“How frightened hypocrisy hastens to defend itself.”
Victor Hugo
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April 2, 2014 5:25 pm
Lewis Explains The Casino: “Why Are You Even Arguing” That This Is Not Rigged?
Submitted by Tyler Durden on 04/02/2014 16:43 -0400
Round 2 of the HFT vs Reality death match just took place on Bloomberg TV. Once again the clear winner was Katsuyama and Lewis version of the real world as Manoj Narang finally lost all credibility with the mind-0bumbing comment that “speed matters less in today’s market than it has ever mattered.” But the Tradeworx CEO was a background singer compared to Michael Lewis who explained in his clearest analogy yet how the casino works and then devoured the anchor’s constant efforts to play down the “rigged” market perspective… “it’s very clear that people are being front run in the market… so, why are you even arguing about this?”
Plenty of good stuff in the clip but this little exchange summed up the problem perfectly…
Lewis explains the game, exposes the rigging, and slams the mainstream media’s “defense” of this…
LEWIS: So of course the tourists get fleeced all the time in the poker games, because they don’t know the deck is rigged. The poker players pay the casino a cut of what they make. The casinos, operators, pay the tour group – the tour group company money to bring in the tourists.
So in this case, casino’s the exchange, the poker players are the high-frequency traders, and the tour group operators are the banks and the brokers that handle the stock market orders. And I think the analogy is pretty close. So is that rigged? Is that a rigged game? I think it is a rigged game.
SCHATZKER: Well, it’s rigged only inasmuch as…
LEWIS: Why are you so invested in the idea this is fair? Why are you even arguing about this? It’s so clear.
SCHATZKER: Me?
LEWIS: Yes, you seem to be. I mean, it’s very interesting. But you seem to be – you can see, it’s very clear that people are being front run in the market. There’s plenty of evidence in the book.
SCHATZKER: Their orders are being anticipated…
LEWIS: Anticipated and run in front of, that’s right.
Shocked…
And then Manoj Narang comes in… and the long words surge and the credibility plummets… “there are so many assertions that are provably false… oh my gosh so many…” crickets… and then finishes off all credibility with “speed matters less in today’s market than it has ever mattered.”
Virtu Delays IPO Amid “Flash Boys” Furor; FBI Investigates Legality of High Frequency Trading; Reader HFT Anecdotes
The bloom is about to come off the High Frequency Trading bloom, but only after billions and billions of dollars were skimmed off trades.
With everyone now looking the same direction and seeing the same thing, HFT trading firm Virtu Will Delay IPO, amid furor spurred by Michael Lewis Book “Flash Boys”.
Virtu Financial Inc., the high-frequency trader that announced plans last month to sell shares, has delayed the deal, two people with knowledge of the matter said.
Virtu’s bankers won’t start marketing the initial public offering until after April 20, delaying the process from this week, according to the people, who asked not to be named because the decision is private.
The delay comes amid unprecedented scrutiny of high-frequency traders. “Flash Boys,” the Michael Lewis book released yesterday, argues that high-speed traders, Wall Street brokerages and exchanges have rigged the $23 trillion U.S. stock market. New York Attorney General Eric Schneiderman is examining privileges such as enhanced data feeds marketed to high-speed firms, while the Federal Bureau of Investigation is looking into whether those traders are breaking U.S. laws by acting on nonpublic information.
Virtu said it doesn’t believe it broke the law, “but we cannot predict the outcome of the inquiry.”
Reader Anecdotes
In response to High Frequency Trading Hits 60-Minutes Scrutiny; Trading or Skimming? Reader Sam writes …
Hey Mish,
We don’t have regular TV anymore but enjoy many other types of programming for much less than the cost of cable TV etc. So I appreciate the link to 60 Minutes as it was fantastic. High Frequency Trading is something I watch and experience daily.
On Friday I was selling a sizable quantity of shares in a small company and from the seller side I watch a million shares trade above my sell price. My shares were being picked off bit by bit and only a partial fill by the end of the day. It was unreal and very obviously being manipulated. The exchanges were ignoring my order to sell and matching orders at higher prices. I’ve also had the same buy side happen as in the 60 Minutes video with my buy price ignored as well.
This is most frustrating. I didn’t get my buy price even though it was in the money and with lots of shares trading. I also see data on the screen that’s in conflict with other similar data which seems to be hang-ups in the threads of information.
