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"HFT Is A Growing Cancer" Says Mom And Pop's Favorite Retail Broker Charles Schwab

Tyler Durden's picture




 

On one hand CNBC does its darnedest to refute Michael Lewis' claim that markets are rigged (even if it woefully does so by showcasing the most clueless "defenders" it can afford), and yet on the other "mom and pop's" preferred retail broker Charles Schwab, just came out and slammed HFT as a "growing cancer that needs to be addressed." Hmmm.... who to believe?

From Charles Schwab:

High-frequency trading is a growing cancer that needs to be addressed

April 3, 2014

Schwab serves millions of investors and has been observing the development of high-frequency trading practices over the last few years with great concern. As we noted in an opinion piece in the Wall Street Journal last summer, high-frequency trading has run amok and is corrupting our capital market system by creating an unleveled playing field for individual investors and driving the wrong incentives for our commodity and equities exchanges. The primary principle behind our markets has always been that no one should carry an unfair advantage. That simple but fundamental principle is being broken.

High-frequency traders are gaming the system, reaping billions in the process and undermining investor confidence in the fairness of the markets. It’s a growing cancer and needs to be addressed.  If confidence erodes further, the fuel of our free-enterprise system, capital formation, is at risk. We can’t allow that to happen. For sure, we still believe investing in equities is a primary path to long-term wealth creation, and we believe in the long-term structural integrity of the markets to deliver that over time for individual investors, which is all the more reason to be vigilant in removing anything that creates unfair advantage or undermines investor confidence.

On March 18, New York Attorney General Eric Schneiderman announced his intention to “continue to shine a light on unseemly practices in the markets,” referring to the practices of high-frequency trading and the support they receive from other parties including the commodities and equities exchanges. He has been a consistent watchdog on this matter. We applaud his effort and encourage the SEC to raise the urgency on the issue and do all they can to stop this infection in our capital markets. Investors are being harmed, and they shouldn’t have to wait any longer.

As Michael Lewis shows in his new book Flash Boys, the high-frequency trading cancer is deep. It has become systematic and institutionalized, with the exchanges supporting it through practices such as preferential data feeds and developing multiple order types designed to benefit high-frequency traders. These traders have become the exchanges favored clients; today they generate the majority of transactions, which create market data revenue and other fees. Data last year from the Financial Information Forum showed this is no minor blip. High-frequency trading pumped out over 300,000 trade inquiries each second last year, up from just 50,000 only seven years early. Yet actual trade volume on the exchanges has remained relatively flat over that period. It’s an explosion of head-fake ephemeral orders – not to lock in real trades, but to skim pennies off the public markets by the billions. Trade orders from individual investors are now pawns in a bigger chess game.

The United States capital markets have been the envy of the world in creating a vibrant, stable and fair system supported by broad public participation for decades. Technology has been a central part of that positive story, especially in the last 30 years, with considerable benefit to the individual investor. But today, manipulative high-frequency trading takes advantage of these technological advances with a growing number of complex institutional order types, enabling practitioners to gain millisecond time advantages and cut ahead in line in front of traditional orders and with access to market data not available to other market participants.

High-frequency trading isn’t providing more efficient, liquid markets; it is a technological arms race designed to pick the pockets of legitimate market participants. That flies in the face of our markets’ founding principles. Historically, regulation has sought to protect investors by giving their orders priority over professional orders. In racing to accommodate and attract high-frequency trading business to their markets, the exchanges have turned this principle on its head. Through special order types, enhanced data feeds and co-location, professionals are given special access and entitlements to jump ahead of investor orders. Last year, more than 95 percent of high-frequency trader orders were cancelled, suggesting something else besides trading is at the heart of the strategy. Some high-frequency traders have claimed to be profitable on over 99 percent of their trading days. Our understanding of statistics tells us this isn’t possible without some built in advantage. Instead of leveling the playing field, the exchanges have tilted it against investors.

