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More Proof That the Stock Market is Rigged (1 Viewer)

cstu

Footballguy
IT FINALLY COMES OUT: Elite Traders Are Getting Access To Data Before Everyone ElseRead more: http://www.businessinsider.com/latency-in-trading-2013-6#ixzz2W7r22UXJ
In the past few days people have finally started paying attention to a funny thing going on in the market.Time after time ahead of major news, there seems to be someone who knows something before it happens — there seem to be trades that hit too hard and fast before the news is actually made.

This has been going on for a while, and people are finally starting to understand why.The current target of collective ire is Thomson Reuters. There was some shady trading ahead of the Consumer Confidence number at the end of last month. About a quarter of a second before the number was released, there was an eruption of orders in the SPDR S&P Sector ETF (SPY), the e-Mini (electronically traded futures), and in hundreds of stocks, according to Nanex, a market research firm.

After some digging CNBC's Eamon Javers reported that the source of the early trading was Thomson Reuters. The company has a well known deal with the University of Michigan, the source of the data, that allows Thomson Reuters to release that data 5 minutes before it's supposed to come out (9:55 am) to clients who pay for that privilege.

But Thomson Reuters also provides a service called "ultra-low latency", which allows premium customers to get the Institute for Supply Management's manufacturing index number 2 seconds before it's released to the general public for $2,000 a month.Two seconds in high frequency trading time is an eternity.The University of Michigan responded to this by saying, essentially, 'we do it because people pay for it.'From the WSJ:

Richard Curtin, an economist who runs the university's survey, said he knows the deal gives an advantage to select investors."Hardly anyone would pay for it if they didn't see a profit motive," Mr. Curtin said. Later, he added: "This research is totally funded by private sources for the benefit of scientific analysis, to assess public policy, and to advance business interests. Without a source of revenue, the project would cease to exist and the benefits would disappear."

Before we put on our self-righteous anger hats and ride over to Thomson Reuters pitchforks in hand, let's be real. They aren't the only ones doing this.To get the ISM number early, you also have to pay a $1,025 fee if you don't have a high-speed connection to exchanges, according to WSJ. Again, that's if you don't already have one.

See, exchanges have their own form of latency. While Thomson Reuters is assisting firms trading on news (a strategy called "event jumping" and/or "news feed trades"), exchanges have admitted to allowing latency based on when they send out trade confirmations and how technologically advanced and connected a firm is to the exchange.

Scott Patterson from the Wall Street Journalreported this is early May, and barely anyone made a peep. The CME even admitted that there are "times when customers experience a latency of a few milliseconds between the time they receive their trade confirmations and when the information is accessible on the public feeds."Traders have a bunch of strategies for how to take advantage of this information, but it's really all the same thing — some people have information before other people. Not because they're smart, but because they pay for that privilege.

CNBC's John Carney compared that to the "expert networks" under major scrutiny by regulators and the infamous Goldman Sachs "trading huddles," in which research analysts met to pass tips on tow traders and favored clients, and for which Goldman was fined tens of millions of dollars.When it comes to latency, regulators have really done nothing. There are no rules. It's the Wild Wild West. Commodities Futures Trading Commission head Bart Chilton was on CNBC this morning and basically said... 'welp, this sucks guys, but you're on your own for now.'

Here's a transcript of the conversation he had with Kayla Taucshe and Andrew Ross Sorkin (emphasis ours):

Chilton says: "It may not be illegal, but I think it's unfair. Information is a commodity. I mean, forget about an hour-long massage for $100. Thomson Reuters is paying a million dollars to get a two second advantage from the University of Michigan."Sorkin: Right.Chilton: What that means is that two seconds.Sorkin: This is the Consumer Confidence survey?Chilton: Right. That two seconds can impact markets a lot. These are millisecond markets, and two seconds is huge for them.Sorkin: So my position on this is actually I'm not that bothered by this. I look at the news industry and I say if you want to get Bloomberg News, for example, you have to have a terminal, that's $20,000. You can get this news on the website, but you'll get it later. If you have a Dow Jones terminal, you can get access to Wall Street Journal's stories in advance. All of those things cost money and they are premium tiers for this information. So I'm unclear why we decided this information is somehow more valuable or a public good than other news organizations.Put news organizations aside. Dana Telsey who is an analyst in the retail business. She does a survey. She is constantly surveying retailers. If you pay for the research you get the research. If you don't pay for it, you don't get it.Tausche: Bloomberg News owns Bloomberg News stories. This is Thomson Reuters taking third party information.Sorkin: This is buying it the same way if I were to hire five reporters to go do the survey. I'm hiring the University of Michigan to go do the survey. It's the same thing.Chilton: Keep in mind what you're saying.. and look, it's a debate. And we're gonna do a concept release on a bunch of these technology issues in a month or so. And I'll be talking about it in a week, with regard to our fine furry friend the cheetahs. But, it's all about money. Right? So, if you have the money to afford these extra services. If you can have five reporters, if you can have a supercomputer and do high speed trading. Yeah, you can be in the markets. Is that really where we wanna go, Andrew? That you have to have the money, that you have to have the best, fastest computers?

So that's the question here — do we want to the market to be a meritocracy or do we want to surrender it to the robots — actually not even the robots, the people who can pay for them.Bloomberg News editor Matt Winkler sent a letter to the University of Michigan arguing that, while there are no specific regulations about latency, it seems to be a violation of a more general SEC rule, Regulation FD.

From the letter:This doesn't contribute to a fully informed market as required by the U.S. Securities and Exchange Commission's Selective Disclosure and Insider Trading Rule. Regulation FD, as it is called was approved by the SEC in August 2000 partly in response to reporting by Bloomberg News that showed the wide prevalence of selective disclosure of material information.And for all the cynics out there — yes, there have always been ways for people to pay to game the market. But there are regulations for them. That's the difference here. We have to strive to be better, for now, in this case we're not even trying.You can check out how crazy trading gets ahead of important news (in this case Consumer Confidence) in the video below, provided by Nanex.
 