Thanks
Sam
Something Stinks
Reader PTB with whom I shared the above email responded …
I have experienced the same thing your correspondent mentions. For example, I put in a limit sell order for a thinly traded micro-cap, and saw 100ds of thousands of shares trade ABOVE my limit sell price, and still got no execution. The broker explained that since my price was above the official bid, I had no right to an execution, which is of course technically correct.
But why were those trades ABOVE my limit about? Shouldn’t the buyers have been interested in buying my lower priced shares? Something clearly stinks.
Looks Like Fraud, Smells Like Fraud
If it smells like fraud, it’s because it is fraud. Trades should go to the best execution price. It’s clear they don’t and HFT firms are in the middle of it, skimming billions of dollars in the process. That is the only way these companies can go for years with no trading losses.
“HFT Is A Growing Cancer” Says Mom And Pop’s Favorite Retail Broker Charles Schwab
Submitted by Tyler Durden on 04/03/2014 09:58 -0400
On one hand CNBC does its darnedest to refute Michael Lewis’ claim that markets are rigged (even if it woefully does so by showcasing the most clueless “defenders” it can afford), and yet on the other “mom and pop’s” preferred retail broker Charles Schwab, just came out and slammed HFT as a “growing cancer that needs to be addressed.” Hmmm…. who to believe?
From Charles Schwab:
High-frequency trading is a growing cancer that needs to be addressed
April 3, 2014
Schwab serves millions of investors and has been observing the development of high-frequency trading practices over the last few years with great concern. As we noted in an opinion piece in the Wall Street Journal last summer, high-frequency trading has run amok and is corrupting our capital market system by creating an unleveled playing field for individual investors and driving the wrong incentives for our commodity and equities exchanges. The primary principle behind our markets has always been that no one should carry an unfair advantage. That simple but fundamental principle is being broken.
High-frequency traders are gaming the system, reaping billions in the process and undermining investor confidence in the fairness of the markets. It’s a growing cancer and needs to be addressed. If confidence erodes further, the fuel of our free-enterprise system, capital formation, is at risk. We can’t allow that to happen. For sure, we still believe investing in equities is a primary path to long-term wealth creation, and we believe in the long-term structural integrity of the markets to deliver that over time for individual investors, which is all the more reason to be vigilant in removing anything that creates unfair advantage or undermines investor confidence.
On March 18, New York Attorney General Eric Schneiderman announced his intention to “continue to shine a light on unseemly practices in the markets,” referring to the practices of high-frequency trading and the support they receive from other parties including the commodities and equities exchanges. He has been a consistent watchdog on this matter. We applaud his effort and encourage the SEC to raise the urgency on the issue and do all they can to stop this infection in our capital markets. Investors are being harmed, and they shouldn’t have to wait any longer.
As Michael Lewis shows in his new book Flash Boys, the high-frequency trading cancer is deep. It has become systematic and institutionalized, with the exchanges supporting it through practices such as preferential data feeds and developing multiple order types designed to benefit high-frequency traders. These traders have become the exchanges favored clients; today they generate the majority of transactions, which create market data revenue and other fees. Data last year from the Financial Information Forum showed this is no minor blip. High-frequency trading pumped out over 300,000 trade inquiries each second last year, up from just 50,000 only seven years early. Yet actual trade volume on the exchanges has remained relatively flat over that period. It’s an explosion of head-fake ephemeral orders – not to lock in real trades, but to skim pennies off the public markets by the billions. Trade orders from individual investors are now pawns in a bigger chess game.
The United States capital markets have been the envy of the world in creating a vibrant, stable and fair system supported by broad public participation for decades. Technology has been a central part of that positive story, especially in the last 30 years, with considerable benefit to the individual investor. But today, manipulative high-frequency trading takes advantage of these technological advances with a growing number of complex institutional order types, enabling practitioners to gain millisecond time advantages and cut ahead in line in front of traditional orders and with access to market data not available to other market participants.
High-frequency trading isn’t providing more efficient, liquid markets; it is a technological arms race designed to pick the pockets of legitimate market participants. That flies in the face of our markets’ founding principles. Historically, regulation has sought to protect investors by giving their orders priority over professional orders. In racing to accommodate and attract high-frequency trading business to their markets, the exchanges have turned this principle on its head. Through special order types, enhanced data feeds and co-location, professionals are given special access and entitlements to jump ahead of investor orders. Last year, more than 95 percent of high-frequency trader orders were cancelled, suggesting something else besides trading is at the heart of the strategy. Some high-frequency traders have claimed to be profitable on over 99 percent of their trading days. Our understanding of statistics tells us this isn’t possible without some built in advantage. Instead of leveling the playing field, the exchanges have tilted it against investors.