Here are examples of the practices that should concern us all:

  • Advantaged treatment: Growing numbers of complex order types afford preferential treatment to professional traders’ orders, most notably to jump ahead of retail limit orders.
  • Unequal access to information: Exchanges allow high-frequency traders to purchase faster data feeds with detailed information about market trading activity and the specific trading of various types of market participants. This further tilts the playing field against the individual investor, who is already at an informational disadvantage by virtue of the slower Consolidated Data Stream that brokers are required by rule to purchase or, even worse, the 15- to 20-minute-delayed quote feed they have public access to.
  • Inappropriate use of information: Professionals are mining the detailed data feeds made available to them by the exchanges to sniff out and front-run large institutions (mutual funds and pension funds), which more often than not are investing and trading on behalf of individual investors.
  • Added systems burdens, costs and distortions of rapid-fire quote activity: Ephemeral quotes, also called “quote stuffing,” that are cancelled and reposted in milliseconds distort the tape and present risk to the resiliency and integrity of critical market data and trading infrastructure.  The tremendous added costs associated with the expanded capacity and bandwidth necessary to support this added data traffic is ultimately borne in part by individual investors.

There are solutions. Today there is no restriction to pumping out millions of orders in a matter of seconds, only to reverse the majority of them. It’s the life-blood of high-frequency trading. A simple solution would be to establish cancellation fees to discourage the practice of quote stuffing. The SEC and CFTC floated the idea last year. It has great merit. Make the fees high enough and they will eliminate high-frequency trading entirely. But if the practice is simply a scam, as we believe it is, an even better solution is to simply make it illegal. And exchanges should be neutral in the market. They should stop the practice of selling preferential access or data feeds and eliminate order types that allow high-frequency traders to jump ahead of legitimate order flow. These are all simply tools for scamming individual investors.

The integrity of the markets is at the heart of our economy. High-frequency trading undermines that integrity and causes the market to lose credibility and investors to lose trust. This hurts our economy and country. It is time to treat the cancer aggressively.

Charles Schwab, Founder and Chairman
Walt Bettinger, President and CEO

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Thu, 04/03/2014 - 10:01 | 4620954 Rakshas
Rakshas's picture

Cancer?? but but ......

 

yeah file that under no shit sherlock

Thu, 04/03/2014 - 10:04 | 4620976 spastic_colon
spastic_colon's picture

he said "........free-enterprise system......"  how out of touch is this guy?

Thu, 04/03/2014 - 10:30 | 4621053 VD
VD's picture

this open letter to investors could also be about The Federal Reserve...actually, The Fed is even worst than HFT!

Thu, 04/03/2014 - 10:31 | 4621060 Beam Me Up Scotty
Beam Me Up Scotty's picture

HFT is bad, but how about credit cards and Master/Visa, Discover and Amex?  Thats a 2.5% skim on every transaction.  That produces NOTHING.  Its a huge tax on business, for the benefit of the big banks.  And everyone thinks thats OK. 

Thu, 04/03/2014 - 10:35 | 4621071 cifo
cifo's picture

Tyler, thanks for the very suggestive image.

Thu, 04/03/2014 - 11:08 | 4621202 fonestar
fonestar's picture

 

 

Blame Assad.... FAIL

Blame Putin.... FAIL

Blame HFT vacuums.... YES!!!

Thu, 04/03/2014 - 11:13 | 4621223 VD
VD's picture

Blame the most malignant cancer in 'marketz' = The Fed..... FAIL

Thu, 04/03/2014 - 11:55 | 4621363 Looney
Looney's picture

And why exactly Chucky has come out of his closet TODAY and not a week, a month, a year, or FIVE YEARS AGO?

Has he just learnt about it from Michael effin’ Lewis’ book? Chucky ain’t no better than CNBC-Bloomshit-FOX-SEC-CFTC. They all are bloody cunts. I think? ;-)

Looney

P.S. I'm tryin' on a British accent today ;-)

Thu, 04/03/2014 - 13:22 | 4621648 TruthHunter
TruthHunter's picture

"And why exactly Chucky has come out of his closet TODAY "

 

Chucky probably found out from his IT dept that he had lost the arms race

Play til you get beat, then tattle.

Thu, 04/03/2014 - 11:50 | 4621367 Four chan
Four chan's picture

10 years gone down a road and NOW they want to point out theres a problem with this scalping and front running?

thats rich.

Thu, 04/03/2014 - 10:38 | 4621083 Confused
Confused's picture

No. I think you'd find most here are not ok with it. Or business' that only accept cash. Those are also not ok paying those fees (and avoiding taxes, haha). But thats a different topic. You choose to pay/accept cards. There is NO choice here. You are being scalped. 

 

This will be spun as a Retail Broker covering their bad decisions by blaming others. 

Thu, 04/03/2014 - 10:37 | 4621086 fightthepower
fightthepower's picture

Consumers and businesses make a choice to pay the fees for the convience.  No consumer is given the choice to be front run by HFT. 

