SEC Takes Pulls From Bong, Issues Nonsense
Courtesy of Karl Denninger at The Market Ticker
We PAY these clowns to "oversee" our markets?
At 2:32 p.m., against this backdrop of unusually high volatility and thinning liquidity, a large fundamental trader (a mutual fund complex) initiated a sell program to sell a total of 75,000 E-Mini contracts (valued at approximately $4.1 billion) as a hedge to an existing equity position.
This is what the SEC considers the "Triggering Event."
Let me point out a few things.
I’m going to start by picking on a random day – yesterday.
Note the closing bar @ 15:00. That’s the closing bell from yesterday.
The volume? 71,573 contracts.
Did the market crash – either down or up? No.
In point of fact that’s not a particularly large volume. On Fed Release days we often go through a half-hour or more of this sort of volume, and on Option Expirations it’s even higher – especially on the close. To blame the initiation of the collapse on this order, which is entirely in line with what Globex handles virtually every day on the close, is asinine.
The execution of this sell program resulted in the largest net change in daily position of any trader in the E-Mini since the beginning of the year (from January 1, 2010 through May 6, 2010).
So what? For every buyer there is a seller and vice-versa. Moreover, the individual positions don’t matter in this regard – what matters is the aggregate. Again, Globex handles this sort of transaction volume on the close virtually every day on the closing one-minute bar.
However, on May 6, when markets were already under stress, the Sell Algorithm chosen by the large trader to only target trading volume, and neither price nor time, executed the sell program extremely rapidly in just 20 minutes.
TWENTY MINUTES? Jesus, you’re claiming that a per-minute rate of 1/20th of the operational SINGLE MINUTE closing volume each and every daycrashed the market?
Do you really think we’re this stupid out here, or have you been smoking not bong hits, but crack?
The Sell Algorithm used by the large trader responded to the increased volume by increasing the rate at which it was feeding the orders into the market, even though orders that it already sent to the market were arguably not yet fully absorbed by fundamental buyers or cross-market arbitrageurs. In fact, especially in times of significant volatility, high trading volume is not necessarily a reliable indicator of market liquidity.
Oh, you mean what I’ve talked about now for more than two years? Volume is not liquidity.
Gee, someone’s figured it out? When are you going to stop trying to SELL the people on the "merits" of high-frequency trading as improved liquidity in the market?
Was that announcement going to come too with this report, or were you hoping that the people would be too stupid to read your report for content and realize that you just repudiated your own argument for allowing this crap in the first place?
Still lacking sufficient demand from fundamental buyers or cross-market arbitrageurs, HFTs began to quickly buy and then resell contracts to each other – generating a "hot-potato" volume effect as the same positions were rapidly passed back and forth. Between 2:45:13 and 2:45:27, HFTs traded over 27,000 contracts, which accounted for about 49 percent of the total trading volume, while buying only about 200 additional contracts net.
Exactly – the entire point of HFT is to play "hot potato." When the HFT guys win, they keep the money. When they lose, they crash the market. You put this program in place and you allow it despite knowing that there is no actual LIQUIDITY added to the trading environment by these hyenas.
Never mind this little ditty from Nanex:
Approximately 400ms before the eMini sale, the quote traffic rate for all NYSE, NYSE Arca, and Nasdaq stocks surged to saturation levels within 75ms. This is a new and surprising discovery. Previouisly, when we looked at time frames below 1 second, we thought the increase in quote traffic coincided with the heavy sales, but we now know that the surge in quotes preceded the trades by about 400ms. The discovery is surprising, because nearly all the trades in the eMini and ETFs occurred at prevailing bid prices (a liquidity removing event).
Got it? Someone stuffed the quote system before the sales took place. Who did that, why did they do it, and what did they know that led them to do it? That wouldn’t have been some HFT guys that rammed the exchanges with foreknowledge of the sell order in order to INDUCE a dislocation, would it?
That’s a very good question….. but while you ponder it, thanks for the admission on your faux liquidity claims – let me know when you’re going to pull the HFT guys’ network cords. Oh that would be "never", right?
I’m going to continue to read the rest of this piece of vomit, but the bottom line here is that the SEC wants us to believe that after selling us the "virtue" of HFT-provided liquidity, it has, in its own report, destroyed its own argument for allowing these systems to be connected to the exchanges in the first place.
It also does not (other than in a passing mention) point out that there is a disparity of information – that is, that HFTs can (and appear to on a near daily-basis) create and/or profit from disparities in quote flow information – and may actually cause some of that disparity, whether intentionally or otherwise.
There are no real suggestions for fixes contained in this report that I can find.
I’ll make a couple:
- If you issue a quote or order (buy limit, sell stop or limit, etc) it has to remain valid until (1) it is hit, or (2) a HUMAN reaction time has passed. I propose 2 full seconds – up and back transit time, plus reaction time, plus CPU time for a retail platform. That will make "quote stuffing" so dangerous as to be unprofitable, and end it immediately – if you do it, you’re in deep kimchee as the entirety of the book you issue can be hit.
- For each cancel you issue beyond some number compared to your executions you are charged a fee of some proportion of the order value. This immediately makes unprofitable the issuing of orders or quotes you have no intention of being hit. Issuing an offer to buy or sell must be an actual binding intent to execute a trade. Changing one’s mind is certainly permissible. Intentionally indicating intent where none exists is already illegal.
- Stop ALL privileged quote and execution streams. Everyone has to get the same information at the same time from all venues. If this means that all quotes must go through some centrally-coordinated dissemination system then so be it. The "sneak peeks" you can pay for today make a mockery of National Best Bid and Offer – only the HFT people get it, and they keep the spread between it and what you see. That’s wrong and must change, and it contributed dramatically to the volatility once the NYSE went into "Slow Mode."
I’ll post more once I’ve read the rest of this bilge – assuming I don’t hurl first.
