High Frequency Trading

Uh-oh...

One has to admire Senator Kaufman's persistence. Yet with the market now going back to massively inflated levels which reflect nothing but excess Fed-subsidized liquidity, and with the general population having again forgotten that a year ago on November 21 2008 the world seemed like it was going to end (and SRS hitting several hundred dollars per share), the window to speak to sympathetic ears that actually care may have closed. It will open again, of course, but by then it will be too late.

I guess that the lack of any volume in the market for the last 7 and a half months has finally made an impact on the financial performance of the market operator NYSE Euronext. Read more about it in this article.

In a surprising outcome, Securities Industry News reports that according to a research survey conducted by Greenwich Associates, 55% of investors think high-frequency trading does not have a negative impact on their trading operations, "viewing the phenomenon as the latest development in a constantly evolving market," while 46% think that their institutions are placed at a disadvantage by traders who employ such strategies. Basically, the conclusion, before we disclose more of the study's observations, is that practically nobody has any idea what is really under the HFT surface. With an equal number of advocates and critics, confusion is rampant (and for some of the more vocal HFTsupporters who believe the NBBO is never crossed and displayed liquidity is always protected, we have three words: you are wrong... More on that and "qualified contingent orders" tomorrow).

"As many of you know, we are already moving forward on our market structure initiative. In recent weeks, we have proposed rules that would address the inequities of flash orders and dark pools of liquidity. Both of these undermine the integrity of the market by providing valuable pricing information to select market participants — information that is not widely available to the public. This in turn creates a risk of private markets and two-tiered access to information." - Mary Schapiro, SEC

"The investing community (especially retail) has benefitted from the evolving market structure" - Goldman Sachs

Definitely some interesting articles in my weekly link fest. We’ve got inflation, deflation, oil, jobs and of course plenty of Goldman barbs. What more could you ask for?

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.

A major component of HFT, server co-location, is now becoming a critical regulatory hot topic. The SEC has told the Nasdaq it will regulate its co-location business going forward. This is occurring even as the SEC is furiously googling terms like co-location and high frequency trading, and watching riveting debates between Michelle Caruso Cabrera and Bob Pisani, to find out just what they mean, and what exactly it is they are supposed to be regulating.

The S&P 500 Index is now selling at 26 times operating earnings. That's more expensive than at the bull market top in 2007. Are things really better than at the five-year bull market top in 2007? What about the trillions of dollars of bad assets still on the books of financial institutions around the world? Most analysts agree that the market is over valued. Yet they have to participate because the market is going up. They hope to be the first ones out of the exit when the plug is pulled. Do you think you can do that?

"Banning flash orders and imposing limits on dark pools should not be the end of the story, nor should they be seen as sacrificial lambs offered up by a substantial majority of Wall Street players as the price to ward off deeper review. Chief among the systemic issues that must be carefully reviewed is high frequency trading, which now makes up over 70% of the daily market volume. The SEC needs to closely review these strategies -- whether employed in dark pools or the public markets -- to ensure that high frequency traders are not able to take advantage of the long-term investors who are the backbone of our capital markets. It is the SEC’s mission to protect long-term investors, who care about the valuations of the underlying companies, not those who quest for trading profits achieved in milliseconds." - Senator Ted Kaufman

I wondered how America fell so fast. I think I found the answers.

It is only fitting that on the 22nd anniversary of Black Monday, the commentator is none other than the Chairman of the SEC at the time, David Ruder. While Ruder provides perspectives on what is presumed pervasive insider trading as it relates to Galleon and otherwise, such as the ability by the SEC to use wiretaps when doing an investigation in concert with the US Attorney's office, the real critical message from Ruder is the systemic risk associated with hedge fund groputhink, or a massive position held by numerous hedge funds that turns out to be wrong, best seen it in the basis trade blow up, the Volkswagen short squeeze and the Citigroup exchange offer.

The sad part in all of this is that pension contributions are funding this Casino Capitalism. Money is going to develop new ways to screw buyside clients that invest trillions in the markets. Pensioners don't stand a chance in a neo-Feudal world. I think it's time for a revolution, hopefully one without bloodshed, that will democratize the financial system by loosening the grip of the financial oligarchs.

"That’s why I have urged the SEC to undertake a comprehensive “ground up” review of a broad range of market structure issues before more piecemeal changes occur. We have seen this horror movie before, and only timely regulatory examination can best prevent a sequel: When markets develop rapidly and are not transparent, effectively regulated or fair, the movie’s ending scene can be one of tragedy affecting millions of people." -Sen. Ed Kaufman

A peculiar escalation developing in Chicago (what is it about that city) was today's development in the Citadel - Teza Technologies lawsuit. As a reminder, Teza is the firm run by former Citadel head of HFT and quantitative trading, Misha Malyshev, who got unmasked when it was made clear that he had recruited Sergey Aleynikov from Goldman, and was preparing to launch a quant trading group despite his non-compete with Citadel (which may very well be the reason for the entire Aleynikov fiasco after all). What was surprising in today's hearing was the proclamation by Citadel lawyers that Teza is a "veritable pirate ship of illegal activity."