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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...

 

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Wed, 04/02/2014 - 12:15 | 4617572 Two-bits
Two-bits's picture

Option 1- Moar War.

Option 2- Skynet becomes self-aware.

 

You have chosen the way of pain...

Wed, 04/02/2014 - 12:18 | 4617580 Haus-Targaryen
Haus-Targaryen's picture

I personally look forward to moar volatility in the FX markets.  Watching Yellen explain 0,15€ swings per day on USD/EUR would be hilarious.  Imagine the drinking games ZH could come up with. 

Wed, 04/02/2014 - 12:22 | 4617601 pods
pods's picture

Moneychangers are like locusts.

When will humanity wisen up to the debt bondage that they willingly enter?

Create something out of nothing and lend it out with interest.

And they worship you like gods.

WTF planet am I on?

pods

Wed, 04/02/2014 - 12:35 | 4617654 Dr. Engali
Dr. Engali's picture

You are on the Ferengi home world where nothing is done without a profit motive behind it.

Wed, 04/02/2014 - 13:18 | 4617793 medium giraffe
medium giraffe's picture

What planet indeed pods.  I wish there were more options...

Wed, 04/02/2014 - 12:23 | 4617611 DavidC
DavidC's picture

My liver couldn't handle it!

DavidC

Wed, 04/02/2014 - 12:20 | 4617585 Say What Again
Say What Again's picture

Humans need to pick a specific asset being manipulated by HFT, and start sending bids / offers like crazy.  Then the next day go to a different asset.

I doubt that the algos can handle irrational behavior very well.

Wed, 04/02/2014 - 12:22 | 4617603 F0ster
F0ster's picture

Option 3 - someone with a sharp hacksaw, uses the HFT map to go around and cut the HFT cross land fiber-optic cables.

Wed, 04/02/2014 - 12:48 | 4617689 NEOSERF
NEOSERF's picture

Penny stocks with their billion shares out, forex and bonds...commodities and 100M float equities are uhmmmm too transparent.

Wed, 04/02/2014 - 13:09 | 4617766 Remington IV
Remington IV's picture

10,000,000,000 shares trade every day in the US

HFT's are 8,000,000,000 shares of that

Scalping 1-c / share =  $20,000,000,000 / year

HFT's are not liquidity providers .... they are THIEVES

Wed, 04/02/2014 - 12:18 | 4617581 Rainman
Rainman's picture

First they mock the Durden, then they imitate him.

As usual, no hat tips for you

Wed, 04/02/2014 - 12:20 | 4617586 inky
inky's picture

Zerohedge = voice of truth & freedom

mainstream media = goverment puppets. 

Wed, 04/02/2014 - 12:53 | 4617715 bonderøven-farm ass
bonderøven-farm ass's picture

Sooth.

Wed, 04/02/2014 - 13:18 | 4617788 fightthepower
fightthepower's picture

Zerohedge is what the Wall Street Journal and CNBC should aspire to be. 

Wed, 04/02/2014 - 12:20 | 4617587 ebworthen
ebworthen's picture

I'd love to hear the phone convesations between central bankers about how to keep floating their fiat; ; no wonder the Euro isn't at parity with the Dollar.

They are really trading on people's lives, since people get paid in fiat.

BTW - Amazon releases "Fire" T.V. gadget to burn down their stock.

Wed, 04/02/2014 - 12:19 | 4617589 Caveman93
Caveman93's picture

Choose the form of your destructor. Fx it is.

Wed, 04/02/2014 - 12:22 | 4617590 buzzsaw99
buzzsaw99's picture

virtu does not care if you buy or sell just do something!

make your play quick draw mcgraw

Wed, 04/02/2014 - 12:23 | 4617607 Two-bits
Two-bits's picture

Just like a gambling addict. It is about the action, not the outcome.

Wed, 04/02/2014 - 12:24 | 4617612 buzzsaw99
buzzsaw99's picture

whichever way you go they will see it and execute 2 nanoseconds ahead of you. yeah they don't care.

