More Observations On HFT’s Tyranny Of Stock Markets
by ilene - August 30th, 2010 5:40 pm
More Observations On HFT’s Tyranny Of Stock Markets
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Courtesy of Tyler Durden of Zero Hedge
Anywhere one turns these days, bashing HFT is the new market normal. Having written 150 articles on the topic, beginning in April 2009, we are happy to have brought the world’s attention to this most dangerous of market aberrations. Yet until the SEC finally bans the practices of micro churning, quote stuffing, positive feedback loop chasing, flash trading, subpennying, DMA accessing, and all other aspects conceived merely to provide some market participants with an unfair advantage over everyone else, the fight against HFT must continue.
Which is why we draw your attention to two items: the first is a paper by Bluemont Capital "The Marginalizing of the Individual Investor" in which the authors question if HFT has distorted true market valuation (yes) and to what degree. Some relevant soundbites: "Unfortunately, high-frequency trader interaction with computerized algorithms of large-cap financial institutions is providing opportunities for high-speed, virtually undetectable market manipulation", "At a minimum, computerized high-frequency and algorithmic trading are undermining traditional value investing strategies. Short-term liquidity and data movements are distorting information on real business performance", "Essentially, high-frequency trading platforms function as positive feedback loops. Engineers treat positive feedback loops as inherently unstable, as each positive response generates stepped-up repetition of the same actions. Positive feedback loops result in an ever- expanding balloon, but like all balloons, the risk of bursting increases with the balloon’s size." It concludes that the "continuing advances in computerized trading pose challenges for regulators throughout the world—and leave individual investors marginalized… Regulators should not only seek to assure that markets are able to continue to function under stress, but they also need to devise remedial actions that protect individual investors who have fundamentally different objectives from the high-turnover objectives of high frequency traders and computerized algorithms."
The other notable item is the appearance of our friends at Nanex on ABC radio over in Australia, where firm founder Eric Hunsader discusses the previously highlighted concepts of latency arbitrage as a potential progenitor to the May 6 crash, as well as possible ways that the NBBO arbitrage could have provided for unfair and illegal mispricing opportunities for a select few.
Bluemont Capital "On the Marginalizing of the Individual Investor":
Full August 29 interview with Eric Hunsader on Latency Arbitrage…
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Goldman Subpoenaed by FCIC after Sending Billion Pages of “Rubbish” to Panel
by ilene - June 7th, 2010 7:50 pm
Goldman Subpoenaed by FCIC after Sending Billion Pages of "Rubbish" to Panel
Courtesy of Mish
The Financial Crisis Inquiry Commission (FCIC) is annoyed at the prospect of wading through billions of pages of "rubbish" that Goldman sent in response to an inquiry.
Here’s the result: Goldman Subpoenaed by FCIC After Panel Says Firm Hindered Probe
Goldman Sachs Group Inc. was subpoenaed by the Financial Crisis Inquiry Commission after panel members said the most profitable firm in Wall Street history engaged in a document “dump” to hinder a probe.
Goldman Sachs sent more than a billion pages of documents, FCIC Vice Chairman Bill Thomas said on a conference call with reporters today.
“We did not ask them to pull up a dump truck to our offices and dump a bunch of rubbish,” said Angelides, 56, who previously served as California’s treasurer. “This has been a very deliberate effort over time to run out the clock.”
Thomas said the panel’s requests to Goldman Sachs go back “several months.” Information the firm turned over didn’t comply with what was asked for and has put FCIC investigators in the position of “searching through the haystack for the needle,” he said.
“We expect them to provide us with the needle,” he said.
Federal prosecutors in New York are also investigating transactions by Goldman Sachs to determine whether to bring charges, people familiar with the matter said April 29. The company hasn’t been accused of criminal misconduct.
Finra Finds "Widespread Use Of High-Speed Algorithmic Trading" Was Likely Cause For Flash Crash
Zerohedge reports Finra Finds "Widespread Use Of High-Speed Algorithmic Trading" Was Likely Cause For Flash Crash
From Reuters: "Regulators probing the mysterious May 6 "flash crash" in the stock market are unlikely to find a single cause, though the widespread use of high-speed algorithmic trading was in general likely behind it, the head of the Financial Industry Regulatory Authority said on Monday. "We won’t stop until we finish the analysis. But I think the answer is there is unlikely to be a single cause," Finra CEO Rick Ketchum told Reuters on the sidelines of a conference here. "It is much more likely to be a proliferation of algorithmic trading that was all subject to the same triggers and didn’t have the same controls."
Unfortunately I cannot find any external reference to that quote from Reuters or anywhere else. The only
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The Fattest Finger Ever
by ilene - May 6th, 2010 4:27 pm
The Fattest Finger Ever
Courtesy of Joshua M. Brown, The Reformed Broker
High Frequency Trading, Algorithmic Trading, Fat Finger Errors. Call it whatever you want, we just saw the largest intraday point drop in Dow Jones history, a drop of 998.5 this afternoon. We closed higher, but I’m disgusted.
