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More Observations On Market Manipulation Masking As "Providing Liquidity"

Courtesy of Tyler Durden

And this time it is not those nutcases over at Zero Hedge making the claim, but the reputable New York Times, a place where even more reputable Mexican billionaires go to provide rescue financing. The NYT discloses how Chicago-based traders (what is it with Chicago style [blank] – first in politics (no comment needed there), and now in every story about market manipulation) Optiver, may have been openly gaming the commodities market using HFT strategies:

Its superfast, supersecret oil trading software was called the Hammer.

And if the Commodity Futures Trading Commission is right, the name fit well with an intricate scheme that allowed commodity traders in Chicago working for Optiver, a little-known company based in Amsterdam, to put their orders first in line and subtly manipulate the price of oil to the company’s advantage.

Transcripts and taped conversations of actions that took place in 2007, included in the commission’s case, reveal the secretive workings of high-frequency trading, a fast-growing Wall Street business that is suddenly drawing scrutiny in Washington. Critics say this high-speed form of computerized trading, which is used in a wide range of financial markets, enables its practitioners to profit at other investors’ expense.

And the punchline that is sure to set defenders of HFT fuming:

Traders in the Chicago office of Optiver openly talked among themselves of “whacking” and “bullying up” the price of oil. But when called to account by officials of the New York Mercantile Exchange, they described their actions as just “providing liquidity.”

Ah, the ever generic fallback, and the corollary: markets will be expensive, bid ask spreads will be sky high, etc., etc. Yet if the alternative is a market where firms such as Optiver (a list that includes  many other Wall Street scions, as frequent Zero Hedge readers are well aware) can allegedly not manipulate the market, maybe the trade off is not so bad. But that would of course risk the market collapsing to such values where it has to reflect true economic fundamentals (somewhere much lower from current market values), and, as Rosie pointed out, with mid-term elections coming up, we just can’t have that.

A little more from the NYT on HFT and the noble provisioning of liquidity:

In the cutthroat world of high-frequency trading, success is a function of speed, secrecy and often a bit of intrigue. Few have been more adroit at these arts than Optiver.

Optiver describes itself as one of the world’s leading liquidity providers, a trading firm that uses its own capital to make markets. It seeks to profit on razor-thin price differences — which can be as small as half a penny — by buying and selling stocks, bonds, futures, options and derivatives. (Derivatives represent about 65 percent of its business, equities 25 percent, and commodities and others make up the remaining 10 percent.)


But the extent to which market making (providing liquidity to markets that need it) and proprietary trading (the pursuit of pure profit with a firm’s own money) can properly coexist has become a thorny question for regulators. They are grappling with an exploding business that makes up as much as half the overall trading in the United States and a growing share in Europe as well.

Yet the concept of HFT market manipulation is nothing new:

During a tense conference call in 2007, Thomas Lasala, the chief regulator for Nymex, made his doubts clear about Optiver’s trading strategies.

“The market seems to move in reaction to your orders,” he said, according to a transcript of the conversation. “And I don’t think that is a market-making strategy.

So is this practice isolate to Optiver and commodities?

It could well be that Optiver’s cowboy trading tactics are unique to the company. But as concern grows over the effect that high-octane computerized trading is having on markets worldwide, Optiver’s conduct in the oil futures market raises questions as to whether the relentless competition of this business is forcing companies to engage in similar practices.

“These are proprietary trading shops that are masquerading as market makers,” said Tim Quast of Modern IR, a consulting firm that advises corporations on market structure issues.

Thank you Tim for pointing out the obvious.

So how does one become a master of market manipulation (assuming a preliminary ding for the ever more coveted position of Chief Trader at the New York Fed of course), and more importantly what are the perks:

Given the vicious competition that exists in the industry, Optiver and other companies have become creative in attracting the smartest people in finance. The dress code is aggressively casual. The company provides free breakfasts, lunches and Friday afternoon drinks, as well as chair massages.

And in one recruiting Web video (no longer online), an Optiver trader sitting before four giant trading screens is seen ogling two skimpily clad women as they sit on his thighs.

To enjoy these professional fruits, applicants need to subject themselves to three math-based tests to test facility with numbers and the ability to think clearly under pressure. For one of the tests, 80 questions must be answered in under 8 minutes. Sample questions include 0.034 times 0.2, or, if you have a cube made of 10 by 10 smaller cubes, how many are facing the outside?

What about boats? It is conventional wisdom that all market manipulators are in dire need of boats (presumably to facilitate a Fed raid escape using a city’s sewer system). At Optiver, boats are aplenty:

In one exchange, Christopher Dowson, head of trading in Optiver’s Chicago office and the mastermind behind the oil strategy, bragged to another employee about how he had bought a new speed boat with his share of the returns.

“With these profits, might have to get a bigger one,” he said.

And in another, Mr. Dowson acknowledges that Optiver was so aggressive in conducting its proprietary trades in some smaller stocks that their activities “were as big as the volume traded on the day.”

So why the sudden explosion of all those defending HFT? Could it be that there is something truly ulterior hiding behind this generous liquidity provisioning strategy?

It is precisely this — high-powered computers and the swagger of those who operate them — that is causing worries over high-frequency trading’s increasing sway.

“The markets used to be about capital formation,” said Mr. Quast, the consultant. “Now 80 percent of trading is driven by some form of statistical arbitrage. We are buying into a statistical house of cards that could unravel very quickly.”

After all, when the entire economy is based on Ponzi principles, it is only fitting that the “free and efficient market” is also another pyramid construct. And do not for a minute make the gullible assumption that the SEC, which years ago was acquired in a less then merger-of-equals transaction by Wall Street, will ever do anything to moderate the blatant market manipulation that provides billions in profits to the few sophisticated enough to profit from it, whether it be firms like Optiver, or their much, much bigger peers, many operating out of the southern tip of Manhattan (and other places including famous New York university towns, as well as, of course, Chicago).

And with that, cue in the defenders of “liquidity provisioning” in 3…2…1…


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