One Of The Biggest High Frequenecy Traders Warns Of Potential Market "Catastrophe"

Tyler Durden's picture

Back in April 2009, we wrote what may be the first seminal article predicting the failure of capital markets as a result of widespread predatory high frequency trading and fragmented market structure when we laid out "The Incredibly Shrinking Market Liquidity, Or The Upcoming Black Swan Of Black Swans." Several years later, and countless flash crashes, we have been proven right, however one thing is missing: "the catastrophe" that finally wakes up people to the dangers of all the individual things we have warned about over the years.

Today, we are one step closer to that day, when none other than the head of one of the biggest high-frequency trading companies, Mark Gorton of Tower Research, warned that there are several faultlines in the structure of increasingly electronic, automated financial markets that could lead to a “catastrophe” in the long run, according to the FT. 

To be sure, Mark Gorton, has a clear conflict of interest: being one of the largest HFT members himself, with his company dominating program trading on the NYSE with his Latour Trading subsiiary, the founder and head of Tower Research Capital argued that exchanges have become far more efficient with the advent of more computerised markets, but "cautioned that increasing complexity brought new dangers that needed to be mitigated."

In other words, don't blame the HFTs, blame the markets, which is to be expected from a person who will be out of a job if HFT is banned.

He further adds that "The recent evolution of markets from manual to electronic trading has had huge benefits and investors save money every day due to the lower cost of trading. But electronic trading brings with it a number of new risks, and we need to continue to strengthen the resiliency of electronic markets," Mr Gorton told the Financial Times.

What keeps Gorton up at night? The short answer: the lack of safeguards at exchanges to prevent HFT firms like his from dragging the whole thing down:

The high-frequency trader is particularly concerned over the lack of risk controls at exchanges, which he said constituted a “large hole in the middle of the system that needs to be filled”.

 

HFT outfits and investment groups that use algorithmic strategies say they have a latticework of different safeguards to prevent ultra-fast computerised strategies from running haywire, which has been further reinforced after one high-profile market maker, Knight Capital, imploded in 2012 after losing $10m a minute in a 45-minute electronic trading rampage.

 

Regulators and bourses such as the New York Stock Exchange and Nasdaq have introduced a clutch of reforms and firebreaks in recent years — especially in the wake of a “flash crash” in 2010 that underscored how automated markets have become — such as circuit-breakers when stocks or markets fall by a certain amount.

 

Nonetheless, exchange-level risk controls remain “limited at best” and should assume there will inevitably be glitches, bugs and errant trading algorithms that could cause problems in the wider market, according to Mr Gorton.

Glitches from algorithms, he forgot to add, such as the one Tower uses each and every day to scalp and frontrun billions of trades in order flow.

However, his warning, conflicted as it is, is spot on: the market will crash again, it is only a matter of time, simply because the HFTs have captured market regulators so well, nobody has any idea what is going on any more: “We need a regulatory framework that assumes that any single system in the market will fail and insures that we have multiple redundant levels of checks that can catch failures in other parts of the system,” he said.

What is Gorton's suggestion?

Mr Gorton highlighted in particular the lack of a centralised position-tracking mechanism for the US stock market, the need to refine and synchronise market circuit-breakers between highly correlated markets, such as cash equities and futures, and the absence of clarity over what it takes for trades to be declared invalid.

In other words, focus on the symptoms, shutting down markets when things go haywire, not the underlying cause, which as we have said since 2009 is simple: broken markets, designed to benefit just one group of traders.

Exchanges can in certain cases cancel trades when there is “clearly erroneous execution”. Usually this happens automatically when someone tries to trade at a clearly illogical price, but bourses are given more latitude in times of extreme turbulence.

For HFT that help make markets by trading constantly at lightning speed, that can be problematic as it “creates a situation where market participants are forced to pull back during times of extreme stress due to uncertainty about their positions due to potential trade breaks, and this weakness can contribute to a crash in the future”, Mr Gorton said.

