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Wednesday, July 13, 2016

Heads they win

Tails, you get three years in prison:
What happened then is the same thing that happened with the other two notorious "spoofers" who have gained prominence in the recent year, Nav Sarao and Igor Oystacher: they got too good. So good in fact the HFTs - mostly Citadel - were consistently losing money to them. As a result, Coscia et al had to be punished. He was accused of entering large orders into futures markets in 2011 that he never intended to execute. His goal, prosecutors said, was to spoof, or fool other traders to markets by creating an illusion of demand so that he could make money on smaller trades. Prosecutors said he illegally earned $1.4 million in fewer than three months in 2011 through spoofing.

As Reuters added, Coscia's firm had fewer than 10 employees. However, he "entered more large orders than anyone else in the world" in nearly a dozen CME Group Inc markets ranging from corn and soybeans to gold after he began using two algorithmic trading programs in August 2011, prosecutors said during the trial. To be sure Coscia disagreed with the accusation: he testified that he didn’t do anything wrong and repeatedly said he intended to trade on every order he placed. He also said he traded a lot of large orders he placed. He was asked whether he fraudulently induced other market participants to react to the deceptive market information he created.

“I didn’t induce anyone,” Coscia said. “There’s no deceptive market information either.”

Technically, he is right - he did not induce anyone. He induced a whole of anythings, mostly countless HFT algos that reacted to his orders by pushing the market in the direction of his orderflow, only to be "spoofed." At which point the case really boiled down to just one thing: not whether it is legal to spoof, which it is and yet massive, well-connected HFT firms get away with it every single day, but whether it is legal to take advantage of HFT algos programmed to do just one thing - frontrun orders, and activity which leads to massive losses for the algos and the Citadels behind them, when the spoofer realizes just how dumb his counterparty truly is.

The verdict was clear: nobody is allowed to outspoof the spoofers. And this was the punchline from the lobby of very group of people who take advantage of broken markets every given day:

    "Investors are better off when spoofers who prey on high-frequency traders are brought to justice," said Bill Harts, chief of the Modern Markets Initiative, a group representing high-frequency and algorithmic traders.
Funnier words had rarely been spoken by the person whose "Modern Markets" Initiative has made real modern markets a farcial disaster.

And so the gauntlet has been thrown: anyone who dares to make money by "abusing" the dumb logic of Citadel algos will go to jail.
To make it simple, the big banks have computerized trading programs that prey upon conventional traders. But their behavior is predictable, so a sufficiently clever trader can take advantage of them in much the same way they take advantage of normal investors.

But only the big banks are allowed to cheat. So, do not pass go, do not collect your winnings, go directly to jail.

The stock market isn't even a casino. Casinos are considerably less rigged.

Labels:

80 Comments:

Blogger frenchy July 13, 2016 2:53 PM  

"He was accused of entering large orders into futures markets in 2011 that he never intended to execute."

Ok, so he sent a signal that fooled everyone--computer algorithms--into making decisions that benefited him? Sounds like he figured out how to make money in a rigged system off of the folks who were rigging it. And the feds stepped in to prosecute him, but close their eyes to everything else that goes on. Stinkin' whores.

God help us our system is corrupt. Just looking at what is done to gold and silver price movement is enough to make a billy goat puke. . .and those people get away with fraud. As Gerald Celente would say, "There is no justice, it's "Just us"".

Anonymous LastRedoubt July 13, 2016 3:08 PM  

Not just the big banks, but nevertheless a lot of money.

One I'm aware of is Automated Trading Desk. Their facility, when I toured it, was impressive.

http://www.atdesk.com/

That said, I'm not sure how focused on the future they are if their home page still relies on flash, with no fallback.

Anonymous Jill July 13, 2016 3:11 PM  

Yep.

Anonymous andon July 13, 2016 3:27 PM  

there was some company around Chicago or Great Lakes region that had high speed cable built specifically so they could get micro-second edge on trading and it added up to big money until someone found out what they were up to.

seems to be a crooked business

Blogger Laguna Beach Fogey July 13, 2016 3:30 PM  

Yes, it's a rigged game.

Blogger Rodger Smith July 13, 2016 3:38 PM  

Isn't this similar to the large gambling corporations making it illegal to count cards? I always thought counting the cards was just good strategy.

Blogger praetorian July 13, 2016 3:41 PM  

This comment has been removed by the author.

Blogger SouthRon July 13, 2016 3:44 PM  

There is no seems it is a very dirty business with a huge overlap with organized crime.

Blogger praetorian July 13, 2016 3:45 PM  

One of my millennial employees walked in to the office today talking about how amazing this economic recovery was. I asked him what information he was basing this line of thinking on.

"The media says the market is at an all time high, and minimum wages are going up!"

cantwakeup.jpg

Blogger Orville July 13, 2016 3:46 PM  

And on top of that, the markets are so rigged by central bank manipulation that applying technical or fundamental analysis to a stock is nearly useless.

I'd only dollar cost an ETF like Spiders, and then only if the market was in a secular bull, which it isn't.

Blogger Nathan July 13, 2016 3:50 PM  

"He was accused of entering large orders into futures markets in 2011 that he never intended to execute."

Wait, isn't that the whole point of trading futures? Nobody ever actually "executes" anything...

