Protests over call to ban 'flash' trades-(Hedge Fund protest to much)

market place is fair

for sure

pricks

High-Frequency Distraction
By Ron Insana

Portfolio Manager
7/27/2009 11:40 AM EDT

The New York Times and The Wall Street Journal are taking aim at a new form of computerized trading known as “High Frequency” trading. The algorithm-based trading is allegedly an illegal form of front-running, as high-frequency traders hook into exchange computers and use “flash trades” to suss out incoming order flow and use the lightning speed of their own programs to jump ahead of customer orders. Critics argue that individual investors are at a distinct disadvantage for this reason and a variety of others. The proximity of high-frequency computers, which can be placed next to exchange computers for a fee, allows for an almost-osmotic transfer of information. Senator Charles Schumer (D, N.Y.) is asking the SEC to ban “flash trades,” which are phony orders placed by high-frequency programs that aim to fool market participants into entering orders. The programs jump in front of customer orders and gain a trading advantage. If that is indeed what is happening, it qualifies as “front-running,” an illegal practice on Wall Street. If high-frequency traders are just faster than everyone else and not illegally jumping in front of others or paying off the exchanges to get preferential trading treatment, then this new area of technology-based trading is no less legitimate than the use of the telegraph, the telephone, the ticker, computers, handheld devices or older-style “black box” or “dark pool” programs that give sophisticated traders the ability to simply trade faster. I’d prefer that regulators look into whether a firm like Goldman Sachs (GS) — whose former executives continue to run the New York Stock Exchange (NYX) ; advised on the merger between NYSE and Archipelago, and formerly owned a portion of the combined entity; own Speer, Leeds & Kellogg, the largest specialist firm on the Big Board floor; and control the greatest number of seats in the equity markets — unfairly view order and information flow ahead of its customers and clients. I am far more concerned about that than I am about the emergence of “high-frequency” trading. But the press won’t touch that topic. It’s easier to go after the dreaded speculators and dark pool traders than lose access to the most profitable and prestigious firm on Wall Street.

http://zerohedge.blogspot.com/

So some people have more information than others. Just like everywhere else in the economy. Boo-hoo.

If speed is bad, why don’t we go back to taking and writing orders by hand, and sending them via carrier pidgeon? What say you, Sen. Schumer?

I think the argument is that the mega-firms are using these programs not for fast transactions but to post many, very small transactions to determine the top price a potential buyer is willing to pay, canceling each transaction until the top price is reached and then buying the max at the high price.

It would be like select people on Ebay knowing what the top price everyone is willing to bid and increasing the bids behind the scenes so that the item sells at the highest price of the top bidder.

“If speed is bad, why don’t we go back to taking and writing orders by hand, and sending them via carrier pidgeon?”

What about people who can’t afford pidgeons?

The luddites probably think this is too fast.

http://www.market-ticker.org/

Senator Schumer apparently believes this is an unfair practice, and I agree.

July 24 (Bloomberg) -- Senator Charles Schumer asked the U.S. Securities and Exchange Commission to ban “flash orders,” saying the transactions give high-speed traders an unfair advantage over other investors. Nasdaq OMX Group Inc., Bats Exchange Inc. and Direct Edge Holdings Inc. hold these orders for milliseconds, giving their customers the opportunity to gauge demand before traders on other exchanges get the chance to bid, Schumer said in a letter to SEC Chairman Mary Schapiro. Brian Fallon, a spokesman at Schumer’s office, confirmed the authenticity of the letter. “Flash orders allow certain members of these exchanges to obtain access to order flow information before that information is made available to the public,” Schumer wrote. That allows “those members to use rapid trading programs to trade ahead of those orders and profit from advanced knowledge of buying and selling activity,” he added. The senator said that if the SEC doesn’t prohibit flash orders, he will introduce legislation that would. This is my view:

1. Getting a look at orders before someone else does is commonly called "cheating". The National Market System (NMS) was supposed to prevent that; this was the so-called "innovation" of Nasdaq, remember? No specialists, no balancing of orders to open a stock, all done by computer. Equality of access. Up until it became profitable to make some people more equal. The intent of a public stock exchange is to insure equality of access to information so that the markets are orderly, not rigged.

2. Using flash order information (or anything else) to front-run is illegal. In all of its forms, this is an extremely serious matter and it must be stopped.

