Posted on 06/19/2010 1:24:22 PM PDT by SeekAndFind
Well, we had another flash Crash yesterday, just like the one on May 6, 2010. The only difference is, this time the stocks in question went up instead of down.
In case you missed it, Washington Post’s stock went from $458 to $900 per share in the blink of an eye. All the orders at $900 were cancelled and the market authorities did the usual, “move along folks, nothing to see here,” bit.
The culprits in both incidents (May 6 and yesterday) were High Frequency Trading Programs (HFTPs).
The HFTP industry (and lobbying efforts), always defend their actions by stating that they provide liquidity or make sure the markets are efficient or other nonsensical arguments that fall apart the minute you spend more than 10 seconds thinking about them.
Rather that going over how this whole system works, today I thought it better to simply state the obvious which few people actually do when it comes to this topic.
HFTPs provide NO benefits to the markets. None.
In fact, they are a net drag on: The market Investor confidence The US economy
Regarding #1, HFTPs are a net drag on the market because they cause it to become nothing more than an overleveraged correlation game. For most of 2009 this correlation was between the Dollar and the S&P 500 (-0.98 in fact). Now the correlation is between the Euro: Japanese Yen and the S&P 500. The market is literally following this currency pair tick for tick.
Stocks are NOT meant to be half of an “if A, then B” formula. They are meant to be an asset class that is used to generate wealth and real return, something which people put their money in, hoping that the economy and the company’s results are what drive price.
This brings us to point #2: HFTPs act as a net drag on investor confidence.
HFTPs front-run other REAL investors who actually bother performing analysis or making their own judgments. If an HFTP were a person, it would be the equivalent of a kid who simply steals other students’ answers before they turn in their tests. Is this person really an “A” student? Does he/she really deserve to be a top performer in the class?
The answer to both questions is a resounding “No.”
However, in the case of HFTP trading in the markets, the damage is even more severe because they’re not simply copying someone’s trades, they’re actually TAKING their money.
Remember, investing is a zero sum game. Someone is always on the other end of a trade. So the money HFTPs make (billions) is actually money they’re taking FROM other people. The fact that it’s cleverly dressed up in market-talk of liquidity and efficiency doesn’t take away the fact that other people’s cash GOES into HFTP bank accounts.
Now, that REAL investors have finally begun to catch on that the regulators permit this kind of front-running, they, like anybody who finds out someone else is stealing their ideas, have decided to stop participating in the market.
This is why volume remains a trickle (people proclaim that volume is actually higher today than five years ago, but 70% of market volume today is HFTPs). It’s also why people have begun to HATE the stock market. They know it is manipulated and they know that it’s crooked. That’s why they’re not participating in it anymore.
And now for #3: HFTPs are a net drag on the US economy.
HFTPs are designed by mathematicians, statisticians, computer scientists, engineers and the like. These are all people who could be putting their intelligence and talents to work developing new products, new ideas, new technologies, and other items that could actually HELP the US economy get back on its feet.
Instead, they, like most people, are looking out for the own self-interests and have accepted high paying jobs at HFTP firms. After all, why make $50K doing research when you can make $5 million front-running other orders in the giant casino we call the stock market?
Scroll through any job posting for analysts/ traders and you’ll see the same thing:
Wanted: Math PhD/ Engineer/ Astrophysicist for Proprietary Trading/ Algorithmic trading team.
All those PhDs are leaving the US “brain trust” to get rich on Wall Street. In this fashion, HFTPs act as a brain drain on the US economy and result in more and more of our economic activity being related solely to financial speculation, not creating anything of actual economic value.
In plain terms, HFTPs provide NO benefit to the markets or US economy. Those are the facts. And the more time we spend ignoring them and doing something about it, the worse the damage will be.
May 6, 2010 will not be an isolated incident. There will be more May 6’s in the future. And they will be even larger and more damaging. The time to put an end to this is now.
Good Investing!
Maybe the exchanges shouldn’t cancel trades when these events occur. If you let your computer trade on your account, you should eat the loss when it goes haywire.
Total crock. High Frequency trading is NOT front running. Front running is illegal as it is. There is a BIG difference between firms that pay for ‘flash’ orders that let them know big blocks are coming (should be made unavailable) and the true HFTs that run their own algorithms.
That's all I had to read to determine this article is garbage.
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If the Washington Compost doubles in price, that’s a BIG red flag that something’s seriously screwy!;)
Sounds like a squabble between statistical traders and technical traders.