Thu, 04/03/2014 - 10:53 | 4621138 Beam Me Up Scotty
Beam Me Up Scotty's picture

You have a choice not to buy stocks too. I realize most people here understand how those fees impact consumers. Most sheep have no idea. Again, it's an insidious form of skim. That's all I am trying to point out.

Thu, 04/03/2014 - 11:04 | 4621190 SWRichmond
SWRichmond's picture

These jerks "perhaps" knew about this all along but "perhaps" now with it going public they must act as if they give a fuck in order to appear concerned and convince their muppets not to yank money out of their accounts and make them lose the commish.

Thu, 04/03/2014 - 12:15 | 4621438 alexromanl
alexromanl's picture

HFT is basically a tax that you pay on your transactions.  They should just publicly disclose the cost per trade and we would all be happy.  Retail investors have been taken advantage for millenia, this is just the latest iteration.  After HFTs are "regulated" and put into the mainstream (with Virtu's IPO, you can participate now in the wealth creation that they generate), a new thing will pop-out... perhaps traditional ponzi-schemes or bank robberies will make front news again.

Thu, 04/03/2014 - 10:31 | 4621056 Bananamerican
Bananamerican's picture

"Grandpa, what's a free-enterprise system? And, can I have another bailout cookie please?"

Thu, 04/03/2014 - 10:39 | 4621062 El Oregonian
El Oregonian's picture

 

What? the "bottom-feeders" are now starting to complain of starving because the independent investor carnage floating to bottom of the sea floor is starting to dwindle?

Thu, 04/03/2014 - 10:32 | 4621065 MedTechEntrepreneur
MedTechEntrepreneur's picture

Lets not forget...the real "cancer" is the Fed and the Federal Leviathan...

They make HFT's look like Boy Scouts.

Thu, 04/03/2014 - 10:39 | 4621069 Thought Processor
Thought Processor's picture

 

 

Seriously.  

 

This is one cancer......  among many.

 

Nice that Schwab is speaking up though.  They are adding to the huge red flags which have already been raised on this, which is good.

It's crazy that the SEC and others didn't go ape shit on all of this though after it began (as documented here).  It was clearly a trust destroyer and should have been illegal from the get go.

Knowing how the street works though, my guess is that this will not be fixed and the average investor (are there any left) will continue to exit this rigged game.  And Schwab will continue to suffer.

 

Next up, and perhaps a bigger issue- what are those "Dark Pools" being used for?  I am quite sure they are used to game the public markets.  No other reason for them to exist.

 

I'm sure the SEC will is over this one also..........

 

 

 

Thu, 04/03/2014 - 10:41 | 4621099 Son of Captain Nemo
Son of Captain Nemo's picture

TP

It's more like self preservation in a vain attempt to grab what few bottom feeders are left in the swamp.

If Charles Schwab was so concerned about it they would have sourced Zero Hedge 4 to 5 years ago and said THIS IS A PROBLEM to their clients... 

Thick as thieves.

Thu, 04/03/2014 - 10:43 | 4621110 Confused
Confused's picture

And as another posted has already mentioned, this is an admission that he knew this was happening to his clients. So, what steps were taken to prevent this from happening over and over? Interesting indeed. 

Thu, 04/03/2014 - 10:53 | 4621133 Thought Processor
Thought Processor's picture

 

 

I would agree.   Schwab is the outlier in this though as most of their business is the individual investor, likely to a larger degree than any other broker.

They are and will continue to get hurt by all of this.   The big players and the vast mojority of Wall Street 'big money' could not give two shits about the 'average investor.'

 

Schwab likely has little or no real influence on this whole discussion with regard to those in DC who are paid to keep the status quo going.  At all costs.

 

 

Thu, 04/03/2014 - 10:58 | 4621164 Son of Captain Nemo
Son of Captain Nemo's picture

"The big players and the vast mojority of Wall Street 'big money' could not give two shits about the 'average investor.'"...

And clearly neither does Lewis, Katsuyama or "60 minutes"!

The best part of all of this is the timing and how desperate they all are to resuscitate a patient that's been brain dead going on 6 years now with IEX Group as the new savior!

http://investmentwatchblog.com/high-speed-trading-what-do-you-mean-front...

 

Thu, 04/03/2014 - 11:04 | 4621187 ArkansasAngie
ArkansasAngie's picture

Pension funds should be suing to clawback that which was stolen from their retirees.