 

While electronic, computer-driven markets have been a boon to investors, some of these holes should be addressed, the former Credit Suisse trader and electrical engineer said.

 

“We’re creeping in the right direction, but unless we proactively address these issues, sometime in the next several decades we are going to experience a catastrophe due to runaway computerised trading,” Mr Gorton said.

One question remains, the biggest one: why come public with this warning, which even the most naive traders can between the lines on? The answer is simple - as we have predicted long before the Sarao debacle, once the next big crash happens, everyone will be looking for the scapegoat, and one will be readily available: the same market parasites who have long abused the broken market on the way up, getting rich beyond their wildest dreams, will be those blamed for everything that went wrong on the way down, if only to deflect from the farce that central bankers have unleashed upon capital markets: the High Frequency Traders. And judging by this FT piece, they now know it very well...

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LawsofPhysics's picture

"market"...   LOL!!!

Stop it already!  Casinos go bankrupt all the time.

BullyBearish's picture

When the going gets tough, the tough FLASH CRASH!

thesonandheir's picture

Remind me again which frequency gold runs on?

eforce's picture

"In order to give the goyim no time to think and take note, their minds must be diverted towards industry and trade. Thus, all the nations will be swallowed up in the pursuit of gain and in the race for it will not take note of their common foe. But again, in order that freedom may once for all disintegrate and ruin the communities of the goyim, we must put industry on a speculative basis: the result of this will be that what is withdrawn from the land by industry will slip through the hands and pass into speculation, that is, to our classes."

--The Protocols.

LawsofPhysics's picture

As usual, the jews need to be very careful what they wish for...

Fukushima Sam's picture

"sometime in the next several decades"

This guy is quite the optimist to believe this "market" will be around in several decades!

raeb's picture

Maybe he meant to say days, not decades.

Antifaschistische's picture

LOL!!!!!

 "We’re creeping in the right direction, but unless we proactively address these issues, sometime in the next several decades we are going to experience a catastrophe due to runaway computerised trading,” 

means....WE'RE CREEPING IN THE WRONG DIRECTION!!!

de3de8's picture

"Sometime in the next several decades" didn't bother to read any further

peddling-fiction's picture

No market, just another racket.

I need more asshats's picture

"I heart NYC HF traders", fact or fiction!?

I need more asshats's picture

Come on Peddleboy. Fact or fiction!!!?

Slomotrainwreck's picture

could lead to a “catastrophe” in the long run

 

He meant "it's a catastrophy when the H F Traders don't get their bonuses."

JRobby's picture

Hard to do HFT when volume drops off and the prices are going one way

Antifaschistische's picture

he recommends cancelling orders when something trades at an illogical price...

let me interpret..

when a retail investor (like me/us) puts in a buy order at $10 below market prices, and because the HFTs flash crash a stock and it hits our strike...OUR BUY ORDER will get cancelled!!!   Because the HFT's didn't REALLY intend to sell it to us at that price.   So now, if a trade goes contrary to the INTENTION of the HF Trader, when the INTENTION is counter to the actual algorithm.....the trade should be cancelled.

TOTAL BULLSHIT....

Mr.Sono's picture

Evaporated wealth in 3.2.1....

lordbyroniv's picture

several decades away?  lol.  im worried about this year, fuch several decades away.  bigger fish to fry.

silverer's picture

Yeah, that hit me right away. Another person who thinks this shit can go on forever. It's more like the next few months. This place won't even be here in "several decades". Cave trading, anybody?

BandGap's picture

Using a football term they have "outkicked the coverage".

There is no way, currently, that they can synchronize markets to the point of being "fair". There has always been some lag time between an event and an action. No more.

Antifaschistische's picture

this guy does NOT think catastrope is decades away...but he's an insider, and he canNOT go on record saying "any day now we could experience a complete meltdown"....but yOU KNOW THATS EXACTLY WHAT HE'S THINKING!!