OC Zed

Footballguy
You neglected to highlight this fundamental element from the article:

Mr. Curtin said. Later, he added: "This research is totally funded by private sources for the benefit of scientific analysis, to assess public policy, and to advance business interests. Without a source of revenue, the project would cease to exist and the benefits would disappear."
 

Jayrod

Footballguy
If its not actually insider trading, but people purchasing reports from outside companies for quicker information, I don't see what the outrage is. They have a developed a way to make money. There are still risks involved and it takes a lot of capital up front to make it happen.

 

jonessed

Footballguy
If its not actually insider trading, but people purchasing reports from outside companies for quicker information, I don't see what the outrage is. They have a developed a way to make money. There are still risks involved and it takes a lot of capital up front to make it happen.
There needs to be some regulation around selling metrics like the consumer confidence index early.That may not legally be insider trading, but it's about as close to the line as you can get.
 

OC Zed

Footballguy
If its not actually insider trading, but people purchasing reports from outside companies for quicker information, I don't see what the outrage is. They have a developed a way to make money. There are still risks involved and it takes a lot of capital up front to make it happen.
There needs to be some regulation around selling metrics like the consumer confidence index early.That may not legally be insider trading, but it's about as close to the line as you can get.
How so? A private actor spends its own dime to provide a service and wants to charge its customers for that service. Why do you need regulation here?

By logic, this isn't any different from the Bloomberg terminals which provides subscribers news stories prior to the general public. There's never by any issue with that. And by a broader context, it's not any different than any reporting/news service that provides subscriber-only content.

 

Mystery Achiever

Footballguy
While it feels a little unfair, yikes, please no regulation on this. Where do you draw the line on what constitutes market moving news that cannot be selectively distributed? Analysts move stocks all of the time with reports that go to clients first.And the info is not proprietary in the same sense as a company giving its info, which no one else could know, to just some. Anyone could determine consumer sentiment with their own research

 

The Z Machine

Footballguy
I have no problem with market moving news and paying for access. I have a problem with high frequency trading in general, especially as it ties into "premium access latency" and what that means for effective distribution of capital. HFT serves primarily to transfer wealth from middle class investors to those engaged in the HFT arms race.

 

OC Zed

Footballguy
I have no problem with market moving news and paying for access. I have a problem with high frequency trading in general, especially as it ties into "premium access latency" and what that means for effective distribution of capital. HFT serves primarily to transfer wealth from middle class investors to those engaged in the HFT arms race.
Middle class investors shouldn't be into HFT... it doesn't make economic sense and thus they really shouldn't be too concerned about hourly/daily swings in the market.

 

DiStefano

Footballguy
There always has been, and there always will be people who have more information about the market or about specific stocks than others. If you subscribe to market newsletters, you will get information about companies which is not generally available to others. Frankly, I don't think this particular instance is a big problem. Some people have found a way to make money with ultra fast trading. If you are trading stocks every day, they may have an advantage over you. If you are buying and holding, and making occasional trades as you move in and out of stocks, it won't make a bit of difference.

 

Sand

Footballguy
The length scales most investors trade on is exponentially longer.

If anyone asked my who cheats in the stock market I'd say the Fed. Luckily for us the folks who get early access to that data are the politicians. So it is safe, secure, and never traded on before it becomes public knowledge. :cough:SpencerBaccus:cough:

 

humpback

Footballguy
I have no problem with market moving news and paying for access. I have a problem with high frequency trading in general, especially as it ties into "premium access latency" and what that means for effective distribution of capital. HFT serves primarily to transfer wealth from middle class investors to those engaged in the HFT arms race.
How so?

 

The Z Machine

Footballguy
I have no problem with market moving news and paying for access. I have a problem with high frequency trading in general, especially as it ties into "premium access latency" and what that means for effective distribution of capital. HFT serves primarily to transfer wealth from middle class investors to those engaged in the HFT arms race.
How so?
I fully believe that the economy would would better for the majority if those engaged in the business of finance didn't reap such a large profit. That's a fundamental imbalance in our current economy.HFT is a part of that problem. HFT it's not investing, it's arbitrage. Arbitrage doesn't do much for spurring economic growth, certainly not those that are investing via 401ks and the like.HFT may add some liquidity, but overall I believe it's a detriment to the economy and to society.
 
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humpback

Footballguy
I have no problem with market moving news and paying for access. I have a problem with high frequency trading in general, especially as it ties into "premium access latency" and what that means for effective distribution of capital. HFT serves primarily to transfer wealth from middle class investors to those engaged in the HFT arms race.
How so?
I fully believe that the economy would would better for the majority if those engaged in the business of finance didn't reap such a large profit. That's a fundamental imbalance in our current economy.HFT is a part of that problem. HFT it's not investing, it's arbitrage. Arbitrage doesn't do much for spurring economic growth, certainly not those that are investing via 401ks and the like.HFT may add some liquidity, but overall I believe it's a detriment to the economy and to society.
That doesn't really answer the question- how does it transfer wealth from middle class investors to HFT investors?

I said this in another thread- I'm not a fan of HFT by any stretch, but it's become another boogeyman. It sounds "icky", just like this story does, but it really doesn't negatively impact the average investor. I was curious if you had evidence that it did.

 

The Z Machine

Footballguy
I have no problem with market moving news and paying for access. I have a problem with high frequency trading in general, especially as it ties into "premium access latency" and what that means for effective distribution of capital. HFT serves primarily to transfer wealth from middle class investors to those engaged in the HFT arms race.
How so?
I fully believe that the economy would would better for the majority if those engaged in the business of finance didn't reap such a large profit. That's a fundamental imbalance in our current economy.HFT is a part of that problem. HFT it's not investing, it's arbitrage. Arbitrage doesn't do much for spurring economic growth, certainly not those that are investing via 401ks and the like.HFT may add some liquidity, but overall I believe it's a detriment to the economy and to society.
That doesn't really answer the question- how does it transfer wealth from middle class investors to HFT investors?

