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High Frequency Robber Barrons
Robber Barrons
The February 28, 2015 weekend edition of Barron's carried an article by Bill Alpert about how trading has never been better for "The Little Guy". Alpert claimed to have arrived at this conclusion after months of studying SEC 605 reports. He further went on to rank the "Stock Wholesalers" (folks that actually execute most retail orders) and proclaimed Citadel the winner. Themis Trading wrote a must-read review of this article, so we'll avoid repeating some of the excellent points they make.
The article was filled with contempt for Michael Lewis and his book Flash Boys. Those who found themselves on the exposed side of Flash Boys last year were quick to proclaim the Barron's article to be the true story:

Many industry experts greeted the contents of Barron's article with public glee:

What really caught our eye about the article: journalists are taking an active interest in working with market data! This is a positive development which we encourage wholeheartedly. Lobbyists and other influential companies, such as billionaire Ken Griffin's Citadel, are able to drive their agenda and policy changes through influential media, that up until now, haven't had the ability to actually look at market data and fact-check what they were being told to write.
Fact-Checking Barron's
On the subject of fact-checking, Barron's suggestion that price improvement was improving went undetected by one of the many statistics we regularly track: namely, the percentage of sub-penny trades which indicate price improvement by the minimum permissible amount of 1/100th of a penny per share. Our data on this statistic is charted below. Rather than the expected drop in this value, it remains in a narrow range, indicating that over 25% of all price improved stock trades are only being improved by 1/100th of a cent per share.

A Glaring Omission
This brings up a glaring omission about price improvement that the Barron's article doesn't even mention. There is a distinct loser in price improvement: the trader or investor that posts a displayed limit order to the market. Price improvement ends up costing these investors at least $1 billion a year: we have thoroughly documented this here, and discussed again here, and here, and here (you get the idea).
Back to what was included in Barron's article.
It is possible that our sub-penny indicator missed detecting a shift in price improvement. Since we had over a year of Citadel's 605 reports, we began analyzing these same reports that Barron's used for their article.
SEC 605 reports are filed monthly by participants who execute stock orders. These reports contain information about the stock orders executed by the filing firm for each stock. You can read about the fields required in these reports on the SEC's website here. Note, that only "covered orders" are in the report (details here). This is important, because order types/sizes not covered in this report are fair game to Wall Street - caveat emptor.
For each stock, orders are broken down by 5 order types:
market orders - code "11"
marketable limit orders - code "12"
inside-the-quote limit orders - code "13"
at-the-quote limit orders - code "14"
near-the-quote limit orders - code "15"
Each order type is further broken down by order size
100 to 499 shares - code "21"
500 to 1,999 shares - code "22"
2,000 to 4,999 shares - code "23"
5,000 to 9,999 shares - code "24".
Barron's arranged these 4 size groups together, which makes sense because orders for 100 to 9,999 shares are covered by regulations meant to protect the retail investor.
Here is a chart showing total order counts for all order sizes from Citadel, grouped into one of the 5 order types:
The first two categories, Market (blue) and Marketable Limit (red) are very similar. Marketable Limit orders are Market orders with a limit, priced to execute immediately: a buy order with a limit price higher than the current best offer, or a sell order with a limit price lower than the best bid.
After the flash crash, there was much talk in the industry about banning Market orders or converting them into Marketable Limit orders to protect retailer investors from getting executed at ridiculous "stub quote" prices (some sell orders traded at a penny and buy orders for more than $100,000). You can see from the chart that the largest order type of all is the Marketable Limit (red) and it's growing. At least at Citadel.
Therefore, if one is going to study SEC 605 reports to determine if retail investors are getting better pricing, at the very least, they would include Market and Marketable Limit orders. So upon trying to reproduce Barron's results, we used these two groups.
Our first set of results showed much lower price improvement amounts than Barron's. Re-reading the article, we found a reference indicating Citadel average $0.0048 improvement per share across the 7.6 billion shares it traded. The number 7.6 billion was less than half of the shares we counted. We realized the extras shares we were counting were all coming from the Marketable Limit orders category. After removing Marketable Limit orders from our results, our numbers matched Barron's results exactly.
Which means, Barron's was only using Market orders in their analysis.
Barron's study discards Marketable Limit orders
Barron's study only includes Market orders (shown in blue above). The 4 other groups, including the biggest group - Marketable Limit orders - were discarded.
