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HFT Purge Begins: SEC Prepares To "Remove" Some High Frequency Trading Firms

Tyler Durden's picture




 

Ever since Goldman's anti-HFT Op-Ed less than a month ago, and since the even more recent full-hearted support by Goldman of Michael Lewis' most recent entry into the anti-HFT crusade (one promoting the Goldman-supported IEX exchange), one thing has been clear: the days of market structure in its current format are numbered. This was further confirmed after Goldman exited both its legacy Spear Leeds & Kellogg designated market making post at the NYSE, and is said to be winding down its market-dominating dark pool, Sigma X.

It also means that our 5 year crusade against HFT - not because we want it replaced with a different, Goldman-backed exchange but because HFTs inherently destabilize the market (see May 2010 and the now daily flash crash in individual stocks and/or exchanges) - and specifically those most profitable but also most parasitic and predatory HFT strategies...

... is coming to an end, with both the DOJ, FBI and SEC finally paying attention.

Sure enough, Post reports that just three weeks after the Gary Cohn Op-Ed, the SEC is "preparing to remove some high-frequency trading firms."

The crackdown begins:

In a purge of computerized markets, prompted by public outrage unleashed by Michael Lewis’ “Flash Boys,” the SEC’s campaign will see numerous enforcement actions, new rules and new business practices — a sweeping overhaul that could benefit the beleaguered New York Stock Exchange, The Post has learned.

 

“You’ll probably see the commission coalesce around those enforcement cases and then bring new rules on high-frequency trading,” a source with knowledge of the SEC’s thinking told The Post. “There’s a lot of pressure on the SEC to act.”

More importantly, the broken maker/taker model, i.e., in which HFTs are paid rebates for "liquidity providing" limit orders, even if these are merely frontrunning of large block orders, is about to be overhauled:

Intense lobbying by the NYSE’s owners, IntercontinentalExchange Group (ICE), for reform of the controversial “maker-taker” rebate rule for buying or selling shares is likely to get more sympathy. The rule’s abolition or amendment, seen as increasingly likely, would help reverse NYSE’s losses to rivals who have taken volume with their better pricing.

 

“Back in the day, we used to call it pay to play (now it is called maker-taker), and we used to vigorously fight against it,” said NYSE floor trading vet Doreen Mogavero. “You know, the practice was originally devised by Bernard Madoff — need I say more?”

 

The source familiar with SEC thinking says the NYSE could get a boost as regulators force out dodgy players among the market’s 45 secretive dark pools, 200 “internalizers” and 13 public exchanges. But it might also be a mixed blessing.

 

“Yes, some high-frequency guys are going to be taken out of the game, but the NYSE might get rules they don’t care for,” the source said. “The ability of exchanges to develop and [profit] from special-order types is going to be stopped — and this exchange business of selling direct data feeds is going by the wayside.”

It's not just HFTs, bur dark pools are about to fall under the spotlight:

The SEC is also mulling a trial run for a so-called trade-at rule, requiring brokerages and dark pools to send their orders to the NYSE, Nasdaq and other public exchanges unless better stock prices occur elsewhere, sources say.

The confirms what Reuters reported several days ago when it said that "U.S. securities regulators are considering testing a proposed reform that could drive business to major stock exchanges and away from alternative trading venues such as "dark pools" that critics say may be hurting investors by reducing the quality of pricing."

The proposal, which has so far only been discussed among staff involved in policymaking at the U.S. Securities and Exchange Commission, could limit how much trading occurs inside brokerages and in dark pools, according to people familiar with the matter.

 

The measure aims to address a concern among some regulators and academics about the increasing level of trading that happens outside of exchanges.

 

They say that the amount of trading being done in the "dark" means that publicly quoted prices for stocks on exchanges may no longer properly reflect where the market is, meaning that investors may not be getting the best prices for their trades.

One can keep reading here, or merely glance the graphic below to see how much trading has moved from lit exchanges ever since Reg NMS to dark venues. In short: unlit has lost a stunning 40% of volume as increasingly more traders seek to avoid being frontrun by the HFT parasites.