The whole argument that the people using robots to trade are taking other people's real money is ridiculous. Are they saying that when they decide to "take profits," it is ok, but if a robot trader does it, it is stealing from the real players? It is true that for one investor to sell, another has to buy, but are they saying that they only like the game when they make the profit?
Yeah that is what I thought too.
You’re making a distinction that represents not much of a difference. If a computer placed by GS (or others) at the NYSE can execute an intervening order by virtue of its microseconds-long latency time relative to an off-floor order to take advantage of an incoming order and snipe a cent or a few cents out of a buy-limit or sell-limit....that is front running.
If Goldman (or others) has 2 computers at the exchange that sell a large block of stock back and forth to each other jacking the price by a penny each trade, such that each computer has made (say) 200,000 x 1 cent x 17 times a day x (say) 400 stocks, that is $13.6 MM daily in essentially risk-free trading profits.
Goldman Sachs reported last quarter that it made money each and every trading day of the quarter. As did, IIRC, BAC and JPM. If making money on a given stock trade is a 50/50 affair, then the chances of GS picking “heads”, accurately, on 63/63 consecutive trades (365 days less 104 weekend days less about 10 holiday days all divided by four) the odds of that outcome *for each of these banks* is 1/62! [factorial] which is one of those “every grain of sand on every beach on earth” numbers.
However you define what HFT is or is not, it is becoming common knowledge that the stock market is almost entirely a computer-driven, rigged game, for which there is no enforcement of any existing regulations. Kind of like the whole subprime mortgage fiasco. And, that realization is indeed driving many, many participants out of the market.
But one thing driving participants INTO the market is the realization that by the time 0bama gets through with our economy, there will be essentially nowhere else to place money where the risks of regulatory capture or excess regulation or sudden rule changes (all with no enforcement of any existing regs) outweigh the liquidity the “instant exit” potential of market trading provides or at least pretends to provide. Risks and all. The current regime has made actual investment participation in any non-virtual business, with the attendant employment, permitting, siting, environmental and licensing burdens practically outside serious consideration.
This analysis is spot on. Indeed, HFTs are parasites and are the ones that have destroyed the stock market as a place to invest capital in our economy based on fundamental analysis of the economy and the companies, and achieve a commiserate return for assuming personal risk to help nation increase its wealth.
HFTs are the scum who have wrecked our stock market, and turned it into their private gambling casino.
I figured this out quite some time ago and got the hell out, because what’s going on in the market makes no sense and bears no relationship with what is going on in the external world with respect to the (non-existent) economic growth conditions that prevail right now. I want no part of a rigged game, which is unfortunate, because otherwise I would be willing to risk some of the little bit of wealth that I have accumulated in making capital investments.
One of many easy proofs that it is front-running, purely and simply, is found in Goldman Sachs’ perfect trading record in Q1 versus its barely better than coin-flip record of gains and losses on its “Conviction Buy” stocks during the same period.
It has been observed that more than 3/4 of the recent trading volumes come from High Frequency Trades. This tells us that most people aren’t participating in trading anymore. A lot of this volume is being driven by the big boys.
One BIG problem with your reasoning - in order to front run, you have to KNOW that an order is coming in order t beat it for that 1c. It doesn’t work that way, unless you’re paying the exchange to tell you (flash orders). That is not HFT.
Furthermore, making money on a trade is NOT a even probability trade. That depends on how you’re actually trading. For example, my automated trading models average 65-70% profit to loss ratio.
These things are FAR more complex than 99.99% of people understand.
Well, then you and I have completely different understandings of the terminologies and the meanings of words.
The large computers physically located at the exchange by HFT operators sniping cents and fractions of cents away from incoming retail orders absolutely DO KNOW that an order is incoming. They are located at the exchange for the express and precise purpose of being able to take advantage of much lower latency time in their processing.
Except for the possibility that the computers which execute front running and flash orders are one and the same, or, utilize the same IP addreses, that has nothing whatsoever to do with what I understand “flash orders” to be, which are orders placed with no intention of having them fill. They are orders placed and then canceled for the purpose of distorting the apparent supply/demand structure discernable from the level 2 book. Orders are placed, then canceled in rapid fashion for no discernible purpose other than “faking” a price point of supply or demand. The fact of the matter is, since 2000 the cancel-to-execute ratio has gone from 10:1 to more than 30:1!
