HFT

As part of the SEC's process to fix the broken market, it is currently soliciting public feedback on a variety of issues. Why it is doing so, we don't know - after all anything that does not conform to the SEC's preconception of what the most lucrative market to the SEC's recent batch of clients (see earlier news about an SEC director going to HFT specialist Getco) is, just ends up in the shredder anyway. At this point to believe that the SEC will do anything remotely in the interest of investors instead of millisecond speculators, is naive beyond compare. Nonetheless, while combing through some of the recent public responses on the topic of market structure, we came across the following presentation by $34 billion Southeastern Asset Management (SAM), titled "Comment & Analysis on Equity Market Structure" which must be brought to the attention of all those who have the temerity to defend HFT as an altruistic source of liquidity provisioning. SAM's 4 points are simple, and laid out very easily so that even the mildly retarded  public, pardon, GETCO servants at the SEC can understand it: "1) The intent of the Securities Exchange Act of 1934 as provided for in its preamble is being twisted and abused for the benefit of gamblers and to the detriment of investors. 2) The markets are not "fair and honest", 3) Securities prices are presently "susceptible to manipulation and control, and the dissemination of such prices gives rise to excessive speculation, resulting in sudden and unreasonable fluctuations in the prices of securities. 4) The preceding three issues are fixable by the SEC." Let's dig in.

We are initiating our most recent monthly overview piece, which will provide a digested analysis of Las Vegas gaming trends. And while we develop a working model, we will crib a little here and there from Goldman's Kevin Coyne who is probably one of the best analysts on the street in the space (with a credit bent, of course). Incidentally we picked a month when the double dip in the general economy is starting to seep into the ultimate gambling mecca. "Total Nevada gaming revenue was down 5.7% yoy in April, a drop-off from the 3% yoy increase in 1Q2010." And an interesting observation: it appears MIT has sent a crack team to rob Vegas silly once again. That or the HFT brigade has abandoned the NYSE and is now operating out of collocated servers next to the Bellagio fountains. A last possibility is that the recent dramatic growth in Boaz Weinstein's Saba hedge fund was due entirely to counting cards - "Bacarrat win percentage was only 8.5% in April, the second consecutive month of worse-than-expected performance for the house. March Bacarrat win was 8.4%, which is well below the trailing twelve month average of 12%." That's ok, Vegas - just invite Goldman Sachs to teach you how to get 100% win percentage on every single table.

Yesterday's SEC panel discussion on HFT was largely uncovered by the media, as it was for the most part a one-sided, lobbying effort of the HFT industry to make it seem that all is good with the market and to make it explicit that "once in a lifetime" events like the May 6th 1,000 point crash don't really occur and what was experienced (and will be again quite soon) was a statistical impossibility. Tell that to all those who got stopped out by the market's arbitrary 60% cut off for DK'ed trades and lost millions. For a good, clean, simplistic perspective on HFT, we present this most recent summary piece by the Daily Finance's Peter Cohan, called "What you need to know about HFT." As Cohan summarizes it, "All this so-called liquidity, which generally makes it possible for buyers and sellers to meet, suddenly disappeared because the high-frequency traders' books became too imbalanced. So the HFTs stopped trading, the liquidity dried up and the market plunged." For more sophisticated readers who wish to dig between the lines of naive explanations of industry participants whose primary goal is to escape scapegoating in this time of regulatory upheaval, here is the link to the SEC panel on HFT, which among other industry participants, includes Themis Trading's Sal Arnuk, arguably one of the most objective voices of caution when it comes to broken market structure. In the attached clip, Sal's prepared remarks begin 3 minutes into the video.

The SEC has released its Preliminary Findings Regarding the Market Events of May 6, 2010, which find nothing, and just bring the promise of further investigations. The to-date proposed solution to the problem is laughable - more curbs, which do nothing to address the underlying issues at hand, which are that the modern version of market makers, HFT algos, pull liquidity away on a whim, and which can destabilize the market in an instant once "momentum ignition" strategies take over. As we have speculated, the SEC will find nothing material until such time as the next flash crash wipes out not 10% but puts the market into indefinite hibernation. One thing the report does do, is provide an extensive analysis of High Frequency Traders, a concept that was barely known as recently as a year ago. One thing that there is no mention of anywhere in the report, is the NYSE contraption known as Supplementary Liquidity Provider, a program created to give Goldman dominance over the DMM-parallel liquidity rebate system at the NYSE. One would think that the SEC would be aware of this program that was supposed to expire in early 2009, yet continues to be extended and provides Goldman and Getco with, arguably, unprecedented forward-looking information on order flow.

The reasons for last week's collapse will be probed for a long time, and likely no firm conclusion will ever be derived, because it was caused by a confluence of numerous factors. While there may be immediate causes for the plunge, the one recurring reason for both that crash, and all future ones, will be dominant role played by HFT traders as they now control market structure when they operate, and the massive vacuum left when they decide to simply shut down when things get too heated and there is no regulated liquidity provider backstop. As the New York Times reports yesterday from your typical HFT bucket shop "as the stock market began to plunge in the “flash crash,” someone here walked up to one of those computers and typed the command HF STOP: sell everything, and shutdown." A vivid and brief summary of what we have been warning for over a year. Also, we find out that just like Tradebot, which as "one of the biggest high-frequency traders around, had not had a losing day in four years" that Goldman, and all the other big banks who reported a flawless first quarter, are now nothing but one large HFT prop shop: they push the market higher on no volume, and when the selling in size commences they all just shut down. So much for providing liquidity when it is needed. And as for that 4 year track record... What did Madoff go to jail for again?