Wed, 04/02/2014 - 12:38 | 4617664 Two-bits
Two-bits's picture

What you are saying is that it is more of a battered wife relationship?  It won't happen agian.  

Oh, Snap! Can I add funds directly to my trading account from my EBT card?

Wed, 04/02/2014 - 13:11 | 4617769 Remington IV
Remington IV's picture

They pick your pocket while you wait for your execution

Wed, 04/02/2014 - 12:20 | 4617592 45Condor
45Condor's picture

So that's why I am part of the 95 percent of currency traders that fail to make it rich.

Even writing about the failure ain't helping. Well, that and a lack of ability... hey ho.

Wed, 04/02/2014 - 12:27 | 4617602 ebworthen
ebworthen's picture

"Forex" should have been your first clue; it sounds like a cheap condom.

Magnets under the roulette wheels, loaded dice on the craps tables.

Don't forget to tip the nice ladies that bring the drinks.

Wed, 04/02/2014 - 12:35 | 4617642 45Condor
45Condor's picture

The only tip that I can afford would not be enough for any nice lady. Or bad, for that matter.

Well, that's not entirely true, as I regularly tip that fine lady known as Cable: A digital inamorata of satisfying unpredictability. A fountain of untold wealth and fecundity, when not delivering a whole load of whoopass to any that dare to make impolite overtures towards her. 

Thu, 04/03/2014 - 05:49 | 4620389 StandardDeviant
StandardDeviant's picture

I thought it was an Aussie lager.

Wed, 04/02/2014 - 12:20 | 4617595 DavidC
DavidC's picture

Does this mean we will have a down day in the equity markets at some point just to prove that the HFTs are not manipulating them? Just a thought.

DavidC

Wed, 04/02/2014 - 12:20 | 4617598 LeisureSmith
LeisureSmith's picture

Now let's see if we can get as much press on the curious dynamics of central banking as HFT is currently getting....Thought not.

It's good to see HFT getting exposed, but the smell of rat is tickeling my nostrils.

Are you watching closely?

Wed, 04/02/2014 - 12:22 | 4617606 Cacete de Ouro
Cacete de Ouro's picture

I was under the impression that FX HFT has been happening for a long time now, at least 7-8 years, at the investment banks. Not sure about the independent operators.

Wed, 04/02/2014 - 12:26 | 4617609 Kaiser Sousa
Kaiser Sousa's picture

that Indian asshole who Runs a HFT firm and has no shame in attempting to show how much smarter he is than everyone else was on "Goonberg" this morning opposite Lewis and the Japanese guy...

of course just like on CNBS the anchors let him ramble on endlessly while all the while refraining that the markets arent rigged, so on and so forth...heres my point...

the MoneyChangers paradigm is coming apart with greater rapidity with each passing day...

if u understand this u understand that there could be no better time to aid in the destruction of their debt based currency paradigm buy buying Physical Gold and Silver NOW...

it is we, the people, who have the power...please believe it.

stack.............................

Wed, 04/02/2014 - 13:11 | 4617773 Remington IV
Remington IV's picture

He should be working at a call center

Wed, 04/02/2014 - 12:25 | 4617622 Glass Seagull
Glass Seagull's picture

 

 

How much of the FX "rigging" is done by central banks, and therefore will be "off limits?"

Wed, 04/02/2014 - 12:27 | 4617626 Save_America1st
Save_America1st's picture

Looks like this means we're running out of things to keep the algo-bots busy with. 

When that runs out one these days, Skynet's gonna get bored with us.....and attack. 

http://3.bp.blogspot.com/_yicluje2el0/TNQfWZ8mRzI/AAAAAAAABtQ/NshbfH6lHag/s1600/terminator_10.jpg

Wed, 04/02/2014 - 12:32 | 4617628 Cacete de Ouro
Cacete de Ouro's picture

BIS Paper: "High-frequency trading in the foreign exchange market"

"In March 2011, the Markets Committee established a Study Group to conduct a fact-finding study on high-frequency trading (HFT) in the foreign exchange (FX) market, with a view to identifying areas that may warrant further investigation by the central banking community."

