High Frequency Trading
What happened at 12:03pm Eastern Time? There were no reports out, the 10-YR Note auction wasn’t until 12pm, and the S&P500 was a bit stonewalled just under 1137.00 after a rally from the day’s low. As the market advanced slowly through the congestion it hit: a MASSIVE order, or series of orders, lifted the offer in the e-minis. But it wasn’t your garden variety large order of 2,000 mini’s – I’m talking about 114 times that size.
Since the SEC is beyond incompetent, and all it knows is how to place its employees at major Wall Street firms, the regulator is appealing to you, dear reader, to inform Mary Schapiro just how busted up the current equity market truly is, and to provide ideas on how to fix it, and to explain why "the current highly automated, high-speed market structure" is fundamentally unfair for investors.
“I am very pleased that the Commission is ready to ask serious questions and drill down beneath the standard-issue ‘provides liquidity’ defense of high frequency trading. The SEC needs to understand and control technology and its benefits, not permit technology to operate without regulatory understanding or access to needed data, and in doing so outrace the regulators’ ability to ensure market fairness for long-term investors. I am hopeful that a variety of independent parties will provide the Commission with the empirical studies needed to assess the price impacts of these trades on long term investors, though I worry that the data needed to undertake those studies is still not available,” - Senator Ted Kaufman
SEC Hearing On HFT, Dark Liquidity And Sponsored Access Next Wednesday Will Achieve Absolutely NothingSubmitted by Tyler Durden on 01/06/2010 16:31 -0500
The SEC's highly overpaid bureaucrats will have to wake up early next Wednesday and read all the Goldman Sachs pamphlets on what a bid ask spread is, what predatory algos are, and why HFTs have hijacked the market in order to sound somewhat intelligent at a "Sunshine Act" hearing on high frequency trading, dark liquidity and sponsored access. Being insufferably worthless Wall Street puppets, the hearing will achieve nothing, and will be followed by a Sunset Act hearing in a few years, where a post mortem of all that could have been accomplished, but wasn't, will be eulogized, together with aremembrance of America's once alive capital markets.
As the 'naughties' come to a somewhat anti-climactic close, it is important for those of us in the investment community to take stock of what new lessons have been learned, what immutable laws have been reinforced, and what changes in policy, strategy and execution need to occur in order to avoid a repeat of the booms and busts of the last decade.
True, the decade is not really over, but no one called 1930 the "last year of the 20's," and given the reflective mood that seems to grip all of Western society whenever a year ending in "9" draws to a close, well, we thought we'd better embrace the trend now so that when some idiot with a pair of glow-in-the-dark "2010" glasses with holes in the zeros for his eyes tries to convince us to watch Roy Scheider over and over again in a celebratory, all-day, marathon screening of "2010," well, we can say we gave at the blog.
Instead, and in conjunction with your many suggestions, we took the opportunity to go back over Zero Hedge's posts and see what moved you, with an eye towards getting a sense of what Zero Hedge wants to read. The results were quite interesting. We thought readers would find it engaging both as a sort of "year in review" post, and, perhaps, in finding old material missed the first time around (or before the discovery of Zero Hedge).
The SEC sure has a sense of humor. With everyone screaming for the agency's blood unless it does something to curb rampant and blatantly speculative high frequency trading, as well as to tighten insider trading regulation, what does the Mary Schapiro-lead circus do? Just the opposite. And even as the commission is weeping that its $1 billion budget is woefully inadequate, the agency decides to reduce its own projected revenue in the form of Section 31 fees, to benefit the High Frequency Scalping brigade. The schizophrenic, sociopathic, deranged lunatics have certainly taken over the asylum at 100 F Street, NW Washington. And as if that wasn't enough, the SEC is now slowly pushing to repeal Reg FD in order to make REIT follow-ons a daily occurrence.
With the role of HFT in stocks being actively investigated thanks to Senator Kaufman's ongoing crusade against a two-tiered market, the spotlight has shifted toward High Frequency Trading strategies in options, where now the exchanges themselves are evaluating whether HFT traders are benefiting from their two-tiered role as both a preferential customer and a market maker, however one, having no obligations to create a market, when things turn ugly. A report by Dow Jones titled "Influx Of High-Frequency Traders Prompt New Rules In Options" notes that "options exchanges are drafting new policies to address the ever-expanding role of high-frequency traders in their markets. The policies aim to eliminate some of the advantages that high-frequency traders currently have over professional options market-makers, representing an attempt by the exchanges to level the playing field between these two huge players in the options market and to maintain the orderly functioning of the market." As more transparency is shone on every market dominated by this now-pervasive paradigm, especially with regulators woefully behind the curve, the latest development in the ongoing unmasking of various HFT strategies will only benefit the broader markets.