Here are examples of the practices that should concern us all:
•Advantaged treatment: Growing numbers of complex order types afford preferential treatment to professional traders’ orders, most notably to jump ahead of retail limit orders.
•Unequal access to information: Exchanges allow high-frequency traders to purchase faster data feeds with detailed information about market trading activity and the specific trading of various types of market participants. This further tilts the playing field against the individual investor, who is already at an informational disadvantage by virtue of the slower Consolidated Data Stream that brokers are required by rule to purchase or, even worse, the 15- to 20-minute-delayed quote feed they have public access to.
•Inappropriate use of information: Professionals are mining the detailed data feeds made available to them by the exchanges to sniff out and front-run large institutions (mutual funds and pension funds), which more often than not are investing and trading on behalf of individual investors.
•Added systems burdens, costs and distortions of rapid-fire quote activity: Ephemeral quotes, also called “quote stuffing,” that are cancelled and reposted in milliseconds distort the tape and present risk to the resiliency and integrity of critical market data and trading infrastructure. The tremendous added costs associated with the expanded capacity and bandwidth necessary to support this added data traffic is ultimately borne in part by individual investors.
There are solutions. Today there is no restriction to pumping out millions of orders in a matter of seconds, only to reverse the majority of them. It’s the life-blood of high-frequency trading. A simple solution would be to establish cancellation fees to discourage the practice of quote stuffing. The SEC and CFTC floated the idea last year. It has great merit. Make the fees high enough and they will eliminate high-frequency trading entirely. But if the practice is simply a scam, as we believe it is, an even better solution is to simply make it illegal. And exchanges should be neutral in the market. They should stop the practice of selling preferential access or data feeds and eliminate order types that allow high-frequency traders to jump ahead of legitimate order flow. These are all simply tools for scamming individual investors.
The integrity of the markets is at the heart of our economy. High-frequency trading undermines that integrity and causes the market to lose credibility and investors to lose trust. This hurts our economy and country. It is time to treat the cancer aggressively.
Charles Schwab, Founder and Chairman
Walt Bettinger, President and CEO
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“How frightened hypocrisy hastens to defend itself.”
Victor Hugo
Lewis Explains The Casino: “Why Are You Even Arguing” That This Is Not Rigged?
Submitted by Tyler Durden on 04/02/2014 16:43 -0400
Round 2 of the HFT vs Reality death match just took place on Bloomberg TV. Once again the clear winner was Katsuyama and Lewis version of the real world as Manoj Narang finally lost all credibility with the mind-0bumbing comment that “speed matters less in today’s market than it has ever mattered.” But the Tradeworx CEO was a background singer compared to Michael Lewis who explained in his clearest analogy yet how the casino works and then devoured the anchor’s constant efforts to play down the “rigged” market perspective… “it’s very clear that people are being front run in the market… so, why are you even arguing about this?”
Plenty of good stuff in the clip but this little exchange summed up the problem perfectly…
Lewis explains the game, exposes the rigging, and slams the mainstream media’s “defense” of this…
LEWIS: So of course the tourists get fleeced all the time in the poker games, because they don’t know the deck is rigged. The poker players pay the casino a cut of what they make. The casinos, operators, pay the tour group – the tour group company money to bring in the tourists.
So in this case, casino’s the exchange, the poker players are the high-frequency traders, and the tour group operators are the banks and the brokers that handle the stock market orders. And I think the analogy is pretty close. So is that rigged? Is that a rigged game? I think it is a rigged game.
SCHATZKER: Well, it’s rigged only inasmuch as…
LEWIS: Why are you so invested in the idea this is fair? Why are you even arguing about this? It’s so clear.
SCHATZKER: Me?
LEWIS: Yes, you seem to be. I mean, it’s very interesting. But you seem to be – you can see, it’s very clear that people are being front run in the market. There’s plenty of evidence in the book.
SCHATZKER: Their orders are being anticipated…
LEWIS: Anticipated and run in front of, that’s right.
Shocked…
And then Manoj Narang comes in… and the long words surge and the credibility plummets… “there are so many assertions that are provably false… oh my gosh so many…” crickets… and then finishes off all credibility with “speed matters less in today’s market than it has ever mattered.”