Oooops ... they were in on it?  Well ... then ... retirees should be suing their pension fund managers

Thu, 04/03/2014 - 13:09 | 4621589 NotApplicable
NotApplicable's picture

Not holding my breath on that one.

Thu, 04/03/2014 - 10:42 | 4621101 Cacete de Ouro
Cacete de Ouro's picture

"It's crazy that the SEC and others didn't go ape shit on all of this though after it began".

There is only one thing that would make the SEC go ape shit: Internet porn blocking software.

Thu, 04/03/2014 - 10:48 | 4621127 Bananamerican
Bananamerican's picture

schwab, the FByatch, 60 minutes etc jus tells us all the good grifting is gone outa HFT....as usual, what was left of the "investing" public wasn't even aware of the con (it was a GOOD 5 years heh heh)...now HFT has been discovered but it's just about "over" because "vigilant, first responding fin regulators" are "on the job"...
It's a shame it's still the blow job

Thu, 04/03/2014 - 12:01 | 4621394 MayIMommaDogFac...
MayIMommaDogFace2theBananaPatch's picture

 It was clearly a trust destroyer

BINGO!

Thu, 04/03/2014 - 13:17 | 4621625 mccvilb
mccvilb's picture

The SEC was complicit in the adoption of HFT. Shapiro invited written commentary beforehand. Why? To measure whether we understood what was about to be foisted on us, and what the tolerance for another investor scam would be. She then essentially ignored the public's overwhelming lack of support for it. She had done her part to shelter the SEC from criticism by creating the illusion of preventive oversight.

Chuckie was in on it from the get-go too. There were aspects of it that benefited the brokerages, like increased churn and daytrading, and algo-masking software that allowed massive theft via orchestrated and controlled shorting. Much of that action died along with the jobs and real estate markets, and today HFT suddenly finds itself back in the klieg lights. The current revelations are hardly earth-shattering. The more evil aspects of HFT haven't even been exposed or addressed, but there is a headwind now. Chuck's no stupe. He's found himself a shiny new white horse to ride.

Thu, 04/03/2014 - 10:42 | 4621104 mrdenis
mrdenis's picture

My doctor told me we all have cancer cells in our bodies 

Thu, 04/03/2014 - 11:02 | 4621182 Buckaroo Banzai
Buckaroo Banzai's picture

It's true. A healthy immune system is constantly targeting and destroying the cancer cells in your body. It's only when the immune system becomes deranged does cancer take hold. But of course the last place you'll hear that is from the cancer industry-- one of the fastest growing industries in America!

Thu, 04/03/2014 - 13:11 | 4621600 NotApplicable
NotApplicable's picture

Which is why I'm always telling people wanting money to "cure cancer" that cancer is a symptom of another underlying problem, NOT a disease.

Thu, 04/03/2014 - 13:31 | 4621691 TruthHunter
TruthHunter's picture

Which is why I'm always telling people wanting money to "cure cancer" that cancer is a symptom of another underlying problem, NOT a disease.

You're too polite. I tell them that if they knew the truth, they'd man the guillotines.

Thu, 04/03/2014 - 10:51 | 4621140 Dr. Kenneth Noi...
Dr. Kenneth Noisewater's picture

Meh.  If you want to compete, get faster computers and cross-connect.  Technology moves, and whining like a bunch of disgruntled buggy-whip makers is just sad.

Big funds can't do huge orders without affecting the market anymore?  Boo hoo, just fill or kill if you want a 'guaranteed' price.

And front-running?  BS.  Was using a spyglass to get flag-based news from the Napoleonic wars frontrunning the Gilt?  Is using hand-signals frontrunning open outcry markets?  The only way you can front-run is if you have muppets your prop desk can fade.

Your standard everyday individual trader who puts in a limit order for say 100 AAPL has smaller spreads and more liquidity.  All other bitching is just big legacy players whining their books.

Thu, 04/03/2014 - 11:24 | 4621273 Joenobody12
Joenobody12's picture

I posted this yesterday. Tell me I was not being front run.