Maybe, since doing sequels and remakes of 30+ year old movies is the in thing right now, we can get a sequel to Trading Places where Eddie Murphy and Dan Aykroyd go to jail for bankrupting the Duke brothers even though what they did was perfectly legal at the time.

OpenID basementhomebrewer July 13, 2016 3:55 PM  

I took a tour of the CBOT trading floor about 10 years back. Our tour guide was an old time trader that said before computers the big tading houses would stand at the back top of the "pit". If anyone undercut them on price they pointed at the small time trader and told all the other traders they can choose to trade with the little guy or trade with the big trading house. If they chose the little guy today then they would never be trading with the big trading house again.

This was blatant market manipulation and no one ever got jammed up for it. Now it sounds like the big trading houses have found a way to make sure people don't pull their same type of shenanigans on them through digital trading.

Blogger dc.sunsets July 13, 2016 3:55 PM  

The markets are the largest game of chicken in history. HFT is still programmed by humans.

This sounds a lot like Michael Milkin's trip to Pen Fed for engaging in LBO's that were legal. They just kicked the wrong people's shins.

Milkin paid a "nominal" fine, did some minsec time and retired rich.

Blogger dc.sunsets July 13, 2016 3:59 PM  

As long as Joe White-Collar has his 401k dancing like sugar plums, this con artistry will be unchallenged.

Wait until the other side of the mountain arrives. People associated with all this may actually be executed, so hot will be the mob's rage.

Blogger Groot July 13, 2016 4:02 PM  

For a very good read on this topic, I recommend Michael Lewis's Flash Boys. I know he's hopelessly biased in political matters (e.g., The Big Short never mentioned the government's role in the real estate bubble that popped in 2008), but the boy can write prose.

Anonymous BGKB July 13, 2016 4:02 PM  

All they would have to do to depower HFT is make it so you had to hold a position for at least one second.

Isn't this similar to the large gambling corporations making it illegal to count cards

The casinos have been buying the MIT yearbook every year to add the pictures to their face recognition software automatically as cheaters. They don't want anyone too smart gambling. Its not illegal to count cards but they can ban you.

Blogger Zen Trader July 13, 2016 4:15 PM  

This is patently ridiculous and it's been allowed to go on for years. HFT firms basically make their money by market manipulation and arbitrage. It's gotten so bad that one large fund actually maintains synchronized atomic clocks in its different offices to prevent themselves from being front run. That can't be cheap. Then they will hang some little shit out to dry every few years as kabuki theater. Compared to an HFT firm, $1.4MM in 3 months is absolute chump change. A lot of those programs make upwards of $100M a day.

It's allowed to go on because the HFT firms make money for connected people. Different era, same shit sandwich. The twist here is that it's so arcane most people can't understand it well enough to get angry about it and pressure politicians to actually do something.

Oddly enough, it doesn't affect my trading much at all. It affects you more the shorter your timeframe becomes, or when your order sizes are enormous and getting slipped by HFTs costs you a couple hundred grand.

The funny thing is that the problem is easily solved. Require all orders posted to remain up for .5 - 1 second. That makes HFT arbitrage irrelevant.

Blogger Zen Trader July 13, 2016 4:19 PM  

dc.sunsets wrote:The markets are the largest game of chicken in history. HFT is still programmed by humans.

This sounds a lot like Michael Milkin's trip to Pen Fed for engaging in LBO's that were legal. They just kicked the wrong people's shins.

Milkin paid a "nominal" fine, did some minsec time and retired rich.


Yes, for now. You are starting to see some interesting developments, though. One is the use of deep learning AI. The other is when these algos start to interact with each other, causing weird market behavior.

Personally, I don't think it should be legal to use bots and AI to trade, not because it affects me (it doesn't really), but because it adds a layer of fragility to a system that just doesn't need anymore of it.

Ask yourself what the classical function of the markets is supposed to be, and then ask why we need AI for any of that.

Anonymous GM July 13, 2016 4:28 PM  

I trade futures markets almost every day (conventionally, with my finger on the mouse). I wasn't around when markets were made by guys in the pits but my general understanding is that HFT has driven out human market makers, and that they now compete primarily with other electronic market makers. They haven't affected what I do or how well I do it. They might be able to front run me in the queue and prevent me from being filled, but if that happens it is very rare. For the most part they don't alter the price at which I execute.

Zen Trader is right about HFT and fragility/weird behavior, though. What replacing human market makers with electronic market makers does is create opportunities for dynamic feedback to screw up the market, or to cause liquidity to suddenly dry up and make markets skittish.

That might aggravate ordinary investors, but unnecessary volatility is great for ordinary traders.

Anonymous GM July 13, 2016 4:32 PM  

@ZenTrader

Didn't see your first post. I agree.

Blogger James Dixon July 13, 2016 4:35 PM  

> ...and then only if the market was in a secular bull, which it isn't.

Oh, it's a bull market, and the folks driving it are definitely secular. :) Yeah, I know that's not the definition.

> Oddly enough, it doesn't affect my trading much at all.

Agreed. If you're a small time trader with a long enough time horizon (even a few months is long enough) it will usually all come out in the wash.

> Personally, I don't think it should be legal to use bots and AI to trade, not because it affects me (it doesn't really), but because it adds a layer of fragility to a system that just doesn't need anymore of it.

