The Father Of High Speed Trading Speaks: "The Market We Created Is A Casino; A Complete Mess; A Rigged Game"

Tyler Durden's picture

While simplistic economist hacks and conflicted industry practitioners who stand to lose their entire revenue stream should HFT be liquidated, not to mention pagreview trolling journos, are suddenly not only experts in HFT, but are convinced allegations that high frequency trading rigs markets are blown out of proportion, here is what one of the actual pioneers of, and erstwhile legends in, computerized trading - the billionaire founder of Timber Hill and Interactive Brokers Thomas Peterffy - the man NPR dubbed the "father of high-speed trading" has to say.

The following excerpt is courtesy of Scott Patterson's book Dark Pools: The Rise of the Machine Traders and the Rigging of the U.S. Stock Market, which largely covers the same subject matter as Michael Lewis (and well before), and which has been profiled here previously.

* * *

On the morning of October 11, 2010, Thomas Peterffy stepped onto the dais of the ornate Opéra Salon on the ground floor of the Inter-continental Le Grand Hôtel in Paris. It was a gala event, the fiftieth annual meeting of the World Federation of Exchanges. Attendees included Bill Brodsky, chairman of the Chicago Board Options Exchange, the NYSE's Duncan Niederauer, Christine Lagarde, French minister for the economy and future head of the International Monetary Fund, Nasdaq CEO Bob Greifeld, and Atsushi Saito, CEO of the Tokyo Stock Exchange.

The speaker who would set off the most fireworks was Peterffy, the founder of Timber Hill, one of early users of Island. He looked out over the podium at the upturned faces of his peers and grimaced.

Peterffy had become extremely disillusioned with the market he'd helped create. It wasn't just the deceptive tactics of firms like Trillium, it was the unregulated speed traders who were picking off his own firm's orders, with no firm obligation to stick in the market during tough times. The stock market had been turned into a Wild West of dueling algos -- and some firms, it seemed, had special advantages. Like Haim Bodek at Trading Machines, Peterffy was steamed that his orders were getting clipped time and time again. He wasn't going to take the abuse without fighting back.

He cleared his throat, adjusted his glasses, and launched into his speech.

"An exchange used to be a place, yes, a physical place, where people would come together to buy or sell, hoping to achieve the best price for themselves," he said. "The more the exchange was able to attract all of the buy and sell interests in a product, the more the prices on the exchange would reflect the true state of supply and demand."

It was the old mantra: liquidity breeds liquidity. But something had changed.

"In the last twenty years came computers, electronic communications, electronic exchanges, dark pools, flash orders, multiple exchanges, alternative trading venues, direct access brokers, OTC derivatives, high-frequency traders ... Reg NMS in the U.S. -- and what we have today is a complete mess."

He looked out at the crowd. Dead silence. Peterffy hadn't bothered to warm the audience up with a joke, a humorous anecdote. He cut straight to the point -- and most in that room didn't like what he was saying.

"It is not so much anymore that the public does not trust their brokers. They do not trust the markets, the exchanges, or the regulators either. And why should they, given our showing the past few years? To the public the financial markets may increasingly seem like a casino, except that the casino is more transparent and simpler to understand."

Visible tension spread through the room. Did Thomas Peterffy just call the market a casino? That was an attack they might have expected from the likes of Arnuk and Saluzzi or Senator Ted Kaufman -- but from the founder of Timber Hill and Interactive Brokers, the godfather of electronic trading?

Peterffy, of course, was fully aware that his words seemed to contradict his own history.

"I must confess to you that I was an ardent proponent of bringing technology to trading and brokerage. Unfortunately, I only saw the good sides. I saw how electronic trading and record-keeping could be used to force people to be more honest, to make the process more efficient, to lower transaction costs and to bring liquidity to the markets. I did not see the forces of fragmentation and the opportunity for people to use technology to keep to the letter but avoid the spirit of the rules -- creating the current crisis."

He gazed out at his audience. Peterffy wasn't shocked to see the stern faces, the shaking heads and averted eyes. He was certain that he'd become their enemy -- and he had little hope that they would listen. The computer-trading elite would never admit that the markets they'd created were deeply flawed. Still, he kept hammering away.

