High Frequency Trading

Trading has a few simple rules - do the opposite of Goldman's Thomas Stolper; don't fight the Fed; and buy low, sell high. However, as this series of charts from Nanex shows, it is the latter rule that is the easiest to comprehend and yet - thanks to massive and obvious HFT manipulation - is an extremely difficult thing to do. As Nanex's Eric Hunsader notes, high frequency trading algos do not get much clearer than this as the machines buy low (from you) and sell high (to you) each and every millisecond of the trading day.

As more and more "baby boomers" head into retirement the need for high quality, independent, registered investment advisors will continue to grow.  The need for firms that do organic research, analysis and make investment decisions free from "conflict," and in the client's best interest, will continue to be in high demand in the years to come as more "boomers" leave the workforce.  While the "Wall Street" game is not likely to change anytime soon; the trust of Wall Street is fading and fading fast.  The rise of algorithmic, program and high frequency trading, scandals, insider trading and "crony capitalism" with Washington is causing "retail investors" to turn away to seek other alternatives.

So, apparently, according to Jon Hilsenrath, "QE to Infinity" is actually "finite" after all. There is no doubt that the Federal Reserve will do everything in its power to try and "talk" the markets down and "signal" policy changes well in advance of actual action.  However, that is unlikely to matter.  The problem with the financial markets today is the speed at which things occur.   High frequency trading, algorithmic programs, program trading combined with market participant's "herd mentality" is not influenced by actions but rather by perception. As stated above, with margin debt at historically high levels when the "herd" begins to turn it will not be a slow and methodical process but rather a stampede with little regard to valuation or fundamental measures. The reality is that the stock market is extremely vulnerable to a sharp correction.   Currently, complacency is near record levels and no one sees a severe market retracement as a possibility.  The common belief is that there is "no bubble" in assets and the Federal Reserve has everything under control. Of course, that is what we heard at the peak of the markets in 2000 and 2008 just before the "race for the door." This time will be no different.

Despite the aura of control, Fed officials (and casual observers) may sense things spinning out of control. Of course, hyper-fragility is exactly the effect that all the Fed’s own actions would predictably lead to. When you divorce truth from reality, strange things are bound to happen. There is one thing that we know for sure in this strange period when bankers have tried to manage reality in the absence of truth: that advanced industrial-technological economies designed to run on $20-a-barrel oil can’t run on $100-a-barrel oil, and that is why the US economy was subject to financialization in the first place - to offset declining productive activity by an attempt to get something for nothing. The world is about to find out that you really can’t get something for nothing. It will be a harsh lesson.

All Empires Crash Soon After They Reach Their Peak

US commercial bank loans and leases flat since Lehman, and yet US GDP higher by $2 trillion since the biggest bankruptcy in history. How does one reconcile this monetary and growth quandary? Simple. Enter the Fed.

According to today's data from the US Mint, a record 63,500 ounces, or a whopping 2 tons, of gold were reported sold on April 17th alone, bringing the total sales for the month to a whopping 147,000 ounces or more than the previous two months combined with just half of the month gone.

The Analytics Group of IIROC performed a Trading Review and Analysis of High Frequency Trading on Canadian equity markets.  IIROC uses a methodology to identify user IDs exhibiting high order-to-trade ratios, or HOT User IDs, and covers the period from August 1, 2011 to October 31, 2011.

Below are portions of a comment letter submitted by R.T. Leuchtkafer to the SEC on April 16, 2010, just 3 weeks before flash crash. The second paragraph in the excerpt below, unknowingly describes exactly how the flash crash was started. The letter goes on to alert the SEC on the dangers of High Frequency Trading (HFT), phantom liquidity and other concerns.

While it will be no surprise to any ZeroHedge reader, academic research from ETH Zurich shows that not only are "commodity markets becoming very financialized and computerized... and more susceptible to minor shocks," but "at least 60-70% of price changes are now due to self-generated activities rather than novel information." In other words, only about a third of commodity price moves are caused by real fundamental news now (as opposed to 75% pre-HFT).