Why is all this happening? Because as everyone should know by now, what Goldman wants, Goldman gets. And Goldman wants a complete overhaul of a market that is systematically broken. Our only question is can this overhaul take place without an epic market rout as the HFTs suddenly all go into "Off" mode as their 25 year old math PhD operators look for greener pastures (and to get the hell out of Dodge before the subpoenas come flying in).

 

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Sun, 04/13/2014 - 09:50 | 4653748 Kirk2NCC1701
Kirk2NCC1701's picture

So, some HFTs will be "more equal than others"?

Sun, 04/13/2014 - 09:52 | 4653754 SilverIsKing
SilverIsKing's picture

How frequent is "high?"

Has that been defined?

If I make a trade every 10 minutes and someone else makes a trade every 20 minutes, can I be accused of high frequency trading?

Sun, 04/13/2014 - 09:57 | 4653772 Xibalba
Xibalba's picture

Wow, all it took for the SEC to get off thier useless lazy asses was a book.  Imagine when the film comes out...geez. 

Sun, 04/13/2014 - 10:04 | 4653788 BobPaulson
BobPaulson's picture

The the squid is in charge? Nice.

Sun, 04/13/2014 - 10:12 | 4653805 Algosaurus Rex
Algosaurus Rex's picture

Green = Groped

Red = Reamed

Sun, 04/13/2014 - 10:35 | 4653863 cifo
cifo's picture

Open source HFT!

Sun, 04/13/2014 - 10:37 | 4653866 ParkAveFlasher
ParkAveFlasher's picture

So...what is the real price of anything?  Does anyone know for certain anymore?

Sun, 04/13/2014 - 11:01 | 4653933 Manthong
Manthong's picture

“the days of market structure in its current format are numbered”

Yes.. With or without a corrupt regulatory structure intent on “fixing” it.

Sun, 04/13/2014 - 11:13 | 4653959 Richard Chesler
Richard Chesler's picture

SEC's true motive:

More bandwidth for Porn!

Sun, 04/13/2014 - 11:27 | 4653988 Keyser
Keyser's picture

The likely truth is with everyone and their brother setting up "safe" exchanges, the NYSE and NASDAQ have probably been screaming at the SEC to do something lest they lose all their customers. Funny it had to take a book to expose the situation as the SEC has obviously been complicit. 

Sun, 04/13/2014 - 12:52 | 4654190 Vampyroteuthis ...
Vampyroteuthis infernalis's picture

God bless the squid...... wait.......f*ck the squid!

Sun, 04/13/2014 - 11:08 | 4653943 DeadFred
DeadFred's picture

The real price of deep OTM puts for April is very low. They pay over 1000:1 on a twenty percent drop by Friday. Do you think the odds of a large drop this week is less than 1000:1? I don't.

Sun, 04/13/2014 - 11:30 | 4653995 Keyser
Keyser's picture

Me tinks a Fed Cat Bounce is in the plans for next week. 

Sun, 04/13/2014 - 11:50 | 4654039 DeadFred
DeadFred's picture

A minimum of ten percent drop (S&P) by Friday is my guess and I have zero money riding on it. As things got more out of whack I became less convinced that I would be able to actually profit from the 'event' when it came. How do you sell your speculative options when the market is closed. How do you collect when your counterparty just shut their doors? I quit trading over a year ago (which saved a lot of money on bear positions during a truly epic ramp job) and I won't be playing this one either. In a year I'll be happier with that money in food than with ten times that money frozen in a trading account. We just saw the last bounce IMHO. Watch how things work after the drop. If you don't see a strong "V" bottom then it's just the first leg down.

Of course I'm not known for my optimistic outlook, that's my evil twin LiveFred

Sun, 04/13/2014 - 11:47 | 4654029 ParkAveFlasher
ParkAveFlasher's picture

I got the horse right here, his name is Paul Revere, and there's a guy that says if the weather's clear, can do...

Sun, 04/13/2014 - 12:14 | 4654111 Ralph Spoilsport
Ralph Spoilsport's picture

+1 Guys and Dolls!

Sun, 04/13/2014 - 12:48 | 4654179 U4 eee aaa
U4 eee aaa's picture

We have opex this week(and it comes on a Thursday) . I doubt they'll be handing out free money.