"It is vitally important that we bring an end to this crisis of trust before it spreads any further. That we bring back order, fair dealing, and trust in the marketplace. The financial markets of ... the world's developed countries are at a turning point. Technology, market structure, and new products have evolved more quickly than our capacity to understand or control them. The result has been a series of crises over the past few years that have caused many investors to lose confidence or to think that the whole system is a rigged game."

After Peterffy finished speaking, there was silence. Then a scattered handclap. And then the room burst into loud applause.

Everyone realized: Peterffy had actually done it -- he'd come out and said what so many were thinking, what they all knew deep down. The market was a complete mess. And the old guy was the only one with the balls to stand up there and call a spade a spade.

* * *

Peterffy's full speech can be read below (pdf)

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nope-1004's picture

Takes one to know one, I guess.  If anyone can see the market is a rigged casino, the guy that helped unknowingly create it is as good a candidate as any.

 

Berspankme's picture

I heard Jamie and Lloyd are shocked too

icanhasbailout's picture

Like any casino, on Wall Street the house always wins.

y3maxx's picture

Rigged Casino = Doing G-d's Work

Keyser's picture

Four years later and......................................

 

Serfs Up's picture

...my time...it is coming.

weburke's picture

"but it is the shareholders or taxpayers that pay for the overpriced derivatives"  oh, I see, all this drama is for taxpayers? share-holders- ?    nonsense. some other agenda here.

Crisismode's picture

 

 

A Day Late,

 

And a Dollar Short

 

 

Vice's picture

Finally some fucking recognition for Patterson, which revealed this whole fiasco WELL before Lewis, yet Lewis gets all the fame and fortune. 

 

Connections to Hollywood sure come with benefits. 

quintago's picture

Take a seat right next to our own microwave tower owner.... http://goo.gl/kggQAJ

 

markmotive's picture

Dude it's not just the markets that are rigged. The whole F-cking system is rigged!

The Story of Your Enslavement

http://www.planbeconomics.com/2013/10/the-story-of-your-enslavement.html

boogerbently's picture

" to keep to the letter but avoid the spirit of the rules -- creating the current crisis...."

He could be talking about anything/everything "corrupt."

e2thex's picture

 

 

"...to keep to the letter but avoid the spirit...."

Someone knows how to move the language.  The last commentator who could do that was Eric Sevareid.

Damnnnn.

I_Am_'s picture

@quintago

brilliant observation......

mccvilb's picture

i don't think the markets are rigged. I KNOW THE MARKETS ARE RIGGED.

How do I know this? Because securities laws are systematically being broken and no one goes to jail.

Because money is systematically being stolen by executives and BODs from shareholders and by broker/dealers from investors and nobody protects the shareholders or the investors.

The markets are very transparent. That about summarizes the definition of transparency in the markets.

bania's picture

Nothing like having your Jesus Moment after banking a few billion.

new game's picture

to the author of this very important notice: thanks for the timely info...

NoDebt's picture

They're all tough guys once they're not in a position to do anything about it any more.  They write a book, make more money explaining exactly how they helped fuck everything up.  (Ask Harvey Pitt, for example.)

Oh, and of course, do plenty of speaking engagements.

"the fiftieth annual meeting of the World Federation of Exchanges"

That sentence right there makes me want to throw up on the keyboard.  I didn't even know there WAS a World Federation of Exchanges.  And there he is, speaking to an organization that must have known about, probably facilitated and possibly perpetuated this fraud, telling them something they already knew.  And they applaud him for that act of heroism??  

There's a lot less heroism going on here than this article implies.

Colonel Klink's picture

Nothing like having your come to Torah and Talmud moment after banking a few billion.

Fixed, trust me, Jesus has nothing to do with him.  Short the same ancestry.

Doubleguns's picture

There is just too much news about this and everyone is coming out of the wood work on this. Something must be in the other hand and it must be big because they are trying real hard to distract us with shit we already know about. Next it will be the CFTC coming out on....this.....shit........