"HFT participants in FX tend to be concentrated in three cities: Chicago, New York and London. Outside these three centres, there are currently very few HFT firms, even in regional FX centres such as Hong Kong, Singapore and Sydney. However, the actual physical location of the HFT firms’ offices is irrelevant: what matters is that they co-locate the servers on which they run their algorithms close to the matching engines of the trading venues, which are primarily located in London, New York and Chicago (see below).

HFT firms conduct their FX activities mainly on inter-dealer electronic broking platforms (EBS and Reuters, both London-based companies)6 and multi-bank electronic communication networks (ECNs, most notably Currenex, Hotspot FX and FXall, typically US-based). They are also active on the Chicago Mercantile Exchange (CME) for trades involving FX futures. The two main inter-dealer electronic platforms were developed earlier (in the 1990s) than the multi-bank ECNs (which were developed in the 2000s)."

http://www.bis.org/publ/mktc05.pdf

Wed, 04/02/2014 - 12:36 | 4617644 ebworthen
ebworthen's picture

So three years ago a Committee said (pg. 26 - "Concluding Remarks"):

"Beyond that, policymakers should develop appropriate contacts and maintain a dialogue with (i) the various foreign exchange trading platforms, (ii) the primebrokerage service providers, and (iii) the algorithmic and high frequency trading community in FX in order to track developments and to identify key policy issues in a timely fashion."

Translation = bullshit.

Key terms to ascertain that nothing will be done: contacts, dialogue, community, developments, policy issues, timely fashion.

Thanks for the information; it calcifies my conviction that the markets are rigged.

Wed, 04/02/2014 - 12:27 | 4617630 Dr. Engali
Dr. Engali's picture

All of this leads us ever closer to a single world currency. It appears that Putin is the fly in the ointment right now.

Wed, 04/02/2014 - 12:33 | 4617648 RaceToTheBottom
RaceToTheBottom's picture

Putin just wants to be recognized as important.  The general trend toward NWO will not be derailed by Putin, cause it is in his interests and aligns with what he has been working for all along.

Wed, 04/02/2014 - 12:29 | 4617634 Skin666
Skin666's picture

LOL Plagiarism! Come on Tyler(s), you gotta sue!

Wed, 04/02/2014 - 12:30 | 4617638 Bill of Rights
Bill of Rights's picture
M 5.9 - SOUTH OF PANAMA - 2014-04-02 16:13:28 UTC

 

http://www.emsc-csem.org/Earthquake/earthquake.php?id=369190

Wed, 04/02/2014 - 12:31 | 4617640 alien-IQ
alien-IQ's picture

at this point, the only place you can go without HFT fucking your shit up is pink sheets or the fucking race track.

Wed, 04/02/2014 - 12:33 | 4617649 nixy
nixy's picture

HFT would not have been possible without derivatives?

Derivatives would not have been possible without Fractional Reserve Banking?

One of them rhetorical type questions......

??

Thu, 04/03/2014 - 05:57 | 4620394 StandardDeviant
StandardDeviant's picture

HFT on plain old equities is entirely possible; and widespread, apparently.  BATS itself is an equities exchange.

I don't see why you'd need fractional reserve banking to have derivatives.  Think of agricultural futures, which have been traded for centuries.

Wed, 04/02/2014 - 12:38 | 4617663 RaceToTheBottom
RaceToTheBottom's picture

and the revisionists come out of the woodwork.

I was for it before I was against it.....

http://www.nasdaq.com/article/4-bold-faced-lies-about-high-frequency-tra...

Wed, 04/02/2014 - 12:41 | 4617670 NOTaREALmerican
NOTaREALmerican's picture

As long as the top 10% keep prospering, I'm good with what-ever...