To find out why, and to make it easier for the average reader to follow, we focused on just one stock: one of retail investor's favorites: Apple Computer Corp (symbol AAPL, market cap: $753 Billion).
First we computed the price improvement amount, using the same Barron's formula, for each month's worth of Citadel order data for Apple stock. We separated the results for Market orders from Marketable Limits, not expecting to see much difference. We were wrong. Market orders show significantly greater price improvement than Marketable Limit orders, about 4 times more!
The image below shows the amount of price improvement for the Market orders (blue) used in Barron's study, as well as the Marketable Limit orders (orange) Barron's did not include. Market orders averaged 31 cents per $10,000 worth of Apple stock, while Marketable Limit orders averaged just 9 cents. This means for every $10,000 worth of Apple stock, the wholesaler was giving an average price improvement of 31 cents for Market orders, and just 9 cents for Marketable Limits.
If Barron's had included Marketable Limit orders in their article, readers would have seen a completely different result, as is shown clearly in the chart above. This difference becomes even more pronounced because there are many more Marketable Limit orders than Market Orders; the result would skew towards the much less impressive price improvement amounts for Marketable Limit orders (orange bars).
Barron's and their readers need to know that only about 10% of all orders from SEC 605 reports were being used in the study, and the group of orders chosen just happened to show Wholesalers in the best possible light.
The Barron's article makes no mention that it focused on the tiniest fraction of data which happens to support Wholesalers.
When searching for contact information, we came upon a the following set of comments buried in the code that Barron's published as part of the story:
This comment indicates they knew full well that Marketable Limit orders would have completely changed their story.
Normally this is where we would write a blistering conclusion. However, for a publication that commands the respect of Barron's, we've been robbed of words.
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Wall street reporters not telling the truth? Shocking, just shocking!
It's one big club, and you ain't in it - GC
But you are invited compelled to bleed for it.
Yeah, I was going to use the excuse that I'm a gay transvestite heterosexual who enjoys occasional bestiality to get out of it, but I can't even do that now. Times are tough.
Saying that will just make you more attractive to those in the club.
Fuck Barrons, Steve Forbes, the "Club", all it's members and the kids they rode in on.
"and the kids they rode in on" LOL.....Pedo's run amok in that population segment worldwide....
It is difficult to get a man to understand something when his job depends on not understanding it.
Upton Sinclair
Understanding it causes nailguns accidents....
Uh oh, more stuff to get the bigger fools to buy. I am not sure I like this.
2 in one day. Car Loan cluster f*&^ and now this. Geez it is starting to look little different.
If it's so good for the "little guy", why is my ass bleeding?
Your ass is bleeding from the huge cock obama jambed up it and called it "care". I tell you, my ass is about ten pounds wider after this year.. fvkmeblind that hurt.
If there's one truth I've learned in life, it's that the "little guy" never wins. The sharks get the chum one way or another.
bold and in caps NEVER
Damn, how I wish I were smart and Hebrew.
Yea, competition for retail order flow IS a great thing, but the Schwabs, FIDOs and TDs of the world are reaping ALL the benefit by GETTING PAID FOR IT. Why aren't these payments being passed on to their customers???
THAT is the question all these HFT fan boys need to answer.
Sharks telling the little guy the waters lovely and warm, come in for a refreshing dip.
just a glance at today's trading chart of the sp500 shows you without a shadow of a doubt that it is all rigged. the market has been open for one hour and a half and is up 0.30%. this 0.30% gain was achieved during 5 spikes in the SP500 that lasted about 2 minutes each. volume did not surge during those 2 minute spikes.
end of discussion. 5 interventions in the market that manipulated it higher by 0.30% against a backdrop of horrible economic data releases. very, very easy to find out the very few parties that were involved in these spikes. obviously no one will.
All Journalists are like Whores. Except Whores are honest. A Whore doesn't pretend that they're NOT a Whore. Journalists are like Whores that are paid by someone else to pretend to be your lover.
Cunts.
I know a number of journalists at the NYT and WSJ....they aren't necessarily as smart or hard to manipulte as you would think. And even if they are....the editors make sure not much truth telling occurs.
Don't disrespect whores by comparing them to journalists.
Whores are selling their own properties.
A journalist (and a politician) sells what is yours already.
