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The HFT "Treasure Map" - Presenting The Rigged Stock Market's Full "Latency Arbitrage" In One Chart

Tyler Durden's picture




 

Last week, when poring through the SEC's complaint over ITG's criminal frontrunning of client order flow in a "experiment" prop trading group within its Posit dark pool known as "Project Omega", we clearly laid out the "criminal fraud" that allowed the original dark pool to make money without any risk, and explained why HFT's never lose money.

Only, in this particular case, the fraud was so egregious, even the SEC had to step in and slam ITG with the biggest fine on record for a private Wall Street exchange (at least until the fine about to be levied at Credit Suisse's own dark pool, the biggest in the US, Crossfiner is revealed).

The reality is that most HFTs do not engage in such brazen criminal activity - most act within the confines of the law. And yet, as Virtu has shown year after year, they never lose money. How can the two coexist?

Simple: the answer is that in the aftermath of Reg NMS, and the terminal capture of regulators by those who benefit from market fragmentation, regulators blessed a two-tier market, one in which HFTs can frontrun non-HFT order flow and not be worried one bit about the consequences.

The technical term for this gross aberration of market fairness and efficiency is latency arbitrage, and it is best shown on the following annotated "map" courtesy of Nanex' Eric Hunsader, laying out the embedded, and regulator blessed, latencies between the three big New Jersey exchange centers: Mahwah (NYSE), Secaucus (BATS), and Carteret (Nasdaq) for everyone but the top tier - the High Frequency Traders, whose only advantage is having the millions to spend both in one-time collocation setup as well as recurring microwave/laser fees to obtain faster data access which then allows them to frontrun everyone else and generate massive returns on their investment. Returns that are due only to done thing: frontrunning.

 

What the map clearly shows is the unprecedented timing advantage HFTs have not only over the Securities Information Processor (SIP), which is used by virtually all non-HFT participants, who pay millions for real time feeds.

... but even direct data feeds. As Hunsader notes, "the question is no longer does your dark pool price on the SIP or direct? It's: Does your dark pool use lasers, 40gbe and FPGA, because according to the map, you are simply wasting money on Direct Feeds unless you get the Laser/40gbe/FPGA options."

Which also explains why, as Zero Hedge first showed in March, the latest addition to the microwave tower by Route 17 next to the Mahwah (f/k/a/ New York) Stock Exchange, was precisely an Anova AOptix Intellimax laser, designed to make all formerly state of the art Microwave connections, obsolete.

 

Surprisingly, weeks after our post, the laser was quietly taken down, which we can only attribute to the vocal outcry (and perhaps threats) of all those HFT clients who had spent hundreds of millions on microwave fees, only to see their investment sink overnight.

We patiently await the laser to come back, in the meantime, here are, in conclusion, some questions for Congress to contemplate as they watch every last retail investor leave the fully documented rigged market, in which every order is merely a catalyst for HFTs to report yet another flawless trading quarter thanks to billions of frontrun orders.

 

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Sun, 08/16/2015 - 09:04 | 6431400 Lumberjack
Lumberjack's picture

Outstanding work Nanex!

Sun, 08/16/2015 - 09:27 | 6431441 cnmcdee
cnmcdee's picture

That's nothing.  Wait till they start buying the 1-bit reverse time oscillators that can predict trades 8 HOURS in advance by sending the information back from the future.  Maxwell Equations never negated advanced-waves, and their existence is silent by most physicists.

Sun, 08/16/2015 - 09:36 | 6431467 Headbanger
Headbanger's picture

Oh I get those all the time.

Especially when I'm around nasty fat ass women.

Sun, 08/16/2015 - 16:09 | 6432739 TahoeBilly2012
TahoeBilly2012's picture

I DONT FUCKING GET IT! Orders should be matched and cleared, not at any randowm instant, but only at set times like THE TOP  of every second (or whatever set time interval).

This isn't that hard to figure out. The "market" only matchs orders within .05 seconds at the top of every second. The bids and offers are in, they can't be changed, there is a mirco second delay, the orders get matched and cleared and the next cycle starts again, ready to clear in another second. 

THIS WAY, I DON'T CARE HOW FAR OR CLOSE YOU ARE TO THE MARKET SERVERS, SET ENOUGH DELAY TO ALLOWS ALL ORDERS TO AT SPEED OF LIGHT TO GET BE IN CUE BEFORE THE CLEARING INTERVAL.

You should even be able to set youR order time intervals, like I want my order to clear at the 12:05:56 second clearing time stamp or not clear at all.

 

 

Sun, 08/16/2015 - 20:20 | 6433620 philipat
philipat's picture

Why don't we just pay Nanex to do what SEC, CFTC etc are supposed to do? It would be much less costly and we might even get some "Regulation"?