I said this in another thread- I'm not a fan of HFT by any stretch, but it's become another boogeyman. It sounds "icky", just like this story does, but it really doesn't negatively impact the average investor. I was curious if you had evidence that it did.
The only concrete proof I can offer is that there are many very smart people that are employed by HFT enterprises (I personally know some), whose talents would be much better served if they were engaged in actually creating things, rather than extracting money through more and more complex arbitrage. This goes for a lot of the quant schemes out there, not just HFT.

I *think* that HFT is a contributing factor in the decline in confidence that the general population has shown towards the equities markets. This lack of confidence drives money "under the mattress" rather than being allocated better for economic growth. I also think that HFT is a driver of volatility in the markets, and this can cause problems for more traditional investors, let alone the companies that have the wild swings in their prices. This contributes to the shift from energies within companies going from long term business strategy to a focus on short term share prices.

 

humpback

Footballguy
The Z Machine said:
humpback said:
The Z Machine said:
humpback said:
I have no problem with market moving news and paying for access. I have a problem with high frequency trading in general, especially as it ties into "premium access latency" and what that means for effective distribution of capital. HFT serves primarily to transfer wealth from middle class investors to those engaged in the HFT arms race.
How so?
I fully believe that the economy would would better for the majority if those engaged in the business of finance didn't reap such a large profit. That's a fundamental imbalance in our current economy.HFT is a part of that problem. HFT it's not investing, it's arbitrage. Arbitrage doesn't do much for spurring economic growth, certainly not those that are investing via 401ks and the like.HFT may add some liquidity, but overall I believe it's a detriment to the economy and to society.
That doesn't really answer the question- how does it transfer wealth from middle class investors to HFT investors?

I said this in another thread- I'm not a fan of HFT by any stretch, but it's become another boogeyman. It sounds "icky", just like this story does, but it really doesn't negatively impact the average investor. I was curious if you had evidence that it did.
The only concrete proof I can offer is that there are many very smart people that are employed by HFT enterprises (I personally know some), whose talents would be much better served if they were engaged in actually creating things, rather than extracting money through more and more complex arbitrage. This goes for a lot of the quant schemes out there, not just HFT.

I *think* that HFT is a contributing factor in the decline in confidence that the general population has shown towards the equities markets. This lack of confidence drives money "under the mattress" rather than being allocated better for economic growth. I also think that HFT is a driver of volatility in the markets, and this can cause problems for more traditional investors, let alone the companies that have the wild swings in their prices. This contributes to the shift from energies within companies going from long term business strategy to a focus on short term share prices.
Yeah, that's not really concrete proof of anything.

Companies may be more focused on shorter-term results and returns for their investors, but they certainly aren't shifting their energies because of HFT.

 

Nadtwist

Footballguy
You neglected to highlight this fundamental element from the article:

Mr. Curtin said. Later, he added: "This research is totally funded by private sources for the benefit of scientific analysis, to assess public policy, and to advance business interests. Without a source of revenue, the project would cease to exist and the benefits would disappear."
:thumbup:

 

Sand

Footballguy
humpback said:
The Z Machine said:
humpback said:
I have no problem with market moving news and paying for access. I have a problem with high frequency trading in general, especially as it ties into "premium access latency" and what that means for effective distribution of capital. HFT serves primarily to transfer wealth from middle class investors to those engaged in the HFT arms race.
How so?
I fully believe that the economy would would better for the majority if those engaged in the business of finance didn't reap such a large profit. That's a fundamental imbalance in our current economy.HFT is a part of that problem. HFT it's not investing, it's arbitrage. Arbitrage doesn't do much for spurring economic growth, certainly not those that are investing via 401ks and the like.HFT may add some liquidity, but overall I believe it's a detriment to the economy and to society.
That doesn't really answer the question- how does it transfer wealth from middle class investors to HFT investors?

I said this in another thread- I'm not a fan of HFT by any stretch, but it's become another boogeyman. It sounds "icky", just like this story does, but it really doesn't negatively impact the average investor. I was curious if you had evidence that it did.
The money has to come from somewhere. So who is getting fleeced?

 

Short Corner

Footballguy
humpback said:
The Z Machine said:
humpback said:
I have no problem with market moving news and paying for access. I have a problem with high frequency trading in general, especially as it ties into "premium access latency" and what that means for effective distribution of capital. HFT serves primarily to transfer wealth from middle class investors to those engaged in the HFT arms race.
How so?
I fully believe that the economy would would better for the majority if those engaged in the business of finance didn't reap such a large profit. That's a fundamental imbalance in our current economy.HFT is a part of that problem. HFT it's not investing, it's arbitrage. Arbitrage doesn't do much for spurring economic growth, certainly not those that are investing via 401ks and the like.HFT may add some liquidity, but overall I believe it's a detriment to the economy and to society.
That doesn't really answer the question- how does it transfer wealth from middle class investors to HFT investors?

I said this in another thread- I'm not a fan of HFT by any stretch, but it's become another boogeyman. It sounds "icky", just like this story does, but it really doesn't negatively impact the average investor. I was curious if you had evidence that it did.
The money has to come from somewhere. So who is getting fleeced?
Daytraders? Other HFTs?

Long term investors aren't making or breaking their portfolios with small moves in a given day.