Also agreed. It's only a matter of time till a couple of these AI's start interacting in a negative manner and cause a big time crash. I don't think anyone actually knows how they work at this point. That will affect everyone's trading.

Blogger praetorian July 13, 2016 4:37 PM  

That might aggravate ordinary investors, but unnecessary volatility is great for ordinary traders.

Given that any money you make is a dead weight loss on the economy (not hatin' the player, hatin' the game) we should put some effort into thinking how we might better structure things for those ordinary investors.

Taxing cap gains as ordinary income and making dividends deductible to corporations, as with LLCs, would be a start.

Blogger Human Animal July 13, 2016 4:42 PM  

Isn't this similar to the large gambling corporations making it illegal to count cards? I always thought counting the cards was just good strategy.

No. That's solving the game. You're at a casino to play. The frivolity is part of the agreement. Only one party is allowed to recognize their material interests.

Also see: Diversity Is Our Strength

Anonymous GM July 13, 2016 4:53 PM  

Can you elaborate on this:

praetorian wrote:Given that any money you make is a dead weight loss on the economy

What traders tend to say is that even directional speculators like me are basically market makers. The hedgers come into the futures markets to hedge off their risk and I take it. If I'm smart to take that risk off their hands I get paid. I'm wrong, I pay whoever did a better job than me at taking the right risk from those hedgers.

Blogger Snidely Whiplash July 13, 2016 5:05 PM  

@GM
What the HFT make most of their money on is front-running. they place a hundred bids and offers at 1 cent intervals, see which get taken, and extract the profit between the two, before your transaction can enter the market. If you're actively trading in the commodities market, it's costing you in lost margin. Just because you can't see it doesn't mean it's not a real loss.

Anonymous A Paradigm Is More Than Twenty Cents July 13, 2016 5:05 PM  

James Dixon
It's only a matter of time till a couple of these AI's start interacting in a negative manner and cause a big time crash. I don't think anyone actually knows how they work at this point.

Nonsense! There are men in charge of those bots. Top Men! Yes!

Top Men, I tell you!

Blogger Snidely Whiplash July 13, 2016 5:07 PM  

The 1 second delay people are talking about above would simply prevent the HFT traders from getting the market knowledge soon enough to extract their pennies before your transaction can reach the market.

Blogger praetorian July 13, 2016 5:15 PM  

Yes, I'm very familiar with the argument for trading. It's obviously silly, but I'm familiar with it.

Again, I'm not hating on the player here, my point is simply that concern for short-term traders should not be a high priority when setting policy.

Anonymous GM July 13, 2016 5:19 PM  


praetorian wrote:Yes, I'm very familiar with the argument for trading. It's obviously silly, but I'm familiar with it.

Again, I'm not hating on the player here, my point is simply that concern for short-term traders should not be a high priority when setting policy.


I get that. I'm asking you to explain to me why the argument is silly. It's an honest question.

Blogger praetorian July 13, 2016 5:21 PM  

To elaborate a bit, most day traders simply can't add much information content on top of the existing market, especially instantaneously and from the comfort of their own home. All they can do, for the most part, is front-run, make gut-based trades, use ooga-booga momentum indicators, etc.

The longer term and more informed by the underlying market the trade is, the less that criticism applies. But the "because liquidity" argument is retarded.

It's a living, don't get me wrong here, but we should be honest with ourselves, right?

Anonymous GM July 13, 2016 5:22 PM  

Snidely Whiplash wrote:The 1 second delay people are talking about above would simply prevent the HFT traders from getting the market knowledge soon enough to extract their pennies before your transaction can reach the market.

If I have a limit order to sell at .25 and a million computers do business before me, and I get filled at .25, I kind of don't care about the million computers.

What I'm saying is that my fills are fine.

What do you mean by "margin"? Do you mean bid-ask spread, or margin as in what I put up to open my position?

Blogger Snidely Whiplash July 13, 2016 5:33 PM  

spread


That you don't care about it is obvious.
The money they're making cmes from somewhere.It comes from accurately knowing your ask and bid beforehand, as well as that of hundred of other people.
Some of the brokers run this game on their own customers.

Anonymous Gen. Kong July 13, 2016 5:42 PM  

There is nothing free about a rigged market. Only certain folks have the droit du seigneur to add zeros to their accounts, and only the same crowd can run spoofing algos. This is all far beyond the average cuck's comprehension needless to say. Most of the idiocracy still thinks the privately owned banking cartel known as the "Federal Reserve" is an government agency, when the reverse (the government is a department of the cartel) is actually closer to the mark. MPAI. Also, why would anyone continue to be dumb enough to think there is a 'rule of law'? No news in the truth, no truth in the news….

Blogger Aeoli Pera July 13, 2016 6:04 PM  

Skullduggery, what would their mothers think.

Anonymous GM July 13, 2016 6:11 PM  

Snidely Whiplash wrote:That you don't care about it is obvious.

The money they're making cmes from somewhere.It comes from accurately knowing your ask and bid beforehand, as well as that of hundred of other people.

Some of the brokers run this game on their own customers.


For the record: if they are stealing from me (or anyone else) I care.

If I have a limit to sell at .25 and I execute at .25, how are they stealing my money? The only way I can see them hurting me is if they can use their razzle dazzle to jump the queue and take my fill from me.

I'm telling you my fills are fine.