East Indian's picture

Well, he can't say next week, can he?

deKevelioc's picture

Tough time finding articles today?  

deKevelioc's picture

Tough time finding articles today?  

Dr. Engali's picture

Personally, I hink the Hedge bringing light to the HFTers over the years has been some of their best work.

Grandad Grumps's picture

Ummm yeah, partly. There is no discussion on ZH, that I have seen, about how the pricing mechanism is actually controlled on the specialist and market maker side. Which, I have to assume is also computer controlled ... and funded by the banks. All we hear about is when someone independent figures out how the liquidity providers program their machines and then tries to profit from their discovery in a trivial way and are immediately criminally prosecuted. This screams "grand conspiracy".

Based on observation, I have to think that the HF trading programs as well as the specialist and market maker systems are all integrated into one semi-cohesive conspiracy to defraud those who are not on the inside.

They have scientifically brought market rigging and theft to an entirely new level.

peddling-fiction's picture

Even the laser networks to win "precious" milliseconds to gain an edge is just sick and a symptom of a greater malaise.

falak pema's picture

heading in "right" direction and several decades away...is he referring to HAley's comet?

Thats Tower of Babel research for you.

As for the reference to Tyler's ZH's April 2009 post that was prescience with one hellva loooong fuse !

Robot trader; the original HFT artist; had many occasions to sing : I'm BTFD !!!

As per this GEM from the comment section of April 2009 :

"Who is John Galt? Who is TD?
I'm buying June 100 SDS calls monday. If the black swan comes to pass, I'll donate 10% of the gains to the charity of TD's choice."

hahaha! some commentry !

kotfare17's picture

Ultra elite civil war.

That part of elite which does not have control of HFT is pissed off.

cpnscarlet's picture

Wait just a second!

Are you telling me that interconnected high bandwidth control systes may have hidden instabilities? Well hush my mouf!

/sarc

Have a Nice Day,

Rocket Scientist

buzzsaw99's picture

what he really wants is a guarantee that stock prices will never fall. frikken maggot.

Dr. Engali's picture

Well if he's this concerned then he wouldn't be opposed to a little IEX speed bump built into the system now would he? 

buzzsaw99's picture

naw. an infinitely soaring stock market is good. falling prices are bad. prices should never ever be allowed to go down. /s

Cthonic's picture

A deterministic speed bump measured in microseconds isn't going to level the playing field for human/retail traders.  There are hypothetical market structures (wherein each timeslice is a stochastic double auction) that are "fair" (or rather, as fair as possible given Myerson-Satterthwaite) on human timescales but they aren't compatible with the national market system plan exchanges.

Dr. Engali's picture

There is nothing on God's green earth that will ever level the playing field for retail. Somebody will always have an edge, or find an edge no matter what system is put into place.

Cthonic's picture

I'm only referencing fairness with regard to temporal access; in other words, being located in same building as exchange servers would be no more or less beneficial than being located on the other side of the planet.

RaceToTheBottom's picture

How was it done in the past, when humans were in the loop?

I am probably wrong but I thought in the past the MM role was required to buy to provide liquidity.  This would be regardless of the price.

Now we are saying that HFT will provide the liquidity, but their goals are a lot different than the MM of the past.  How can HFT be expected to perform a service when their profit requires that they act a certain way that will not be in sync with the old MM role?

DipshitMiddleClassWhiteKid's picture

all markets are there to fleece the goyim

MASTER OF UNIVERSE's picture

High Frequency Theft of money through siphoning off of trades on markets is wholeheartedly unethical, and should be viewed as criminal behaviour & theft. I, for one, know it will all blow up in their faces soon enough, but no sympathy should be extended to anyone in any HFT position because it is not honest trading whatsoever. The rock stars of HFT are less trustworthy than used car salespersons.

 

Up yours, HFT.

lester1's picture

No worries. The Fed's PPT has got control of this !!

J J Pettigrew's picture

High Frequency "trading".......ISNT.

