Or consider a type of trading order called a "partial post only at limit." Here, if a fast trader's small buy order is rejected instead of executed, the firm can deduce that a large block of shares may lie hidden in reserve, poised to sell at a given price. Thus a trader may be able to get information without executing the trade. Clever use of this order type can increase the trader's odds of being in the right place at the right time—capturing a splinter-thin, lightning-fast profit before the institution can move.
Chris Isaacson, chief operating officer at BATS Exchange, the third-largest U.S. stock market, downplays such concerns. "This order type is rarely used and would be very complex to implement for the purpose of detecting a large order on the other side," he says. Such a trader "would have to be willing to take considerable risk."
Which is why, since the SEC refuses to get involved, starting tomorrow, all readers should immediately notify their brokers to stop allowing their orders to be Flashed (a topic extensively discussed last summer and which is still continuing with the SEC's blessing) if they have not already done so (as this implicitly allows non-qualified orders to be front run), and to stop trading with any exchange with either has no idea what this is, or refuses to comply. More importantly, brokers should also be advised to drop all order IDs tagging each and every individual order. Since the HFTs front run stock blocks based on a statistical distribution of tagged versus untagged orders, the only hope of equalizing the playing field is if every single order is now untagged, thus fooling HFTs into believing that there is large money sitting in the bid behind the order. Granted, this may force prevailing prices higher for the time being, but the end result will be a faster divergence from market equilibrium, which eventually, when the balance inevitably reasserts itself, will force the vast majority of HFTs to be blown up once there is a market correction and the computers are caught with artificially dollar-cost average inflated prevailing prices. In other words: open war on HFTs has been declared, and since regulators refuse to stand on the side of the small and long-term investors, it is time to form a unified block against the HFT scourge.
And while we are once again (as always) discussing the SEC's terminal incompetence, we wish to present for one last time just what happened on Friday in the LQD flash crash, courtesy once again of Nanex. Note the dubious absence of Waddell and Reed:
Chart 1, which demonstrates what exchange(s) the rogue algo originated from: note the PACF repeater and BATS stubbing all the way down:
Chart 2, which shows the actual LQD trades:
Chart 3, which confirms that the PACF had the BBO all the way down. Once again, no W&R
Is it thus any wonder the industry itself is now ganging up against HFT? We believe that now that HFT is scapegoated by real money accounts for all P&L problems (and otherwise), its days are effectively numbered. Which is why as the HFT world enters its death rattle hours, expect markets to be even more unpredictable and volatile than ever... and of course, to ultimately break as usual.
Pump and Dump
September 30, 2010
By John R. Taylor, Jr.
Chief Investment Officer
At the Jackson Hole conference near the end of August, Fed Chair Bernanke informed the markets that they should anticipate the Fed’s announcement of a new quantitative easing (QE II) effort in the near future. In response, the global equity markets began a powerful rally, which continues today. In the US, the stock market gave us the strongest September since 1939, and Bernanke is still advertising his future plans to inflate the money supply, stimulate inflation, and reflate the economy. The Fed’s strategy seems to go beyond the famous Greenspan ‘put’ or even the Plunge Protection Team, which is rumored to be on the bid whenever US equities are down sharply. Bernanke is being proactive. In the street vernacular, Bernanke’s words are pumping up the prospects for a future liquidity boom, and a very strong equity market. The next step in this process, as carried out by Wall Street’s more scurrilous denizens, would be to dump their lousy equity positions on the market at inflated prices – hence ‘pump and dump.’
Strange thing, the US Treasury has lots of stock to sell: Citibank, AIG, and General Motors. It seems that the US authorities are very interested in making as large a profit as possible on the TARP program and its other equity positions, perhaps trying to draw our attention away from the Fannie Mae and Freddie Mac messes. General Motors is currently worth somewhere between $60 and $85 billion dollars, up from zero eighteen months ago, and at any valuation over about $67 billion, the US would break even. As the offering will be finalized in a month or so, the pressure to get a good price will last for a while. Prior to that AIA, AIG’s very profitable Asian arm, should be sold for around $40 billion, allowing the repayment of AIG’s line of credit from the NY Fed with some left over. Even Citibank, the last of all the banks still owing money to TARP, looks to be a winner. For the government this Houdinilike escape from the horrifyingly large TARP bailout of almost exactly two years ago is a tremendous success, for those buying out the government’s position: caveat emptor!
