Archive for the ‘High-Frequency Trading’ Category

High-Frequency Trading Losing Frequency

Monday, October 5th, 2015

The publication of Michael Lewis’ book Flash Boys early in 2014 brought high-frequency trading (HFT) to the attention of many investors for the first time.

Lewis was quoted on “60 Minutes” saying that HFT rigs the stock market against the small investor. Media made it known that the FBI – the folks who investigate drug dealers and organized crime – was investigating HFT.

Wenning Advice had posted frequently about the practice as early as 2011, warning about the distortion that high-frequency trading causes to market fundamentals, the predatory nature of high-frequency trading, the inequity of high-frequency trading, and the risk that high-frequency trading creates for all of us.  We even pointed out that “Satan is a high-frequency trader.”

Michael Lewis

Michael Lewis

 

But what’s happened to HFT since 2014?  And what happened to the FBI’s investigation of the practice?

HFT has not gone away. But it’s not what it used to be.

We noted in 2011 that HFT accounted for 73% of all equity trading in the U.S., up from 30% four years earlier, based on research from TABB Group.

Rosenblatt Securities estimated that HFT trading volume fell from about 3.25 billion shares a day in 2009 to 1.6 billion shares in 2012. And TABB Group estimated that HFT revenues from U.S. equity trading declined from about $7.2 billion in 2009 to $1.3 billion in 2014.  (more…)

Satan Is a High-Frequency Trader

Friday, October 10th, 2014

Satan is now firmly in control of the markets.

No, we’re not talking about Ben Bernanke, aka Edward Quince.  His time has passed.  We’re talking about a high-frequency trader who also happens to be hell’s CEO.

satanAs evidence, consider Thursday’s market plunge.  The Dow Jones Industrial Average (DJIA) fell 334.97 points, its largest loss of the year.  The drop took place, as Zerohedge noted, after “ ‘someone’ canceled-and-replaced orders for 666 contracts 26 times in the 1130ET to 1200ET period,” after which “selling accelerated lower, no reversal, to close at the lows on heavy volume.”

The number 666 is, of course, the winning number in hell’s lottery.  To trade 666 contracts 26 times, you need a lot of capital in your account.  Most traders would avoid using the devil’s number, but someone – or, more likely, some firm – was trying to make a statement.

What could it mean?  That Satan is in charge, of course.

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Attention Deficit Capitalism

Friday, June 13th, 2014

“Democracy would not be democracy, rule of the people, without at least a modicum of political attention and activity from its citizens.”                                                                                                                                                                                              James Bovard, Attention Deficit Democracy

Is anyone paying attention?

It seems as though the faster the world moves, the shorter our attention span becomes.  And today, speed is measured in nanoseconds.

Many have become complacent as technology has taken over.  High frequency trading, in which computers make the decisions, accounts for the majority of trades today.  HFT is based on arbitrage.  Computers look for discrepancies in pricing and take advantage of them, and that’s how money is made.  A company’s performance is irrelevant.

Humans created computers, but can’t compete with them.  They can try to produce a better algorithm, but the computers will make the decisions.epi_college_unemployment.png.CROP.promovar-mediumlarge

Technology has affected much more than just trading, of course.  Consider communications.  The telephone made it possible to communicate almost instantly.  The Internet, though, has made communications even faster.  Anyone with a computer can send a message to a database of thousands with the click of a mouse.  We can not only hear, but see people anywhere in the world while we talk to them, and our smartphones guarantee that we remain virtually connected at all times.

These and other technological developments have been a big boost to productivity, but they remove the human element.  Life in real time is also life on auto pilot.  We’re connected electronically, but disconnected socially and emotionally.

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Investing at a Profit Now a Sure Thing – For Some

Friday, May 16th, 2014

Imagine being able to trade stocks and knowing that you will make a profit every day.

Of course, for the average investor, this is impossible.  But mega-banks aren’t average investors.

According to Jim Quinn of The Burning Platform, “JPMorgan experienced ZERO trading loss days in 2013.  Goldman Sachs, Morgan Stanley and most of the mega-banks have had virtually perfect daily trading results since 2010.  If they are all winning, who is losing?”

Banks like JPMorgan, Goldman Sachs and Morgan Stanley can, of course, attract the best and brightest traders, so you would expect above-average results from them.  But how does anyone manage to make it through an entire year without a single day in which trading losses take place?

