Here are some common-sense rules for such a "new market":
- Every offer and bid will be left up for 15 minutes and cannot be withdrawn until 15 minutes has passed.
- Every security--stock or option--must be held for a minimum of one hour.
- Every trade must be placed by a human being.
- No equivalent of the ES/E-Mini contract--the futures contract for the S&P 500--will be allowed. The E-Mini contract is the favorite tool of the Federal Reserve's proxies, the Plunge Protection Team and other offically sanctioned manipulators, as a relatively modest sum of money can buy a boatload of contracts that ramp up the market.
- All bids, offers and trades will be transparently displayed in a form and media freely available to all traders with a standard PC and Internet connection.
- Any violation of #3 will cause the trader and the firm he/she works for to be banned from trading on the exchange for life--one strike, you're out.
Is such a retail-trader friendly exchange possible? There would certainly be a nice profit in it, for everyone who is tired of providing liquidity for HFT firms would flee the existing exchanges in a New York minute.
Nanex's excellent and thorough analysis of sub-penny trade data doesn't support SEC's conclusions about internalizers as written in the final flash crash report. There is abundant evidence that internalizer software was acutely sensitive to the integrity of the consolidated feed and would switch off internal matching only if and only when the quote was crossed. Furthermore, short term volatility had little, if any impact on the number of sub-penny trades. About the only thing Nanex findings have in common with the SEC report on this matter, is that the date in question was May 6, 2010. This revelation, that internalizer software is sensitive to the integrity of the consolidated quote, means someone could manipulate the consolidated quote in order to cause internalizer software to reject valuable retail orders and spill them to dark pools or exchanges. This may explain the common micro-bursts of activity that occur throughout the trading day and cause a number of stocks to have crossed quotes in the consolidated feed - and implicitly open the broad market itself to these micro-bursts causing another flash crash.
In tort law, an attractive nuisance is any potentially hazardous object or condition that is likely to attract the naive and unwary, i.e. children. A classic example is an abandoned swimming pool half-filled with fetid water. The stock market is demonstrably an "attractive nuisance" and should be closed immediately. It should never be reopened unless these conditions can be met: 1) All shares must be owned for at least four hours 2) All trading must be executed by humans on a transparent exchange where all trading activity (and open orders) is visible to all participants 3) Intervention in the market by the Federal Reserve or any Central State agency or agents is against the law. If you insist on putting money at risk in the stock market, be aware that you are playing a rigged roulette wheel and thus you are a mark. You might win, or the entire game might collapse in a rotten heap of lies and corruption. Just remember that the market is ruled by parasites who need to keep their hosts (investors) alive so they can continue to feed off them (i.e. biotrophic parasites). If the hosts all leave the market, the parasites will have only themselves to feed on, and they will quickly expire.
The 'what we lose in margin, we'll make up for in volume' strategy is failing. And for the NYSE it is failing large. The decision to 'enable' HFT - for its 'liquidity-provision', which after all has done nothing but expose the dismal reality of a market structure designed to nickel-and-dime retail til the last penny drops, has had the absolute opposite unintended consequence of driving the only real liquidity provider - the retail trader putting his real money to work - out of the market. As Securities Technology reports, the NYSE Euronext reports daily volume of trading stocks down 16.9% from a year ago (and down 17.8% YTD compared to last year) and down 9.9% from June alone. NYSE/Arca/MKT's share of trading in NYSE-listed stocks is down 34.3% from a year ago as the dark pools rise, and with volumes collapsing it is only likely that we will see far more 'incidents' such as Knight - where companies whose top-line explicitly stems from flow trading - increasingly find themselves redundant; whether or not this is due to a self-inflicted algo, or other, potentially more sinister, reasons.
Active traders and professional money managers already know how the U.S. stock market actually works, but Joe and Jane Citizen, whose pensions generally depend on the market in some way, typically do not. This entry is for them. Today's financial markets are endlessly complex, and this complexity implicitly serves to mask the true nature of market operations. Most of this complexity can be boiled away with zero loss of understanding. Indeed, manipulating this complexity is what earns the big bucks on Wall Street, while boiling it away earns the big bucks for commentators and analysts. Thus complexity serves the financial industry extremely well.
- The first and most important thing to understand about the U.S. stock market is how few humans are actually involved in the decision to buy or sell large blocks of shares.
- The second important thing to know about the stock market is that central banks and governments intervene as buyers to trigger rallies and put floors under declines.
- The third thing to know about U.S. stock market is that their operations are opaque, invisible, and hidden from the citizenry and non-Elite human traders.
- The fourth and last thing to know about U.S. stock markets is that this skimming and intervention have left the markets extremely vulnerable to collapse.
While the attached interview between the Casey Report and HFT expert Garrett from CalibratedConfidence will not reveal much unknown new to those who have been following the high frequency trading topic ever since ZH made it a mainstream issue in April of 2009, it will serve as a great foundation for all those new to the topic who are looking for an honest, unbiased introduction to what is otherwise a nebulous and complicated matter. We urge everyone who is even remotely interested in market structure, broken markets and the future of trading to read the observations presented below.