Virtu Delays IPO Amid “Flash Boys” Furor; FBI Investigates Legality of High Frequency Trading; Reader HFT Anecdotes
The bloom is about to come off the High Frequency Trading bloom, but only after billions and billions of dollars were skimmed off trades.
With everyone now looking the same direction and seeing the same thing, HFT trading firm Virtu Will Delay IPO, amid furor spurred by Michael Lewis Book “Flash Boys”.
Virtu Financial Inc., the high-frequency trader that announced plans last month to sell shares, has delayed the deal, two people with knowledge of the matter said.
Virtu’s bankers won’t start marketing the initial public offering until after April 20, delaying the process from this week, according to the people, who asked not to be named because the decision is private.
The delay comes amid unprecedented scrutiny of high-frequency traders. “Flash Boys,” the Michael Lewis book released yesterday, argues that high-speed traders, Wall Street brokerages and exchanges have rigged the $23 trillion U.S. stock market. New York Attorney General Eric Schneiderman is examining privileges such as enhanced data feeds marketed to high-speed firms, while the Federal Bureau of Investigation is looking into whether those traders are breaking U.S. laws by acting on nonpublic information.
Virtu said it doesn’t believe it broke the law, “but we cannot predict the outcome of the inquiry.”
Reader Anecdotes
In response to High Frequency Trading Hits 60-Minutes Scrutiny; Trading or Skimming? Reader Sam writes …
Hey Mish,
We don’t have regular TV anymore but enjoy many other types of programming for much less than the cost of cable TV etc. So I appreciate the link to 60 Minutes as it was fantastic. High Frequency Trading is something I watch and experience daily.
On Friday I was selling a sizable quantity of shares in a small company and from the seller side I watch a million shares trade above my sell price. My shares were being picked off bit by bit and only a partial fill by the end of the day. It was unreal and very obviously being manipulated. The exchanges were ignoring my order to sell and matching orders at higher prices. I’ve also had the same buy side happen as in the 60 Minutes video with my buy price ignored as well.
This is most frustrating. I didn’t get my buy price even though it was in the money and with lots of shares trading. I also see data on the screen that’s in conflict with other similar data which seems to be hang-ups in the threads of information.
Thanks
Sam
Something Stinks
Reader PTB with whom I shared the above email responded …
I have experienced the same thing your correspondent mentions. For example, I put in a limit sell order for a thinly traded micro-cap, and saw 100ds of thousands of shares trade ABOVE my limit sell price, and still got no execution. The broker explained that since my price was above the official bid, I had no right to an execution, which is of course technically correct.
But why were those trades ABOVE my limit about? Shouldn’t the buyers have been interested in buying my lower priced shares? Something clearly stinks.
Looks Like Fraud, Smells Like Fraud
If it smells like fraud, it’s because it is fraud. Trades should go to the best execution price. It’s clear they don’t and HFT firms are in the middle of it, skimming billions of dollars in the process. That is the only way these companies can go for years with no trading losses.
Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
“HFT Is A Growing Cancer” Says Mom And Pop’s Favorite Retail Broker Charles Schwab
Submitted by Tyler Durden on 04/03/2014 09:58 -0400
On one hand CNBC does its darnedest to refute Michael Lewis’ claim that markets are rigged (even if it woefully does so by showcasing the most clueless “defenders” it can afford), and yet on the other “mom and pop’s” preferred retail broker Charles Schwab, just came out and slammed HFT as a “growing cancer that needs to be addressed.” Hmmm…. who to believe?
From Charles Schwab:
High-frequency trading is a growing cancer that needs to be addressed
April 3, 2014
Schwab serves millions of investors and has been observing the development of high-frequency trading practices over the last few years with great concern. As we noted in an opinion piece in the Wall Street Journal last summer, high-frequency trading has run amok and is corrupting our capital market system by creating an unleveled playing field for individual investors and driving the wrong incentives for our commodity and equities exchanges. The primary principle behind our markets has always been that no one should carry an unfair advantage. That simple but fundamental principle is being broken.
High-frequency traders are gaming the system, reaping billions in the process and undermining investor confidence in the fairness of the markets. It’s a growing cancer and needs to be addressed. If confidence erodes further, the fuel of our free-enterprise system, capital formation, is at risk. We can’t allow that to happen. For sure, we still believe investing in equities is a primary path to long-term wealth creation, and we believe in the long-term structural integrity of the markets to deliver that over time for individual investors, which is all the more reason to be vigilant in removing anything that creates unfair advantage or undermines investor confidence.