 

Sand

Footballguy
humpback said:
The Z Machine said:
humpback said:
I have no problem with market moving news and paying for access. I have a problem with high frequency trading in general, especially as it ties into "premium access latency" and what that means for effective distribution of capital. HFT serves primarily to transfer wealth from middle class investors to those engaged in the HFT arms race.
How so?
I fully believe that the economy would would better for the majority if those engaged in the business of finance didn't reap such a large profit. That's a fundamental imbalance in our current economy. HFT is a part of that problem. HFT it's not investing, it's arbitrage. Arbitrage doesn't do much for spurring economic growth, certainly not those that are investing via 401ks and the like. HFT may add some liquidity, but overall I believe it's a detriment to the economy and to society.
That doesn't really answer the question- how does it transfer wealth from middle class investors to HFT investors?

I said this in another thread- I'm not a fan of HFT by any stretch, but it's become another boogeyman. It sounds "icky", just like this story does, but it really doesn't negatively impact the average investor. I was curious if you had evidence that it did.
The money has to come from somewhere. So who is getting fleeced?
Daytraders? Other HFTs?

Long term investors aren't making or breaking their portfolios with small moves in a given day.
I'd say mutual funds.

 

The Z Machine

Footballguy
The Z Machine said:
humpback said:
The Z Machine said:
humpback said:
I have no problem with market moving news and paying for access. I have a problem with high frequency trading in general, especially as it ties into "premium access latency" and what that means for effective distribution of capital. HFT serves primarily to transfer wealth from middle class investors to those engaged in the HFT arms race.
How so?
I fully believe that the economy would would better for the majority if those engaged in the business of finance didn't reap such a large profit. That's a fundamental imbalance in our current economy.HFT is a part of that problem. HFT it's not investing, it's arbitrage. Arbitrage doesn't do much for spurring economic growth, certainly not those that are investing via 401ks and the like.HFT may add some liquidity, but overall I believe it's a detriment to the economy and to society.
That doesn't really answer the question- how does it transfer wealth from middle class investors to HFT investors?I said this in another thread- I'm not a fan of HFT by any stretch, but it's become another boogeyman. It sounds "icky", just like this story does, but it really doesn't negatively impact the average investor. I was curious if you had evidence that it did.
The only concrete proof I can offer is that there are many very smart people that are employed by HFT enterprises (I personally know some), whose talents would be much better served if they were engaged in actually creating things, rather than extracting money through more and more complex arbitrage. This goes for a lot of the quant schemes out there, not just HFT.I *think* that HFT is a contributing factor in the decline in confidence that the general population has shown towards the equities markets. This lack of confidence drives money "under the mattress" rather than being allocated better for economic growth. I also think that HFT is a driver of volatility in the markets, and this can cause problems for more traditional investors, let alone the companies that have the wild swings in their prices. This contributes to the shift from energies within companies going from long term business strategy to a focus on short term share prices.
Yeah, that's not really concrete proof of anything.Companies may be more focused on shorter-term results and returns for their investors, but they certainly aren't shifting their energies because of HFT.
Ok, so how about my other points? Do you think it's a good thing that only growth in wealth in the last decade has gone to those involved in finance? Personally, I think an economy whose growth is driven by more and more complex financial instruments, and whose benefits go to a small handful of people to be extremely problematic and dangerous in three long term.Anyway, from my cursory searching, the academic research is mixed on the impact of HFT on the markets themselves. Perhaps it's tough to decouple the HFT effects from other aspects, or perhaps it's too early in the development of HFT to maker concrete claims.

I haven't seen much in terms of the "brain drain" aspect I talked about earlier.

 

humpback

Footballguy
I have no problem with market moving news and paying for access. I have a problem with high frequency trading in general, especially as it ties into "premium access latency" and what that means for effective distribution of capital. HFT serves primarily to transfer wealth from middle class investors to those engaged in the HFT arms race.
How so?
I fully believe that the economy would would better for the majority if those engaged in the business of finance didn't reap such a large profit. That's a fundamental imbalance in our current economy. HFT is a part of that problem. HFT it's not investing, it's arbitrage. Arbitrage doesn't do much for spurring economic growth, certainly not those that are investing via 401ks and the like. HFT may add some liquidity, but overall I believe it's a detriment to the economy and to society.
That doesn't really answer the question- how does it transfer wealth from middle class investors to HFT investors?

I said this in another thread- I'm not a fan of HFT by any stretch, but it's become another boogeyman. It sounds "icky", just like this story does, but it really doesn't negatively impact the average investor. I was curious if you had evidence that it did.
The money has to come from somewhere. So who is getting fleeced?
Daytraders? Other HFTs?

Long term investors aren't making or breaking their portfolios with small moves in a given day.
I'd say mutual funds.
Short Corner has it right- HFTs compete against other traders for the most part, including HFTs. They are in and out of trades in seconds (sometimes a fraction of a second), and look to make pennies (sometimes a fraction of a penny) per trade. They really have no impact on longer term prices which concern the average investor (including mutual funds).

 

humpback

Footballguy
The Z Machine said:
I have no problem with market moving news and paying for access. I have a problem with high frequency trading in general, especially as it ties into "premium access latency" and what that means for effective distribution of capital. HFT serves primarily to transfer wealth from middle class investors to those engaged in the HFT arms race.
How so?
I fully believe that the economy would would better for the majority if those engaged in the business of finance didn't reap such a large profit. That's a fundamental imbalance in our current economy.HFT is a part of that problem. HFT it's not investing, it's arbitrage. Arbitrage doesn't do much for spurring economic growth, certainly not those that are investing via 401ks and the like.HFT may add some liquidity, but overall I believe it's a detriment to the economy and to society.
That doesn't really answer the question- how does it transfer wealth from middle class investors to HFT investors?I said this in another thread- I'm not a fan of HFT by any stretch, but it's become another boogeyman. It sounds "icky", just like this story does, but it really doesn't negatively impact the average investor. I was curious if you had evidence that it did.
The only concrete proof I can offer is that there are many very smart people that are employed by HFT enterprises (I personally know some), whose talents would be much better served if they were engaged in actually creating things, rather than extracting money through more and more complex arbitrage. This goes for a lot of the quant schemes out there, not just HFT.I *think* that HFT is a contributing factor in the decline in confidence that the general population has shown towards the equities markets. This lack of confidence drives money "under the mattress" rather than being allocated better for economic growth. I also think that HFT is a driver of volatility in the markets, and this can cause problems for more traditional investors, let alone the companies that have the wild swings in their prices. This contributes to the shift from energies within companies going from long term business strategy to a focus on short term share prices.
Yeah, that's not really concrete proof of anything.Companies may be more focused on shorter-term results and returns for their investors, but they certainly aren't shifting their energies because of HFT.
Ok, so how about my other points? Do you think it's a good thing that only growth in wealth in the last decade has gone to those involved in finance? Personally, I think an economy whose growth is driven by more and more complex financial instruments, and whose benefits go to a small handful of people to be extremely problematic and dangerous in three long term.Anyway, from my cursory searching, the academic research is mixed on the impact of HFT on the markets themselves. Perhaps it's tough to decouple the HFT effects from other aspects, or perhaps it's too early in the development of HFT to maker concrete claims.

