High Frequency Trading
Barclays Wants Dark Pool Complaint Against It Dismissed, Says "Nobody Was Harmed"; NY Attorney General DisagreesSubmitted by Tyler Durden on 07/24/2014 12:18 -0400
File this one for the bizarro files. After Barclays was caught lying to its "sophisticated" clients about how it handles their order following the lawsuit by NY AG Schneiderman, the bank, having suffered an epic 75% collapse of trading volume in its dark pool, has decided to fight back and earlier today filed a motion to dismiss the dark pool complaint against it. Its main argument, as reported by the WSJ, is that the attorney general's complaint "fails to identify any fraud, establishing no material misstatements, no identified victims and no actual harm." In other words, Barclays alleges the dark pool participants were smart enough to figure out Barclays was lying to them when it promised their order flow wouldn't be offered up to predatory algos.
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The last six months have not run according to anyone’s plan. Who would have thought that equity market structure would yield a best-selling book, after all? As ConvergEx's Nick Colas notes, on the fundamental side of things, interest rates across the developed world are lower, not higher – counter to the consensus view just 180 days ago. Mutual fund investors first bought U.S. equities earlier in the year, then in the last 6 weeks have begun to liquidate in earnest. Exchange Traded Fund investors are buying more fixed income products than those dedicated to U.S. stocks. Large cap stocks are trouncing small caps in terms of performance. And as for volatility – well, Elvis has clearly left the building on that one. So which of these surprises has staying power into the back half of 2014?
VIX was monkey-hammered lower once again today, lifting stocks vertically to Russell 2000 record highs and The Dow within a point of 17,000. The question is who (or what) is doing it. Nanex seems to have found out who... It appears the un-visible hand of VIX manipulation (that we have shown previously) has been forced into the open public markets as Barclays goes dark. Simply put, massive bursts of 1-lot TVIX orders flood and delay the markets enabling HFTs to manipulate the tail that inevitably wags the market (via VXX, SPX options hedges and leverage) and now that the dark pools are disappearing, we see it all in real-time.
First it was gold, now it is HFT - poor Barclays just can't get away with any market rigging crime these days: "In sum, Barclays’ courting of high frequency traders, and its willingness to falsify the extent of high frequency trading activity in its dark pool, was contrary to Barclays’ representations to clients that Barclays operated with “transparency” and provided a safe venue in which to trade. As described by one former senior Barclays Director: “there was a lot going on in the dark pool that was not in the best interests of clients. The practice of almost ensuring that every counterparty would be a high frequency firm, it seems to me that that wouldn’t be in the best interest of their clients . . . It’s almost like they are building a car and saying it has an airbag and there is no airbag or brakes.”
Having spent a week in surprisingly bright and sunny London, ConvergEx's Nick Colas reports that the consensus opinion in this global financial hub is that equities are where the sun shines the brightest. Public companies are intent on tapping those better days with more aggressive global investor outreach, and asset managers/brokers of all stripes feel that the developed economy bull market has a few more years to run. At the same time, everyone agrees that the near term feels a bit damp and acknowledges that the low levels of actual volatility are worrisome for their artificial “Keep calm and carry on” sentiment. Other heard/seen observations: London is no longer a British city, the surge in foreign buyers is creating a world-class property bubble. His conclusion, as long as humans are humans there will always be financial bubbles, either due to groupthink over real estate prices or financial assets. Just as surely as there will always be an England.
In what we are sure will be a reassuring hearing full of confirmation that markets are unrigged, safe for investors, and why retail has never had it better, the Permanent Subcommitte on Investigations will start by hearing from IEX's Brad Katusyama who will, as he did before, put them straight on the real actions of the high frequency trading community... Remember the last time HFTs tried to defend themselves... they lied.
in the past year it has became very clear that the asset class where the growth of HFT has been most pronounced is not in equities but in FX - perhaps linked to the tidal departure of all carbon-based FX traders all of whom it now appears were engaging in gross "chat room" mnaipulation - and to a lesser extent, options. But one place that seemed somewhat immune from the ravages of the constant millisecond back-and-forth churn and quote stuffing known as high frequency "trading" were bonds.
Our response to a question asked by CNBC-- “Why if everybody is talking about inflation is the bond market not moving?
The recent public outcry over high frequency trading is pointless. Solutions exist. Virtually every comparable market in the world uses them already. But, some electronic exchanges may not willingly adopt them. Doing so may disrupt their current business model. The incentives are misaligned, and competitors or regulators may need to force the issue to see change. Luckily, the issue to be forced is far simpler than most think. It’s time to add quality to the matching process.
One allegation about price manipulation was made by the German regulator BaFin. That proves it, right? Not so fast.
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.
Capture, corruption, irreparable harm--and little hope for change.
[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.”