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).

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Kirk2NCC1701's picture

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

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?

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. 

BobPaulson's picture

The the squid is in charge? Nice.

ParkAveFlasher's picture

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

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.

Richard Chesler's picture

SEC's true motive:

More bandwidth for Porn!

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. 

Vampyroteuthis infernalis's picture

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

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.

Keyser's picture

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

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

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...

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.

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.

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?

DR's picture

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

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

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.

PubliusTacitus's picture



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.

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.

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.

Remington IV's picture

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

nmewn's picture

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

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.

Tinky's picture

Apparently you aren't aware of the Belgian Solution™

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?

U4 eee aaa's picture

It will probably return ;)

Remington IV's picture

Liquidity = C++ programmer definition of front-running

buzzsaw99's picture

sec = toad of the squid

toady's picture

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

U4 eee aaa's picture

Sounds like an even better plan

Element's picture

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

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.

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!"



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.

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?

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.

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!

wmbz's picture

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

GrinandBearit's picture

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

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

buzzsaw99's picture

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

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...

Ignorance is bliss's picture

How will effect gold and silver markets?