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Pre-Blame-Game Begins: Fed's Brainard Fingers HFT For "Amplifying Market Shocks"
We warned previously that when (not if) the market crashes next, The Fed is going to need a scapegoat (other than British traders living at home with their parents) and judging by The Fed's Lael Brainard's comments today, high-frequency-traders (HFT) are in the crosshairs. Crucially, Brainard warns that HFT "may amplify market shocks," and The Fed is "studying possible changes in liquidity resilience." As Brainard hints, if liquidity is less resilient, that "could be significant" in times of stress if "it acted as an amplification mechanism, impeded price discovery, or interfered with market functioning."
As Bloomberg reports,
Federal Reserve Governor Lael Brainard says central bank is closely watching for changes in the resilience of market liquidity, in prepared remarks Wed. at panel discussion about future of financial market intermediation.
- Brainard speaks in Salzburg, Austria, at global forum on finance
- “An upcoming study of the October 15 event will shine some light on the functioning of the U.S. Treasury market, but there is still much we need to learn,” Brainard says, referring to intraday gyrations in 10-year Treasury yields that day
- “Although anecdotes of diminished liquidity abound, statistical evidence is harder to come by,” Brainard says
- If liquidity is less resilient, that “could be significant” in times of stress if “it acted as an amplification mechanism, impeded price discovery, or interfered with market functioning”
- Regulation may be playing contributing role in reducing broker-dealer bond inventories, but other factors may also be contributing, Brainard says
- High frequency traders’ effect on market liquidity is a topic for further research, and markets increasingly dominated by HFTs “may be less able to absorb large shocks”
So given all that, why is HFT tolerated after all?
Could it indeed be that the only reason why HFT - which has constantly been in the background of broken market structure culprits but never really taken such a prominent role until last night, is because the market is being primed for a crash, and just like with the May 2010 "Flash Crash" it will all be the algos' fault?
This is precisely the angle that Rick Santelli took earlier today, during his earlier monolog asking "Why is HFT tolerated." We show it below, but here is Rick's punchline:
Are regulators stupid when it comes to high frequency trade? Well, i think that there was a time where they were a bit slow to the party. But i don't think it's stupidity or ignorance or not paying attention. So let's wipe that off. So the question i'm asking is, why do they let it continue?
Why is it that anybody would want HFT to be unchallenged or at least not challenge it now? My reason, this is just my reason, when i look at the stock market it's basically at historic highs. When i look at what the federal reserve is doing, it's mostly to put stocks on all-time highs. When i look at all the debt and all the programs that don't seem to be making a difference except for putting stocks on all-time highs, i see that you have this tower of power with regard to the stock market. And nobody wants to challenge or alter hft because it is good to go that many days without having a loss. So my guess is when the stock market eventually deals with reality and pricing, which will come at a time when there's not a zero interest rate policy and we're long past QE, I think they'll address it.
Rick's full clip:
Precisely: when reality reasserts itself - a reality which Rick accurately points out has been suspended due to 5 years and counting of Fed central-planning - HFT will be "addressed." How? As the scapegoat of course. Because since virtually nobody really understands what HFT does, it can just as easily be flipped from innocent market bystander which "provides liquidity" to the root of all evil.
In other words: the high freaks are about to become the most convenient, and "misunderstood" scapegoat, for when the market finally does crash. Which means that those HFT-associated terms which very few recognize now, especially those on either side of the pro/anti-HFT debate who have very strong opinions but zero factual grasp of the matter, such as the following...
- Frontrunning: needs no explanation
- Subpennying: providing a "better" bid or offer in a fraction of penny to force the underlying order to move up or down.
- Quote Stuffing: the HFT trader sends huge numbers of orders and cancels
- Layering: multiple, large orders are placed passively with the goal of “pushing” the book away
- Order Book Fade: lightning-fast reactions to news and order book pressure lead to disappearing liquidity
- Momentum ignition: an HFT trader detects a large order targeting a percentage of volume, and front-runs it.
... will become part of the daily jargon as the anti-HFT wave sweeps through the land.
Why? Well to redirect anger from the real culprit for the manipulated market of course: the Federal Reserve. Because while what HFT does is or should be illegal, in performing its daily duties, it actively facilitates and assists the Fed's underlying purpose: to boost asset prices to ever greater record highs in hopes that some of this paper wealth will eventually trickle down, contrary to five years of evidence that the wealth is merely being concentrated making the wealthiest even richer.