Sun, 08/16/2015 - 09:04 | 6431401 fudge
fudge's picture

night targets ;)

Sun, 08/16/2015 - 09:38 | 6431470 Headbanger
Headbanger's picture

Nope 

Daytime targets with drone dropping chaff around the towers

Sun, 08/16/2015 - 09:04 | 6431402 RaceToTheBottom
RaceToTheBottom's picture

Isn't "Latency arbitrage" really just providing liquidity?

Should not we be putting these Banksters up on pedestals and giving them white house cuff links instead of criminalizing them?

?

Sun, 08/16/2015 - 09:06 | 6431403 world_debt_slave
world_debt_slave's picture

I wonder if Nathan Mayer Rothschild was one of the original frontrunners?

Sun, 08/16/2015 - 09:09 | 6431410 Troy Ounce
Troy Ounce's picture

 

As If US Congress cares

 

Sun, 08/16/2015 - 10:21 | 6431585 SSRI Junkie
SSRI Junkie's picture

they do care and profit from it. that's why they exempted themselves from insider trading laws during this massive fraudulent run-up in the stocks

Sun, 08/16/2015 - 09:11 | 6431417 i_call_you_my_base
i_call_you_my_base's picture

It's a salami slicing grift. And these people think they're sophisticated.

Sun, 08/16/2015 - 09:13 | 6431419 exartizo
exartizo's picture

even more proof the US stock market Casino is rigged and has been for years.

Sun, 08/16/2015 - 09:13 | 6431420 TomJoad
TomJoad's picture

Hunsader, Thank you. Don't go near any construction projects or drive any cars. 

 

Jump! You Fuckers!

 

(Frankly I'm getting kind of tired waiting for them to jump. They obviously have no individual or collective conscience.)

Long rope and lamp posts.

 

Sun, 08/16/2015 - 09:18 | 6431428 Groundhog Day
Groundhog Day's picture

When retail completely leaves, who will these predators scalp from next

Sun, 08/16/2015 - 09:21 | 6431435 i_call_you_my_base
i_call_you_my_base's picture

They will just trade with each other and keep values up with the help of the fed. This is effectlively a price fixing scheme.

Sun, 08/16/2015 - 09:21 | 6431436 EurGold
EurGold's picture

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Sun, 08/16/2015 - 09:34 | 6431460 Bollixed
Bollixed's picture

Another useless spammer...

Sun, 08/16/2015 - 11:22 | 6431774 dearth vader
dearth vader's picture

From Ireland +353... of all places.

Sun, 08/16/2015 - 11:24 | 6431783 Clowns on Acid
Clowns on Acid's picture

tungsten.com

Sun, 08/16/2015 - 12:44 | 6432068 bamawatson
bamawatson's picture

EurGold --- your add is cheesy and condescending. My guess is you have made dead nuts cod lox certain no one from this site will patronize you

Sun, 08/16/2015 - 09:28 | 6431445 buzzsaw99
buzzsaw99's picture

free markitz bitchez

Sun, 08/16/2015 - 09:28 | 6431446 philosophers bone
philosophers bone's picture

The legalization and institutionalization of fraud.

Sun, 08/16/2015 - 09:30 | 6431448 fxpmtrader
fxpmtrader's picture

Only completely useless ignorant dumb idiots are still trading these "markets".
They, every single one of them, deserve what they get.

"Tell me with whom you are dealing with - and I'll tell you who you are".

Sun, 08/16/2015 - 09:32 | 6431453 Brazen Heist
Brazen Heist's picture

So how do they (HFTs) exactly make guaranteed profits from this?

Walk me through the details, this is all new to me.

Sun, 08/16/2015 - 09:40 | 6431474 negative rates
negative rates's picture

That's easy, they create fits from their problems.

Sun, 08/16/2015 - 09:34 | 6431462 the not so migh...
the not so mighty maximiza's picture

Fanatastic article!!!!!   I can't wait for CNBC to cover this...hahahahahahaha

 

 

 

 

Sun, 08/16/2015 - 09:48 | 6431498 Max Cynical
Max Cynical's picture

Does anybody have any data on total HFT annual profits? I remember seeing Virtu was making up to $1.5M/day.

Sun, 08/16/2015 - 12:02 | 6431938 RaceToTheBottom
RaceToTheBottom's picture

Does the Columbian Drug cartell fill out Accounting statements for the public to see?

Sun, 08/16/2015 - 10:15 | 6431573 theyjustcantstop
theyjustcantstop's picture

people wanted to know the black-swan that would bring the dollar demise, you just read it, politicians,the fed.. crony-capitalist, and the msm conspired, and cheated every American, and world investor, from that worker putting $50.00 a pay check into they're 401k, on up,  that invested in what they believed, and was told was Americas free market.