It is front running.  Traders have an idea, HFTs dont have an idea until they see your order.

That is theft.

nixy's picture

<<High Frequency "trading".......ISNT.

It is front running.  Traders have an idea, HFTs dont have an idea until they see your order.

That is theft.>>

Yes.... had eff all to do with an honest market ...(as if there could be anything else)

JamaicaJim's picture

Jamaica Jim’s CAMPAIGN CHANNELING THE CANDIDATES REPORT

*”JJ” – through means of taught Rastafarian ways, is able to channel the inner thoughts/grab conversations out of the air/catches whiffs of sentiment of others.

Throughout 2016, JJ is channeling candidates for the Kabuki Theater of the Absurd “race” for the Presidency. These powers come and go….stay tuned for updates Mon….

THESE ARE TODAYS’ CHANNELINGS….

FEBRUARY 4, 2016………

Donald Trump: (inside his office, speaking)…”OK…..so we go after that Cruz guy….what a slimeball….fire that guy who brought the coffee in…..just do it….teach him to tuck his shirt in….fire him anyway…WHERE’S MY PHONE???”

Ted Cruz: (on the phone) “…….no…no..I told him to burn it………what’s that?...OK..so I say that, but don’t mean it…got it…..is Lloyd in?.....no…OK….keep my phone handy…got it….”

Marco Rubio: (also on the phone) “…..look, I’m cuter than Cruz….look at his waist line….plus, I’m really Hispanic….I can a la ~espanol 20% of the vote….dump him…..I told you I’d sell my……………

…what? (muffled voices…Dimon on line 2?”)…I gotta go. LaRaza is in the lobby..”

Hillary Clinton: (in staff meeting, speaking) “………..Now, I told you bitches that NO more infiltrators to my public meetings!!! ONLY my lesbian friends and the dumb fat guilt ridden guys…the pussy whipped….how many times do I have to tell you???!!!....

Bernie Sanders: (on phone) “…….OK, so how many new donations do we have? I’m flying coach again…dammit…..I hate this “sincere shit”…WHO CAN LOSE SIX IN A ROW???...listen…I gotta go vote on raising taxes..the off to New Hampshire…..yes ….yes…..coach…..fuck!

Carly Fiorina: ( to lone staffer) “……well, fuck”

Mike Huckabee: (to wife) “……you know, honey, I am going to miss all that free food and the pleasant fiction of thinking I had a chance to/Mrs. Huckabee: “Oh shut up, you asshole!”

Ben Carson: (to himself)….”Do I quit?...do I…..stay the course…?.....what did I have for breakfast? …oh that’s right…I scalpeled an egg…wait….did I?”

Chris Christie: (on phone to campaign manager) “….look, we stay in and stay low…gotta be a cabinet post in there somewhere….(farting)…….no, no, no, no…and FUCK Giuliani, OK? ….now unless you have some food…hot food….I’m hanging up”

Rand Paul: (on phone with father) “…..OK, OK, OK…I suck at campaigning…you weren’t so hot yourself, old man….look….I can be effective as a….what……OK…knock off the jokes about my hair Dad…”

Rick Santorum: (with wife in family truckster) “…look honey I../(wife interrupts)..shut UP about the race asshole! I TOLD you people in Iowa wouldn’t remember you!”

jakesdad's picture

broken record time:

 

there is no such thing as "high-frequency trading" - there is most assuredly such a thing as low-latency frontrunning!

madbraz's picture

title should read "market manipulator who for god knows what reason is not rotting in a jail cell talks more BS to defend his corrupt practices with a nod and a wink from the NY FED and the SEC"

CHX's picture

"Decades"... You gotta be kidding... weeks, months or a few years at the very most. 

RadioFlyer's picture
RadioFlyer (not verified) CHX Feb 4, 2016 10:23 AM

This market will be propped up until the next False Flag event.  Then its tits up.  I'm guessing Super Bowl.  Hope not.

bjax's picture

Sooner rather than later I hope!