On March 18, New York Attorney General Eric Schneiderman announced his intention to “continue to shine a light on unseemly practices in the markets,” referring to the practices of high-frequency trading and the support they receive from other parties including the commodities and equities exchanges. He has been a consistent watchdog on this matter. We applaud his effort and encourage the SEC to raise the urgency on the issue and do all they can to stop this infection in our capital markets. Investors are being harmed, and they shouldn’t have to wait any longer.
As Michael Lewis shows in his new book Flash Boys, the high-frequency trading cancer is deep. It has become systematic and institutionalized, with the exchanges supporting it through practices such as preferential data feeds and developing multiple order types designed to benefit high-frequency traders. These traders have become the exchanges favored clients; today they generate the majority of transactions, which create market data revenue and other fees. Data last year from the Financial Information Forum showed this is no minor blip. High-frequency trading pumped out over 300,000 trade inquiries each second last year, up from just 50,000 only seven years early. Yet actual trade volume on the exchanges has remained relatively flat over that period. It’s an explosion of head-fake ephemeral orders – not to lock in real trades, but to skim pennies off the public markets by the billions. Trade orders from individual investors are now pawns in a bigger chess game.
The United States capital markets have been the envy of the world in creating a vibrant, stable and fair system supported by broad public participation for decades. Technology has been a central part of that positive story, especially in the last 30 years, with considerable benefit to the individual investor. But today, manipulative high-frequency trading takes advantage of these technological advances with a growing number of complex institutional order types, enabling practitioners to gain millisecond time advantages and cut ahead in line in front of traditional orders and with access to market data not available to other market participants.
High-frequency trading isn’t providing more efficient, liquid markets; it is a technological arms race designed to pick the pockets of legitimate market participants. That flies in the face of our markets’ founding principles. Historically, regulation has sought to protect investors by giving their orders priority over professional orders. In racing to accommodate and attract high-frequency trading business to their markets, the exchanges have turned this principle on its head. Through special order types, enhanced data feeds and co-location, professionals are given special access and entitlements to jump ahead of investor orders. Last year, more than 95 percent of high-frequency trader orders were cancelled, suggesting something else besides trading is at the heart of the strategy. Some high-frequency traders have claimed to be profitable on over 99 percent of their trading days. Our understanding of statistics tells us this isn’t possible without some built in advantage. Instead of leveling the playing field, the exchanges have tilted it against investors.
Here are examples of the practices that should concern us all:
•Advantaged treatment: Growing numbers of complex order types afford preferential treatment to professional traders’ orders, most notably to jump ahead of retail limit orders.
•Unequal access to information: Exchanges allow high-frequency traders to purchase faster data feeds with detailed information about market trading activity and the specific trading of various types of market participants. This further tilts the playing field against the individual investor, who is already at an informational disadvantage by virtue of the slower Consolidated Data Stream that brokers are required by rule to purchase or, even worse, the 15- to 20-minute-delayed quote feed they have public access to.
•Inappropriate use of information: Professionals are mining the detailed data feeds made available to them by the exchanges to sniff out and front-run large institutions (mutual funds and pension funds), which more often than not are investing and trading on behalf of individual investors.
•Added systems burdens, costs and distortions of rapid-fire quote activity: Ephemeral quotes, also called “quote stuffing,” that are cancelled and reposted in milliseconds distort the tape and present risk to the resiliency and integrity of critical market data and trading infrastructure. The tremendous added costs associated with the expanded capacity and bandwidth necessary to support this added data traffic is ultimately borne in part by individual investors.
There are solutions. Today there is no restriction to pumping out millions of orders in a matter of seconds, only to reverse the majority of them. It’s the life-blood of high-frequency trading. A simple solution would be to establish cancellation fees to discourage the practice of quote stuffing. The SEC and CFTC floated the idea last year. It has great merit. Make the fees high enough and they will eliminate high-frequency trading entirely. But if the practice is simply a scam, as we believe it is, an even better solution is to simply make it illegal. And exchanges should be neutral in the market. They should stop the practice of selling preferential access or data feeds and eliminate order types that allow high-frequency traders to jump ahead of legitimate order flow. These are all simply tools for scamming individual investors.
The integrity of the markets is at the heart of our economy. High-frequency trading undermines that integrity and causes the market to lose credibility and investors to lose trust. This hurts our economy and country. It is time to treat the cancer aggressively.
Charles Schwab, Founder and Chairman
Walt Bettinger, President and CEO