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The End Of HFTs (And Price Discovery): America's Biggest Money Managers Launch Their Own Dark Pool
Remember when the always entertaining HFT lobby decided to spin Michael Lewis' Flash Boys by saying that the HFT parasites may frontrun orders and may make a mockery of efficient, non-tiered markets, but they only do so for "slow money", vanilla funds (who can afford to pay HFT "tolls") and generally don't impact mom and pop retail investors (as if retail investors still exist, and as if it isn't mom and pop's money keeping mutual funds in business) which somehow was supposed to absolve them of years of post-Reg NMA rigging and manipulation.
Yet despite its inherent stupidity, this "justification" did bring up a valid point: if mutual funds are indeed impaired thanks to slippage costs in the ~1% per trade ballpark, leading to billions in annual "tolls" paid to HFT algos just because they exist, frontrun and sub-penny every order, then why don't these same vanilla funds launch their own trading venue allowing them to trade away from the predatory algo plague?
Surely, if HFTs are so bad, then the vanilla funds will finally realize that "enough is enough" and take their precious orderflow away from public exchanges, right?
Yes, and yet for years the big money managers stoically took it on the chin, and whether out of lazyness or some other unexplained motive, allowed their orders to continue being HFT-frontrun on public exchanges and 3rd party dark pools year after year, making VWAP and TWAP orders a cost center, boosting the case that HFTs aren't really bad for stocks.
According to the WSJ, some of America's largest mutual funds and asset managers led by Fidelity Investments "are close to launching a private trading venue designed to let them buy and sell large blocks of stock without the involvement of Wall Street firms and high-speed traders, according to people familiar with the matter."
The new venture is the who's who of traditional asset management in the US and includes nine firms, including BlackRock Inc., Bank of New York Mellon Corp. , J.P. Morgan Chase & Co. and T. Rowe Price Group Inc., who are saying goodbye to "lit" markets, i.e. public exchanges, "and forming a company that will operate a "dark pool”—a private trading venue that offers investors a degree of anonymity—the people said."
Who will own the new venue:
Now the partnership between the companies has formalized, with Fidelity taking the largest ownership position in the new company and other fund firms holding smaller stakes, these people said. The company is expected to launch in the coming days, and trading will begin later this year. The companies each will have representatives on the board and will work together on decision-making, these people said.
The company that will host the trading venue is now called Luminex Trading & Analytics, which was approved as a broker-dealer by the Financial Industry Regulatory Authority on Dec. 26, according to public documents. Michael Cashel, a senior vice president at Fidelity, will be Luminex’s interim chief executive, these people said.
This is both good and bad news. It is good, because it formally marks the beginning of the end of HFT (even if it means that Brad Katsuyama's IEX exchange as a "fair" provider of an HFT-free market is now essentially dead).
"The effort is unusual for the fund companies because they are rivals, and typically use similar trading venues at big banks, or public exchanges. They have banded together recently out of a shared desire to cut costs and weed out high-frequency traders, who often have an unfair advantage according to critics. The companies also have had trouble buying and selling large orders of stock in other pools, these people said. The new venue will require all trades have a minimum share amount.
It's bad news because as a result of the terminal failure of corrupt regulators to do their job and regulate public markets - a sad fact which is now confirmed as a result of this proactive step by money managers to simply skip markets altogether and start their own private venue - price discovery for what little is left of retail traders, is now dead, as the market making blocks will execute in dark venues on prearranged prices which will only hit the CQS after the fact, and essentially establish not only a two-tier, but a multi-tier market, in which having access to the most up to date price information will be determined by how much one is willing to pay.
That said, even as broken as it currently is, the market is still a self-regulating ecosystem, and it was only a matter of time before the scourge that is HFT is not only exposed for everyone, but ultimately wiped out. Which is why the good vastly outweighs the bad.
The only problem is that with HFT soon to be shunned from equity markets everywhere, in its deathly throes it will focus almost exclusively on the one market where there is still some volume (thanks to central banks) and volatility: FX. And we for one can't wait to see the look on Abe and Kuroda's faces when, in a few milliseconds, the USDJPY trades down from 120 to 0.001 simply thanks to a fat algo finger.
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"If you want your efficient markets, then you can keep your efficient markets..."
its all rigged.
Seriously JP Morgan? You got to be fucking kidding me.
The wealth of the country flees the land
Like cottonseed on a wind
Blown by the fetid breath
Of money-pimps in Bedlam
Pursuing the creed of masters
Who worship a market freed
Of all restraints on greed -
While politicians posture
And feed on delusions of power
Directly from the Federal Reserve printing press into the bankers and Silicon Valley criminals pockets, creating Weimar style poverty and hyperinflation. Time to bring back Hitler and let him at it.
The last time they did this, Berlin 1920 , they devalued the currency so much so fast that people were literally starving to death. Little boys and girls were standing on the streets prostituting themselves just so they could afford a scrap of bread.
Chosenites are real nice people aren't they?
And where is law enforcement?
Eating donuts, of course!
currency system one designed by patriots for patriots.
currency system number two designed by jews for jews.
now get back to work debt slaves.
