mod (Andy) note: "Blast from the past - Best of Eddie" If there's an old post from Eddie you'd like to see up again shoot me a message.
Much has been made about the death of investing over the past several years. Thanks to the proliferation of quants and their burly supercomputers, we've seen average intraday stock holding periods drop to a ludicrous 28 seconds (by most estimates) and up to 70% of trading volume on a given day resulting from high frequency trading bots. These bots operate largely through dark pools, where they're given rebates and what amounts to inside information milliseconds before other market participants' trades are executed, allowing the bots to front run the trades. These advantages are considered their compensation for "providing liquidity".
We all saw just how fragile that liquidity can be last May, when the HFT crowd all closed up shop at once and the market dropped 600 points in five minutes to a level 9.2% below the day's open. Over the subsequent 20 minutes, the market roared back to close down 300 points - after having been down 1,000 points just a few minutes before. It caused a trading nightmare, with companies like Accenture selling for a penny a share, and Proctor & Gamble dropping 37% for a few minutes. Some trades were eventually unwound and disallowed. It was utter chaos. And the machines got rich.
It's no wonder investors don't trust the market anymore.
Enter Credit Suisse and their new Light Pool. Slated to open shop in the next couple of months, Light Pool is meant to be an exchange for Institutional Investors tired of being front-run by the machines. An early pioneer in the field of dark pools, Credit Suisse is determined to create a high-transparency ECN which penalizes and eliminates high frequency traders - even if that ECN has to operate at a loss because of it.
“There’s a real need for a new kind of displayed market where all the rules are set with long-term investors in mind,” said New York-based Mathisson. High-frequency trading, which encompasses computer-driven strategies whose common thread is the rapid submission and execution of orders, accounts for at least half of U.S. equities volume, according to the U.S. Securities and Exchange Commission. “Our idea is to forego that chunk of the market and create a niche market with rules aimed at long-term investors,” he said.
Credit Suisse didn't create Light Pool out of the goodness of their collective hearts, of course. It was created in response to the anticipated regulatory restrictions on dark pools, which proves that common sense regulation can make a difference. That's not a shot at Credit Suisse by any means; if anything, they're the only shop being proactive about rectifying an obvious grift in the system.
This is a step in the right direction for the market. I don't expect the HFT front running problem to go away overnight, but at least Light Pool puts them on notice. Here's hoping it's successful.
I'd be interested to hear some input from traders on this one. Could we see a return to market transparency and the elimination of unfair advantages provided to a well-connected minority of market participants? Or should long term investors just accept their fate as sheep to be sheared (and, frankly, skinned)?
Unfair advantages? Can you elaborate on those please? Traders and long term investors have very little in common imo, best described by the x axis of your bloomberg. Zoom in as far as it goes. HF, zoom out a bit more, day traders, zoom out as far as it goes (within reason) long term investors.
I hope the well connected minority you refer to are the insider traders who litter the exchange floors.
If people dropped the hype about HF trading they'd probably get the liquidity they crave back, but I guess people need their evil spirits to blame for their lack of returns.
Very strong circumstantial evidence = FACT
I dont agree that long term investors are paying the price for HFTs gaming market microstructure. For the long term guys HFTs are the ones providing most of the liquidity to the market. As we saw in May... when they step away the market simply has very little liquidity. I think the people that HFTs hurt are the old school market makers/specialists. HFTs have totally destroyed their margins via tighter spreads. Tight spreads = more liquidity = more efficient market = less volatility.
I also wish to discuss this "recent volatility"... WHAT RECENT VOLATILITY!?!?! The VIX is at/near historical lows. Anyone that thinks "this market is crazy" hasnt been trading very long. This market is really boring... The S&P went something like 33 straight days without closing below the 10 day moving average for the first time in its history. That in itself helps show how little volatility is out there. Bull markets are characterized by long slow grinds higher with sharp pullbacks. Bear markets are characterized by long slow grinds lower with sharp rallies. Regulators are the worst because they do not understand the instruments which they are supposed to regulate, I do not see how going after HFTs is going to help make the markets more efficient or protect investors all that going after HFTs and dark pools is going to do is reduce liquidity which makes spreads wider which creates more volatility which is exactly what they are trying to control.