Do me a favor and help me see how I'm getting ripped off.

praetorian wrote:To elaborate a bit, most day traders simply can't add much information content on top of the existing market, especially instantaneously and from the comfort of their own home. All they can do, for the most part, is front-run, make gut-based trades, use ooga-booga momentum indicators, etc.



You didn't show that speculation does not adding liquidity. If a hedger wants to buy a price, and there is no hedger to sell that price, then a trader who knows the way that market is trading and believes it is going to trade down may sell to that hedger.

And if a winning speculator nets out not with a hedger but with a losing speculator, then what you have is a transfer of dollars from one rich asshole to another rich asshole. Why that is a dead loss to the economy I don't understand.

This has nothing to do with defending my speculation. I don't claim any insight into economics and admit I add no "information" content. If I never placed another trade I would still make a comfortable living doing things that are less controversial.

Anonymous Rolf July 13, 2016 6:15 PM  

Clearly he was guilt of the heinous crime of insufficient palm-greasing, I mean, failing to donate to the major party organs as an enlightened and philanthropic trader would do.

Blogger Unknown July 13, 2016 6:21 PM  

Carl Denninger talked about HFT at length, as far back as 2009. https://market-ticker.org/akcs-www?singlepost=2138332
More than 2/3 of all volume is now HFT, and you would have to be a fool to dip even a pinky toe into that sort of market.

Anonymous Rolf July 13, 2016 6:25 PM  

GM - if you have a limit buy order at $25, and a legitimate owner of that stock is willing to sell at $24 because of the current buy/sell/last data they see, most of which is generated by HFT, and posts a sell-order at $24 or better, and someone can see both your buy and his sell faster than you can see each other, then buy from him at $24, sell to you for $25, and pocket the difference (profit to him). That means you buy at a higher price than the fundamental market would demand, AND the seller sells at a lower price than he could have, and the HFT doesn't provide anything of use to the market except a friction, volatility, increased transaction costs, and bad data about what investors really are doing. It means that the markets no longer provide a means of price discovery, but a way to extract money from investors, muck like a thief picking your pocket.

Blogger praetorian July 13, 2016 6:29 PM  

You didn't show that speculation does not adding liquidity

Correct, I showed that it doesn't add information to the market, which is my primary concern.

The liquidity argument is largely circular: the market needs liquidity because day-traders because liquidity because day-traders. As trades become investment and insurance based (see my argument for dividends) rather than day/nano-second trades, liquidity needs are far lower.

Releasing your brain into the actually productive part of the economy, rather than having you make wild guesses at soy bean futures, would be better for us all.

Blogger Lovekraft July 13, 2016 6:38 PM  

Money Monster, new release with George Clooney and Julia EatPrayLove Roberts, examined this. Algorithms.

Spoiler: the bad guy's scheme was to manipulate a South African mining firms stock numbers via union collusion (start a strike to drive down stock price, buy low, then lift the strike and sell high). But the union boss betrayed him.

Blogger James Dixon July 13, 2016 6:59 PM  

> If I have a limit to sell at .25 and I execute at .25, how are they stealing my money?

If you place a limit order and it executes, you're not. But what about the limit orders that might have executed without their interference. What about market orders?

Anonymous andon July 13, 2016 7:18 PM  

@ #38 - thanks for that, makes sense

Blogger Snidely Whiplash July 13, 2016 7:27 PM  

The only way I can see them hurting me is if they can use their razzle dazzle to jump the queue and take my fill from me.


Exactly what they do

Blogger Unknown July 13, 2016 7:28 PM  

This is business as usual in the White White West, the pinnacle of human 'civilization'. Always exploiting, always cheating, always breaking the rules others are forced to follow. Because power. Western civilization has failed because it does not understand, and has never understood, the right use of power. It still doesn't. Robert Greene is not God.

Game is the Western inheritance. Lies within lies within lies. Everyone is gaming everything now. The greatest challenge now is preventing the biggest lie of them all - liberalism - from following any salvage operations or anti-corruption initiatives into the seats of power. The White White West, as a morally bankrupt and easily manipulated system, is probably not equipped to do this. Systemic and widespread moral corruption is the main reason it was so easy for the Rothschilds to use the White White West to invent hedging centuries ago. Nothing has really changed. White supremacy is still an enslaving bloodlust. The kin of Rothschild and their Asian students are no doubt using quantitative trading and political posturings like Brexit and the Trumpening as opportunities to drain yet more money from a corrupt and decaying civilization. Somebody has to.

Perhaps the only relevant question then is this: Is it a sin to take money from the dying?

Anonymous Takin' a Look July 13, 2016 7:29 PM  

Rule of law....heh

Anonymous PhillipGeorge(c)2016 July 13, 2016 7:41 PM  

Heads they win, tails you lose.

the solution is to use money rather than legal tender. LOL.

Jury Nullification means, f..... the professionals/ Unionized weaponized professionals.

Blogger seeingsights July 13, 2016 8:12 PM  

I strongly agree that these computer algorithms might cause a stock market crash. I shall give my recent experience as a minor example:

I bought Charles Schwab stock in 2015, and it outperformed the stock market--I had a return over 10 percent going--until Brexit.

Right after Brexit, Schwab went down over 11 percent! How in the world did that happen? How is Charles Schwab so connected to Brexit? Come on.

