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.
How "Sub-Pennying" In Dark Pools Ignores SEC Rule 612, Makes A Mockery Of The NBBO, And Is Another Illicit Source Of Billions For Wall StreetSubmitted by Tyler Durden on 04/08/2010 13:19 -0500
One of the key "market integrity" (actually, much more appropriately said, lack thereof) topics that has not been touched at all by the Mainstream Media is the issue of Sub-Pennying, or the process of stepping in in front of displayed orders in blatant violation of NBBO rules as determined by Rule 612, in which broker-dealers profit to the tune of billions of dollars from "playing inside the spread" and in the process compromising the NBBO, having stocks being propped up by passive limit orders, pushing legitimate liquidity providers out of the market (after all,who wants to be constantly front run by block sniffing algos) and in general hurts the price discovery process. With regular exchanges predominantly used by schmucks and market small-timers, who trade in small volumes as the bulk of block order traffic has moved to various ATS and dark pools (primarily that of Goldman Sachs' Sigma X) leave it to the pros to find a way to make a mockery out of the market. Of course, as long as everyone is buying (with the taxpayer selling involuntarily) nobody has much reason to complain. However, when the ponzi ends and the rush to offload hits a fever pitch, the spirit of friendly thievery may turn sour very, very fast. Also, anyone who has any illusions they can trade fairly in dark pools (or the broader market), you have our condolences. We present a great guide on the dangers to market integrity from Sub-Pennying as presented by Dennis Dick of Bright Trading.
NYSE's Latest Benevolent DMM Getco Slapped With $2 Million Fee For Improper FSA Reports, As SEC Begins To Track HFT TradingSubmitted by Tyler Durden on 04/08/2010 12:40 -0500
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.
In an effort to dredge a moat around market share for Amex & Arca, the NYSE has implemented a new Penny Pilot "Premium Tier" pricing schedule for the options of 15 specific issues. Liquidity providers transacting serious size across these anointed sticker symbols ... AAPL, BAC, C, DIA, EEM, FAZ, GDX, GE, GLD, IWM, QQQQ, SPY, UNG, USO & XLF ... will (yet again) enjoy additional rebates as the NYSE attempts to  stave off competition from other options exchanges and  further buoy an anemic equity market, which continues to plow forward on phantom volume at 3 am on Sunday night (like the accelerator of a Toyota Camry beneath a sleep-driving Ambien junkie approaching a raised drawbridge with both eyes closed shut, one hand on the wheel and the other on his sixth bear claw).
How does an NFL linebacker develop computer algorithms that give a crucial edge in the market? “Large pipes” are your trading edge, and “clouds” do the heavy lifting. Like the NFL, you can’t defend against speed. Jon’s system catches big hedge funds, pension funds, and mutual funds shifting large positions. If China is serious about throttling back its economy, it will have a dampening effect on global markets. Volatility is going to die. An exclusive Hedge Fund Radio interview with OptionMonster’s Jon Najarian.
Senator Kaufman Reminds Most HFT Issues Still On Table; Notes Rising Market Structure Concern By Regulators And Market ParticipantsSubmitted by Tyler Durden on 03/03/2010 17:28 -0500
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."
Bankers are destroying Capitalism. Unfortunately, most Westerners won’t realize this until five years from now, when the middle class has been forcibly relegated to the ranks of the poor. And this isn’t just a situation that will afflict America but it will likely afflict Japan and many countries in the EU such as the UK, Spain, and Greece just to name a few.
From Mary Schapiro's speech at the 37th Annual Securities Regulation Institute at the Hotel del Coronado, California, surely a very much deserved, and taxpayer sponsored boondoggle, on the changing landscape in financial markets. Presented without expletive filled commentary.
The SEC has opened up the public comment section for File No. S7-02-10 "Concept Release on Equity Market Structure" also known as the "Help us because the SEC is hopelessly lost when evaluating the impact of high frequency trading" proposal. As the SEC points out: "This release is intended to facilitate public comment by first giving a basic overview of the legal and factual elements of the current equity market structure and then presenting a wide range of issues for comment. The Commission cautions that it has not reached any final conclusions on the issues presented for comment. The discussion and questions in this release should not be interpreted as slanted in any particular way on any particular issue. The Commission intends to consider carefully all comments and to complete its review in a timely fashion. At that point, it will determine whether there are any problems that require a regulatory initiative and, if so, the nature of that initiative." Most relevantly for Zero Hedge readers, the SEC's response solicitation form is now open and can be found here.