The point of this is that this crap is flat out illegal, but there is no enforcement being carried out. It is exactly the same situation as exists on the souhern border of the US.
Here’s section 9 of the SEC act of 1934:
Section 9 — Manipulation of Security Prices
a.Transactions relating to purchase or sale of security
It shall be unlawful for any person, directly or indirectly, by the use of the mails or any means or instrumentality of interstate commerce, or of any facility of any national securities exchange, or for any member of a national securities exchange—
1.For the purpose of creating a false or misleading appearance of active trading in any security registered on a national securities exchange, or a false or misleading appearance with respect to the market for any such security, (A) to effect any transaction in such security which involves no change in the beneficial ownership thereof, or (B) to enter an order or orders for the purchase of such security with the knowledge that an order or orders of substantially the same size, at substantially the same time, and at substantially the same price, for the sale of any such security, has been or will be entered by or for the same or different parties, or (C) to enter any order or orders for the sale of any such security with the knowledge that an order or orders of substantially the same size, at substantially the same time, and at substantially the same price, for the purchase of such security, has been or will be entered by or for the same or different parties.
2.To effect, alone or with one or more other persons, a series of transactions in any security registered on a national securities exchange or in connection with any security-based swap agreement (as defined in section 206B of the Gramm-Leach-Bliley Act) with respect to such security creating actual or apparent active trading in such security, or raising or depressing the price of such security, for the purpose of inducing the purchase or sale of such security by others.
3.If a dealer or broker, or other person selling or offering for sale or purchasing or offering to purchase the security or a security-based swap agreement (as defined in section 206B of the Gramm-Leach-Bliley Act) with respect to such security, to induce the purchase or sale of any security registered on a national securities exchange or any security based swap agreement (as defined in section 206B of the Gramm-Leach Bliley Act) with respect to such security by the circulation or dissemination in the ordinary course of business of information to the effect that the price of any such security will or is likely to rise or fall because of market operations of any one or more persons conducted for the purpose of raising or depressing the price of such security.
4.If a dealer or broker, or the person selling or offering for sale or purchasing or offering to purchase the security or a security-based swap agreement (as defined in section 206B of the Gramm-Leach-Bliley Act) with respect to such security, to make, regarding any security registered on a national securities exchange or any security-based swap agreement (as defined in section 206B of the Gramm-Leach-Bliley Act) with respect to such security, for the purpose of inducing the purchase or sale of such security or such security-based swap agreement, any statement which was at the time and in the light of the circumstances under which it was made, false or misleading with respect to any material fact, and which he knew or had reasonable ground to believe was so false or misleading.
5.For a consideration, received directly or indirectly from a dealer or broker, or other person selling or offering for sale or purchasing or offering to purchase the security or a security-based swap agreement (as defined in section 206B of the Gramm-Leach-Bliley Act) with respect to such security, to induce the purchase of any security registered on a national securities exchange or any security-based swap agreement (as defined in section 206B of the Gramm-Leach-Bliley Act) with respect to such security by the circulation or dissemination of information to the effect that the price of any such security will or is likely to rise or fall because of the market operations of any one or more persons conducted for the purpose of raising or depressing the price of such security.
6.To effect either alone or with one or more other persons any series of transactions for the purchase and/or sale of any security registered on a national securities exchange for the purpose of pegging, fixing, or stabilizing the price of such security in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.
^^^^^^^^^^^^^^^^^^
The technique or I should really say tactic of disseminating flash orders is a completely different tactic than front running, whether we are talking about old-style front running or computer-assisted front running. All these tactics are expressly illegal. That is the only salient point.
Finally, a profit to loss ratio has nothing to do with what I spoke of, which is the win/loss ratio. It is entirely possible to lose more trades than you win, but to profit nonetheless because your position sizing is such that your winning trades are larger than your losing trades. And it’s a moot point anyway. If you don’t think there is something odd, incredibly odd, astronomically impossibly odd about a 100% win rate in the stock market, taken over 63 consecutive days, then you and I have irreconcilably different conceptions of what constitutes odds and fair markets in the first place.
This is a pretty good summary of what this is about.
http://static.seekingalpha.com/uploads/2009/7/26/saupload_flash_orders_diagram.jpg
Other types of HFTs actually do arbitrage - which is, effectively, a service they’re being paid for. Efficient price discovery is what this is all about and some HFTs are very good at making markets far more efficient.
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