Amusingly some get it, such as the former chairman of Morgan Stanley Asia, Stephen Roach, who in the clip below laid it out perfectly in an interview with Bloomberg TV earlier today (he begins 1:30 into the linked clip), and explains precisely why HFT will be the next big Lehman-type fall guy, just after the next market crash happens. To wit: "flash traders are bit players compared to the biggest rigger of all which is the Fed." Because after the next crash, which is only a matter of time, everything will be done to deflect attention from the "biggest rigger of all."
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So enjoy the ride for now but Brainard's comments (full speech below) appear to be pre-empting the blame game for when (not if) this bubble blows.
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Recent Changes in the Resilience of Market Liquidity
Recent events and commentary raise concerns about a possible deterioration in liquidity at times of market stress, particularly in fixed income markets. These concerns are highlighted by several episodes of unusually large intraday price movements that are difficult to ascribe to any particular news event, which suggest a deterioration in the resilience of market liquidity. For example, on the morning of October 15, 2014, 10-year U.S. Treasury yields gyrated wildly, and the intraday movement in Treasury prices was 6 standard deviations above the mean. In addition, after 4 p.m. on March 18 EDT of this year, a meeting day for the Federal Open Market Committee, the U.S. dollar depreciated against the euro by 1.75 percent in less than three minutes, an unusually large drop in such a short interval. A few weeks later, markets experienced some very large intraday movements in the price of German bunds during times of little market news.
In contrast, there have been a few notable episodes where market volatility was clearly attributable to significant news but nonetheless appeared to evidence some deterioration in the resilience of liquidity. For example, on January 15 of this year, the announcement by the Swiss National Bank regarding the floor of the exchange rate between the euro and the Swiss franc led to severe disruptions in foreign exchange markets. Separately, the rise in bond yields in May and June 2013, the so-called taper tantrum, also appeared to many observers to have been out of proportion to the news that prompted it.
A reduction in the resilience of liquidity at times of stress could be significant if it acted as an amplification mechanism, impeded price discovery, or interfered with market functioning. For instance, during episodes of financial turmoil, reduced liquidity can lead to outsized liquidity premiums as well as an amplification of adverse shocks on financial markets, leading prices for financial assets to fall more than they otherwise would. The resulting reductions in asset values could then have second-round effects, as highly leveraged holders of financial assets may be forced to liquidate, pushing asset prices down further and threatening the stability of the financial system.
Although anecdotes of diminished liquidity abound, statistical evidence is harder to come by. Indeed, there is relatively little evidence of any deterioration in day-to-day liquidity. Traditional measures of liquidity, such as bid-asked spreads, are generally no higher than they were pre-crisis. Turnover, an alternative measure of day-to-day liquidity, is lower, but it is unclear whether this reflects changes in liquidity or perhaps changes in the composition of investors. The share of bonds owned by entities that tend to hold securities until maturity, such as mutual funds and insurance companies, has increased in recent years, which would lead turnover to decline even with no change in market liquidity. In some markets, the number of large trades has declined in frequency, which could signal reduced market depth and liquidity, but could also reflect a shift in market participants' preferences toward smaller trade sizes.
Finding a high-fidelity gauge of liquidity resilience is difficult, but there are a few measures that could be indicative, such as the frequency of spikes in bid-asked spreads, the one-month relative to the three-month swaption implied volatility, the volatility of volatility, and the size of the tails of price-change distributions for certain assets. We see some increases in the values of these indicators, which provide some evidence that liquidity may be less resilient than it had been previously. But this evidence is not particularly robust, and, given the limitations of the existing data, it is difficult to know the extent to which liquidity resilience may have declined.