After exposing the stock market manipulative arsenal that is High Frequency Trading, quote stuffing, flash trading, packet churning, layering, sub-pennying, liquidity, latency and dark pool arbitrage, NBBO and Reg NMS exemptions, "hide-not-sliding", collocation, and much, much more for four years, or so long even Credit Suisse joined the chorus we started in April of 2009, we are glad to learn that finally, with a ridiculous Rip Van Winklesian delay, but better late than never, "the FBI has teamed up with securities regulators to tackle the potential threat of market manipulation posed by new computer trading methods that have taken operations beyond the scope of traditional policing." In other words, the SEC has finally realized it can no longer pretend it is not co-opted, but because it has no clue where to even start with HFT, has asked the help of the Feds. Which in itself is hardly reason for optimism, but if there is one thing Hans Gruber has taught us, it is that when the Feds get involved, the first thing they do is cut the power, and in this algo-based market that will end some 99% of all daily manipulative practices we have all grown to love and look forward to every single day.

The European Commission formally endorsed the financial transaction tax agreed to by eleven of the 27 members. The tax will be set at 0.1% for stocks and bonds and 0.01% for derivatives. The tax will go into effect at the start of 2014, by which time the participating countries will give it formal approval.

There seems to be two purposes of the tax. The first is to raise revenue. The EC projects the tax will raise 30-35 bln euros annually where ever and whenever an instrument from eleven is traded. This would seem to block the ability to avoid the tax by moving transactions out of the eleven countries. It reinforces the "residence principle". This essentially means that if some one is a resident of the eleven countries, or acting on behalf of a resident, the transaction will be taxed anywhere it takes place. The other purpose is to deter the high frequency trading, which some officials see as largely unnecessary and potentially destabilizing.

There was a time back in 2009 when GETCO was the absolute titan of the high frequency trading arena, printing money with the reckless abandon of a Federal Reserve on full tilt. It even got its own profile piece in the WSJ in the summer of 2009: "Meet Getco, High-Frequency Trade KingMeet Getco, High-Frequency Trade King." However, the good days were not to last as shortly thereafter we got a flash crash, then we got three + years of Ben Bernanke's (and every other bank's) central planning and some $10 trillion in combined exogenous liquidity to prop up the market, both of which resulted in the complete loss of faith in a standalone stock market by the retail investor (and once the current unwind of the December rotation from stocks into savings accounts over capital gains tax fears ends, the outflows will resume especially as latest ICI data shows with the smallest inflow into domestic equities to date in 2013). And since retail orders no longer would feed the frontrunning, sub-pennying, quote churning, flash crashing juggernaut that is HFT, that meant less revenue and profit for algo master GETCO. How much less? A whopping 82% less in the nine months ended September 30, 2012 compared to a year prior, and 92% less when annualizing 2012 results compared to the firm's heyday in 2008, the year in which it made a record $430 million in net income. Getco's net income as of September 30, 2012: a tiny $25 million.

"Jesse Litvak arranged trades for customers as part of his job as a managing director on the MBS desk at Jefferies.  Litvak would buy a MBS from one customer and sell it to another customer, but on many occasions he lied about the price at which his firm had bought the MBS so he could re-sell it to the other customer at a higher price and keep more money for the firm.  On other occasions, Litvak misled purchasers by creating a fictional seller to purport that he was arranging a MBS trade between customers when in reality he was just selling MBS out of his firm’s inventory at a higher price.  Because MBS are generally illiquid and difficult to price, it is particularly important for brokers to provide honest and accurate information. The SEC alleges that Litvak generated more than $2.7 million in additional revenue for Jefferies through his deceit.  His misconduct helped him improve his own standing at the firm, as his bonuses were determined in part by the amount of revenue he generated for the firm." 

Israel hasn`t attacked Iran, huge builds in gasoline products, no jump in demand, yet oil price moved up regardless...