Standing on its own, the outlook for the equity market is not rosy. Earnings have been boosted by cost reductions, by productivity, and by absorbing competitors with excess cash. The outlook for future growth can not be good when the mean forecast for GDP growth in the US next year is around 2% and even that is dependent on some optimistic projections for final sales and exports. With those facts weighing on the market, should the US government be out pushing equities to climb higher? It seems that it is the Fed’s and the administration’s highest priority to have the S&P rising every month. A quick review of the correlation tables shows that a climbing S&P has equaled a falling dollar, climbing commodity prices, and higher inflation. As there is no inflation to speak of – and fear of deflation is
rampant in some quarters – this strategy seems to have little risk, at least for the government and the average US family. Bernanke and his friends in the Treasury seem to be pulling a fast one on the world, inflating US assets and deflating US liabilities through a falling dollar, while giving the US companies a chance to fund themselves cheaply. The only ones who are harmed are not voters or, if they are, they don’t have many votes. However, those who own the most US assets and will be financing the US in the future can not be pleased by this. It might be that the Eurozone is short-sighted allowing the euro to rise (see A Race to Two Bottoms, September 23), but the US is not thinking about the long term either. This is a very short term game. If the economy does go into a recession next year, as we expect, equities will decline anyway, and the government’s escape will only be temporary.
TARP II will need to be rolled out alongside QE II and many will be left with a sour taste in their mouths.
h/t Teddy KGB
This Week's Health Industry <b>News</b> - NYTimes.com
Decisions on several major drug treatments are expected.
The Birmingham <b>News</b> Pink Edition: Supporting the fight against <b>...</b>
Reports on the work being done in our community to fight the disease and sharing the stories of breast cancer survivors.
Midterm election results could mean bad <b>news</b> for climate change <b>...</b>
Dem-originated energy legislation, including cap and trade, may be on life support under a GOP House majority.
eric seiger eric seiger
Or consider a type of trading order called a "partial post only at limit." Here, if a fast trader's small buy order is rejected instead of executed, the firm can deduce that a large block of shares may lie hidden in reserve, poised to sell at a given price. Thus a trader may be able to get information without executing the trade. Clever use of this order type can increase the trader's odds of being in the right place at the right time—capturing a splinter-thin, lightning-fast profit before the institution can move.
Chris Isaacson, chief operating officer at BATS Exchange, the third-largest U.S. stock market, downplays such concerns. "This order type is rarely used and would be very complex to implement for the purpose of detecting a large order on the other side," he says. Such a trader "would have to be willing to take considerable risk."
Which is why, since the SEC refuses to get involved, starting tomorrow, all readers should immediately notify their brokers to stop allowing their orders to be Flashed (a topic extensively discussed last summer and which is still continuing with the SEC's blessing) if they have not already done so (as this implicitly allows non-qualified orders to be front run), and to stop trading with any exchange with either has no idea what this is, or refuses to comply. More importantly, brokers should also be advised to drop all order IDs tagging each and every individual order. Since the HFTs front run stock blocks based on a statistical distribution of tagged versus untagged orders, the only hope of equalizing the playing field is if every single order is now untagged, thus fooling HFTs into believing that there is large money sitting in the bid behind the order. Granted, this may force prevailing prices higher for the time being, but the end result will be a faster divergence from market equilibrium, which eventually, when the balance inevitably reasserts itself, will force the vast majority of HFTs to be blown up once there is a market correction and the computers are caught with artificially dollar-cost average inflated prevailing prices. In other words: open war on HFTs has been declared, and since regulators refuse to stand on the side of the small and long-term investors, it is time to form a unified block against the HFT scourge.