I always believed the next crash would bring equities back to 2008-2009 levels but it's going to be worse, their not going to have those that usually don't sell, and ride out the storm.

the tbtf's days are numbered.

 

 

Sun, 08/16/2015 - 10:21 | 6431589 q99x2
q99x2's picture

Go Hunsader! Death to all parasites.

Sun, 08/16/2015 - 10:24 | 6431595 max2205
max2205's picture

Hfts fucking other Hfts doesn't really bother me 

Sun, 08/16/2015 - 11:15 | 6431747 arbwhore
arbwhore's picture

"Questions for Congress" ... hahahahaha

Sun, 08/16/2015 - 12:05 | 6431949 tttan
tttan's picture

Real traders make money by takaing this. These HFTs make money by cheating and frontrunning without taking any market risk.  The investing community including mutal funds and index funds have been quiet about this which means they are also conspiring with these guys. The whole system is corrupt and takes advantge of the people who need to invest in the market place.  Congress will not act because they are just as corrupt accepting donations from these corporations. The people have to sue these HFT and bankrupt them

Sun, 08/16/2015 - 13:02 | 6432125 Fuku Ben
Fuku Ben's picture

Good. I'm glad this finally came out. This is very similar to what I was mentioning in the link below and had seen roughly 2 years ago.

Let's see what, if any, consequences Hunsader has as a result of this. Hopefully none and it will be stopped and those that allowed it and benefited from it punished. But as we all know that isn't typically how it works. No time to change like the present.

http://www.zerohedge.com/news/2015-07-31/head-trader-worlds-4th-largest-...

Sun, 08/16/2015 - 13:03 | 6432131 Chuck Knoblauch
Chuck Knoblauch's picture

HfT is an entitlement program.

Welfare for the upper class.

These people don't work for a living.

Sun, 08/16/2015 - 14:07 | 6432322 withglee
withglee's picture

Why are they making this so difficult?

This is obviously about gaming the system. It is not about trading.

Based on this map, adding a delay to the timestamps of all transactions solves the problem.  When assigning timestamps, add a random delay taken from a uniform distribution between 0 and 5 milliseconds. This will "neuter" all gaming tactics and have no effect whatever on actual trading.

Not to do this is to admit that it is not an even playing field and intended to not be one.

What do you call a market where all participants don't compete on equal terms? A "rigged" game.

Sun, 08/16/2015 - 14:41 | 6432432 MedicalQuack
MedicalQuack's picture

What does it take to wake up the government, who runs from white collar code crime, it's everywhere, code hosing as I call it.  If you never saw the documentary "The Wall Street Code" about Haim Bodek and his code discoveries, well worth the watch and he get BATS fined in a round about way.  It's one of the videos at the Killer Algorithms page.  I used to write code but not financial code but healthcare and we have the same code hosing crap going on over there too.  Scroll down through the other videos and you can watch those too if you like to find it.  I tried to put videos that I felt were pretty much at layman levels together where it might help consumers realize all the shit that's going on.  Nanex is doing great work to expose the code hosing in the markets, been going on for years and our government keep turning a blind eye, and us little folks suffer.  

That was really a good catch too on the lasers with the pictures! 

http://www.ducknet.net/attack-of-the-killer-algorithms/

If you want to look at this, see how you get scored with Predictive Medication Adherence scores.  It's a secret, you can't get your score, but you either get one to five stars or a score of zero to 500 with the FiCO medication adherence predictions.  All they need is your name and address and you are secretly scored, excess "scoring" of US consumers leads to denial of access.

  http://ducknetweb.blogspot.com/2015/06/medication-adherence-predictions-enter.html

Stuff gets even worse too as if you pay cash for your prescriptions and they can't find enough data, you're out outlier, more on the war on cash from this end where there's a captive audience as we need our meds.

http://ducknetweb.blogspot.com/2015/07/patients-who-pay-cash-when-filling.html

 

Sun, 08/16/2015 - 15:09 | 6432547 vinoverde
vinoverde's picture

For the first time I am seriously thinking about getting twitter just to follow this guy.

Sun, 08/16/2015 - 16:45 | 6432887 Keltner Channel Surf
Keltner Channel Surf's picture

If, by "get" Twitter, you mean join up, choose a handle, etc., you really don't need to, simply keep this link up and refresh often:  https://twitter.com/nanexllc

Mon, 08/17/2015 - 01:29 | 6434418 onmail
onmail's picture

Highly Fcuked Trading

Mon, 08/17/2015 - 16:38 | 6436836 SweetDoug
SweetDoug's picture

'

'

'

Who here, amongst us, really believe they took the laser down?

 

Moved it, yeah…

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