This is speculation, but I blame program trading. One program might have an algorithm which goes something like, "If financial stocks go down, sell Schwab stock." Another program might be programmed, "If Schwab stock goes down a certain percentage, sell you holdings too."

So all these computer programs were piling in with sell orders, driving down the price of the stock.

Schwab has rallied the past few days. One financial commentator, in an article, made the point that the decline in Schwab's stock price was absurd, and that its a great buy now.








Anonymous grey enlightenment July 13, 2016 8:14 PM  

More liquidity means better fills and thus better prices for retail investors. This is especially relevant for ETFs and futures, where you want the price to as closely match the underling as possible. IF there is a large divergence, arbitrage traders narrow it ..but this is all done automatically

Anonymous grey enlightenment July 13, 2016 8:17 PM  

I strongly agree that these computer algorithms might cause a stock market crash. I shall give my recent experience as a minor example:

hmm but the market crashed 20% in two days in 1929, nearly half a century before algorithmic trading was invented. The EMT is a useful heretic because it says prices will converge eventually to their fair value in spite of volatility

Blogger Michael Maier July 13, 2016 8:19 PM  

What about the Banksters and their systems is NOT fundamentally dishonest?

Blogger praetorian July 13, 2016 8:22 PM  

More liquidity means better fills and thus better prices for retail investors.

Yep. All that money that the "liquidity providers" suck out of the market (except in a crisis, when liquidity is actually needed, of course) comes from heaven, like manna.

We should be thanking them for front-running us, amirite?

Anonymous andon July 13, 2016 8:24 PM  

people in the stock market are basically gambling so I don't feel sorry for any losses by them

Anonymous grey enlightenment July 13, 2016 8:30 PM  

For a very good read on this topic, I recommend Michael Lewis's Flash Boys. I know he's hopelessly biased in political matters (e.g., The Big Short never mentioned the government's role in the real estate bubble that popped in 2008), but the boy can write prose.

Like Obama..all style no substance or wrong substance

Anonymous GM July 13, 2016 8:41 PM  

praetorian wrote:The liquidity argument is largely circular: the market needs liquidity because day-traders because liquidity because day-traders. As trades become investment and insurance based (see my argument for dividends) rather than day/nano-second trades, liquidity needs are far lower.

a) Do futures contracts benefit the real economy?
b) If yes, should futures contracts trade on an exchange or only over the counter?
c) Do you think market-making activity is ever valuable to the real economy?

Snidely Whiplash wrote:The only way I can see them hurting me is if they can use their razzle dazzle to jump the queue and take my fill from me.

Exactly what they do


I'm sorry that you're not getting filled, but I can report that my fills are fine.

Just like the train.

James Dixon wrote:If you place a limit order and it executes, you're not. But what about the limit orders that might have executed without their interference. What about market orders?

All I can tell you as a market participant is that the vast majority of the time my orders fill at the price I want them to fill at. If I hit the bid, it executes at the bid price I can see. If I lift the offer, it executes at the offer price I can see. Generally the market does not run up or down faster than my eye can follow.

I know that the HFTs are not running it up and down by multiple ticks faster than my eye can process, because that is what a look at the trade by trade order history shows.

The exchanges no longer report trade size by the size of the market order that hit the book, but instead by the size of the limit order that was filled, and people routinely break up big orders. That makes it difficult to see how many individual trades transact per second, but I just looked at today's trading in crude and glancing through the trade history it looks like it is rare for more than one price to trade per second, which is what I can see with my own eyes.

Anonymous GM July 13, 2016 8:42 PM  

Rolf wrote:GM - if you have a limit buy order at $25, and a legitimate owner of that stock is willing to sell at $24 because of the current buy/sell/last data they see, most of which is generated by HFT, and posts a sell-order at $24 or better, and someone can see both your buy and his sell faster than you can see each other, then buy from him at $24, sell to you for $25, and pocket the difference (profit to him). That means you buy at a higher price than the fundamental market would demand, AND the seller sells at a lower price than he could have, and the HFT doesn't provide anything of use to the market except a friction, volatility, increased transaction costs, and bad data about what investors really are doing. It means that the markets no longer provide a means of price discovery, but a way to extract money from investors, muck like a thief picking your pocket.

I'm aware of this sort of arbitrage in the context of stock markets, where there is no single centralized exchange and someone with access to multiple exchanges and thick ass cables can insert themselves between market participants and pocket a spread.

But on a centralized exchange this sort of information arbitrage is unavailable, at least under the assumption that our brokers aren't in cahoots with the market makers. That would be an obvious abuse, just like this bullshit ruling against Coscia is an obvious abuse. But those abuses don't logically implicate HFT.

Now what you are proposing is the following happening on one exchange:

a) I have a limit order sitting in the queue to buy at .25
b) .25 is the inside bid.
c) A seller puts in a limit to sell below the market at .24.
d) .24 executes.

But that breaks the rules of the game, HFT or no HFT.

If you put a limit order to sell in below market, it becomes a market order, so that should hit the next best bid in the queue, which is the first .25 in line at the moment when the sell .24 hits the exchange. Since we know I am in the queue, .24 will not trade.

Again, unless the exchange is fucking around with the queue, or the HFTs can somehow see orders on the way from the broker to the exchange, both of which would be obvious abuses that are logically independent from HFT, the bots are not intrinsically harmful to futures traders like me.