And while we are once again (as always) discussing the SEC's terminal incompetence, we wish to present for one last time just what happened on Friday in the LQD flash crash, courtesy once again of Nanex. Note the dubious absence of Waddell and Reed:
Chart 1, which demonstrates what exchange(s) the rogue algo originated from: note the PACF repeater and BATS stubbing all the way down:
Chart 2, which shows the actual LQD trades:
Chart 3, which confirms that the PACF had the BBO all the way down. Once again, no W&R
Is it thus any wonder the industry itself is now ganging up against HFT? We believe that now that HFT is scapegoated by real money accounts for all P&L problems (and otherwise), its days are effectively numbered. Which is why as the HFT world enters its death rattle hours, expect markets to be even more unpredictable and volatile than ever... and of course, to ultimately break as usual.
Pump and Dump
September 30, 2010
By John R. Taylor, Jr.
Chief Investment Officer
At the Jackson Hole conference near the end of August, Fed Chair Bernanke informed the markets that they should anticipate the Fed’s announcement of a new quantitative easing (QE II) effort in the near future. In response, the global equity markets began a powerful rally, which continues today. In the US, the stock market gave us the strongest September since 1939, and Bernanke is still advertising his future plans to inflate the money supply, stimulate inflation, and reflate the economy. The Fed’s strategy seems to go beyond the famous Greenspan ‘put’ or even the Plunge Protection Team, which is rumored to be on the bid whenever US equities are down sharply. Bernanke is being proactive. In the street vernacular, Bernanke’s words are pumping up the prospects for a future liquidity boom, and a very strong equity market. The next step in this process, as carried out by Wall Street’s more scurrilous denizens, would be to dump their lousy equity positions on the market at inflated prices – hence ‘pump and dump.’
Strange thing, the US Treasury has lots of stock to sell: Citibank, AIG, and General Motors. It seems that the US authorities are very interested in making as large a profit as possible on the TARP program and its other equity positions, perhaps trying to draw our attention away from the Fannie Mae and Freddie Mac messes. General Motors is currently worth somewhere between $60 and $85 billion dollars, up from zero eighteen months ago, and at any valuation over about $67 billion, the US would break even. As the offering will be finalized in a month or so, the pressure to get a good price will last for a while. Prior to that AIA, AIG’s very profitable Asian arm, should be sold for around $40 billion, allowing the repayment of AIG’s line of credit from the NY Fed with some left over. Even Citibank, the last of all the banks still owing money to TARP, looks to be a winner. For the government this Houdinilike escape from the horrifyingly large TARP bailout of almost exactly two years ago is a tremendous success, for those buying out the government’s position: caveat emptor!
Standing on its own, the outlook for the equity market is not rosy. Earnings have been boosted by cost reductions, by productivity, and by absorbing competitors with excess cash. The outlook for future growth can not be good when the mean forecast for GDP growth in the US next year is around 2% and even that is dependent on some optimistic projections for final sales and exports. With those facts weighing on the market, should the US government be out pushing equities to climb higher? It seems that it is the Fed’s and the administration’s highest priority to have the S&P rising every month. A quick review of the correlation tables shows that a climbing S&P has equaled a falling dollar, climbing commodity prices, and higher inflation. As there is no inflation to speak of – and fear of deflation is
rampant in some quarters – this strategy seems to have little risk, at least for the government and the average US family. Bernanke and his friends in the Treasury seem to be pulling a fast one on the world, inflating US assets and deflating US liabilities through a falling dollar, while giving the US companies a chance to fund themselves cheaply. The only ones who are harmed are not voters or, if they are, they don’t have many votes. However, those who own the most US assets and will be financing the US in the future can not be pleased by this. It might be that the Eurozone is short-sighted allowing the euro to rise (see A Race to Two Bottoms, September 23), but the US is not thinking about the long term either. This is a very short term game. If the economy does go into a recession next year, as we expect, equities will decline anyway, and the government’s escape will only be temporary.
TARP II will need to be rolled out alongside QE II and many will be left with a sour taste in their mouths.
h/t Teddy KGB
This Week's Health Industry <b>News</b> - NYTimes.com
Decisions on several major drug treatments are expected.
The Birmingham <b>News</b> Pink Edition: Supporting the fight against <b>...</b>
Reports on the work being done in our community to fight the disease and sharing the stories of breast cancer survivors.
Midterm election results could mean bad <b>news</b> for climate change <b>...</b>
Dem-originated energy legislation, including cap and trade, may be on life support under a GOP House majority.
eric seiger eric seiger
No comments:
Post a Comment