Sun, 04/13/2014 - 10:16 | 4653822 paint it red ca...
paint it red call it hell's picture

Anyone thinking the SEC is acting out of a newly found regulatory morality is deluded, naive, or mistaken.

Their assignment has simply been changed preparing foundations for the next underhanded but profitable market endeavor. Beware the hidden hand.

Sun, 04/13/2014 - 12:20 | 4654124 fattail
fattail's picture

I agree.  This seems like a good opportunity to pull a few levers to force the market down to a sufficient extent to allow the Fed to stop the taper and openly print.

Off topic.  Who foresaw a Russian civil war a year ago as the next black swan?

Sun, 04/13/2014 - 12:34 | 4654159 DR
DR's picture

True. My question is what is Goldman Sachs up to?

Sun, 04/13/2014 - 12:50 | 4654181 U4 eee aaa
U4 eee aaa's picture

Exactly. The only time they ever change the rules is if they are losing or the pitchforks and nooses are at the door. They are just taking their ball and going home to mama. Goldman is clearly getting its butt kicked in HFT and they don't like it one bit. They are losing control. Time to move the goal posts

Sun, 04/13/2014 - 17:58 | 4655002 mccvilb
mccvilb's picture

Unlikely there will be any significant changes to make the system an honest one and even less likely we'll see specific incriminations. That said there is a new sherrifette in Dodge, Mary Jo White. I'll reserve judgment until we see how far she's going to run with this civilly and where the NY Atty General's Office will take it criminally, but I won't be holding my breath.

Sun, 04/13/2014 - 10:12 | 4653811 PubliusTacitus
PubliusTacitus's picture

Correct.

 

This is what you wanted, isn’t it?

 

HFT are evil.

 

So SEC is doing what it does best – mass action, with max force, and zero accountability.

 

How is HFT defined?  LMAO, do you actually think lawyers understand this concept at all?  Or care?

 

No, they’ll do whatever they want, as they always do.

 

Let’s hope this means DJIA 13000, so we can at least reset to a more reasonable level.

 

Past SEC performance is an indicator of future returns.

Sun, 04/13/2014 - 12:17 | 4654118 BandGap
BandGap's picture

I think the focus of this discussion should also be the instability inherent in using an HFT system. Which algo rules?

It boggles the moind to think that FIFO cannot be achieved here.

Sun, 04/13/2014 - 12:54 | 4654198 icanhasbailout
icanhasbailout's picture

yerp - now that the relatively little guy can do it too, it's about to become a restricted trade. This is right in the script - the role of the SEC is to prevent competition to the big boys.

Tue, 04/15/2014 - 10:24 | 4660728 Remington IV
Remington IV's picture

NYSE specialists were the first front-runners so , of course they're mad at the HFT front-runners

Sun, 04/13/2014 - 09:50 | 4653750 nmewn
nmewn's picture

But but but...what will become of the liquiditeee? ;-)

Sun, 04/13/2014 - 10:03 | 4653787 Element
Element's picture

Very good point, but it's only some, the selected winners will take up the slack ... for the sake of the children.

Sun, 04/13/2014 - 10:56 | 4653922 Tinky
Tinky's picture

Apparently you aren't aware of the Belgian Solution™

Sun, 04/13/2014 - 11:46 | 4654028 Spigot
Spigot's picture

I see your winky smiley and raise you a !8-o surprised expression with mouth agape.

None of this is happening without the explicit nod from all the major assholes at the top. Question is why?

One sure thing is that when you shut down a siginificant amount of supposed market making trading volume, what do you have left?

HFT has consistently represented over 70% of volume. So, Potemkin-Market. IOW - you take these churners out and you got little left.

Some one is very short. Some one wants to buy pennies on the dollar. We'll get the market crash they have all been drumming on for the past 6 months. My guess is the Chinese will be buying US companies for nothing...plan?

Sun, 04/13/2014 - 12:52 | 4654191 U4 eee aaa
U4 eee aaa's picture

It will probably return ;)

Tue, 04/15/2014 - 10:25 | 4660734 Remington IV
Remington IV's picture

Liquidity = C++ programmer definition of front-running

Sun, 04/13/2014 - 09:52 | 4653755 buzzsaw99
buzzsaw99's picture

sec = toad of the squid

Sun, 04/13/2014 - 09:56 | 4653768 Winston Churchill
Winston Churchill's picture

Stool of the squid.