As we continue to investigate quantitative evidence of the deterioration in the resilience of liquidity in some of the financial markets, we are also trying to tease out the various drivers of liquidity conditions, such as changes in regulation, trading strategies, and market structure. Regulatory changes are often cited as a contributing factor. Trading financial assets is a balance-sheet-intensive activity, and the Dodd-Frank Act, has created incentives for institutions to carefully assess the risks of such activity through stricter requirements on leverage, liquidity, and proprietary trading, raising the cost of market making and possibly affecting market liquidity. Indeed, there is evidence of reductions in broker-dealer bond inventories in recent years. Nonetheless, since not all broker-dealer inventories are used for market-making activities, the extent to which lower inventories are affecting liquidity is unclear. Moreover, reductions in broker-dealer inventories occurred prior to the passage of the Dodd-Frank Act, suggesting that factors other than regulation may also be contributing. In assessing the role of regulation as a possible contributor to reduced liquidity, it is important to recognize that those regulations were put in place to reduce the concentration of liquidity risk on the balance sheets of the large, highly interconnected institutions that proved to be a major amplifier of financial instability at the height of the crisis.
A second possible contributor may be the growing role of electronic execution of trades across equity, Treasury, and foreign exchange markets and the associated increasing role of high-frequency trading. Competition from high-frequency trading in a particular market may reduce the attractiveness of that market for traditional (manual) traders or slower automated traders, leading to a progressive shift in the composition of market participants toward high-frequency traders (HFTs) over time. This shift could be important to the extent that HFTs may have more limited capacity to support liquidity resilience since, on average, HFTs appear to trade with smaller inventories and lower capital than traditional traders. Although having less inventory and capital reduces the cost of trading, it also means that markets increasingly dominated by HFTs may be less able to absorb large shocks. Thus, liquidity may be sufficient and relatively cheap on normal trading days, but it may not be deep enough to prevent large price swings when demand for liquidity is significantly above the norm. This consideration would be most relevant in the markets that are amenable to high-frequency trading, and automated trading more generally, where assets are fairly standardized, such as equities and U.S. Treasury securities, and less relevant in markets where securities are more idiosyncratic, such as corporate bonds. It is also possible that markets that more readily lend themselves to high-speed trading may be characterized by relatively greater concentration over time. Achieving the speed necessary for high-frequency trading requires large technology investments that necessarily may support a relatively more limited number of market participants. Greater concentration in turn might be associated with lower resilience at times of stress. The possible effect of HFTs on the resilience of market liquidity is an important topic for future research.
Of course, other developments may be affecting liquidity in financial markets. For example, market participants have indicated that changes in participants' risk-management practices may be contributing to reduced market liquidity. In particular, the experience of the financial crisis may have led many participants to reevaluate the risk of their market-making activities and either reduce their exposure to that risk, become more selective, or charge more for it, thereby reducing liquidity.4
It is also worth noting the increased role of asset managers on the buy side of the fixed income markets. During normal market conditions, the demand for liquidity from this group of bond holders is likely relatively small, since asset managers acting on behalf of retail investors generally buy bonds to hold them for some period. Moreover, managers of open-end funds hold liquidity buffers that enable them to respond smoothly to normal redemption demands. However, because the large increase in bond fund holdings is relatively recent, little is known about how these funds will react to periods of market stress or to abrupt changes in financial conditions and the adequacy of their liquidity buffers for such situations. Because funds potentially allow daily redemptions even against illiquid assets, it is possible that redemptions could be magnified in stressed conditions as individuals try to redeem early, which in turn could lead to liquidations of relatively less liquid assets, thereby amplifying price volatility and reducing market liquidity.
If in fact liquidity resilience has declined recently, it may be a transitional development that will be corrected going forward as participants adjust their risk management practices, and the structure of these markets continues to evolve. For example, if traditional providers of liquidity scale back their activity in response to changes in regulation and market structure, over time, this shift may create incentives for other providers, which are not similarly constrained, to step in.
Stress tests, such as those announced by the Securities and Exchange Commission (SEC) offer one way to help ensure that market participants are prepared for sharper spikes in market volatility. For instance, in the Federal Reserve Board's most recent stress test, the severely adverse scenario featured a large decrease in the prices of corporate bonds.
We are in the early stages of data-based analysis of possible recent changes in the resilience of market liquidity. An upcoming study of the October 15 event will shine some light on the functioning of the U.S. Treasury market, but there is still much we need to learn. More broadly, at the Board, we will closely monitor and investigate the extent of changes in the resilience of liquidity in important markets, while deepening our understanding of different contributors and how market participants are adapting.
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Smells like scapegoating to us...
And India has already started:
- INDIA SAID TO CONSIDER ALGO TRADING CURBS TO CHECK MANIPULATION
Would that ever be allowed in America?