Can anyone recommend a brokerage firm who will not front run trade orders ? I am getting fucked at my brokerage firm lately. I put in a sell order for 1000 shares at the bid when there was several thousands bid shares there. The minute I click the place order button shit happened. Many trades changed hand at the bid and I got 3 shares sold. A few days prior and today it gets to be even more bizzard. I typed up an order to buy 100 contracts of a call option at $2.67. I click the preview page which then led me to a summary of the trade I was about to place. Instead of placing the trade by clicking the " place order " button, I switched to the portfolio page to see how much cash I have left and tried then to adjust the price by entering a new order as the price was starting to drop. Guess what, while I was busy typing up this new order and even when I did not click the " place Order" button for the prior abandoned order , a trade went through and 100 contracts was bought at the $2.67 price for me. 

I had a similar experience a few days prior and I thought I was making a mistake at that time unknowingly. So I was extra careful each time since then to make sure I did not enter any order accidentally. Todays trade was bizzard to say the least. It was as if someone was watching me as I typed and placed my trade before I authorized it. 

Also, today I wanted to sell 9999 shares of a stock at the bid when there was about 5000+shares at the bid. The minute I click the place order button , all hell broke loose. Over 20000 shares changed hand and I got 600 shares out of 9999 filled. Tell me I did not get front run. I want to fill a compalin to the SEC but I think they will just laugh at me. I want to exit my current brokerage firm. I am just one of the many mom and pa so guess which brokerage firm that is. 

Thu, 04/03/2014 - 11:26 | 4621278 Joenobody12
Joenobody12's picture

I think I will try my luck with Schwab. 

Thu, 04/03/2014 - 16:26 | 4622505 August
August's picture

To add insult to insult, he said "...OUR free-enterprise system..."

Thu, 04/03/2014 - 10:07 | 4620988 Sudden Debt
Sudden Debt's picture

They can say whatever they want. Everybody can say whatever they want.

Did you already notice there isn't a single politician addressing the HFT issue?

none.

So nothing will happen. Ever.

Thu, 04/03/2014 - 10:11 | 4620998 Dr. Richard Head
Dr. Richard Head's picture

And should something happen at all it will just further entrench the elite money changers in the practice.  Look for a bill that is titled something that would imply "banning" HFT, yet would just bury the practice behind the SEC or something. 

Thu, 04/03/2014 - 10:39 | 4621095 Bananamerican
Bananamerican's picture

How bout creating the
"The Market Unfair Participant Protection Enforcement Taskforce"?

Thu, 04/03/2014 - 11:13 | 4621221 MarsInScorpio
MarsInScorpio's picture

Sudden:

 

As always, it's great to see your posts.

 

The reason you don't hear from politicians is because as the NSA controversy illustrated, they don't have the faintest idea in Hades what computer technology is, or what it is capable of doing.

 

Go ahead, ask them at their Town Halls to explain to you what HFT is.  Maybe you'll get an answer to what the acronym means, but beyond that - forget it.

 

They are incompetent pigs slopping at the trough.

-30-

 

Thu, 04/03/2014 - 13:23 | 4621655 gmrpeabody
gmrpeabody's picture

Twoo....,

...so twoo.

Thu, 04/03/2014 - 10:37 | 4621081 prains
prains's picture

It's all gone so terribly wrong and for so long now there's nothing even worth returning to in this "system". It's over so burn it down already

Thu, 04/03/2014 - 18:07 | 4622885 StychoKiller
StychoKiller's picture

Hmm, guess I was the only one to effectively close my Schwab IRA in 2010.  Have more PEOPLE followed my lead?

Thu, 04/03/2014 - 10:00 | 4620955 digitlman
digitlman's picture

Fuck Chuck.  He's just as much a part of the problem.

Thu, 04/03/2014 - 10:03 | 4620967 Kirk2NCC1701
Kirk2NCC1701's picture

Like the Fed, Chuck hates competition. 

Thu, 04/03/2014 - 10:12 | 4621001 nickels
nickels's picture

Losing at the HFT game? Spike the guns of the other side.

Thu, 04/03/2014 - 10:21 | 4621032 Cursive
Cursive's picture

@Kirk2NCC1701

Why doesn't Chuck just join/route through IEX?  Now that Chuck admits that his customers are hurt by HFT, it's time for some Schwab customers to file suit against Chuck if he doesn't use different/better routing.  Send in the lawyers...  ;-)

Thu, 04/03/2014 - 13:13 | 4621610 NotApplicable
NotApplicable's picture

My thougts exactly.

Thu, 04/03/2014 - 10:06 | 4620983 spastic_colon
spastic_colon's picture

the rats are all jumping (right after they drop dime on the "system")

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