FIFY

Sun, 04/13/2014 - 09:56 | 4653767 toady
toady's picture

"Remove" permanently?  As in kill the CEOs and corporate officers?

Sun, 04/13/2014 - 12:53 | 4654194 U4 eee aaa
U4 eee aaa's picture

Sounds like an even better plan

Sun, 04/13/2014 - 10:00 | 4653776 Element
Element's picture

Only five years?! Hey, that's pretty good-going for a corrupt guberment agency!

Sun, 04/13/2014 - 10:03 | 4653781 zipit
zipit's picture

Wrist-slapping in 3, 2, 1.  Then back to business as usual, except very slightly different, so as to pass through the gaping loophole(s) that will be present.  Godswork.

Sun, 04/13/2014 - 10:03 | 4653782 SilverIsMoney
SilverIsMoney's picture

The speed at which the cracks are starting to appear...Goldman, Russia, and the militias all moving in tandem seems awfully odd... then again i'm sure all is well!

 

"Don't worry about the wooosshhh sound hunny i'm sure it's nothing! Go back to bed!"

http://www.youtube.com/watch?v=0udToKp6COY

 

Sun, 04/13/2014 - 10:16 | 4653800 db51
db51's picture

W T F?  Why don't we just crown Lord Blankfein King and get it over with.  Fucking asshole.   I would so like to see him swinging from the end of a rope.

Sun, 04/13/2014 - 10:28 | 4653838 MillionDollarBoner_
MillionDollarBoner_'s picture

Presumably that would be a silk rope ;o)

http://en.wikipedia.org/wiki/Laurence_Shirley,_4th_Earl_Ferrers

Mon, 04/14/2014 - 07:06 | 4656171 Its_the_economy...
Its_the_economy_stupid's picture

"After the execution his body was taken to Surgeon's Hall for public exhibition and dissection."

 

Why waste a perfectly good body?

Sun, 04/13/2014 - 10:11 | 4653809 yogibear
yogibear's picture

Don't worry Eric Holder's Just-Us department will make sure any procedings againt the financial criminal kingpins gets thrown in the trash.

Sun, 04/13/2014 - 10:20 | 4653831 wmbz
wmbz's picture

Big gubmint is and always will be corrupt, now it's wide open. In your face and up your ass, fuck you corrupt. Beyound contempt!

Sun, 04/13/2014 - 10:21 | 4653834 wmbz
wmbz's picture

P.S. "You don't want to go there buddy"

Sun, 04/13/2014 - 10:18 | 4653825 GrinandBearit
GrinandBearit's picture

Regulators?... we don't need no stinking regulators.

TPTB are going to keep this scam going until the very end.

Sun, 04/13/2014 - 17:30 | 4654939 buzzsaw99
buzzsaw99's picture

the regulators are there to make sure the little crooks don't rob the big crooks

Sun, 04/13/2014 - 10:26 | 4653842 new game
new game's picture

you don't have to participate. do you go to casinos? do you back your ass into a fan?

eat your pudding and stfu...

Sun, 04/13/2014 - 10:37 | 4653867 Ignorance is bliss
Ignorance is bliss's picture

How will effect gold and silver markets?

Sun, 04/13/2014 - 12:01 | 4654069 Solarman
Solarman's picture

Rhetorical question?

Sun, 04/13/2014 - 10:42 | 4653884 MiniCooper
MiniCooper's picture

I've been saying this since HFT and dark pools appeared.

A national stock exchange is a natural monopoly. Multiple exchanges just fragment true liquidity and make prices inefficient . A stock exchange should be a regulated utility that promotes the most efficient allocation of capital and trading at the lowest spreads. It is not econiomically efficient to have more than one stock exchange. I have also been saying for years that the NYSE floor is an arachaic anathema that makes no sense. I come from London and we have had an electronic stock exchange for decades.

