Front Running

When obnoxiously wealthy pricks with the ability to bribe stock exchanges to place their trading computers on the floor of the exchange and financially induce the Wall Street banks to funnel trades through their dark pools in order to know what is happening a nanosecond before everyone else, and use this information to front run unknowing investors to generate risk free profits, it’s wrong. It really is black and white. I don’t care that it is supposedly “legal”.  By complying with Regulation NMS the smart order routers of institutional investor firms like Vanguard, Fidelity and Schwab simply funneled naïve investors into various snares laid for them by the unscrupulous high frequency traders. The bad guys always win and the good guys always lose on Wall Street. And no one does anything because they are all on the take. Lewis puts it in terms the average person can understand.

None other than status-quo-hugger Berkshire Hathaway's Charlie Munger took aim at the scourge of HFT this morning; blasting high-frequency traders as "the functional equivalent of letting rats into a granary," and exclaims "it does the rest of civilization no good at all." Buffett reminds that HFT is "not a liquidity provider, " explaining that while it does produce volume, that is not the same as liquidity; and while the Oracle opines (incorrectly) that the small investor has never had it so good, Munger is quick to point out that the money HFT makes does not come from heaven and in fact it is the small investor who is hurt by the fact that large investors (who mostly act on small investors' behalf) are severely impacted. Even the usually abstinent Bill Gates remarks upon HFT as "adding no value.. because when the liquidity is needed, it isn't there." Munger sums it up: "I don't like it."

[J. Bradley Bennett]...compared high frequency trading to buying a first-class ticket on an airline...“Is there anything unfair about that? Doesn’t sound like it to me.”

In a world filled with innuendo, false flags, and more one thing remains constant: What is Goldman Sachs (GS) up to and more importantly – why?

Suddenly the world is a buzz with the revelations that High Frequency Trading (HFT) may be doing more than actually harming the markets, it might be destroying the illusion they still are markets. This past Sunday the world at large was introduced that maybe, just maybe, something was amiss in the financial markets. Between the Federal Reserve's massive QE experiment amplified by the arms race of algorithmic technologies (aka HFT) to shave off a piece of that pie for themselves, the last few years have been nothing less than breathtaking. The only good thing that has come out lately on this whole issue of HFT is maybe for the first time in years the cover has been thrown off exposing the parasitic beast that’s been living just beneath the surface passing itself off as a symbiotic entity, rather than the pernicious monster its grown to be. Now the only question left to ask is: Can they invoke the death penalty for this creature... Without killing the patient?

Fundamentally oriented investors tend to think that quants, like blondes, have all the fun. As ConvergEx's Nick Colas notes - it all looks like easy money - scalping trades with lightning fast computers, front running news with preferential access to press releases, or managing leveraged portfolios with thousands of small but profitable positions – but quants face their own significant challenges. Finding common rule sets that work in a wide array of stocks is not easy, and markets adapt quickly to close opportunities that seem historically profitable - the number of potential signals is seemingly endless; and regulators are now aware of quantitative investing and, in some cases, don't like what they see. Here are 10 reasons why why "it's not easy being a quant."

Society is about to turn decidedly against the Bankers

COMEX inventories are collapsing, how much longer until we get a "run" on the Comex?

Reality will reassert itself in 2014, with lemmings, flippers, and hedgies getting slaughtered as the housing market comes back to earth with a thud. The continued tapering by the Fed will remove the marginal dollars used by Wall Street to fund this housing Ponzi. The Wall Street lemmings all follow the same MBA created financial models. They will all attempt to exit the market simultaneously when their models all say sell. If the economy improves, interest rates will rise and kill the housing market. If the economy tanks, the stock market will plunge, creating fear and killing the housing market. Once it becomes clear that prices have begun to fall, the flippers will panic and start dumping, exacerbating the price declines. This scenario never grows old.

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.

It would appear that the government, via its mortgage-financing subs Fannie Mae and Freddie Mac, is providing yet another $50 to $100 million fillip to banks - but this time at the expense of their ignorance. As Reuters reports, the FBI is investigating "unsophisticated tradecraft," such as hand signals and special telephone ring tones, that some traders are conspiring to rig rates on large orders submitted by the GSEs - front running them in the interest rate swaps market. Of course, no one is surprised at yet another manipulation or malfeasance but the 'high-level-employee' whistleblower's exposure is perhaps not surprising since the size of 'hedging' orders from the mortgage-managers provides an incentive for front-running ahead of the trades - "GSEs frequently submit large interest-rate swap trades, making them easy targets for front running and lucrative targets for market manipulation."

• House Unveils $1.01 Trillion Measure to Fund Government (BBG)
• Credit Suisse Tells Junior Bankers to Take Saturdays Off (BBG)
• Spot the odd word out: ECB Sees Bad-Debt Rules as Threat to Credible Bank Review (BBG)
• Insert laugh track here: Spain GDP grows at fastest pace in almost six years (FT)
• Scandinavian Debt Crisis Waiting to Happen Puzzles Krugman (BBG)
• Fed Said to Release Plan to Limit Banks’ Commodities Activities (BBG)
• Thai Protesters Extend Blockade After Rejecting Poll Talks (BBG)
• China provinces set lower growth goals for 2014 (BBG)

Facts are treasonous and dangerous in an empire of lies, fraud and propaganda. It is maddening to watch the country spiral downward, driven to ruin by a psychotic predator class, while the plebs choose to remain willfully ignorant of reality and distracted by their lust for cheap Chinese crap and addicted to the cult of techno-narcissism. We are a country running on heaping doses of cognitive dissonance and normalcy bias, an irrational belief in our national exceptionalism, an absurd trust in the same banking class that destroyed the finances of the country, and a delusionary belief that with just another trillion dollars of debt we’ll be back on the exponential growth track. The American empire has been built on a foundation of cheap easily accessible oil, cheap easily accessible credit, the most powerful military machine in human history, and the purposeful transformation of citizens into consumers through the use of relentless media propaganda and a persistent decades long dumbing down of the masses through the government education system. This national insanity is not a new phenomenon. Friedrich Nietzsche observed the same spectacle in the 19th century: “In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule.”

How Much Are Intelligence Analysts Front Running Markets?

There is "not a chance," that the Fed will be able to unwind its balance sheet in an orderly manner, "because everybody is front-running [them]," as the Fed is creating "serial bubbles," that are increasingly hard to manage since "we're getting in deeper and deeper every time." David Stockman has been vociferously honest in the last few days and his Bloomberg Radio interview with Tom Keene was extremely so. While Keene tries his best to remain upbeat and his permabullish self, Stockman just keeps coming with body blow after body blow to the thesis that this 'recovery' is sustainable. "They are using a rosy scenario forecast for the next ten years that would make the rosy scenario of the 1981 Reagan administration look like an ugly duckling," he exclaims, adding that the Keynesian Krugmanites' confidence is "disingenuous" - "the elephant in the room - the Fed," that are for now enabling rates to stay where they are. The full transcript below provides much food for thought but he warns, if the Fed ever pulled back, even modestly, "there would be a tremendous panic sell off in the bond market because it is entirely propped up... It's to late to go cold turkey."