Tuesday, April 03, 2012

SEC Probes High Frequency Trading

A WSJ article discusses what the SEC is looking at:

The SEC is examining whether such order types unfairly allow high-speed traders to jump ahead of other investors in an exchange's "order book," or the queue of buy and sell orders that are typically ranked by price and when they were received, according to people familiar with the matter.

Another area of focus for the SEC are the rebates some traders earn from exchanges even as other investors pay fees to complete trades, say people familiar with exchange operations and the SEC probes.

The SEC should ignore the quid pro quos among institutions, exchanges, and retail flow, because for decades exchanges and brokers screwed consumers via their coalition on the commissions and spreads, which was encouraged via the regulators. Why trust them now? As if the current most prominent regulator, Barney Frank, won't be an effective crony capitalist in 9 months, setting an example for all the other current regulator big-wigs. The key for them to be valuable is creating barriers to entry, as there's no big institution that's going to hire someone good at lowering costs to consumers. Of course, that's all hidden behind some pretext about protecting against fraud, and helping the stability of the exchanges, and fairness, and lots of other platitudes. Just think about whatever the SEC wrote in the 60's and 70's and know they were shills for the brokerages and exchanges who colluded to steal investors blind via spreads and commissions that never would have survived a competitive market (thank you regulators!).

What caused commisssions and spreads to come way down over the past 20 years? Not regulatory innovation, but rather competition via the internet, just as in life insurance.

In business, there are lots of different fee structures, and they depend on a lot of variables: a la carte, teaser rates, bulk savings. To view each as a conspiracy that must be proven otherwise is meddlesome and ignorant, creating the completely understandable system that only stasis and oligopoly generate.

If they are truly interested in stopping another flash crash, they should disallow market orders. That is, the flash crash of 2010 was caused by some Texas bumpkin selling $4.1B worth of E-minis (ES) at market prices, which created a panic. Now, just as in hijacking airplanes for kamikaze missions is probably done, that specific trade won't crash markets again, but making sure all exchanges have a contingency for a stupid market trade would be a good thing.


Anonymous said...

Agreed. For decades, regulation-driven cartels cost consumers $20+ every time they traded a stock, and now everyone is indignant about the hypothetical possibility that they are being screwed out of a fraction of a cent.

Mercury said...

How can you disparage the regulatory capture that has characterized the relationship between the (now lamer than ever) SEC and big Wall St. trading firms in one paragraph and then swallow the SEC’s laughable Flash Crash report in the next sentence?

Zero Hedge, Nanex and the CME have eviscerated this piece of crap long ago. At this point the SEC has no credibility and little apparent expertise in this area let alone any other. See:

The HFT threat to a reasonably fair, transparent and orderly marketplace is real and measureable: field day here:
http://www.nanex.net/FlashCrash/OngoingResearch.html Mini flash-crashes and subsequent “do-overs” happen all the time now.

Current equity market structure isn’t the finely honed, hyper-evolved, superior product of healthy competition, it’s a fragmented, opaque wasteland manipulated by the Fed, rigged by high-tech weaponry and almost completely devoid of any retail confidence. Commissions are now low enough so as to not be a barrier to anyone. That battle is over. But a single (or possibly a very few) centralized, transparent and orderly marketplace/clearinghouse has always been the best means to price discovery, transparency and market confidence. The endless array of platforms, exchanges, dark pools and crossing networks we have now are a joke and SEC attempts to unify and control them (order handling rules etc.) are worse.

It's the 21st century, you shouldn’t be able to gain market advantage by digging a f-ing tunnel to the exchange: http://investoholic.net/general/99-wall-streets-speed-war

Incremental advances in technology aren't always beneficial. When the most intense battleground in the market isn’t within the marketplace itself but instead surrounds the quest for zero-latency (sub-speed of light delay communications) its time to head in another direction and become reacquainted with the primary functions of a market.

Eric Falkenstein said...

I think you possess a lot of concern over things you don't fully understand or control, which are all those high frequency tactics. If you just look at commissions and spreads, the data suggest your concerns are misplaced.

My idea about market trades was, that is a simple problem that every exchange ought to have thought out, and something regulators should be interested in.

as per "But a single (or possibly a very few) centralized, transparent and orderly marketplace/clearinghouse has always been the best means to price discovery, transparency and market confidence.", that isn't true for any competitive market in history I am aware of, just government contracts, which aren't competitive. Art, food, clothes, houses are all decentralized markets, always have been.

Eric Falkenstein said...

The E-minis average about 1k contracts on the top level, and the lower level go up a little, but not much. A market trade for 75k contracts causes havoc unless there is a circuit breaker built in some where.

Mercury said...

Of course if you just look at commissions and spreads things look cool….because that was yesterday’s battle (90’s NASDAQ market maker collusion). A bunch of specific regulations were thrown up to plug that hole but now dealers have found a way to work around them (and what? thats OK because now they’re quants and not “Fat Tonys?”)…and its arguably worse. What the spread of XYZ is at any given nanosecond has almost nothing to do with how much its going to cost you to buy 100k shares. High commissions, wider spreads but reliable liquidity can be a better deal for market participants than low commissions, tighter spreads but unreliable liquidity. And no, volume does not equal liquidity. I don’t need to know how to code a headline reading or quote-stuffing algo to understand that much.

I’m only talking about shares of stock here which are completely fungible and unlike even commodities there are no delivery cost considerations. This is not true of clothes, art and real estate. And if a government or any other contract isn’t competitive then it isn’t in a market.

Your mkt order ban would/might be one of many possible steps in the right direction…possibly even the most elegant. But right now we have a system that allows for overwhelming the mechanics of market structure and the market itself under some conditions. I don’t think that’s optimal or even better than what existed before, even at < 1c/share.

Anonymous said...

wasn't that 75000 contract order from Waddell? Would not that make it a Colorado bumpkin? Leave us Texas bumkins out of this discussion!

Anonymous said...

errr... make that a Kansas Bumpkin..sorry Colorado! (my bad)

spragus said...

The compliance dept at a large life co. at which I worked mandated that my personal trades be done only as a market order. (I never liked market orders, but that was how we were forced to trade). There was a time, however, when putting in a market order did not entail the risk that it does today; for many reasons cited by Mercury, a market order has become a crapshoot. As for the Flash Crash, the bulk of Waddell's order was filled after the market turned around, as I recall.

Anonymous said...

See a chart showing in detail where the W&R trades occurred. http://www.nanex.net/FlashCrashFinal/FlashCrashAnalysis_WR_Update.html