Do you see what happens Larry when a CNBC anchor and a trader discuss a concept that is not prominently featured every day on Page 6? The punchline from Steve Grasso: "Michelle, I love you despite not having common sense on this issue." 4 out of 5 moronic bloggers would certianly not be so generous as to add the the last qualifier. But yes, when even people MCC, whose "talents" are elsewhere, become trading pundits, you know the end of the trading world is nigh.

Well, we had a two whole days of HFT-free markets. That was about all we could ask for. And now, like evil German-sounding robots from the future, they are back. The market is melting straight up without interruption, and without any volume. Retail is now completely out of the market, and our advice to everyone is to stay out and let the computer blow themselves up again. In the meantime, please don't ask how and why Goldman and JPM can both have a perfect quarter. The chart below says it all.

It took the Goldman HFT algos 5 minutes to find Portugal on the map. S&P, with all the finesse of a drunk, pre-BofA acquisition Merrill bull in a CDO store, comes in and spoils the party. Although with volume non-existent, we expect the market to go straight up in a straight line once again as the selling volume dries out.

A chart explaining the six primary strategies of buy-side short-term algorithmic traders.

Yesterday we observed that the SEC has finally decided to start collecting data on the one segment of the market most misunderstood by the SEC (by their own admissions), that of High Frequency Trading, and we demanded that instead of merely collecting data and throwing it into the shredder, this data has to be released for thorough public analysis and investigation, as the SEC has proven time after time that it is hopelessly inadequate when it comes to matters dealing with simple cognitive processes and determination of cause and effect (we are certain that a few well trained lab rats could do the entire job of the SEC, and have none of the billion dollar taxpayer cost attendant with feeding this bloated monster of disregulation and corruption). Today, Senator Ted Kaufman joins our pleas for full and transparent disclosure of all tagged HFT data. Alas, we are convinced that as long as the market is not allowed a down day by the primary dealers, any push for the SEC to do its job properly will be drowned out in the typical chorus of bullshit that the market is doing oh so well, and look just how much liquidity in Ambac and Citi there is... After all, that is all anybody trades these days.

The SEC has finally acknowledged it is hopeless at regulating the latest generation of market forntrunning specialists, in the form of various iterations of High Frequency Traders. We are happy that one year after starting our campaign against the complete travesty to market efficiency that is HFT (yes, they frontrun and scalp and subpenny and generate artificial momentum, but they bring liquidity!.... in five bankrupt stocks while raising slippage costs everywhere else) the SEC has realized that there is so much more than meets the eye, and that no matter how many conflicted Op-Eds are publish in Advanced Trader, that will not change the nature of what HFT is.At a meeting today, the Securities and Exchange Commission voted unanimously for a plan to tag high-frequency traders with ID numbers and give the SEC access to information on their trades. Branding sure is an appropriate act for all these parasitic market participants. Hopefully the SEC will tear itself away from the terabytes of kiddie and tranny porn available on the internet to actually analyze and compile the data it receives (we realize that releasing it to the public would be far too much in keeping with Obama's initial and soon forgotten promise of unprecedented transparency), instead of just dumping it in the shredder as it has done in the past with Madoff, with Greenspan, and with other masters of the ponzimonium.

In an ironic twist for one of the biggest liquidity providers in the world, and now a brand spanking new DMM on the NYSE, giant quant trading firm Getco was just slapped in the UK with a $2 million fine for "failing to make accurate reports of transactions." It appears that these may very well have been purposeful transgressions masking some improper underlying trade activity, because as the WSJ reports, "the FSA said the errors were particularly serious because they took place during a period of heightened awareness around transaction reporting because of Mifid's implementation." In addition to Getco, Credit Suisse (which lately has been peddling its own algo product suite) and Instinet have both been fined. In other news, the farce that is the SEC is now threatening to tag HFT firms and keep a very much private and internal track of their trades. HFT algos in turn are shaking in fear in anticipation of their manipulative practices being uncovered by a bunch of transvestite porn aficionados... Not.

Yet another much needed reminder that the topic of High Frequency Trading is far from resolved. On Tuesday, Senator Ted Kaufman reminded that increasingly more regulators and market participants remain divided over HFT, even as concern about possible improprieties associated with market structure grows. Kaufman's most recent topic of focus - order cancellations. He said the SEC should address the "burgeoning" number of order cancellations involved in high frequency trading, which, he added, are "clearly excessive" and virtually a "prima facia" case that battles between competing algorithms have become "all too commonplace, overloading the system and regulators alike."

Sergey Aleynikov, the former Goldman programmer, who was arrested by the FBI in July last year on virtually a day's notice after Goldman told the FBI the Russian had stolen secrets that could be used to manipulate markets, has just been indicted on charges he stole computer codes used for proprietary high-frequency trading programs. The specific charges include theft of trade secrets, transportation of stolen property in interstate and foreign commerce and unauthorized computer access. The charges carry a total jail time of 25 years.

9 months of "who wants to be short over the weekend?" Time to flip that one around. This has now been the fastest correction in the bear market rally. Where are the HiFTers providing the bids and liquidity? But the biggest question: why are treasuries unchanged? The Fed's biggest nightmare is slowly materializing...