The last time they did this, Berlin 1920 , they devalued the currency so much so fast that people were literally starving to death. Little boys and girls were standing on the streets prostituting themselves just so they could afford a scrap of bread.
http://www.washingtonpost.com/local/education/majority-of-us-public-scho...
t.rowe price...the eddie haskel of the group....
Those food cards will still ring up to the very end, exempting a Carrington event.
Directly from the Federal Reserve printing press into the bankers and Silicon Valley criminals pockets, creating Weimar style poverty and hyperinflation. Time to bring back Hitler and let him at it.
Really! Is JP Morgan to big to be broken up into at least 25 seperate banks/brokers/financial institutions? What is the government waiting for? I think Citibank is the de facto "bad bank" but all banks, as currently structured, are parasites.
Directly from the Federal Reserve printing press into the bankers and Silicon Valley criminals pockets, creating Weimar style poverty and hyperinflation. Time to bring back Hitler and let him at it.
moral hazzard is coming back like hairy beavers in porn. uhhhh both are painful to watch until you get used to it.
Insert dark pool joke here.
But enough about your mom's pussy.
i thought they didnt like to swim?
Bank lobby is open civil war.
This is survival of the fittest zone.
Pop up the popcorn. Get some scotch ready.
Watch the movie
My guess:
Sacrificial lambs:
1) Barclays
2) Merryll lynch
FX market will be the fun one to watch. CitiFX might be the lamb. Hopefully all fail.
Don't forget jeffries and margin stanley.
I bet Citi.
Announcing the launch of a "dark pool" on MLK day is RAAAAACIST
LMFAO. Thanks I fell better now
Sounds like you've been drinking.
Hope it wasn't too far.
hell yes, Vodka from Norway
http://us.vikingfjord.com/
"We're going to deal with this ourselves. Privately."
I'm surprised regular mom and pop investors are even allowed to buy & sell securities on their own still. You would think this game would have been taken private years ago. Oh well, its getting to that point very quickly now. Making up for lost time. At least we won't have to complain about "rigged markets" much longer. There won't be any markets to participate in.
How Fucking Terrible
bravo. hft is an illegal tax on trades. period.
I trade a piece of paper for a piece of paper you have...
Did anything of real value change?
Yes. I'm now holding a valuable piece of paper, say a title to property. You are now holding a worthless piece of paper, say a Dollar.
Only if the other guy uses his paper to buy 'things'.
Depending on how many pieces of paper you get for YOUR piece of paper, you could have just lost every'thing' you could have bought otherwise.
Physical Gold and Silver...
nothing else...
u will never when in the grand game the MoneyChangers constructed...
stay away, or stay screwed...
DEATH TO THE MONEYCHANGERS.
Great. Because when my mutual fund company needs to sell something, I'm sure one of their 8 competitors is going to rush to fill that order.
I wonder if the FX markets will be as willing to reverse fat finger trades for HFT firms as the criminals that run the equities markets are.
no, the brokers will have to assume the risk for the difference.
see FXCM...
Anyone have any idea what the name of this company is?
Lumière
http://disney.wikia.com/wiki/Lumi%C3%A8re
Or, is it Lucifer?
Because the old muppet graveyard is overflowing.
Looks like the big boys are taking their ball and going home.
Au revoir liquidity. Nice knowing you.
Just in time for them, market volatility will increase back to 2007-08 levels this year and this new dark pool will try keep HFT Algos out to try to contain larger and crazier price swings.
Every 7-8 years the $%$^ his the fan on the financial markets, this time will be worse and most of us here know it.
So the fat asses at NYSE (and whoever owns it now) are losing any semblance of their monopoly, who needs a chair there when everyone can login from their smart phones, hey?
You know, all these guys are still going to try to HFT each other, and might even sell seats to HFT players, it's not especially about HFT, or it doesn't have to be.
I'd also add that during hurricane Sandy when lower Manhattan was flooded NYSE (and Nasdaq?) were offline for a couple of days, they didn't even have any workable contingency systems - when I'm sure they've spent hundreds of millions planning and buildng them. A new market might be better implemented, hey with servers in Costa Rica or wherever, to beat the clock HFT will have to move there wherever there is - and if the servers are located all over the world they will be hard to beat.
look who jumps in to lend a hand, jpm, and associates.
every time time a penny moves they get their vig.
During the last major financial downturn no exchange failed, but many banks did. If the banks become exchanges we should expect a black swan event to wipe out the nation.
Banks should not clear their own trades.
Hello Everybody.
First time Poster on Zerohedge, and longtime lurker. I wouldn't be posting right now if I didn't feel like we are near the end of this charade.
I will tell a short story as to how I got to this site.
I am a Gen Xer and a Mechanical Engineer. I started reading MsM sites like CNN, Yahoo, etc. when 9/11 happened. I felt a new responsiblity to be informed about what is happening in my country. I am patriotic and was willing to fight and die for whatever we needed to do to find Osama. Of course, as time continued on, I grew more and more frustrated, and the shit about him escaping from Tora Bora was just literally unbelievable to me...I suddenly had serious questions, I couldn't answer alone.