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nailguns everywhere
Looks like the desoldering guns are coming out.
Um, if the Fed wants to control HFT it might start by ending its relationship with Citadel and close its Chicago and NY Trading Floors???
HFT would disappear like a Madoff investment account if US currency was backed by gold
If USD were backed with 1200 an ounce gold there wouldn't be an economy that would run for longer than a day. 1200 an ounce is where it's staying as well because of the underlying mechanics and weight of the major problem pinning it down. The currencies operating right now. All of the fiat is the issue. Maintain the idea that one goes before the other; it is will never get fixed and it will all crash and burn to the ground. History is full of examples of WHY it's the dumbest idea to handle fiat currencies to begin with. The unfortunate thing is all those PM's are priced and managed by the same people that handle the fiat printing which is a major unresolvable conflict of interest.
The fact is everyone in the 'first world' is going to lose everything because of the monkey trap they've build themselves. In africa to catch a monkey a small jar is placed at the base of a tree with nuts or other items which may attract the monkey’s curiosity. The opening of the jar allows the monkey to place their hand in, but when they try to take the nut, they are unable to do so without letting go of the contents of the jar.
The current situation is self created, the solution is let go. Move it over to BitCoin. Repair what can be salvaged then properly sharpen the pencil to restore proper asset valuation. After the asset valuation is fixed then countries can jam their PM's back into their currencies. Right now: there is no market, there is no value estimate on assets, there is no will from any of the parties to let go of their nut. Eventually the hunter called math comes back and has a financial BBQ because a bunch of dumb monkey's were too stupid to let go of the nut.
Such optimism. Remind us, how many of Tim Geithner's "arsonist" are bankrupt and in prison again?
http://rickwells.us/boehner-got-5-million-ryan-2-million-mcconnell-9-mil...
All of those rat bastards should be shot on sight. Justice, bitches.
The buck stops with Congress! Nuff Said. FUCK!
It really is laughable the way they just put countless amounts of disinformation out into the media. That is the very heart of their control. Nobody can ever figure out what is going on. A very well know and predictable system of non linear disinformation. http://www.thetruthaboutthelaw.com/they-promote-every-side-to-constantly...
Confusion reigns supreme --- seemingly almost by design. Hmmm...
The medium is the message. Repeat anything enough, broadly enough, it becomes a herd trigger. Check this out.
https://www.youtube.com/embed/DxZzRuU5fAY
This is what I have been saying since 2009. The next "crash"we will see this no bid "market" vaporize before our eyes. It won't be like 2009 when it was easy to make fiat on the downside before they made selling illegal, in the next crash nobody will be able to collect on the downside because there won't be any market left to collect from. We will simply wake up one morning and the casino will be closed. Bye bye thanks for playing. Here's your complimentary Spider man towel. Have a nice day.
Next Crash: the hedgies will dump first into whatever liquidity is out there. The rest of the sheeple? Rots of ruck.
They're getting scared. It's like when Bear Sterns CEO was saying everything was fine heading into their fateful weekend.
It has not only been allowed, but actively encouraged, so it's now time to find a witch to burn at the stake......
Let's start with Boehner. Send a message.
b...but what about the 'liquidity' they provide?
Comes in a 40 oz bottle because they only way anyone could believe anything they say is if they are drunk.
When thieves fall out...
HFT is the Heroin Poppy fields in Afghanistan.
US authorities perfectly willing to put up with it or even orchestra it's rise only to use its existance later on for their own nefarious purposes.
funny, I don't remember any fed clowns "blaming" the HFTs/algos for sending the dow from 7,000 to 18,000. 7 years of computers reading & trading on headlines such as "no change in 0% interest rate + another $85 billion in bonds bought with $$$ that doesn't exist" had absolutely nothing to do with it. guess that was from "improving fundementals & good economic policy".
I wonder what he tried to do, that didn't work, which is making him angry.
When will they challenge HFT? “when the stock market deals with reality… [then HFT] will be flipped from innocent market bystander… to the root of all evil.”
Really? Have you heard of “false flag’… and how governments (agents of criminal and useless classes) employ false flags to create fictional reasons to impose martial law… as an excuse to eliminate dissidents… those who ask too many questions… those who describe too many official crimes… those who oppose rule by thieves?
