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HFT + Inept Regulators + Fed Distortion = More Flash Crashes
Submitted by Adam Taggart via PeakProsperity.com,
As luck would have it, we had Joe Saluzzi lined up to record a podcast the day the news broke recently that the suspected culprit for the 2010 flash crash, Navinder Singh Sarao, had been arrested. Saluzzi is co-founder of Themis Trading LLC, long-time cautionary on the dangers of high-frequency algorithmic trading, and co-author of Broken Markets: How High Frequency Trading and Predatory Practices on Wall Street Are Destroying Investor Confidence and Your Portfolio.
In this discussion, Joe shares his suspicions about Sarao (a contributor to the crash, but highly unlikely to be the actual cause) and then provides his expert assessment of what has been done in the intervening years since the flash crash to safeguard the market against a similar failure (precious little). In his opinion, a winner-take-all high-tech arms race, clueless and toothless regulators, and central bank price distortion are conspiring to make us more vulnerable -- not less -- to another systemic breakdown:
What’s happened is the markets have evolved and they've obviously embraced computerization and technology. Some things have been very good for the markets and brought down cost. But regulators don’t seem to have evolved. They don’t seem to have caught up with times and they don’t necessarily have the eyes and ears out there to monitor things on a micro-second or nano-second level.
Just as an example: the FCC has proposed putting together a consolidated audit trail. This came about after the flash crash back in 2010. And we’re five years into this and they’re still out for bid, waiting for someone to bid on the project, and it’s nowhere near completion. And even when it does get completed, it’s still not going to be an all-encompassing view. They won’t be able to see futures, because the CFTC monitors that group. So it will be an incomplete set. It will be better than what they have now -- which is called Midas, basically a bunch of a direct data feeds that are supplied by the exchanges. And Midas, by the way, was built by a high frequency trading firm named Trade Works that still gets paid by the FCC over couple million dollars a year for this thing. So it makes you wonder how they're properly equipped to monitor it. And when you see cases like spoofing pop up and you’re like “How could they have missed it”? As you mentioned Eric Hunt from Nanex, he sees this stuff all the time and he tweets it. I mean if I was a regulator I would just follow Eric and I’d say: "There’s an example right there, I don’t have to do the work, I’ll just follow Eric, he’s doing the work"
(...)
What happened to the price discovery mechanism? Is it really being set by fundamental investors who have looked at a company and its long term aspects, or is it now being set by Fed policy or some algorithm that’s tied to one currency pair or another?
And we're getting bubbles in certain areas because no one is really looking at valuations. All they care about is “Okay I made money today and I start fresh tomorrow because every night I go home flat and I start the game all over again”. That’s a scary thought. That’s a scary thought that these multi assets are now playing into each other and the correlation is so tight that when one market sneezes they all catch a cold really, really quickly.
I think we have to blame central bank intervention. How can we not? It’s all around the world. They’re setting interest rates at a ridiculous level. Quantitative easing is distorting all sorts of prices of assets. How do you price things anymore when you have such a giant manipulator out there?
Click the play button below to listen to Chris' interview with Joe Saluzzi (40m:53s)
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>>>>. On-the-take regulators
>>>>. Inept regulators
Or inept regulators intentionally put there.
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Wow the government doesn't know what one hand is doing from the other! BREAKING NEWS
No wonder they threatened me with nuclear bombs in my hood for playing the other side of that parabola!
it's like any other programming, it's easier to crack, hack, and exploit than to proactively defend and fix... easier technically and often more likely financially, so regulators or defense of ANY coding is always going to be reactive
coders looking to take advantage of code will always have the technical potential to be one step ahead, and the financial incentive to try be 3-4 steps ahead
it's not inept, per se.... anyone that uses the word inept probably could not even remotely begin to do a much better job themselves. there can be improvements of course but it's always always going to be inferior by a significant margin because of the nature of coding.
Just let me know the day before the collapse so I can have my puts in place.
Let me know the day before so I can place my long orders. BTFD ya know?
NANEX is the brainchild of Eric Hunsader , not Eric Hunt.
The regulators are not inept, they are corrupt.
I have a funny feeling we are finally going to discover the true meaning of the Oligarch of Omaha's famous words "financial weapons of mass destruction" on this next crash that is right upon us with probability , p = 1.0 certainty. Jade Helm, or whatever that Dr. Strangelove shit is going on down there in Texas is, is gettin' weird. This much military volatility, social volatility, economic volatility, political volatility, business volatility, et cetera, sure makes for the most volatility that the World has _ever_ known in the history of civilization. At what point logically can this shit just keep chugging along at semi-operating speed without people wondering if it would be better to just get out and walk the rest of the way? In other words, my mechanical engineering sense says that the freight train of reality is just about at the station any day now and someone from Z/H should start getting donuts at the same donut shop as the Jade Helm dudes so that they can report back on just how nutty their plans are?
I don't know too much about Texas, but aside from George Bush having a ranch there why is Texas a significant state for the Jade Helm GI Joes in the USARMY-M-WRAPS(tm)? Would a logical Russian Federation ever even contemplate Texas as anything significant? What about this MSM spew that it's in prep for Middle East war preparation? Like, what are these Jade Helm dudes expecting to accomplish in Texas this summer, America?
Johnny Winter is from Texas, great guitarist, great Rock & Roll?
:|
My Solution To HFT Fraud: Balance out the server latency and use a program to catch the bad guys. Cut the HF out of HFT and call it ET (Electronic Trading) or something in which you read the ping (server latency), like is done in online gaming matches and balance it out so that everyone can play an honest game without somebody having the advantage of a faster ping connection. On top of that you need a punkbuster variant like used in gaming to catch the cheaters who always will be there to try to get an dishonest advantage trough for example spoofing. Why HFT was introduced in the first place is beyond me because it’s like playing an online game knowing you always will lose that game while the other guys are playing, sitting next to the computer server.
I think it has a lot to do with the regulator, the exchanges and the HFT market makers are working in cahoot to scam everyone else through information and speed disadvantage.
I am confident they know the solution to it, but they don't want to because market manipulation IS their intention. If the market is fair for everyone, the market makers would not prosper. The shareholders of Citadel and Virtu would not prosper in a fair market condition. They are doing all these intentionally.
Any Tom, Dicky, and Hairy employed as a regulator would solve the problem years ago already. These people that currently run the show are not honest people. We probably may need a new exchange run by the public for the public to set things right, and leave the current exchange to dust.