Through legal theft … also known as high-frequency trading (HFT).  As we’ve previously reported, Michael Lewis’ new book “Flash Boys” shines a light on this dark side of Wall Street, pointing out that HFT enables Wall Street’s biggest players to buy shares at one price, then sell them to investors at a higher price in a practice known as front running.

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Shining a Light on Dark Pools

Friday, April 11th, 2014

“Unless there are some changes, there’s going to be a massive crash, a flash crash times ten.”                                            Ron Morgan and Brian Levine, Goldman Sachs

As recently as 2005, dark pools made up 3% to 5% of trading activity.  Today, it’s 12%.

Dark pools are like fraternal clubs, but without the secret handshake.  No one talks about them, so they’re a mystery to the world at large.  Many were unfamiliar with dark pools until this past week, when The Wall Street Journal announced that Goldman Sachs is planning to close its Sigma X dark pool, which is one of the industry’s largest and darkest pools.  (Goldman has not confirmed that action.)Dark Pools 2

So what is a dark pool?  It’s a stock exchange where trading takes place in the “dark,” which means the size and price of orders are not revealed to other participants.

To some extent, dark pools are a reaction to high-frequency trading (HFT), which we discussed last week and in other previous posts.  When trades take place in the dark, algorithmic traders can’t take advantage of them.

Theoretically, if dark trades, which are typically high volume trades, took place in the light of day, high-frequency traders would amplify the impact of such trades and potentially cause another flash crash.  Or worse.

But on Wall Street, of course, nothing is ever that simple.  There’s more to dark pools than that.  Consider some of the questions that dark pools raise:

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Good Market Rigging vs. Bad Market Rigging

Friday, April 4th, 2014

“The markets are rigged. … These firms make their money by front-running trades. They’re using their speed advantage to buy shares first and then selling them back at a higher price. The result is higher prices for investors in those shares. That’s rigged.”                                                                                                                                      Michael Lewis

Based on the Federal Reserve Board’s actions of the past five years, you may have thought that “market rigging” was a good thing.  After all, a great deal of wealth has been created from the Fed’s bond buying – although, granted, almost all of it went to those who were already wealthy.

But suddenly, high-frequency trading is being charged with rigging the markets and it’s creating a bit of a furor.  Apparently the Fed is responsible for good rigging and HFT is responsible for bad rigging.  Consider this week’s HFT-related news:

  • Michael Lewis, author of Moneyball, was interviewed by “60 Minutes” in advance of publication of his book, Flash Boys, in which he makes the case that HFT rigs the markets against the small investor.

  • There was the heavy backlash from those who disagree with his conclusion … that is, the people who make money off of high-frequency trading.  Supporters contend that HFT has created liquidity and reduced the cost of trading for small investors.  In other words, the market is rigged against small investors, but it costs them less to make a trade.  Yippee!!
  • Then there’s The Wall Street Journal’s announcement this week that HFT is being investigated by the FBI – not the Securities and Exchange Commission (although it is participating in the investigation), the FBI.  You know, the guys who investigate bank robberies, money laundering, drug cartels and the Mafia.  And now you can add high-frequency trading to that list.  Apparently, insider trading was already taken. (more…)

Fundamentally Flawed

Friday, March 14th, 2014

Imagine if the outcome of a football game depended more on the weather than on the talent of the players.

Weather, indeed, can have an impact and should, but its role is usually to test the talents of the players, not to be the primary factor in the outcome.  When it is the primary factor, anything can happen.  In such cases, would you put money on the game?

The weather is not the number one factor affecting the performance of the stock market these days, but neither is the talent of the players – that is, the fundamental performance of publicly held companies.

In recent years, The Federal Reserve Board has held sway over the market’s performance via quantitative easing, although under former Chair Ben Bernanke, it was somewhat more predictable than the weather.AUDJPY

Now, with tapering under way, that may change (we’ll see, as many expect plenty of bond buying ahead).  Yet other world events may replace QE in determining the performance of the market.  That means potentially greater volatility than we’ve experienced in the easy money era.

It doesn’t take much to affect today’s global economy, especially when the impact of events is amplified by high-frequency trading.  Consider, for example, the impact of the falling yen and Australian dollar on the S&P 500.