This is not an argument for the economic validity of futures or the moral purity of speculation. But it is how these particular markets work.

Blogger praetorian July 13, 2016 8:49 PM  

a) Do futures contracts benefit the real economy?
b) If yes, should futures contracts trade on an exchange or only over the counter?
c) Do you think market-making activity is ever valuable to the real economy?


In some cases and at some level, exchange is fine, yes.

Look, you can dance around it all you like, but you sitting in a room flipping bits on a blinky-blink screen around markets you don't and can't possibly understand doesn't add much value. Yes, it makes you money. No, I don't blame you for doing it. But stare it in the face, man.

The EMT is a useful heretic because it says prices will converge eventually to their fair value in spite of volatility

Did you just invoke the efficient market theory?

Anonymous User July 13, 2016 8:51 PM  

Where are all the customers' yachts?

Anonymous GM July 13, 2016 8:57 PM  

praetorian wrote:a) Do futures contracts benefit the real economy?

b) If yes, should futures contracts trade on an exchange or only over the counter?

c) Do you think market-making activity is ever valuable to the real economy?


In some cases and at some level, exchange is fine, yes.

Look, you can dance around it all you like, but you sitting in a room flipping bits on a blinky-blink screen around markets you don't and can't possibly understand doesn't add much value. Yes, it makes you money. No, I don't blame you for doing it. But stare it in the face, man.


There is nothing in what I wrote that suggests I cannot stare it in the face.

Which means you have an ax to grind.

Which is supported by the lack of information in your response.

Which means you have nothing to teach me about economics.

Which is unfortunate.

Cheers.

Anonymous Rolf July 13, 2016 8:58 PM  

@55 - GM - that is exactly the point. The HFT *ARE* mucking with the order queues by posting request-for-quotes and canceling the vast majority of them without a fill. Not just some, not just a bare majority, but a YUGE majority.

One simple fix: An order can't be canceled in less than ten seconds. Suddenly all the HFT algos lose their biggest edge over actual investors.

Anonymous grey enlightenment July 13, 2016 8:59 PM  

Front running can be thwarted by breaking the order into pieces and sending them to multiple exchanges instead of just a single large market order. That's what happens mostof the time

Blogger praetorian July 13, 2016 9:04 PM  

Which means you have nothing to teach me about economics.

Probably so, my man. I'm just a internet shit-poster, after all. I'd recommend Keen.

Good luck out there.

Blogger Groot July 13, 2016 9:11 PM  

@53. grey enlightenment:
"Like Obama..all style no substance or wrong substance"

Actually, I'm pretty sure that he writes his own books. Did you read the book, or are you just pulling a review out of your, um, thin air?

@18. Zen Trader:
"Milkin paid a 'nominal' fine, did some minsec time and retired rich."

Milken was rich, indeed ($2B), but he did not retire. I knew him from Kleiner Perkins and he was very active, primarily in philanthropy and funding medical research.

"Personally, I don't think it should be legal to use bots and AI to trade"

An offshore AI, distributed across multiple continents, and communicating encrypted blocks across encrypted pipes is not going to care about your laws, compliance, or juris my diction crap.

Anonymous GM July 13, 2016 9:29 PM  

Rolf wrote:@55 - GM - that is exactly the point. The HFT *ARE* mucking with the order queues by posting request-for-quotes and canceling the vast majority of them without a fill. Not just some, not just a bare majority, but a YUGE majority.

That whooshing sound you just heard was my argument going over your head.

What you proposed is impossible.

Cheers.

Blogger Blastman July 13, 2016 9:59 PM  

I don't know what type of backroom deals Wall Street is engaged in, but it seems to me that WS is just looting these companies.

Buybacks at $46 Billion a Month Dwarf Everything in U.S. Market

The biggest source of fresh cash in American equities isn’t speculators or exchange-traded funds -- it’s companies buying their own stock, by a 6-to-1 margin.

Chief executive officers, who just announced the biggest round of monthly repurchases ever, executed about $550 billion of buybacks last year, according to data compiled by S&P Dow Jones Indices. That compares with a net $85 billion of deposits by customers of mutual and exchange-traded funds, the biggest gap since 2012, data compiled by Bloomberg and Investment Company Institute show.

Companies in the S&P 500 have spent more than $2 trillion on their own stock since 2009, underpinning an equity rally in which the index has more than tripled. They were on pace to spend a sum equal to 95 percent of their earnings on repurchases and dividends.



Profits Without Prosperity

Five years after the official end of the Great Recession, corporate profits are high, and the stock market is booming. Yet most Americans are not sharing in the recovery. While the top 0.1% of income recipients—which include most of the highest-ranking corporate executives—reap almost all the income gains, good jobs keep disappearing, and new employment opportunities tend to be insecure and underpaid. Corporate profitability is not translating into widespread economic prosperity.

The allocation of corporate profits to stock buybacks deserves much of the blame.

Blogger Lazarus July 13, 2016 10:14 PM  

Derivatives of derivatives, says the Preacher,
derivatives of derivatives! All is derivatives!