How could we let Osama get away in Tora Bora? MsM websites just weren't cutting it anymore, so I started reading papers like Newsweek, WSJ, NYTimes for real information. Then we started the Great Iraq Distraction Event. Fortunately, there were some critical articles of the Iraq War in WSJ and NYT and for awhile I felt everything was okay.
Fast forward to 2008, and watching the market crash and erase over a decade and a half of gains within a few weeks really made me WAKE UP. I stuck to my trusty Newsweek, WSJ, NYT updates like glue, but AFTER THREE YEARS they just didn't paint a real picture anymore. I've seen all the properties FOR LEASE, FOR RENT, FOR SALE for the last few years everywhere I go on the West Coast from Seattle to San Diego. The MsM has dropped the ball. The world they describe, I do not see.
So, I started reading the NYTimes comments section on the web because at least they weren't usually spewing outright BS then one day I noticed a link to the site. ZH is THE HOLY GRAIL for DATA GEEKS.
I am an Engineer. I believe in numbers, BUT only if numbers are measured ACCURATELY. Simply said, quantitative analysis can sometimes be the ONLY method by which clear judgements can be made. If an Engineer were to use false data, he/she would endanger the lives of people in society. It is clearly not in the best interests of society to falsify Engineering Data, but then I see it all the time with Financal Data. The NAR story still blew my mind, even though I have seen the evidence for years. The NAR data can only be described as OUTRIGHT FRAUD and COLLUSION by the GOVERNMENT, BANKS AND REALTORS!
I took a Macro-Econ course in college and became well versed in the terminology of the Fed and fiat currency. But what really concerns me about the published economic data on ZH is that it shows UNREAL fluctuations and volatility. The only real world analogs are explosions, implosions->objects undergoing exponential growth and exponential decay BUT, IN GENERAL, THEY DO NOT OSCILLATE AT HIGH FREQUENCY! It seems humans simply do not have the inherent ability to understand non-linear mathematical principles.
So, all us data geeks have to make some kind of prediction right?
I will say only this. If 60-70% of the market is HFT algos, then what does that mean? Well, they don't hold positions to lose money, right? So why wouldn't the market start the month at some nominal level (say 10,000) then fluctate wildy all month only to return back to nominal? Will we start to see the same pattern at shorter periods? A month, to a week to a day?
When the daily flash crash (and flash recovery) becomes ho hum... It will simply be the new normal, and the "stock market" will become the casino game it's been for a long time now. People will click at random and become millionaires in seconds.
Numbers don't matter its faith in the numbers. Faith erodes in environment of greed. Rationalization is no match for reality. Reality is the balancing, you can stay out of balance for so long then reversion comes. No one is in control. Reconciliation of all interest in the long-term.
DIDN'T TAKE LONG. ANOTHER DEAD BANKER. Forex trader who worked for HSBC and Royal Bank of Scotland and as head of Forex Trading for National Australian Bank, walks into the mountains on the day Swiss dump the Euro, found dead four days later.
http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=11386699
From the article you linked: "Mr Flanagan had told staff at a hotel that he intended to walk up the mountain on January 8"
D'ja see the size (and age) of that guy? Going for a "walk up the mountain", eh?
Without other meaningful evidence, I'd say that looks like a heart attack. Maybe sitting at his desk so long, his vacation killed him.
We had to dark pool some folks.....
It's bad news because as a result of the terminal failure of corrupt regulators to do their job and regulate public markets - a sad fact which is now confirmed as a result of this proactive step by money managers to simply skip markets altogether and start their own private venue - price discovery for what little is left of retail traders, is now dead, as the market making blocks will execute in dark venues on prearranged prices which will only hit the CQS after the fact, and essentially establish not only a two-tier, but a multi-tier market, in which having access to the most up to date price information will be determined by how much one is willing to pay.
First ... count the periods in the above paragraph.
Now on the subject: A few years from now when we look back and realize just a few companies have a strangle-hold on "all" markets, we'll ask ourselves "how did they do it?" And here it is.
1. Let HFT trading destroy the market with noise rather than nipping it in the bud with the obvious solution ... that being "add a random delay to each transaction which would make any HFT algo impotent."
2. To save the world from those evil HFTs, create a "dark pool" where only this handful of traders can play.
If it wasn't the original plan, it certainly shows how "don't let any crises go to waste" is an excellent strategy.
Buying a stock, holding it for a micro-second, and selling it ... that is "not" investment.
Investing in companies is obviously a "low frequency" practice. A trading system supporting this function should have a "low pass filter." Adding a random delay imposes that filter.
"If it wasn't the original plan, it certainly shows how "don't let any crises go to waste" is an excellent strategy."
You nailed it. The question now is, what is the manipulation this new dark pool brings to markets.
Old Fisherman... You Never know what hides in them Dark Pools
And this is an improvement how, exactly? Because this group of crooks won't abuse the "dark" nature of these trades like everyone else has?
Yes, this is a big step forward towards an open and honest market.