The Island-Renaissance fusion was a vision of the future in which high-speed AI-guided robots would operate on lightning-fast electronic pools, controlling the daily ebb and flow of the market. The AI Bots poured their valuable liquidity into Island, which, in turn, made it possible for the Bots to operate at high frequencies. They fed off one another, creating a virtuous cycle that would become un- stoppable. Little-known outfits such as Timber Hill, Tradebot, RGM, and Getco would soon start trading on Island, forming the emergent ganglia of a new space-age trading organism driven by machines. Tricked-out artificial intelligence systems designed to scope out hid- den pockets in the market where they could ply their trades powered many of these systems. In the process, the very structure of how the U.S. stock market worked would shift to meet the endless needs of the Bots. The human middlemen, though they didn’t know it, were being phased out, doomed as dinosaurs. And the machines were breeding more machines in an endless cycle of innovation, as programmers pushed the boundaries of speed more ruthlessly than Olympic sprinters. Trading algorithms would mutate, grow, and evolve, feeding off one another like evolving species in a vast and growing digital pool.
High-frequency trading became so competitive that on a truly level playing field no one could make money operating at high volumes. Starting in 2008, there had been a frantic rush into the high-frequency gold mine at a time when nearly every other investment strategy on Wall Street was imploding. That competition was making it very hard for the firms to make a profit without using methods that Bodek viewed as seedy at best. And so a complex system evolved to pick winners and losers. It was done through speed and exotic order types. If you didn’t know which orders to use, and when to use them, you lost nearly every time. To Bodek, it was fundamentally unfair—it was rigged. There were too many conflicts of interest, too many shared benefits between exchanges and the traders they catered to. Only the biggest, most sophisticated, connected firms in the world could win this race.
Haim Bodek thought practically nonstop for days about what the trade-venue representative had told him that night at the New York party. The way that the abusive order types worked made him think back to a document he’d been given by a colleague that summer as he researched what was going wrong at Trading Machines. The document was a detailed blueprint of a high-frequency method that was said to be popular in Chicago’s trading circles.
It was called the “0+ Scalping Strategy.”
In early December 2009, Haim Bodek finally solved the riddle of the stock-trading problem that was killing Trading Machines, the high-frequency firm he’d help launch in 2007. The former Goldman Sachs and UBS trader was attending a party in New York City sponsored by a computer-driven trading venue. He’d been complaining for months to the venue about all the bad trades—the runaway prices, the fees—that were bleeding his firm dry. But he’d gotten little help.
Some interesting market chatter was recently intercepted: if true, then JP may be quietly offloading at least some part of his financial exposure using dark liquidity.
Europe Begins Push To Ban HFT: Calls "Quote Stuffing" Market Abuse, Dark Pools "Tragic Error", And "Explicitly Rules Out" Flash OrdersSubmitted by Tyler Durden on 11/25/2010 15:07 -0400
The push back against the HFT market-propping travesty is finally starting to gain steam...but for now only in Europe. After all, the Fed realizes all too well that it needs all the resources it can get in its bid (no pun intended) to keep stocks as artificially high as possible, of which the HFT upward biased feedback loop is a critical one (the PD POMO monetization circuit being a second one... and when both fail, there is always the Citadel dark pool direct purchasing channel). Reuters reports thet "Britain and France flagged on Thursday a looming crackdown on ultra-fast share trading that featured in May's brief "flash crash" freefall on Wall Street, alarming regulators and investors globally. French Economy Minister Christine Lagarde said a
form of computerized trading known as high-frequency trading (HFT) may
need banning in some cases." Lagarde, who has recently shown a willingness to be seen as not part of the Bernanke mold, told reporters that her "natural tendency would be at least to
regulate, to oversee it very strictly and after a cost-benefit analysis
of these methods, maybe to forbid it." Elsewhere, a European Parliament November 16 report on MiFID "Calls for the practice of ‘layering’ or ‘quote stuffing’ to be explicitly defined as market abuse." This is something Zero Hedge has been demanding for about a year now, and obviously something that the corrupt regulators at the SEC, headed by the galactically incompetent Mary Schapiro continue to pretend does not exist. Lastly, in an attempt to make the life of the NYSE easier, whose primary source of revenue, now that Chinese IPOs have been uncovered to be a pathological, unauditable scam, has collapsed, the target has now shifted to dark pools: "The proliferation of dark pools was a tragic error and I would like us to come back to it" according to Bank of France Governro Christian Noyer. The latest onslaught against dark pools is not at all surprising: after all the NYSE is pushing hard to preserve some semblance of relevance (and EPS) as it is now attempting to create "a global network of as many as 40 "liquidity hubs" in data centers around the world." All in all, this smells like the role of HFT right here in our own back yard is about to get seriously curbed. Add the fact that Prett Bharara is about to open at least one criminal case against a domestic HFT outfit, and the robotic permabid behind the market may soon be very, very scarce.
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 14:19 -0400
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.
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 19:11 -0400
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.
“The Chief Executive of One of the Country's Biggest Block Trading Dark Pools Was Quoted Two Weeks Ago as Saying That the Amount of Money Devoted to High-frequency Trading Could ‘QUINTUPLE Between this Year and Next’"Submitted by George Washington on 11/06/2009 22:13 -0400