The reality of the situation is that HFT is the tool of criminal and useless classes; and, when reality asserts itself, such classes will not punish themselves for the ruin they cause.
They will, instead, use the economic slaughter as an excuse to impose martial law – but then I repeat myself.
There is ample historical example for this consequence.
During the French slaughter (1792-4), Judeo-Bolshevik monopolists and money-lenders withheld food from the market; they blamed shopkeepers, peasants (farmers) and hoarders for such shortages, seized their supplies and paraded them before a Revolutionary Tribunal before carting them off to the guillotine. Today “hoarders” are known as “preppers” – those who buy a cabin in the woods, stock up on food, guns and precious metals. All these “hoarders” were accused and delivered to French committees of terror by an arm of “watchers” and “listeners”.
During the Russian mass slaughter, they did the same thing, only with a wider net: hooligans, speculators (those with property worth 10,000 rubles or more), anti-socialists, obstructionists, and saboteurs were added to their lists. Their property was seized, they were paraded before a Revolutionary Tribunal before receiving the shot in the nape of the neck. Here, “watchers” and “listeners” were replaced mainly by an army of Judeo-Bolsheviks.
In other words, during those slaughters “preppers” were among the first to be targeted.
You think it’s not likely here? Then, why is the Department of Homeland Security modeled after French committees of terror, the Judeo-Bolshevik Cheka and the Nazi Schutzstaffel?
What does the DHS plan to do with 2-3 billion rounds of ammo… an amount sufficient to wage an Iraqi War, at its highest rate, for 25 years? Remember, so-called terrorists do not travel as armies; but, rather cells of 5-10… and the DHS needs 2-3 billion rounds of ammo for these tiny cells? Try again.
And, why is the DHS recruiting, training and protecting an army of “watchers” and “listeners” – commonly known as informers?
By the act of Congress that established the DHS a system was created by which informers could make false allegations against anyone they please with near-total impunity. Of course, such informers aren’t described as informers; rather they are given the title “submitting person” and the DHS Act provides that their falsehoods will never be examined by any court or legislature or law enforcement agency. The legislation even specifies how this immunity is obtained. The “submitting person” only has to give an “express statement” that his lies were “voluntarily given” and that he expected “protection from disclosure”.
I’m sorry guys, but silly season is over. Even if you own physical gold, live in a cabin in the woods along with a stash of ammo and AK-47’s, you lose. If you don’t fall to the horde of hungry homeless, you will fall to DHS death squads. All the homeless have to do is to wait until you collapse from lack of sleep (24, 48, 72 hours), then they march in, slit your throat and… let your imagination run wild.
It seems you’d want better for your family.
If you own stocks or bonds, guess what: you’re depending on criminal and useless classes to deliver your purchasing power at the moment of their greatest victory. Do you really believe they (Wall Street… foreign or domestic banks… et cetera) will deliver your profits to you? Did I mention something about ‘silly season’?
If you want to survive – along with your property, you have to combine with others of like mind for the purpose of mutual protection, among other purposes. The big question now is, ‘HOW is this to be done?’ And the quick answer is, ‘You must establish First-Amendment assemblies – the only historically-proven method by which men have made their lives and property secure from rule by thieves.’
The American Revolution, for example, was powered by a large network of such assemblies: from town meetings, county meetings, state conventions and, ultimately, to Continental Congresses.
Let’s be realistic: this solution won’t be easy or quick… unprecedented adventures never are.
But it’s a much better alternative than waiting for them to smash in your door.
Shouldn't naked-shorting be added to the list?
“History is full of examples of WHY it’s the dumbest idea to handle fiat currencies… the solution is to let go. Move it over to BitCoin.”
So wrote CPL, at 15:05.
He also forgot to mention that BitCoin is a “fiat currency”; it has no collateral.
Two vultures on a large branch. One says "I'm hungry". The other vulture says "Be patient". The first one says "Patience my ass, I'm going to kill something!"
RICO baby, RICO.
Ding ding ding ding ding! We finally have a winner. Someone with the balls and honesty to call it what it is.
OK! You didn't like that?
Shouldn't naked-shorting be added as a major, wherever?
Sure the inside traders in congress like it.
Pssssssssssssssssssssssssssst
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Indians designed the s/w for HFT at Wall Street
Dont tell anyone