 

http://www.ftfnews.com/the-hot-air-over-high-frequency-trading/#.U0MxWvl...

 

Never mind.  

Colonel Klink's picture

Soon to be declared there wasn't any manipulation after the investigation.  Much like PMs.

Move along!

Blazed's picture

@Klink,

Some good ole Talmud.

Sanhedrin 57a . A Jew need not pay a gentile ("Cuthean") the wages owed him for work.

Baba Kamma 113a. Jews may use lies ("subterfuges") to circumvent a Gentile.

Baba Mezia 24a . If a Jew finds an object lost by a gentile ("heathen") it does not have to be returned. (Affirmed also in Baba Kamma 113b)
Sanhedrin 57a . When a Jew murders a gentile ("Cuthean"), there will be no death penalty. What a Jew steals from a gentile he may keep.
 
Baba Kamma 37b. The gentiles are outside the protection of the law and God has "exposed their money to Israel."
Sanhedrin 54b. A Jew may have sex with a child as long as the child is less than nine years old.
 
Kethuboth 11b. "When a grown-up man has intercourse with a little girl it is nothing."
Sanhedrin 55b. A Jew may marry a three year old girl (specifically, three years "and a day" old).
Raging Debate's picture

Doubleguns - It's called the jig is up. It was inevitable. When growth stalls and then stops people get itchy and clamor for change. I liked your commentary over the years. Good to see you still blasting away.

To all here, thank you for years of service to bring light to the dark of DC and Wall St. Many seeds were planted that are now taking root. The small minority in alternative media are no longer alone.

Let's hope the long transition back to sanity does not include WW3. Keep up the pressure, the job is only half done.

Doubleguns's picture

Did not realize anyone was paying attention. 

 

It turns out ranting and raving here is ALOT better than yelling at the TV and Radio. I get to hear others rants and raves, quite often better than mine, not just an echo of mine off the wall, AND the news is much more accurate, truthful and unbiased and awesome and.........obviously you understand. Your here!!! 

goBackToSleep's picture

say it aint so margaret! 1000 days of consecutive wins does not a bell curve make!

stocktivity's picture

Oh yeah....Jamie and Lloyd are shocked all right. With a crooked little smirk on their faces.

Wahooo's picture

It's no smirk. It's an outright belly-laugh.

More_sellers_than_buyers's picture

FUCK HIM AND THE HORSE HE RODE IN ON.  He fucked it up! he squashed everyone in his way! and now I'm supposed to applaud him because he see's the monster he created? Fuck off and die asshole

TheReplacement's picture

After actually reading the article it turns out he was the one getting hosed by HFTs. 

phoolish's picture

Like, how can ANY intelligent participant, etc., let alone the so-called "Father" not immediately see the manifest opportunities for scamming and fraud w/ such "technology?"  Those opportunities are obvious.

 

I suspect he only regrets being found out because now the distortions are so obscene.

 

NOTaREALmerican's picture

Optimism tend to cloud the mind.

Didn't Greenscam say the banks were self-regulating because the bankers were so honest and had such expensive suits?  Most of the people who worshipped Greenscam believe him too.

The Gooch's picture

All "financial advisors" should dress like Navin R. Johnson.

"Step right up and win some crap!"

http://www.youtube.com/watch?v=Ag6DtzRUF5U

Squid-puppets a-go-go's picture

yup, this man is Capitalism's Oppenheimer

goBackToSleep's picture

Weapons of mass distraction. I think they may have squeezed the last nickel out of the boomers. Hope there's gold in them there pension funds. Me thinks zee Germans could comment on that one.

Fuckenpuken!

Round 2 and 3

http://www.zazzle.com/hft_no_bell_curve-235536899066446769

http://www.zazzle.com/7_years_gold-235292943319213139

icanhasbailout's picture

"It is difficult to get a man to understand something, when his salary depends upon his not understanding it!" - Upton Sinclair

Pool Shark's picture

 

 

William O'Brien is shocked, SHOCKED, that illegal gambling is going on here...