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High-Speed Casinos

Friday, April 26th, 2013

A tweet – 12 words, 140 characters – caused a selling frenzy last week, as the stock market dumped $134 billion in stocks in a minute and a half and the Dow Jones Industrial Average dropped 1 percent of its value, or 143 points.

The market recovered quickly, as the Associated Press announced that someone had hacked into its computer system and posted a fake tweet about two explosions in the White House.

But the hoax served as a frightening fire drill.  If it had been real, the average investor would have been burned alive.

We’ve warned readers about the dangers of high-frequency trading before.  This is an example of why we’re concerned.  If the White House explosions had been real, the algorithms that make decisions for high-speed traders would have continued selling, leaving the average investor behind as stock values tumbled.

Rick Santelli, on-air editor for CNBC Business News, said high-frequency trading has turned the markets into “high-speed casinos.”

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Where’s the Equity in HFT?

Friday, January 25th, 2013

In spite of all of the talk about equity, fairness and helping the middle class that’s been circulating in Washington, the stock market is now rigged to help the rich and powerful – and little is being done about it.

The individual investor is told to invest long-term and plan ahead. But the real money is being made in nanoseconds by supercomputers. If you have the right algorithm, you don’t need to plan for the next minute, never mind 30 years from now.

The SEC has been clamping down on insider trading, in which individuals use knowledge that isn’t available to the public for personal gain. But is high-frequency trading (HFT), in which computers mine data to find and take advantage of pricing inefficiencies, any different?

It’s legal for computers to make decisions based on information that isn’t available to the public, but it’s not legal for people to do so.

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Ignoring the Cliff

Monday, December 17th, 2012

The fiscal cliff beckons and, as previously predicted, a resolution is unlikely.  So let’s ignore the cliff this week and consider what’s happening elsewhere.

Viva Europe!

Last week was a good week for Europe – at least in comparison to most weeks.

The Eurozone is in a recession; unemployment continues to rise, and both industrial production and retail sales have dropped even further than had been predicted.

So where’s the good news?  Well, for starters, European leaders were given the Nobel Peace Prize.  While we’re not sure what the sovereign debt crisis has to do with war and peace, at least Europe is not the Middle East.  In what other continent do neighboring countries lend billions of dollars to each other when they have no hope of ever getting it back?

In addition, the European Union reached two agreements this week:

  • The 27 EU countries agreed to give the European Central Bank (ECB) oversight of their banks
  • They also agreed to provide Greece with an additional $64 billion in bailout funds

The ECB has not always shown sound judgment and the wisdom of pouring more money into the Greek sinkhole remains to be seen.  But the Greek funding will at least stall a default, which could potentially bring down the currency union, and the banking agreement should at least expedite decision making.

Whether the new agreements will help solve the crisis or prolong the pain remains to be seen, but at least the European Union negotiated and reached compromises.  That’s more than can be said for President Obama and the U.S. Congress.

Volatility: Europe vs. the U.S.

The inability to compromise is affecting the volatility of U.S. markets.

This week, for the first time this year, Europe’s volatility index (VIX) dropped below the U.S. VIX (16.6% vs. 16.8%).  In addition, Europe’s Euro Stoxx 50, the European equivalent of the Dow Jones Industrial Average, is easily outperforming the DJIA, with a year-to-date return of +13.5% vs. +7.75%.

Zero Hedge reported, “Are we seeing a wholesale capital outflow beginning as US’ Fiscal Cliff fears trump any year-end shenanigans potentially coming from Europe (post-Summit)? One thing is for sure, certain media individuals will have to change their tune now Europe is the year’s winner and the US becomes the center of the world’s event risk focus.”

High-Frequency Trading Is “Predatory”

Credit Suisse’s trading strategy team released a report this week called, “High Frequency Trading – Measurement, Detection and Response,” in which the firm said, as Zero Hedge put it, “that high frequency trading is a predatory system which abuses market structure and topology, which virtually constantly engages in such abusive trading practices as the Nanex-branded quote stuffing, as well as layering, spoofing, order book fading, and, last but not least, momentum ignition.”

Get Your Food Stamps!

With unemployment figures and the housing market improving, the U.S. economy is on the upswing, right?  If that’s the case, why are a record number of Americans receiving food stamps?

According to the U.S.D.A., a record 47.7 million Americans are now living in poverty.  In September, a record 607,544 Americans became eligible for food stamps.

Imagine if we were in a recession!