3. To the extent that these HFT systems are in fact using flash (or other) traffic to get in front of orders and advantage themselves they are dramatically increasing the violence of market moves. A stock trading at $20 that has a bid come in with a limit of $20.10 would normally fill (assuming sufficient depth) at $20; this does not materially move the market. But if a HFT system "sees" that order, steps in front of it and buys up all the shares at $20 and then re-sells them to the customer at $20.04 (one penny better than the next best offer at $20.05) it has caused the current "last" price to move where it otherwise would not. Multiply this by millions of shares an hour and the impact on price moves could be tremendous. While I understand that many people like the move of the last two weeks in the market, the fact remains that what goes up can also come down with equal violence.

4. HFT systems that front-run are able to garner risk-free profits. This is in fact the reason such a practice is banned - their "risk-free" profit is your guaranteed loss. Remember, the markets are in fact a negative-sum game (due to trading costs) - if there is a "risk-free" opportunity out there it can only exist because someone else is guaranteed a screwing.

I call upon The SEC to conduct a full and public investigation of the HFT systems in use today, along with immediately banning the "flash" traffic in accordance with Senator Schumer's request. I specifically want to know:

1. Have any of these HFT systems been using flash traffic (or any other mechanism) to "step in front" of a flashed order?

2. What part did these systems play in the October and March meltdowns, along with the ramp job of the last two weeks? Specifically, were they stepping in front of orders in these cases, thereby dramatically amplifying market moves while skimming off their pennies?

Public and fair markets demand transparency. All users must obtain access to order flow at the same time, without exception, and attempts to "step in front of the line" must be met with both civil and criminal sanction for market manipulation.

I can think of three relatively-minor changes that would leave those who are using HFT legitimately unharmed but would destroy most of the ability to cheat. These are:

1. Eliminate the 'flash order' entirely. All market participants must get order and flow information at the same time - no exceptions.

2. Force all orders (e.g. IOC, etc) to be valid for a reasonable minimum period that allows human response. 1 second would meet this criteria; it would destroy the ability of the "robots" to use abusive order patterns without preventing the legitimate use of "immediate or cancel" orders. The time selected must be greater than the average human reaction time plus round-trip network transit time within the nation; visual recognition time for young adults averages a bit over 200 milliseconds (0.2 seconds) exclusive of the response (e.g. a mouse click) and round-trip transit time on high-speed circuits cross-country (corner-to-corner) is approximately 100ms. Thus the minimum acceptable time is in the neighborhood of 500ms assuming no intervening computer computational delays (e.g. brokerage servers, etc); doubling this to provide for a margin (not all people are 20 years old, there are typically multiple computers between the exchange and end user, charting or display software requires time to post the event on the screen, etc) seems reasonable.

3. Define as "front running" by law any scheme or practice that exposes or discovers orders to any select group of players before the market as a whole, irrespective of how. The unfortunate reality is that there is no mechanism available to prevent computers from exploiting asymmetric information; ergo, you must define the provision or discovery and use of any such asymmetric information in the public markets as a criminal offense. Penalties should include treble forfeiture of all profits gained from such an abuse and a permanent ban on all access to the securities business as well as prison time. "Arms races" are inherently negative-sum games; the only winning party is the guy who is selling the weapons. In this case the losers are the public and institutions who are attempting to invest or trade in the equities markets.

It is time to put a stop to this part of The Bezzle.

I have no respect for any Freeper who opposes what the hedge funds are doing w.r.t. this.

Good comment but most others are lame jokes and dumb

Yeah i got side blinded with this, i know of other ways they are scamming the public, this was new i missed this one.

So bad on me.

That was from Karl Denninger. He wrote a short entry a couple of weeks ago when the story about the arrest of the former GS programmer aired. Goldman Sachs was refusing to reveal just what the software does, but insisted it was theirs. Denninger, and other market watchers, insisted that all investors needed to know just what the software does, before they invest more money of transact more trades.

The speculation is that it was capable of handling front-running (as described in your main article). Apparently, that is illegal, and would discourage any sane investor.

Front running via high frequency trading is a very big issue these days. Some reports have Goldman Sachs making more than 50% of the trades on our stock exchanges via HFT. This is the massive in and out and test the market—high frequency trading