High Frequency Trading
Earlier it was announced that the NYSE has added GETCO as a NYSE Designated Market Maker, and that GETCO has purchased 350 NYSE DMM assignment from Barclays Capital. GETCO is already a supplementary liquidity provider (a program that was conceived as a temporary measure, yet which is now running almost a year past its original expiration date, merely to pay "liquidity providers" Goldman and GETCO), as well as a market maker on the NYSE. Yet the question of just how much principal/prop exposure GETCO takes (as the WSJ disclosed previously this amount is staggering and is often 10-20% of daily volume) in "providing" all this liquidity, deserves additional analysis, as being so intimately linked in various cross-markets means that GETCO, which is struggling in the face of ever increasing HFT competition, will now need to become an ever greater "economy of scale" (think Goldman) in the markets to extract the same unleveraged returns it did in the past. And by doing so, it will likely take on ever greater unbalanced prop exposure, whose eventual (and very sudden) unwind will prove most interesting due to the ever increasing implied correlation between all asset classes. Themis Trading shares some additional insight into just what this development means for both exchanges and investors.
"A handful of high-frequency trading firms accounted for an estimated 70 percent of overall trading volume on U.S. equities markets in 2009. One firm with such a computerized system traded over 2 billion shares in a single day in October 2008, amounting to over 10 percent of U.S. equities trading volume for the day. What are the advantages and disadvantages of this technology-dependent trading environment, and how are its risks controlled?... The high-frequency trading environment has the potential to generate errors and losses at a speed and magnitude far greater than that in a floor or screen-based trading environment." - Chicago Federal Reserve
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?"
As the only way to make money in this market is to mimic the big boys and to churn stock after stock (especially those with massive short interests) then closing 100% in cash at the end of every day, it was only a matter of time before someone started pitching the very same product that Comedy Central's Cash Cow highlighted is a sure way to make gobs of free money, to retail investors. That this someone happened to be Lime Brokerage is probably not very surprising.
"Meanwhile, every 20 milliseconds "HFT-Quants" are taking another "too-dumb-to-stop-trading" little investor trapped in the illusion that Fannie, Freddie and AIG will "be worth something, someday." "HFT-Quants" don't think long term. Their algorithms think in milliseconds, just enough time to skim more money from all the 'dumb money' out there." Paul Farrell, MarketWatch
Dear Senator Kaufman, we at Zero Hedge applaud your effort to bring transparency to, and evaluate the various new forces that, for better or worse, determine the modern market landscape. However, we would like to bring to your attention a fact which renders your entire approach of seeking fair and unbiased commentary from the SEC irrevocably moot. The reason is that the SEC, in alignment with many of the very industry players who may be abusing market structure for their own tiered benefit, stands to benefit significantly from an increased amount of daytrading volume across all markets, and, in fact, based on actions as recent as 4 months ago by the SEC, the regulator is well aware of the monetary benefits that ever-increasing churn creates for the commission and is fully intent on capitalizing on them. We thus suggest you bypass any protocol that has an SEC intermediation and go directly to penning a Bill which, we trust, will prove to be more fair and objective than anything the SEC would ever provide you with. The reason for the SEC's insurmountable conflict of interest is the so-called Section 31.
Yet another good introduction for the novices in the field. Keep in mind the various participants have extensive interests so read between the lines.
"In response to recent media stories on High Frequency Trading, we wanted to clarify our position to clients."
Whitney Tilson continues investigating High Frequency Trading
Lately, as the topic of High Frequency Trading has gotten front page prominence, there has been much confusion as to the top line impact on traders that utilize HFT methods, and inversely how much of a "toll" on investors high frequency trading is. In other words: what is the cost of liquidity?
Damage control... Or is Goldman a little worried what Direct Edge may disclose.
From the appended Schumer piece on Bloomberg:
“Goldman Sachs believes high-frequency trading should have an accompanying obligation to provide liquidity, and be subject to appropriate regulatory oversight,” Canaday said.
Ed, we have been giving you the chance to provide your side of the story for months. Please take us up on the offer.
HFT creates systemic instability and makes market manipulation much easier.
Zero Hedge recently had some choice words against a subset of HFT, namely Flash Trading, and as even Irene Aldridge confirmed earlier, there is something very wrong with that subset of program trading. It seems our admonitions have fallen on the right ears. In a startling development of anti-establishmentarian activism, Senator Charles Schumer has asked the SEC to ban Flash Trading in its entirety, as it "gives high-speed traders an unfair advantage over other investors."
First Goldman, now High Frequency Trading... The media onslaught is converging.
Better late than never.