The media talking about HFT/Darkpools at this point is nothing more than filller for air time as the markets do nothing but grind higher. I dont think a day can go by without the stupid flash crash being mentioned... it happened in May... ridiculous.
trade4size makes an excellent point...imp/hist vol on almost all commodities has been smoked...
Liquidity is a neccessity and high freq market makers allow that to happen...
T4S,
To be fair, it has happened several times since to a lesser degree.
No one is saying do away with HFT (well, some people are, but no one who reads this site I don't think). What CS is doing is setting up a parallel exchange where HFT is banned.
To be honest, I like CS's idea because I'm betting that the same prop shops/HFT groups that utilize data (all of them) to support their execution will essentially operate in the same environment. It'll take a year, maybe, for them to alter their models and utilize the light pool's effect to their benefit, but it's almost certain to happen. I think CS is pretty dumb though, to be fair. I don't particularly see many institutional investors feeling like their rebate is going to be substantial enough to completely switch over to a new ECN. CS is just going to lose money and end up providing new opportunities for the guys they're trying to supplant...
Most of the people that wail and gnash their teeth about HFT have no idea what they are talking about (Zerohedge, etc.) or have a vested interest in it going away (Themis Trading, etc.) The plural of "anecdote" is not "data."
Are there some issues that need to be resolved? Yes. But overall, HFT has made the market much more efficient.
"Vanguard believes that a vast majority of "high-frequency trading" is legitimate and adds value to the marketplace through increased liquidity, tighter bid-ask spreads and a better-linked national market system."
--Gus Sauter, chief investment officer, Vanguard Group
As to the Light Book, I'm curious to see how this will actually be any different from a normal ECN given they said this:
"Opportunistic firms, which Galinov says include some high- frequency trading companies, will be kicked off the platform and prevented from providing orders or executing against bids and offers directly through Light Pool. They’ll instead have to go through the Jersey City, New Jersey-based National Stock Exchange, where Light Pool will also publish its quotes. "
So you can't execute directly against Light Book, but have to route through NSX. This looks similar to how Direct Edge's arrangement with ISE before Edge became an exchange. If there's a Light Book bid for 1 million shares being displayed as an order on NSX, I fail to see how this will prevent gaming. People will just pay more attention for large size going off on NSX.
Assuming they are able to front run trades as Braverman said, please explain to me how that should be legal.
There is one specific regulation in Reg NMS that disallows "locked" markets. There is a nationally disseminated NBBO, but it is also possible for firms to subscribe to, and aggregate individual market centers' inside markets themselves. If you want to pay for that, you can do it. If you don't, you relay on the slower NBBO broadcast. Here's Tradeworx' (a big, scary HFT player) article on the issue... in which they provide a solution to the problem by proposing eliminating the locked market prohibition from Reg NMS.
http://www.iimagazine.com/exchanges_and_trading/Articles/2455058/Makint…
What, specifically, are you referring to when you claim HFTs are front running? 99% of what you read on HFT on the internet is tinfoil hat, ignorant, alarmist bullshit...aka zerohedge, etc.
Didn't Reg ATS come about because of Credit Suisse CrossFinder....which was THE FIRST EVER ORIGINAL DARK POOL ATS.
Before patting CS on the back...which I think is one of the top 3 Banks on the street....let's not forget the 90's
And my post is deserving of Monkey shit because why? Why dont you show yourself and post your wonderful comments?
This is a great read, too...
http://highfrequencytradingreview.com/the-hft-interviews-manoj-narang-t…
Can someone comment on the unwinding of trades? If I buy 100 shares of ACN at a penny a share, due to errors in the seller's algorithms, how is that my problem? Are there gentleman's agreement rules on share settlement that prohibit one person from taking advantage from another's stupidity or lack of computing correctness?
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