Blogger KG July 13, 2016 10:19 PM  

@ GM I agree with everything you said. HFTs may account for a lot of volume and take advantage of fraction of a second price discrepancies between exchanges, but it simply shouldn't affect a good Trader. The thing that screw up traders is stop hunting. Market markets whether they be human or bots can see every order sitting there and manipulate price to quickly drop just below a cluster of stops to take them out, then proceed as normal. A good Trader can spot this. I find it interesting that Richard wyckoff wrote about this manipulation in 1929 and the market structure he described is still what we see today. Theirs tricks haven't changed much.

Blogger KG July 13, 2016 10:25 PM  

This comment has been removed by the author.

Blogger Groot July 13, 2016 11:25 PM  

@64. Blastman:
"WS is just looting these companies."

Wall Street is these companies; they are looting the rest of us. ZIRP/Quantitative-Easing/Helicopter-Money are geared solely at propping up the Stock Market, i.e., the top 1% of the top 1%.

ZeroHedge has been all over this for years.

It is also the archetypical phenomenon where Austrian economics diagnoses and predicts with crystal clarity, and where Keynesian "economics" is just baffled. Not all investments are equal: there is good investment and there is malinvestment, like these buybacks or all the crony socialism at Solyndra or Tesla Motors. All government spending is malinvestment, both corrupt and wasteful, with any exception being a unicorn.

Blogger bob k. mando July 14, 2016 12:05 AM  

this is just the flip side of the Jon Corzine / Hillary Clinton thing. both of them committed multiple felonies, and everyone knows it.

but judges either rewrite the law from the bench ( Corzine ) or the prosecutors never even bring charges ( Hillary ) and, thus, their actions are no longer de facto "illegal" as it makes no difference what the law actually says.

in this case, there was no law against what they are doing. in fact, the big HFTs did a lot of lobbying specifically to make sure that this wasn't outlawed.

so the judge just re-wrote law from the bench in order to convict them.



47. seeingsights July 13, 2016 8:12 PM
made the point that the decline in Schwab's stock price was absurd, and that its a great buy now.



exactly so.

IF Schwab's fundamentals are still good
THEN Schwab should at least continue to pace the market

even if Schwab is heavily invested in British / Euro companies, that still hasn't shown any significant impact, therefore Schwab should return from the dip fairly quickly.

if you still have a reserve stash AND you feel good about Schwab you might consider throwing some more of it at Schwab to get the dip price.



54. GM July 13, 2016 8:41 PM
a) Do futures contracts benefit the real economy?



the real economy ( producers ) invented futures trading in order to smooth out short term fluctuations so they wouldn't get caught with their shorts down and a whole bunch of product on their hands at the same time they were experiencing a cash squeeze.

for instance, a farmer has a pretty good idea of what his production cost is going to be to bring his 'x' acres of crop from planting to harvest is going to be.

if he can secure a futures contract in the spring which GUARANTEES him cost+30% ( or whatever ), assuming the crop comes in, this makes it very easy for him to go to the bank ( if he needs to ) and secure a loan for summer operations until harvest.

if the farmer brings in a bumper crop BUT SO DOES EVERYONE ELSE, corn markets can go in the toilet for months. but he's counting on that harvest revenue to pay his bills for the whole year ...

if he gets caught up short ( barn burns down, tractor blows engine, daughter gets married, etc ) and is cash poor come the fall, he can have really serious problems, even if everything went fantastic for him cropwise.

Blogger Were-Puppy July 14, 2016 1:14 AM  

@18 Zen Trader

Ask yourself what the classical function of the markets is supposed to be, and then ask why we need AI for any of that.
--

If robots can replace burger flippers and cops, then why can't an AI replace traders?

Anonymous SciVo July 14, 2016 1:33 AM  

I don't care how it's fixed -- institute a one-second delay, micro-tax the transactions, undo the decimal conversion and revert to 16ths, encourage competition instead of prosecuting it, or just plain string them from lampposts -- but the one single most wrong answer is to let them pretend that they're doing us a service, when they flee at the first sign of illiquidity. High-frequency micro-rape adds up.

Anonymous Jack Amok July 14, 2016 2:47 AM  

Which means you have nothing to teach me about economics.

I think what you know about economics could fit in an imaginary paper cup. No doubt a very large imaginary paper cup, but an imaginary one none the less.

Anonymous SciVo July 14, 2016 3:35 AM  

KG wrote:The thing that screw up traders is stop hunting. Market markets whether they be human or bots can see every order sitting there and manipulate price to quickly drop just below a cluster of stops to take them out, then proceed as normal. A good Trader can spot this.

I've seen that called "shaking the money tree."

Anonymous SciVo July 14, 2016 3:41 AM  

Groot wrote:@64. Blastman:

"WS is just looting these companies."

Wall Street is these companies; they are looting the rest of us. ZIRP/Quantitative-Easing/Helicopter-Money are geared solely at propping up the Stock Market, i.e., the top 1% of the top 1%.

ZeroHedge has been all over this for years.


I don't think he gets the part where the executives making the decision to buy that stock back are getting paid in stock, so they're using their megacorp's access to cheap money to boost the value of their own personal pay packages -- which are incidentally taxed at a lower rate than yours -- basically laundering their salaries through Wall Street, right in front of everyone, laughing all the way.

Blogger James Dixon July 14, 2016 3:49 AM  

> ZIRP/Quantitative-Easing/Helicopter-Money are geared solely at propping up the Stock Market, i.e., the top 1% of the top 1%.