- Must read: Did foreigners cause America's financial crisis? Or what happens when all your debt and equities are belong to us (Newsweek)
- Ben Bernanke's term running out as Senate democrats try to set a vote (The Hill)
- Banks set for record pay, and you thought Goldman was bad - Morgan Stanley prepares to fork over a stunning 63.8% of revenue as compensation (WSJ)
- Dark pools may face pricing disclosure rules, EU watchdog says (Bloomberg)
- In defense of the case against HiFTers (Cassandra)
- Senate to vote on PAYGO legislation to clear way for debate over debt ceiling (The Hill)
- Dubai flare up 2.0? Abu Dhabi's Dubai aid shrinks to $5 billion (Reuters)
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.
In Order To Make The Ponzi Market Keep Going Ever Higher, Barney Frank Tries To Make Shorting Virtually ImpossibleSubmitted by Tyler Durden on 01/06/2010 14:01 -0500
As part of the Barney Frank proposed Manager's Amendment, which will accompany HR4173, the "Wall Street Reform and Consumer Protection Act of 2009", are three little-noticed rules that, if adopted, will make shorting stocks if not impossible, then extremely problematic and difficult. It is obvious why these rules would end up in an amendment: the outcry from retail and institutional traders would have been huge had these proposals made the full text of the proper Bill, and into the full view of the Mainstream Media. So why bother with these - simple. As everyone is aware, Ponzi schemes only work when constantly growing, as otherwise they blow up, implode under their own weight, once price discovery is attempted by all. Case in point: when Madoff's securities was unable to find another greater fool in the face of collapsing asset values, the jig was up overnight, and the value of the pyramid went from $50+ billion to $0 instantaneously.
In this manner, Ponzies are like sharks - they need to swim to live: any deviation from the norm threatens their very survival. By comparison, shorting has always been the most traditional way to force price discovery: as idiot money pension funds tend to be long-only, selling only occurs in times when book gains have to be realized, and facilitates a rising market without any natural checks and balances. If this amendment passes, the entire equity market will have become Madoff securities to the dot. It will continue going up, until market values are a reflection of no underlying fundamentals, but simply the latest pension fund long-only dumb terminal willing to throw managed capital into the bonfire of an inevitable future stock market collapse. And, to borrow another page from the Madoff analogy, when the inevitable correction does occur, it would not be 10% or 20%: the entire worth of the Ponzi would be gutted.
Anyone looking at their 401(k) portfolio performance since the end of August will undoubtedly be very happy (and extremely surprised), as the market has climbed steadily higher despite i) increasingly declining trading volume and ii)consistent and material withdrawals from domestic equity mutual funds. Furthermore, if anyone was merely looking at the trading action in regular hours, one would think there was absolutely no profit made since early September. The reason for that: all the upside since September 14th has come exclusively from after hours action. The chart below demonstrates the relative performance of regular hour trading in the SPY as well as that in the extended session. The notable observations: gaps, gaps, gaps. Every single day, minimal volume pushes the futures index higher. Good news, bad news, it don't matter to the Goldman S&P and Russell 1000 futures desk: they just lift every micro offer, giving the impression that the market is unstoppable, often leapfrogging each other as the latest viagra'ed GDP or unemployment rumor is spread. Come morning, it is time for the HFT brigade to come in and scalp their trillions of pennies while leaving the market unchanged, then at 4pm handing it off again to leveraged futures manipulation and dark pools. In a nutshell, this is the secret of the past quarter's phenomenal market performance.
- Bad news for Athens: ECB says no bailouts, look for record Greek CDS risk shortly (WSJ)
- Suspected intervention weighs on Swiss franc (FT)
- For stocks, the worst decade ever (WSJ)
- Fund boss made $7 billion in the panic (WSJ)
- Mihskin's brilliance to the forefront again, as Iceland lawmakers reject Icesave bill, another downgrade impending (Bloomberg)
- China now exporting its bubbles: considers extra $200 billion for CIC sovereign wealth fund (Bloomberg)
- Tishman's $5.4 billion boomerang gives Rob Speyer costly lesson (Bloomberg)
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.