I haven't seen much in terms of the "brain drain" aspect I talked about earlier.
Like I said, I'm not a fan of HFT at all, but just pointing out that the meme that they are robbing the average investor blind just isn't true. Companies also aren't doing anything differently because of HFT.

 

Mystery Achiever

Footballguy
Thomson Reuters is stopping the early peek for elite clients after NY regulators started looking into it.

ETA- From latest report I heard, they are suspending pending review from the AG. So, it is more that they are cooperating with regulators than having change of heart about the practice.

 
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GroveDiesel

Footballguy
I have no problem with market moving news and paying for access. I have a problem with high frequency trading in general, especially as it ties into "premium access latency" and what that means for effective distribution of capital. HFT serves primarily to transfer wealth from middle class investors to those engaged in the HFT arms race.
Middle class investors shouldn't be into HFT... it doesn't make economic sense and thus they really shouldn't be too concerned about hourly/daily swings in the market.
:goodposting:

The average investor worries way too much about swings in the market. Why the average investor should care about market confidence reports is beyond me. Look at and review your portfolio once a year, rebalance if need be and stop looking at it until next year.

 

Sand

Footballguy
Short Corner has it right- HFTs compete against other traders for the most part, including HFTs. They are in and out of trades in seconds (sometimes a fraction of a second), and look to make pennies (sometimes a fraction of a penny) per trade. They really have no impact on longer term prices which concern the average investor (including mutual funds).
They shave profit off of any transaction they can. Mutual funds/ETFs will be in that class.

 

humpback

Footballguy
Short Corner has it right- HFTs compete against other traders for the most part, including HFTs. They are in and out of trades in seconds (sometimes a fraction of a second), and look to make pennies (sometimes a fraction of a penny) per trade. They really have no impact on longer term prices which concern the average investor (including mutual funds).
They shave profit off of any transaction they can. Mutual funds/ETFs will be in that class.
They don't shave profit off of every transaction. I hate defending them, but in terms of their impact on the average investor, there is no definitive answer- many people think it's been a net benefit.

 

cstu

Footballguy
Third Largest Futures Broker Gets Record Fine For HFT Stock Market Manipulation

Submitted by Tyler Durden on 07/11/2013 09:34 -0400

When we tapered our coverage of HFT manipulation and stock market abuse some time ago, we thought that the message had been heard loud and clear: high frequency trading is a sophisticated market manipulating parasite, whose only real function is to abuse market structure and integrity, by making conventional market manipulation practices more difficult to spot and identify. It turns out some, i.e., Newedge, thought they could still get away with traditional manipulative practices such as spoofing, layering, momentum ignition, wash trading, bypassing, and others, if only they were wrapped in an HFT blanket. It did so for four years from 2008 until 2011. As it turns out it was wrong, and in a stunning example of actually doing its job, FINRA fined Newedge, which is one of the largest futures brokers in the world and ranks third in terms of U.S. customer assets on deposit, a record $9.5 million.And while the mechanisms by which Newedge was engaging in market manipulation and outright fraud are largely irrelevant (one can always be found that works and escapes supervision for some period of time), what is more troubling is that seemingly "respected" brokerages continue to abuse markets and rule-abiding participants for the sole benefit of their clients, and their own bottom lines and bonuses of course, despite signing such ironclad fraud prevention mechanisms as self-policing, ethics and compliance manuals. Shocking.

Oh, and yet another reason - one which we have been pointing out for years - as to why the retail investor has given up on the manipulated venue where hedge funds and prop desks pass to each other the hot potatoes money printed up by the Fed.

From the WSJ:

Brokerages are required to monitor clients' trading activity in order to keep the clients from breaching risk limits, and to curb manipulative activity, among other things. Newedge failed to do so for years despite repeated warnings, according to Finra. The brokerage allowed potentially manipulative trading such as "spoofing," in which firms place orders designed to trick other firms into buying or selling stocks, and "marking the close," in which firms push around stock prices at the close of trading in order to benefit from the final price, Finra said.

...

The sanctions come as regulators step up scrutiny of computer-driven trading amid worries that it is enabling market manipulation that could pose risks to the financial system and damage investor confidence. Regulators have fined several trading firms for manipulative activities over the past year, and expect to bring more such cases in the near future, according to people familiar with the matter.

Newedge allowed the questionable behavior—some of which was executed by day-trading firms—to persist despite numerous red flags, including concerns raised by employees, an independent consultant, exchanges and regulators, the filing and documents show. Regulators said Newedge's failure to track client orders over the four-year period "caused considerable systemic risk to the marketplace," according to a settlement document reviewed by the Journal.

That's ok though: Ben Bernanke is there to make sure all risk is gone.