The problem is - who gets to own/control the stock exchange. It should NOT be the people or organisations who make markets on it as it gives them the power to make the rules that favour their interests over the investing general public.

Same problem with the banking system. The genral public need banking as a utility function. It went wrong when we allowed the bankers to effectivley control its regulation.

I fear we may see the the US stock market fall further into the hands of powerful interests who are not aligned with the interests of the investing general piublic. The discusison about the disappearance of 'mom n pop' investors (which I find a hateful and insulting term) is well worn but really the general public gets it - the market is so obviously broken and pitted against their interest they are no longer willing to take part. Not so stupid the 'mom n pop' investor after all.

Sun, 04/13/2014 - 10:46 | 4653894 saveUSsavers
saveUSsavers's picture

Liquidity= DEBT ! As in LEVERAGE. Someone tell The Esteemed Langone.

Sun, 04/13/2014 - 11:01 | 4653936 rsnoble
rsnoble's picture

"some"???  Just leave the important ones in place?

Sun, 04/13/2014 - 11:16 | 4653966 Conax
Conax's picture

The one that shackles silver at $20 will always be there, see?

They don't have the metal they claim, if that gorilla gets loose there will be hell to pay for the shorts. 

It is like JPM 'getting out of commodities', with the exceptions of PMs, of course.

 

 

Sun, 04/13/2014 - 12:57 | 4654203 U4 eee aaa
U4 eee aaa's picture

So is buying deep OTM puts on JPM like buying lottery tickets that will pay one day.....and at about the same ratio?

Sun, 04/13/2014 - 11:12 | 4653957 farmboy
farmboy's picture

Just because Goldman is loosing the HFT race other will be handicapped

Sun, 04/13/2014 - 11:45 | 4654022 joego1
joego1's picture

The whole thing will be a smoking pile of ruble before it's ever reformed.

Sun, 04/13/2014 - 12:05 | 4654083 Stan522
Stan522's picture

The ones that remain are managed by the big campaign contributors.........

Sun, 04/13/2014 - 12:19 | 4654122 Bangin7GramRocks
Bangin7GramRocks's picture

They should change the name and the concerned citizenry will go back to sleep. Remember the Blackwater private army? It still exists and now it is called Z. Just as corrupt and dangerous, but nobody gives a shit anymore.

Sun, 04/13/2014 - 12:30 | 4654157 Fred Hayek
Fred Hayek's picture

Once all the marks get wise to the grift you have to move on to another con. The smart grifter (Goldman) gets out in front of this process and might even trick some marks into believing its protestations of concern for market integrity if they're not too bright and have no memory.

Sun, 04/13/2014 - 13:00 | 4654207 optimator
optimator's picture

Prepares to remove "some".   Must be the elimination the competition.

Sun, 04/13/2014 - 13:29 | 4654280 I Write Code
I Write Code's picture

Don't hate the players, hate the game.

Sun, 04/13/2014 - 15:10 | 4654538 RaceToTheBottom
RaceToTheBottom's picture

Quick, line up the low level Indians.  We need to quickly resolve this and their role is the patsy.

Sun, 04/13/2014 - 16:08 | 4654702 Femme Meatwad
Femme Meatwad's picture

Why is ZH so supportive of GS and Mr. Lewis in their endeavors?

Frankly, the real pariahs here are the broker-dealers who keep ripping off their clients (like GS). It is no wonder why GS and others want to support a dark pool like IEX, so they can keep ripping off clients. Now Fidelity and Schwab want their own closed trading venues, so they too can obscure price discovery in an aggregated open market and they too can keep ripping off their clients. Note also that Mr. Lewis never says one whit about the elephant in the room, the Fed and all the primary dealers, who have collectively ripped off the American people with interest rate manipulation and currency devaluation schemes that funnel money to special interests.

Sun, 04/13/2014 - 21:54 | 4655537 rosiescenario
rosiescenario's picture

" the SEC is "preparing to remove some high-frequency trading firms."

 

....those "some" being the ones that did not donate to Obama, Pelosi, or Reid?????

Mon, 04/14/2014 - 09:00 | 4656405 NEOSERF
NEOSERF's picture

Once they shake out HFT, I might be the only retail trader left!

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