Just stick with the term "Presstitutes"
When the correction comes to the stock market the presence of these Algos, all run by the TBTF cabal, will "cry havoc" and accelerate the fall, as no CB on earth will be able to control the fiat Frakenstein born in the ugly under-belly of a Oligarchy controlled dark magma of cesspools interlinked.
Swing with your own ropes you shallow minions of greedy, universal empires of wind n piss.
Twitter uses should follow eric at @nanexllc, his daily posts are as entertaining, and informative, as any financial stuff on the net
Santoli is a pimp
Yep. And a journalist with a BA in history - no computer, business, economics or math background. Just a shill paid to spew BS to "The Little Guy."
The truth always spoils the ending of an otherwise happy fairy tale.
Truth is supposed to be moral, hence, the moral of the story.
Banksters & Wall St. know no truth, hence, they have no morals.
Even more lies! I'm soooo disappointed again, for the 10th time today.
weekly EIA crude inventory report (yesterday)
+10.303 million barrels (expected +3.950 million barrels)
largest weekly build since march 2001 ... that month, remember, was the first month of the 2001 recession (ran from march to november)
I remember when 7,000,000 was alot
It does not matter if the "little guy" wins or loses if he or she does not have any funds to allegedly "invest".
Panic is setting in. HFT's need volume and depth to profit.
You know the markets are rigged against you so get out completely or stop whining!
Cud ya' please tell 'em to stop helpin' 'cause I hardly got anymore $$$!
Where's my Yacht?
All I know is that for years I was trading with about a 50% success rate. With the correct money management techniques I was able to keep a positive win loss ratio. I've pretty much stopped trading now because I did not have 1 single winning trade in around 100. Giving me a 100% loss ratio, even with the best kelly criterion techniques applied no one can win with those odds! I can't remenber the number of times my stops, along with most other muppets, would be taken out a 3am in the morning.
Only dumb sheeple are still trading in that unfair rotten pool of Sharks (Megabanks), Crocodiles (HFs and SWFs) and Gorillas (CBs) - where the small fish are nothing else but fucked and food.
Smart poeple take/took their money out of banks and invest in real things (instead of rotten rigged paper games) and/or produce something (real and) useful and that way create steady cash flow - independent from those parasites and the money changers.
Unfortunately 99.99% are too dumb and too ignorant - and prefer to live and die like slaves who have never ever used their brains.
'Fair to the little guy'? What BS! HFT's without customers that make thousands of trades without loosing anything?
All I can say is grab the rope and know where the lamp posts are located. It's time for a little revolution.
Thinking on this further, the elites that tell us that HFT front running the markets is for our good is a just another symptom of the sickness that pervades the elites in the West that rule over us serfs. They are utterly depraved. How otherwise can they turn a blind eye to the mass murder of the last twenty-five years? 500K Iraqi's in the 1990's, about 1M in the Middle East 2000 to 2008, and another 1M from Ukraine to the Middle East to East Asia since 2008?
We cannot depend on Americas to stop this madness. The people are kept dumb by the Western elites. If the people knew what the elites are doing to them and the rest of the world they would reach for the ropes to put the sociopathic elites out of their and our misery.
There is some good news for me to report (not on HFT).
I cancelled my subscription to Barrons, which I had read for years, about 2 years ago. I was sick of the propaganda.
About 9 months ago, I get a call from Barrons. They want me back! They want me back so bad, that a 1 years scrip was only $50! (Regular price is $300.)
I told the Lady that I wouldnt read their crap if they gave it to me for free.
The old media is hurting. I cancelled Fortune magazine 2 years ago, and miraculously, I just started receiving it again! Free. And I believe Steve Forbes recently sold Forbes to a Chinese firm. Getting out while the getting is good, I'd say.
Hmmmmmm , so MKT ORDRS get less of a rape than MRKTBLE LIMITS ehh ( if that is even possible since one really cannot be just a little bit raped ) - the SCAM is that decimalization was introduced to allow for subpenny shaving of ANY order , regardless of type. It's just like the MANDRAKE the MAGICIAN method so simply explained by G. Edward Grifffin. The HFT guys are using an order and the exchanges as an insurance policy - a backstop against loss , if you will - to print money for themselves and their method to do this was made lawful by the Congress of the United States. I don't know that anyone likes to be violated in this way , but of course , I could be wrong about that. RISK FREE TRADING for HFT and RISK ENHANCED TRADING for EVERYONE ELSE.