Naturally, this being a story about HFT, there is much humor:

The emergence of manipulative trading activity—made easier by improved technology and the proliferation of electronic trading venues—has prompted regulators, traders and investors to try to build better methods to track and defend against stock-market gamers, traders say. Finra last August implemented a sophisticated market-surveillance system that already has sparked nearly 300 investigations, Mr. Gira said. The SEC is using a new market-monitoring system called Midas to track trading across stock exchanges. "Professional traders and [brokers] have developed systems and functionality to avoid being taken advantage of through bad behaviors, whether it's spoofing or other forms," said Chris Concannon, partner at Virtu Financial LLC, a high-frequency trading firm.

So the SEC is using an HFT firm to catch other HFT firms "at it." The same HFT firm that the SEC used a month ago to find that HFT does not cause flash crashes. Absolute, mindboggling idiocy.

Below is one example of what NewEdge did - spoofing, a practice we have long described on Zero Hedge.



What else:

Finra said clients also engaged in multiple "wash trades," in which a firm acts as buyer and seller in the same trade to distort market activity. The practice can create the illusion of heavy trading volume that lures firms that are tracking for such activity. Between October 2008 and September 2009, three Newedge customers executed wash trades involving more than 70,000 shares of stock on an NYSE exchange, according to Newedge's settlement offer with NYSE, which was reviewed by the Journal.

Newedge also allowed some customers to evade rules around short-selling, in which traders borrow shares and sell them with the intent to buy the stock back at a lower price, profiting from the decline, according to the documents reviewed by the Journal.

For instance, Newedge allowed some clients to operate through "by-pass" accounts, which enabled skirting of rules requiring firms to locate stock—or provide assurances that they could borrow the stock—before entering a short sale. Newedge allowed the firms to short the stock without confirming that they had actually located it, "essentially relying on an 'honor system,'" according to Finra's letter reviewed by the Journal.

Newedge, which began providing direct access to U.S. stock exchanges in January 2008, received repeated warnings that its systems weren't capturing client orders, and that it was uninformed about the risk controls of clients, according to the NYSE settlement.

From the service's inception, Newedge "knew that it was unaware of what controls its clients had implemented," the settlement says.

In May 2008, a high-ranking Newedge employee sent an email to another employee expressing concerns "about the proliferation of equity trading systems without any sort of systemic evaluation of risk control functions," according to the NYSE settlement.

Another red flag, the settlement says, was "numerous regulatory inquiries [Newedge] received regarding the activity of one particular Newedge client." The client wasn't identified.

As long as that client wasn't the NY Fed's Kevin Henry all is well. Which of course he isn't. After all the NY Fed only uses Citadel.

The list of abuses goes on and on and on, because nothing has ever actually been fixed, and will continue to remain unfixed until the next, and courtesy of the central banks' all in gambit on reflation, final crash. Until then, retail will continue to disappear until finally just the primary dealers and the central banks are left buying and selling meaningless pieces of paper from each other.
 

cstu

Footballguy
Link

High-frequency trading represents more than half of all transactions of American stocks these days, but just how fast is high-frequency? So fast, it turns out, that data companies now provide financial data to their most premium subscribers early -- as little as two milliseconds early in the case of a $20,000-per-month service the Nasdaq and Chicago Mercantile Exchange debuted in May using microwave networks. That time difference is enough to gain quite the financial advantage.

One key data provider, Thomson Reuters, announced this week it was suspending its 9:54:58 a.m. release of the University of Michigan's consumer confidence data to about a dozen premium subscribers (not to be confused with those regular money management customers who pay to receive the data at 9:55 a.m., a measly five minutes before the University of Michigan posts the consumer confidence index online) while New York Attorney General Eric Schneiderman investigates the practice.

Thomson Reuters maintains that their 9:54:58 a.m. release, for which some clients pay more than $6,000 a month, does not violate federal insider trading laws since they disclose the tiered pricing to all customers.

So how and why do traders capitalize on those all-important two seconds?

Paul Solman dove deeper into the futuristic world of high-frequency trading in a 2012 interview with Robert Harris, whose fictional account of Wall Street depicts traders doing, well, exactly what they already do:



Robert Harris:
I thought I was making this all up, but, of course, I then discover that this is yesterday's news. They've been doing this for years. There's nothing you can invent that these guys, very clever, haven't thought of before you. Bloomberg News feeds are digitalized and go straight into the machine and buzzwords are picked out: "panic, rumor, fear, slump." And, you know, you just get a few milliseconds', maybe, advantage if the machine can work out what this news story is going to do to the markets in the next few minutes.


Paul Solman:
And that's what your novel gets at, the ability of an algorithm to exploit that anxiety.


Robert Harris:
That we are the victims of some sort of gigantic H.G. Wells-like science fiction creation, which is the market, so huge in the numbers of shares and the vast values of transactions every day, so fast with the speed, that it has somehow slipped the control of human beings and almost is itself a kind of Frankenstein's monster run amok in the world.
And if speed is of the essence, proximity to the computer networks that guarantee that speed is paramount. (Check out this video to see what half a second of high-frequency trading looks like). The increased interest in New Jersey's wetland warehouses to host fiber optic cables, as this New York Times story captures, proves the point: the closer you are to the data networks of the big financial exchanges, the shorter the cables and the faster data will travel to you on the trading floor.

In his 2012 Making Sen$e report, Paul Solman also quoted from technology consultant Kevin Slavin's TED talk on cutting-edge technology:



Kevin Slavin:
And this is really where the wires come right up into the city. And the further away you are from that, you're a few microseconds behind every time. These guys down on Wall Street, they're eight microseconds behind all these guys going into the empty buildings being hollowed out up around (New York's point of entry for the Internet at a so-called carrier hotel in Tribeca).
Just to give you a sense of what microseconds are, it takes you 500,000 microseconds just to click a mouse. But if you're a Wall Street algorithm and you're five microseconds behind, you're a loser.
So for whom is this so important? Who's buying up real estate in beautiful downtown Secaucus, New Jersey?