 

 

i_call_you_my_base's picture

Most casinos aren't rigged. The house has odds, but that's not "rigged" where different participants have different advantages. Saying the market is a casino is actually an insult to casinos.

logicalman's picture

I would never go into a casino, buy yes, you are correct.

The Gooch's picture

Have you been to a bank?

NoDebt's picture

I went to a bank once.  I only have scattered, disjointed memories of it.  I think these are the memories that those who claim to have been "abducted by aliens" have ACTUALLY experienced.  Like them, I remember the anal probe quite clearly.  The rest is a bit fuzzy.

falak pema's picture

haha, you talk of the "theoretical" modus operandi just like for deposit banks which are the most regulated institutions in the world (not the investment and Shadow banks). 

In reality the casino is a huge front operation to skim all sorts of derivative products like hot money deals and tax evasion spiels that feed the front roulette wheel type show. Its full of brokers, just like the banks, selling inside plays to HFT dark pools. Its a den of thieves for all types of side shows like real estate scams and drug money recycling into casino operations.  

Wheels within wheels. You should talk to the Mafia boys about that. Just like Ws today and its non regulated shadow banked securitized derivatives soup. 

i_call_you_my_base's picture

I wasn't defending casinos. My point is that if you walk into a casino you have no advantage over the guy walking in next to you. You can't pay for advantage. Casinos actually enforce a level playing field. If a participant is caught gaming the system they are banned, and not only banned from that casino, but from all casinos. By comparison the casinos are straight up, at least from the perspective of the participants. Once the money is skimmed, I agree, all sorts of corruption goes on.

StupidEarthlings's picture

If by level playin field you mean..everyone usually loses at the same rate..then yes..I agree.

;)

813kml's picture

I would say that no casinos are rigged, they are heavily regulated by the gaming control board and also self-policed.  They know that if word gets out that one casino is cheating then they would all suffer from guilt by association.  A casino license is a cash cow and difficult to come by, the risk of cheating doesn't come close to justifying the reward.

We would be fortunate if Wall Street were run like a casino.

Spastica Rex's picture

Depends on your perspective.

I would say that all casinos are transparently rigged.

That people insist on losing money in casinos says more about human nature than it does about the nature of casinos.

NickVegas's picture

I love to gamble, and it is a rare trip indeed when I don't catch the casino cheating. The casinos steal for the same reason a thief steals. I would say all the casinos I've been to steal. I bet Charles Barkley encountered some of the best deck mechanics money can buy. Yeah, yeah, the average smuck gets cheated only occasionaly, and when it happens the smuck gets his bet back and life goes on.

813kml's picture

I gamble too and catch mistakes (I don't complain about those in my favor), but I don't think they were intentional.  Every game either has odds in the casino's favor or provides a rake (poker, sports betting).  The casino is going to get your money, there's no need to cheat.

I'm sure there are instances of pulling a mechanic in to take down a whale or a hot streak, but overall the games are simple and the rules don't change.  Unless you're talking about slots, but they're a black hole.  Wall Street cheats consistently and changes the "rules" constantly. 

Cognitive Dissonance's picture

Most inventors lose control of their creation the moment it is born. The result of that gestation is only seen with any clarity after it has been co-opted and monitized. Too late to change or abort at that point.

blindman's picture

or, these manifest principles have a meaning and statement
beyond the personal one might ascribe
as an egoic self or identity. inventors being mere opportunist
minds in time and place entirely mischaracterized as "persons"
while chiefly being harmonic and attuned archetypes of the
lazy life strand lying on the shore, (in the form of a, hopefully
and partial, question). who remembers or gives a flying shite
concerning the phoenicians? that would be nearly no one.
anyway ... here a song ...
.
Deja Vu - Crosby, Stills & Nash
https://www.youtube.com/watch?v=HiDOMuhpqUo
.
financialisation is a fucking banker spell denominated
and nominal in a scam embedded in an insider death scam.
as they say .... so it goes ......

Confused's picture

But.....but....liquidity. 

 

For anyone who hasn't seen it, Haim Bodek mentioned in the article:

https://www.youtube.com/watch?v=kFQJNeQDDHA