highlighted on the chart below: FX."

We added:

Sadly, with increasingly more homo sapiens-type banker FX traders being laid off left and right for pervasive and ubiquitous manipulation of currencies (who can forget the infamous "Cartel" chat room, JPM's head of spot trading presiding), what this means is that more and more algos will rush into this product to fill the voids left by carbon-based traders.

 

And for those trading FX, our condolences: because the typical bizarro, idiot moves that previously were reserved for stocks are now sure to take over the final bastion of capital markets. In other words, the next time you feel like the USDJPY is trading as if it is in need of a software update, you will be right.

 

Then again, in a world in which FX is the one battleground where central bankers now joust every minute, we can't wait for the reaction when some fat finger algo decides to take USDJPY higher by 1000 pips, or crashes the EURUSD by 2000, "just because." Surely the look of sheer panic on the faces of "central planners" everywhere in that particular "Jerome Kerviel Kodak moment" would be even more priceless than the stock of VRTU upon IPO. Speaking of, we wonder: will VRTU algos ramp VRTU stock to infinity, or is there some conflict of interest here?

We are happy to report that this time the mainstream media is following our reports much more closely then five years ago, because overnight none other than Bloomberg came out with "High-Frequency Traders Chase Currencies as Stock Volume Recedes" in which we read, guess what, "Forget the equity market. For high-frequency traders, the place to be is foreign exchange. Firms using the ultra-fast strategies getting scrutiny thanks to Michael Lewis’s book “Flash Boys” account for more than 35 percent of spot currency volume in October 2013, up from 9 percent in October 2008, according to consultant Aite Group LLC. It’s the opposite of equities, where their proportion shrank to 50 percent in 2012 from 66 percent four years ago, according to Rosenblatt Securities Inc."

But our readers already knew this. Let's see what else our readers knew:

“The use of HFT will make trading and regulation in the FX market more complex, and there would also be some questions over the fairness,” Anshuman Jaswal, senior analyst at research firm Celent in Boston, said by e-mail. “Use of HFT also increases liquidity and depth in markets. Both sides of the argument carry some weight, and there is no one right answer.”

 

The debate surrounding high-frequency trading, a term describing strategies that use lightning-fast computers to eke out profits in securities markets, blew up this week after Lewis published “Flash Boys” and said U.S. equities are rigged. The book makes few references to currency, saying instability HFT creates is bound to spread from equities sooner or later.

 

High-frequency strategies flourished in American equities as rising computer power and two decades of regulation broke the grip of the New York Stock Exchange and Nasdaq Stock Market and trading spread to more than 50 public and private venues. Now, speed traders are proliferating in foreign exchange.

 

“Any of the big names that are involved in the equity side are generally starting up FX businesses as well,” Brad Bechtel, managing director at Faros Trading LLC in Stamford, Connecticut, said of high-frequency trading in a phone interview.

 

...

 

While speedier strategies are becoming “really prevalent” in foreign exchange and some are predatory, many are “rather benign and provide liquidity to the market,” said Aaron Smith, managing director and co-founder at Pecora Capital LLC.

 

“We see plenty of strategies that depend on low latency and co-location in London or New York,” Smith said in a phone interview from Zurich. Some of the company’s portfolio, which includes currencies, is traded with systematic methods, with holding periods of a few hours to a few days, he said. Still, there are other issues to consider.

Yup, we knew all that too. We also know that not everyone is delighted about the incursion of HFT in FX:

“We don’t want to be in the high-frequency space because
then you’re in a technological foot race against the next guy,” Smith
said. “When they have a bigger, faster, stronger computer, you’re out of
business. We’re not interested.”

Too bad, because what else do we know about the FX space? Well, courtesy of ongoing daily revelations, and a financial space in which all carbon-based FX traders and strategists at major banks are dropping like flies either being fired, under civil and/or criminal investigation, or relocated to other easier to manipulate markets like commodities, FX is and was arguably more rigged than even Libor.

So what is the take home? It turns out that as manipulating humans leave FX in droves, they are replaced by, drumroll, manipulating algos. However, just like in equities where the HFT parasites merely facilitated the Fed in its relentless pursuit to send asset prices to new unseen bubble levels, for the most part HFTs also help central banks in ramping FX pairs in whatever the required FX manipulation by the G-7 central planners du jour may be. In other words, the regulators will turn a blind eye to all the FX rigging now conducted almost exclusively by algos as longas it goes in their favor.

However, once the market crashes and/or FX begins trading abnormally broken, watch as the full wrath of the same economists and corrupt regulators turns on HFT, which will be scapegoated as the biggest market villain in history. None other than Goldman has already set the stage for the public lynching of the vacuum tubes.

But for now, as long as the dancing continues, we must all "trade" in a world in which the now standard US and Japan market open results in a spike in the USDJPY, in which any good or bad news results in a spike in the USDJPY, and when every downturn in stocks is promptly offset with, you guessed it, another HFT momentum-ignition surge in the USDJPY, promptly offsetting the asset weakness.

And when Michael Lewis releases "FX Boys" in 3 years, followed by "Liberty 33 Boys" in another 3, everyone will be shocked by just how rigged everything was, and how nobody had any idea there was (taxpayer backed) gambling going on here...