Robert Harris:
They don't hire anyone to work who has less than a Ph.D. in the natural sciences or mathematics and that (wasn't) peer-reviewed in the top 15 percent. They don't even want someone to come and work for them who's got a degree in economics. It's too soft.


Paul Solman:
The algorithms are actually the brainchildren of top-flight physicists, forced to migrate to Wall Street in the early '90s when Congress killed the 54-mile-in-circumference supercollider, for which land outside Dallas was already excavated.
 

Sand

Footballguy
Short Corner has it right- HFTs compete against other traders for the most part, including HFTs. They are in and out of trades in seconds (sometimes a fraction of a second), and look to make pennies (sometimes a fraction of a penny) per trade. They really have no impact on longer term prices which concern the average investor (including mutual funds).
They shave profit off of any transaction they can. Mutual funds/ETFs will be in that class.
They don't shave profit off of every transaction. I hate defending them, but in terms of their impact on the average investor, there is no definitive answer- many people think it's been a net benefit.
On 60 minutes right now there is a story about exactly how the market is rigged ("Flash Boys") to transfer tens of billions to high frequency traders. Proven. Done.

They are doing exactly as I said - shaving profits off billions of transactions. Frontrunning the market.

 
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DiStefano

Footballguy
Short Corner has it right- HFTs compete against other traders for the most part, including HFTs. They are in and out of trades in seconds (sometimes a fraction of a second), and look to make pennies (sometimes a fraction of a penny) per trade. They really have no impact on longer term prices which concern the average investor (including mutual funds).
They shave profit off of any transaction they can. Mutual funds/ETFs will be in that class.
They don't shave profit off of every transaction. I hate defending them, but in terms of their impact on the average investor, there is no definitive answer- many people think it's been a net benefit.
On 60 minutes right now there is a story about exactly how the market is rigged ("Flash Boys") to transfer tens of billions to high frequency traders. Proven. Done.

They are doing exactly as I said - shaving profits off billions of transactions. Frontrunning the market.
It's not the market that's rigged; it's the government that's rigged.

 

Johnny Rock

Footballguy
Short Corner has it right- HFTs compete against other traders for the most part, including HFTs. They are in and out of trades in seconds (sometimes a fraction of a second), and look to make pennies (sometimes a fraction of a penny) per trade. They really have no impact on longer term prices which concern the average investor (including mutual funds).
They shave profit off of any transaction they can. Mutual funds/ETFs will be in that class.
They don't shave profit off of every transaction. I hate defending them, but in terms of their impact on the average investor, there is no definitive answer- many people think it's been a net benefit.
On 60 minutes right now there is a story about exactly how the market is rigged ("Flash Boys") to transfer tens of billions to high frequency traders. Proven. Done.

They are doing exactly as I said - shaving profits off billions of transactions. Frontrunning the market.
:goodposting:
 

Sand

Footballguy
Short Corner has it right- HFTs compete against other traders for the most part, including HFTs. They are in and out of trades in seconds (sometimes a fraction of a second), and look to make pennies (sometimes a fraction of a penny) per trade. They really have no impact on longer term prices which concern the average investor (including mutual funds).
They shave profit off of any transaction they can. Mutual funds/ETFs will be in that class.
They don't shave profit off of every transaction. I hate defending them, but in terms of their impact on the average investor, there is no definitive answer- many people think it's been a net benefit.
On 60 minutes right now there is a story about exactly how the market is rigged ("Flash Boys") to transfer tens of billions to high frequency traders. Proven. Done.

They are doing exactly as I said - shaving profits off billions of transactions. Frontrunning the market.
It's not the market that's rigged; it's the government that's rigged.
They are intertwined. The market is rigged.

 

humpback

Footballguy
Short Corner has it right- HFTs compete against other traders for the most part, including HFTs. They are in and out of trades in seconds (sometimes a fraction of a second), and look to make pennies (sometimes a fraction of a penny) per trade. They really have no impact on longer term prices which concern the average investor (including mutual funds).
They shave profit off of any transaction they can. Mutual funds/ETFs will be in that class.
They don't shave profit off of every transaction. I hate defending them, but in terms of their impact on the average investor, there is no definitive answer- many people think it's been a net benefit.
On 60 minutes right now there is a story about exactly how the market is rigged ("Flash Boys") to transfer tens of billions to high frequency traders. Proven. Done.

They are doing exactly as I said - shaving profits off billions of transactions. Frontrunning the market.
They aren't doing exactly as you said, but it's not worth arguing over considering I hate HFT.

 

hxperson

Footballguy
Short Corner has it right- HFTs compete against other traders for the most part, including HFTs. They are in and out of trades in seconds (sometimes a fraction of a second), and look to make pennies (sometimes a fraction of a penny) per trade. They really have no impact on longer term prices which concern the average investor (including mutual funds).
They shave profit off of any transaction they can. Mutual funds/ETFs will be in that class.
They don't shave profit off of every transaction. I hate defending them, but in terms of their impact on the average investor, there is no definitive answer- many people think it's been a net benefit.
On 60 minutes right now there is a story about exactly how the market is rigged ("Flash Boys") to transfer tens of billions to high frequency traders. Proven. Done.

They are doing exactly as I said - shaving profits off billions of transactions. Frontrunning the market.
They aren't doing exactly as you said, but it's not worth arguing over considering I hate HFT.
:goodposting:

 

sporthenry

Footballguy
Short Corner has it right- HFTs compete against other traders for the most part, including HFTs. They are in and out of trades in seconds (sometimes a fraction of a second), and look to make pennies (sometimes a fraction of a penny) per trade. They really have no impact on longer term prices which concern the average investor (including mutual funds).
They shave profit off of any transaction they can. Mutual funds/ETFs will be in that class.
They don't shave profit off of every transaction. I hate defending them, but in terms of their impact on the average investor, there is no definitive answer- many people think it's been a net benefit.
On 60 minutes right now there is a story about exactly how the market is rigged ("Flash Boys") to transfer tens of billions to high frequency traders. Proven. Done.

