dark pools

I contend that Lewis should have done a lot more to identify the parties involved and tell the full story of latency arbitrage in Sigma X.

Back on March 21, before the release of Michael Lewis' Flash Boys and before the infamous 60 Minutes interview, when Goldman COO Gary Cohn wrote his infamous WSJ Op-ed bashing HFT, it was clear that something was afoot. That something became promptly clear when it was revealed that Goldman is among the core backers of the pseudo dark-pool IEX exchange popularized as the protagonist in Flash Boys, and juxtaposed to the frontrunning, and faceless, HFT antagonist that Lewis maanged to demonize so well in the span of a few hundred pages, he promptly provoked a renewed investigation by the FBI, the SEC and DOJ into HFT. A few days later, the shocker became a double whammy when Goldman announced that in addition to turning its back on HFT which had served it so well for years, the firm would also say goodbye to the NYSE and its designated market maker post, the last remaining legacy of its $6.5 billion Spear Ledds & Kellogg acquisition from 2000. Moments ago we got the third and final "shocker" in this series of stunning disclosures by Goldman, this time involving Goldman's own "unlit" venue - one involving its own Dark Pool - the infamous, and market dominant Sigma X, which according to the WSJ, is about to be shut down!

"I must confess to you that I was an ardent proponent of bringing technology to trading and brokerage. Unfortunately, I only saw the good sides. I saw how electronic trading and record-keeping could be used to force people to be more honest, to make the process more efficient, to lower transaction costs and to bring liquidity to the markets. I did not see the forces of fragmentation and the opportunity for people to use technology to keep to the letter but avoid the spirit of the rules -- creating the current crisis....  Technology, market structure, and new products have evolved more quickly than our capacity to understand or control them. ... To the public the financial markets may increasingly seem like a casino, except that the casino is more transparent and simpler to understand.... The result has been a series of crises over the past few years that have caused many investors to lose confidence or to think that the whole system is a rigged game."

What is there in this world that is transparent? Is there anything left? You just need to take a look around you. The growing number of corruption cases, the people that embezzle, fraudulently take, borrow, beg and steal at whim.

The blog posts and defenses of high frequency trading in the past week have come with dizzying high frequency. Flash Boys has struck many a nerve; the truth can be a bitter pill at times. And of course, the pro-HFT defenses are all made by many who are very, very staked in the status quo of our market structure. Now, bloggers using twitter is one thing; conflicted insiders using television to make their HFT defenses are another. 

In the aftermath of Michael Lewis' book "Flash Boys" there has been a renewed surge in interest in High Frequency Trading. Alas, much of it is conflicted, biased, overly technical or simply wrong. And since we can't assume that all those interested have been followed our 5 year of coverage of a topic that finally has earned its day in the public spotlight, below is a simple summary for everyone.

• The counter-HFT-attack begins with first target - dark pools: Dark markets may be more harmful than high-frequency trading (Reuters)
• Malaysia Jet Team Hears Pings Consistent With Black Box (BBG)
• At Toyota as Humans Steal Jobs From Robots (BBG)
• ‘Reverse Auctions’ Draw Scrutiny (NYT)
• Death knell sounds for Brazil’s economic strategy (FT)
• Technology Traders Head for the Exit as Put Trades Surge (BBG)
• NSA Uses Corporate News to Spread Propaganda and Silence Dissent (TruthDig)
• Holcim, Lafarge agree to merger to create cement giant (Reuters)
• Any minute now: Investment Jump Seen From Macy’s to Berkshire After 2013 Fizzle (BBG)
• India kicks off world's biggest election in remote northeast (Reuters)

UPDATE: Nasdaq negative year-to-date; Biotechs 3-month lows. AMZN, FB, TWTR, NFLX, P all in Bear market territory

Shortly after 946amET, the stock of The Nasdaq OMX Group suddenly dropped in a mini-flash-crash from from 35.98 to 35.00 in just over 2 seconds on approximately 100,000 shares. As Nanex notes, this is what high-frequency-trading liquidity looks like. But now, an hour or so later, the Nasdaq index and most especialy its Biotech and high-growth names are being crushed. Biotechs are near 3-month lows, Momos are down 16 to 18% since FOMC, and Nasdaq is about to go negative for the year.

One has to wonder why we are dodging this truth about what we've become: a nation that turns a blind eye to skimmers, scammers and legal looting. As in the story of the Emperor's new clothes, the onlooker who declares the obvious - in this case, that the stock market is rigged - shatters the consensus lie.

In what is a true double whammy of market structure stunners from Goldman over the past week, not only has the firm done an about face on HFT (we eagerly await Goldman's pardon of "HFT market manipulator" and former Goldman employee Sergey Aleynikov) and is now actively bashing the high freaks (much to the chagrin of Virtu and its pulled IPO, whose lead underwriter Goldman just happened to be), overnight it was reported that Goldman is also in the process of selling its "designated market-maker" unit to Dutch firm IMC Financial Markets to sell the trading business.

The stock market really was rigged... “It’s 2009,” Katsuyama says. “This had been happening to me for almost two years. There’s no way I’m the first guy to have figured this out. So what happened to everyone else?” The question seemed to answer itself: Anyone who understood the problem was making money off it...

It seems the blatant unveiling of the HFT market's Holy Grail trading - Virtu (1 loss in 1238 days) - has raised some attention as Bloomberg reports, NY AG Eric Schneiderman has opened a broad investigation into whether U.S. stock exchanges and alternative venues provide high-frequency traders with improper advantages. As one European lawmaker noted, "the area of high-frequency trading is lacking suitable regulation," and Schneiderman warned "this new breed of predatory behavior gives a small segment of the industry an enormous advantage over all other competitors."  We wonder how this will affect Virtu's IPO given regulation is risk factor #1!

So far in 2013, Bank of America lost money on 9 trading days out of a total 188. Statistically, this result is absolutely ridiculous when one considers that the bulk of bank trading revenues are still in the form of prop positions disguised as "flow" trading to evade Volcker which means the only way a bank could make money with near uniform perfection is if it either i) consistently has inside information that it trades on or ii) it consistently front-runs its clients (the latter incidentally was a topic we covered back in 2009 relating to Goldman Sachs, and which the bank sternly rejected). We now know that when it comes to Bank of America at least one of the two happened.

With December's "fat finger" in US Treasury Futures proved as nothing but an HFT algo gone wild, Nanex has turned its deep-thought to the recent halt in gold futures markets. Their conclusion, this was not the result of a fat finger, but rather the work of a high frequency trading algorithm that would pause, and (probably) test the market before continuing. A fat finger would not have had such distinguishing features.