While true, it's also still true that somewhere around 50% of the US has exposure to the stock market, either directly or through their retirement/pension plan.

And one of my pet peeves is the often touted statement that share buybacks are good for the shareholder. That's only true in the long run if the shares are retired. From what I've seen, most companies don't retire the shares, but keep them on hand for resale at a later date. As a shareholder, I'd much rather see that money used for dividends.

Anonymous Jack Amok July 14, 2016 5:32 AM  

, I'd much rather see that money used for dividends.

so would I. Dividends represent cash on hand in the present - the result of actual measured profit in previous years. Capital gains represent speculation of possible profit in future years. Less fantasy, more reality, that would be a good thing

Anonymous map July 14, 2016 6:43 PM  

1) I think there is a big misunderstanding with HFT. The real purpose of having very fast connections is to reduce slippage. Even real-time data feeds from retail traders have lag. TDAmeritrade, for example, has a lag of 1500 milliseconds. You can actually rent co-located servers and vm machines that will reduce this lag to 1-2 milliseconds.

2) You can't make money trading the bid/ask difference. That is the money made by the market maker.

3) Companies like Citadel pay TDAmeritrade to use Citadel's execution services. The exchanges, in turn, pay Citadel for this additional volume. The amounts are small, fractions of a penny, but they do add up.

4) When trading a stock, you can create a good-to-close order that is substantially outside the current market price. For example, if Apple is trading at $100, then you create a GTC order to buy 100 shares of Apple at $85 and that order will sit on the exchange forever. This is because stocks are fairly permanent. If you try the same thing with derivatives, where your buy or sell order or the credit/debit spreads are substantially outside the market, then the trading system will reject the order and kick it out of order queue. This is because derivative securities expire and they want to keep junk out of the order flow.

I haven't read the case, but my suspicion is that this particular HFT guy was generating enough volume to collect fees from the exchange, but his order flow had a huge number of orders that were rejected by the exchanges. They were priced in such a way that they would never fill, but they became part of the statistics that determined how much they were being paid. That is probably what is meant by spoofing: getting the exchange to pay you for rejected orders. This would be tantamount to fraud.

5) I don't see how placing orders and then canceling them makes money. If the counterparty can't respond to what the HFT guys are doing because their systems are too slow to spot the activity, then how can regular investors be ripped off? This is the underwear gnomes argument.

6) There are different areas of Wall Street at war with each other. Corporate executives want investors following the EMT because it is a pure buy side play that hands money to corporate pay packages. They don;t like short-sellers or program traders that realize handing money to companies using dollar-cost averaging isn't always the best way to make money. Therefore, corporate management has the same view of hedge-funds and program traders like they viewed corporate raiders: as a threat to themselves. We should be careful what we criticize. Things like dividend and share buybacks is a far bigger problem.

Blogger Zen Trader July 14, 2016 7:18 PM  

seeingsights wrote:I strongly agree that these computer algorithms might cause a stock market crash. I shall give my recent experience as a minor example:

I bought Charles Schwab stock in 2015, and it outperformed the stock market--I had a return over 10 percent going--until Brexit.

Right after Brexit, Schwab went down over 11 percent! How in the world did that happen? How is Charles Schwab so connected to Brexit? Come on.

This is speculation, but I blame program trading. One program might have an algorithm which goes something like, "If financial stocks go down, sell Schwab stock." Another program might be programmed, "If Schwab stock goes down a certain percentage, sell you holdings too."

So all these computer programs were piling in with sell orders, driving down the price of the stock.

Schwab has rallied the past few days. One financial commentator, in an article, made the point that the decline in Schwab's stock price was absurd, and that its a great buy now.







You're talking about cascading action or stop runs. This has happened ever since we had markets, it's not just the machines. People will have stop orders to cash out if the market starts to reverse. Others will sell because they're scared. There's a very old expression to "buy with the cannons and sell with the bugles," meaning to buy when things are bad and sell when they're going great.

Blogger seeingsights July 14, 2016 7:29 PM  

@ 69. bob k. mando

Thanks for the reply, I bought additional shares of Charles Schwab stock a few days ago. The low right after Brexit was $24.05. Today it closed $26.92. Up over 11 percent since the Brexit lows.

I am bullish of the stock, and still a great price to buy.

Blogger Blastman July 14, 2016 10:26 PM  

@SciVo


My concern about "backroom deals" is how these different stock buybacks are being done -- particularly tender offers and how they are executed (market distortion timing). A large corporate stockholder generally can't unload a large volume of stock without driving down the price of a stock, and hence the current paper valuation of its stock holdings. But if a company is willing to announce a large tender stock buyback and offer it to me, then maybe I can unload huge amounts of a stock without losing valuation of my holdings.


hbr

Not all buybacks undermine shared prosperity. There are two major types: tender offers and open-market repurchases. With the former, a company contacts shareholders and offers to buy back their shares at a stipulated price by a certain near-term date, and then shareholders who find the price agreeable tender their shares to the company.


Yet in recent years, hedge fund activists such as David Einhorn and Carl Icahn—who played absolutely no role in the company’s success over the decades—have purchased large amounts of Apple stock and then pressured the company to announce some of the largest buyback programs in history.


And because corporations aren’t required to disclose daily buyback activity, it gives executives the opportunity to trade, undetected, on inside information about when buybacks are being done.




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