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The Missing Volume
by ilene - January 27th, 2010 6:19 pm
The Missing Volume
By Ilene
The Missing Volume – with Nicholas Santiago
Nick writes in Where Has All the Volume Gone?
Let’s say the market is in an economic recovery and the financial crisis is behind us. Normally one would expect the trading volume in the stock market to increase. This has not been the case. Volume for the month of November and December 2009 have been lighter than August of 2009. Remember August is notoriously the lightest trading month of the year. Hence the term ‘summer doldrums.’ January is usually a very high volume month, yet it has started off the New Year even lighter than the last two months of 2009.Light volume markets are very difficult to short. Hence the old saying, ‘never short a dull market’. This is as dull of a market as we have seen in many years. While there are some stocks such as Apple (NYSE:AAPL), and Amazon (NASDAQ:AMZN) that have traded with respectable volume the bulk has come from government owned names. Stocks such as Citigroup (NYSE:C), American International Group (NYSE:AIG), Fannie Mae (NYSE:FNM), and Freddie Mac (NYSE:FRE), have often accounted for one third, and sometimes
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More on the Massive Trading Volumes in Troubled Financial Stocks
by ilene - August 30th, 2009 1:55 pm
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Growing evidence, number trails and a culture of greed support a connection between high frequency program trading and market manipulation and, by all appearances, the pumping up of stocks of troubled financial companies… – Ilene
More on the Massive Trading Volumes in Troubled Financial Stocks
By Brett Steenbarger at TraderFeed
This story began with simple reader inquiries concerning a stock market indicator called TRIN and their perceptions that TRIN was "broken". For the uninitiated, TRIN assesses the proportion of stock exchange volume that is going to advancing stocks to the volume attributable to declining issues. When TRIN is below 1.0, it means that volume is relatively concentrated in rising shares; above 1.0 means that volume is concentrated in declining stocks.
TRIN appeared to be broken because we were getting huge swings in its values from moment to moment in the market. It would swing wildly, sometimes going far above 1.0 and sometimes far below. I pointed out that, from a purely mathematical vantage point, this could only occur if a disproportionate share of NYSE volume was occurring in one or a handful of stocks.
Further inquiry revealed that this was, indeed, the case: I found that, not only were the trading volumes of such stocks as C, AIG, FNM, and FRE elevated, as noted the by Big Picture blog, but that their composite volumes (their volumes traded across all exchanges) exceeded that of all other NYSE stock trading! Indeed, I discovered that the 20-day TRIN was at its lowest level since 2000 because volume was highly concentrated in rising stocks. This was not just unusually heavy volume; it was unusually heavy to the buy side.
Since this volume was directional--all of these stocks had made spectacular percentage gains--and because the highly unusual activity was unique to troubled financial firms (not stable companies such as GS and JPM), I surmised that something might be afoot: a systematic attempt to bolster the shares of taxpayer supported companies that--for political reasons--could not return to the bailout well. Why such an attempt? Perhaps to reimburse the largest shareholder of the institutions and position these companies to raise capital on their own. They certainly weren’t going to raise their own capital as languishing two-dollar zombie…
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Buddy, Can You Spare $5 Trillion?
by ilene - July 11th, 2009 7:46 pm
Is Japan turning into Zimbabwe? And if you see green shoots after this one, let me know what you’re drinking!
Buddy, Can You Spare $5 Trillion?
Courtesy of John Mauldin
This Is Outrageous
The Land of the Setting Sun
Buddy, Can You Spare $5 Trillion?
There is no doubt that the US is in financial trouble. Those talking of a strong recovery are just not dealing with reality. But the US is in better shape than a lot of countries. This week, we begin by looking at Japan. I have written for years about how large their debt-to-GDP ratio is, yet they keep on issuing more debt and seemingly getting away with it. But now, several factors are conspiring to create real problems for the Land of the Rising Sun. They may soon run into a very serious-sized wall. And it is not just Japan. Where will the world find $5 trillion to finance government
This Is Outrageous
But first, I want to direct the attention of those in the US finance industry to a white paper written by Themis Trading, called "Toxic Equity Trading Order Flow on Wall Street." Basically, they outline why volume and volatility have jumped so much since 2007; and it’s not due to the credit crisis. They estimate that 70% of the volume in today’s markets is from high-frequency program trading. They outline how large brokers and funds can buy and sell a stock for the same price and still make 0.5 cents. Do that a million times a day and the money adds up. Or maybe do it 8 billion times. It requires powerful computers, complicity of the exchanges (because the exchanges get paid a lot), and highly proximate computer connections. Literally, the need for speed is so important that to play this game you have to have your servers physically at the exchange. Across the river in New Jersey is too slow. Forget Texas or California. This is a game played out in microseconds.
The retail world doesn’t get…
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the site