I am back from my brief blogging hiatus and not surprisingly, all of the nutty things going on in the financial markets have not magically reversed themselves. So, after some separation from the markets I have made a list of the things I think make the least sense and would impact investors in a meaningful way if the current trends turned around.
The Proposal That Has Dark Pools Sweating; The Dark Pool Vs. HFT Scramble Is About To Enter Round TwoSubmitted by Tyler Durden on 12/11/2009 18:11 -0500
Dark pool operators, who have quietly been redirecting shady order flow via dark pools of "liquidity" with minimal supervision and below the radar for many years, are getting spooked by a proposed SEC rule which would have these same dark pools identifying their trades in real time, thus removing the benefits associated with what is effectively an OTC equities market. Their response: blame it all on the HFT guys, who use the information that would leak to front-run the crap out of the "long-onlies." Yet weren't these same HFTs claiming just yesterday that all they do is provide liquidity and tighten spreads? ... Someone is lying.
"We will continue to use all tools at our disposal to aggressively pursue illegal market manipulation by high frequency traders and others." Mary Schapiro
But we thought manipulation by HFT only existed in the deranged brains of certain fringe websites. How is that possible?
A new white paper out of Themis Trading analyses the impact of predatory algos comprising various HFT strategies. In Themis' view: predatory HFT generates $1.5-$3 billion in profit. Themis concludes with the following three market integrity questions:
1. Instead of belittling the impact of latency arbitrage, and representing it as a gloriously naive $0.01-$0.02, does the regulators' thinking change if that impact is as high as $3 billion a year?
2. In a quid-pro-quo worlds, are market centers merely charging HFTs a higher fee in exchange for an advance look at the NBBO? Market centers should be protecting all participants equally.
3. The most critical question: "When a market center provides an HFT the ability to out-maneuver institutional orders, is not the exchange putting institutions and their brokers in breach of their fiduciary responsibilities, especially those institutions managing pension funds governed by ERISA?"
Tobin Tax Opponents Are Ignoring The Real HFT-Induced Trading Toll; Why VWAP Is A Gold-Mine, But Not For YouSubmitted by Tyler Durden on 11/29/2009 13:47 -0500
Empirical data suggests that High Frequency Trading, and VWAP algos in particular, introduce numerous adverse selection and increased liquidity shortfalls relative to non-HFT trading strategies. The ultimate cost of currently existing HFT-mediated market tolling may far surpass any proposed transaction tax, implying trading costs may in fact be reduced as a Tobin variant removes the externality features associated with adverse HFT market-dominant algorithms.
Sen. Kaufman Urges SEC To Work Quickly On Uncovering Possible High Frequency Market Manipulation And Systemic RiskSubmitted by Tyler Durden on 11/20/2009 16:18 -0500
Sen. Kaufman admirably takes on the windmills again, this time sending a much more sternly worded letter to Mary Schapiro to finally step away from the game of taxpayer funded Solitaire, and instead of waiting for twitters and bloggers to hand her agency cases of insider trading on a silver platter, to finally do something proactive, before her thoroughly discredited agency comprising of what are apparently some of the most inept government workers in existence, is responsible for not only the biggest ponzi blow up (done and done) but for the greatest market collapse courtesy of a few unsupervised Atari consoles.
Lately, Goldman has been extolling the virtues of its theological affiliations and humanistic aspirations to, well, high heaven. Curious to dig deeper through the firm's purported philanthropic efforts, we decided to take a detailed look at the 2007 and 2008 tax records of the charitable Goldman Sachs Foundation. We will not comment on the performance of the actual Foundation: to the chagrin of many needy children who look up to the St. Goldman cathedral in anticipation of a generous holiday season, the Goldman Sachs Foundation has lost gobs of money in the past two years: the fund started off with $275 million in 2007, $269 million in 2008 and ended the year with $161 million. Of course, it is Goldman's prerogative to trade with its money as it desires: while this loss is deplorable, its only outcome will be that fewer Cap 'N' Trade propaganda initiatives will get the due "charitable funding" courtesy of Goldman. Yet what the foundation's tax record do provide, is a very unique and open glimpse in the myriad trading patterns of Goldman's proprietary trading operations... And boy does the firm trade.