They are doing exactly as I said - shaving profits off billions of transactions. Frontrunning the market.
Rigged in what sense? People were always looking for an edge. I don't think many knew the extent and how frontrunning was happening but people were certainly aware of the fiber optics networks and firms trying to be as close to exchanges. I never realized they were frontrunning people from one exchange to another but does that necessarily make it rigged?

And as much crap as HFTs get. They do provide liquidity. So getting rid of them will drive up bid/ask spreads. I'm sure this will get people looking to alternatives and the exchange on 60 minutes looked somewhat promising if people are that interested/worried about this to check out.

 

jonessed

Footballguy
Short Corner has it right- HFTs compete against other traders for the most part, including HFTs. They are in and out of trades in seconds (sometimes a fraction of a second), and look to make pennies (sometimes a fraction of a penny) per trade. They really have no impact on longer term prices which concern the average investor (including mutual funds).
They shave profit off of any transaction they can. Mutual funds/ETFs will be in that class.
They don't shave profit off of every transaction. I hate defending them, but in terms of their impact on the average investor, there is no definitive answer- many people think it's been a net benefit.
On 60 minutes right now there is a story about exactly how the market is rigged ("Flash Boys") to transfer tens of billions to high frequency traders. Proven. Done.

They are doing exactly as I said - shaving profits off billions of transactions. Frontrunning the market.
Rigged in what sense? People were always looking for an edge. I don't think many knew the extent and how frontrunning was happening but people were certainly aware of the fiber optics networks and firms trying to be as close to exchanges. I never realized they were frontrunning people from one exchange to another but does that necessarily make it rigged? And as much crap as HFTs get. They do provide liquidity. So getting rid of them will drive up bid/ask spreads. I'm sure this will get people looking to alternatives and the exchange on 60 minutes looked somewhat promising if people are that interested/worried about this to check out.
Yes. That makes it rigged.

 

hxperson

Footballguy
sporthenry said:
Short Corner has it right- HFTs compete against other traders for the most part, including HFTs. They are in and out of trades in seconds (sometimes a fraction of a second), and look to make pennies (sometimes a fraction of a penny) per trade. They really have no impact on longer term prices which concern the average investor (including mutual funds).
They shave profit off of any transaction they can. Mutual funds/ETFs will be in that class.
They don't shave profit off of every transaction. I hate defending them, but in terms of their impact on the average investor, there is no definitive answer- many people think it's been a net benefit.
On 60 minutes right now there is a story about exactly how the market is rigged ("Flash Boys") to transfer tens of billions to high frequency traders. Proven. Done.

They are doing exactly as I said - shaving profits off billions of transactions. Frontrunning the market.
Rigged in what sense? People were always looking for an edge. I don't think many knew the extent and how frontrunning was happening but people were certainly aware of the fiber optics networks and firms trying to be as close to exchanges. I never realized they were frontrunning people from one exchange to another but does that necessarily make it rigged?

And as much crap as HFTs get. They do provide liquidity. So getting rid of them will drive up bid/ask spreads. I'm sure this will get people looking to alternatives and the exchange on 60 minutes looked somewhat promising if people are that interested/worried about this to check out.
What I find fascinating in all of this is that the people that are getting screwed by HFT's aren't the retail equity investors, they are the large institutional investors - the hedge funds, mutual funds, broker/dealers, etc. The retail investor never trades enough size (save perhaps the 1%) for any of this frontrunning to really affect them, and even if their trades were front run (in the form of perhaps a larger block trade by a retail brokerage firm), the cost was likely negligible compared to their trading fees.

The victims in this case are pretty much the same group of guys that the public has generally hated since 2008, and even at times been accused of manipulating the stock market (see the ridiculous claims in the Apple stock thread for example, as if anyone would bother trying to manipulate the share price of the largest market cap company in the world).

 
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sporthenry

Footballguy
jonessed said:
sporthenry said:
Short Corner has it right- HFTs compete against other traders for the most part, including HFTs. They are in and out of trades in seconds (sometimes a fraction of a second), and look to make pennies (sometimes a fraction of a penny) per trade. They really have no impact on longer term prices which concern the average investor (including mutual funds).
They shave profit off of any transaction they can. Mutual funds/ETFs will be in that class.
They don't shave profit off of every transaction. I hate defending them, but in terms of their impact on the average investor, there is no definitive answer- many people think it's been a net benefit.
On 60 minutes right now there is a story about exactly how the market is rigged ("Flash Boys") to transfer tens of billions to high frequency traders. Proven. Done.

They are doing exactly as I said - shaving profits off billions of transactions. Frontrunning the market.
Rigged in what sense? People were always looking for an edge. I don't think many knew the extent and how frontrunning was happening but people were certainly aware of the fiber optics networks and firms trying to be as close to exchanges. I never realized they were frontrunning people from one exchange to another but does that necessarily make it rigged? And as much crap as HFTs get. They do provide liquidity. So getting rid of them will drive up bid/ask spreads. I'm sure this will get people looking to alternatives and the exchange on 60 minutes looked somewhat promising if people are that interested/worried about this to check out.
Yes. That makes it rigged.
What part in particular? It is probably a fine line, sure, but how is it any different than event driven trading? Is it rigged that people use algo trading to trade on breaking news? Is it rigged that people pay to get this data milliseconds early? Where is the line drawn? I imagine it is different for everyone but even then, this isn't really going to affect retail investors at least directly.

Retail investors aren't really being frontrun and they still won't be able to compete with computers on breaking news. And any restrictions or regulations have to take into account that liquidity premiums will go up which will most likely affect retail investors more. Sure, some retail money in institutional investors is affected but in a country where 50% of the population doesn't even own stocks, it seems a bit over dramatized.

 

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