Wed, 04/02/2014 - 12:42 | 4617673 TuPhat
TuPhat's picture

I am not gambling with my retirement funds.  No FX, No stocks, No commodities.  I keep it all in a bank.  /sarc off.

Wed, 04/02/2014 - 12:47 | 4617684 LawsofPhysics
LawsofPhysics's picture

Oddly enough, that might just be the smartest contrarian play of the century...

sick isn't it?

Wed, 04/02/2014 - 12:50 | 4617697 DavidC
DavidC's picture

Well, until the bail-ins start anyway.

DavidC

Wed, 04/02/2014 - 13:07 | 4617704 The Wisp
The Wisp's picture

At least we Know every body's   Currency is Safe..

  Computers never make a Mistake... /sarc

Wed, 04/02/2014 - 13:00 | 4617712 Dewey Cheatum Howe
Dewey Cheatum Howe's picture

The answer is ~6% differential between USD and silver, per year on average. Follow the skim based on that rough number.

If that ratio correlates long term what are the odds of that being a function of nonrigging.......

Just track it on from about 02 - 03.  There should be a correlation that shouldn't exist if I am right because one shouldn't be related to the other to couple in this sort of manner.

Wed, 04/02/2014 - 12:55 | 4617722 QE49er
QE49er's picture

 

 

"Money's most powerful ability is to allow bad people to continue doing bad things at the expense of those who don't have it."

 

"I learned that everything in this world, including money, operates not on reality - but the perception of reality."

 

"Who else is going to change the world Marty?"

 

http://www.youtube.com/watch?v=coDtzN6bXAM

 

The cat is out of the bag and no one even seems to even care.  What will it take for people to wake up, the whole thing is rigged!

Wed, 04/02/2014 - 13:38 | 4617872 Catullus
Catullus's picture

PLEASE let someone defend HFT in FX by saying they "provide liquidity". The entire concept that you need to provide liquidity in an FX transaction is beyond ridiculous. Equities you could maybe make the argument. FX... You are trading in money. How much money do you need money to be?

Wed, 04/02/2014 - 14:56 | 4618218 Itch
Itch's picture

Regulators should be looking at the whole "dynamic spread" phenomenon in FX (when they get a moment), certified scam; these spreads are so dynamic in some cases that they can move over 100 times in a second and blow out to over 100 pips on occasions(when i say occasions, i mean 4 times a month minimum, making tight positions nearly impossible to sit on). All this is possible through the smoke and mirrors PR bullshit of liquidity sourcing; we can only offer what we get offered etc. How one broker cant find liquidity within a full cent, when all it's major counter parties are quoting within few pips, is beyond me. Either they are getting a bum deal or their customers are...don't need to finish the rest of that.

In saying that, the regulator would actually need to be bothered about the "little guy".

Wed, 04/02/2014 - 15:05 | 4618254 MarcusAurelius
MarcusAurelius's picture

In the currency world much like every other traded financial instrument these scammers simplyuse digital hypothesized money to screw you out of real money (which is your account). 

Here.....there is 1,000,000,000.00. See it. It exists in the same way that liquidity exists for these HFT idiots and TBTF banks. You can't take it out. You can't use it for anything tangible. Hell you can't even buy a coffee with it. It is not even paper. It is less than paper. It exists for a brief moment in cyber space just long enough to f--k you out of your real money that you use to invest with. The money that you saved through the exchange of currency for production or services. 

When you have no accountability for how you make money then you make it by doing whatever you have to even if that means by lying, stealing and cheating. After all your bonuses are not paid in leveraged digital money with the exception of how it looks when it hits your bank. 

It is for this reason that Gold will continue to be important. 

Wed, 04/02/2014 - 15:46 | 4618408 ThisIsBob
ThisIsBob's picture

Oh, screw FX traders.  Those guys would trade in a temple if they could get away with it.

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