Managing Risk = Cherry Picking?









I read a competitor’s blog yesterday (well, they are not really a competitor, as they are not a broker, rather they are a voice in the high frequency debate which always is the polar opposite of ours, and they are typically amazing at the art of spin) and were scratching our heads about how the flash crash had good news for retail investors (TabbGroup’s Laurie Berke’s Take). She states The good news: retail orders may be protected in little-known ways by OTC market makers. So it’s not necessarily an ‘us vs. them’ marketplace.” She discusses how Internalizers stopped executing retail order flow for the online brokers with their own capital, and routed them to the public markets, the retail public was served well! Why? She states: the retail investor, who has no automated risk and P&L management tools, no data latency detection capabilities and no smart order routing software, had the order handling procedures of professional market makers managing his orders to the extent possible by accessing multiple liquidity venues at very high speeds and executing against stub quotes only when other alternatives had come to naught. So much for the totally disadvantaged retail investor.”


Hang on. I need to breathe. Ok, let’s see if I have this straight. And please know all this information comes to you courtesy of the SEC’s report. It is just that Tabb’s Berke chooses to paint it as she does above.

1)       Normally retail orders sent to online brokers are SOLD to OTC internalizers, who pay the online brokers for these orders, because they make money cherry picking from them. This is why retail “only pay $8 bucks/trade”.

2)       On May 6th, some of them stopped executing against their own capital by taking the others side period, and routed them to the public markets, thereby stressing the markets.

3)       On May 6th, some of them also cherry picked which ones they would stop executing, by committing their capital, and which ones they would “exhaust” to the market. As the market tanked they didn’t buy with their own money; they routed out, and they only sold to retail buy orders with their own money. When the market rose just as quickly back up, they didn’t sell with their own money; they routed out and only bought from retail sell orders with their own money.

4)       In addition, the orders that the internalizers routed (exhausted) out, market orders, were converted to limit orders with the limits being the then-current bid side of the market. As there were data delays, that bid-side was inaccurate, and so the order kicked back to the internalizer. The internalizer then converted the market order to a new lower limit, which again was kicked back, and so on, and so on, and so on. Order and quote traffic snowballed, and data delays widened. Market orders were therefore executed against drastically lower prices than the “best-available market price” that the retail investor and trader thought they would rightfully be entitled to.

5)       Retail investors got reports from sell orders that they sent that day as late as 9pm, at the lows of the day.

6)       These “professional order handling procedures” benefitted the retail investor.

I don’t know what to say, except that if Wall Street Experts think that this was good behavior, and behavior that was fair, and behavior that benefitted retail investors and traders, then maybe that is the real problem.

Good Grief Charlie Brown.

Where we left off 4:00pm EST:

DJIA                                             10,967.65                                       +22.93

S&P500                                          1,159.97                                         -0.78

NASDAQ Composite                     2,380.66                                       -19.17

Futures now at 7:30am EST:

DJIA:                                                     +7.00

S&P500:                                                +1.30

NASDAQ 100:                                     +0.50

Key Data out today: 


08:30:                                    Initial Jobless Claims (expected 455,000; we should just leave this same number in every week)

08:30:                                    Continuing Claims (expected 4,457,000)

10:30:                                    ICSC Chain Store Sales YoY (expected 2.9%)

08:00:                                    England and ECB rate decisions

13:20:                                    Fed’s Fischer speaks in Minneapolis.

13:30:                                    Fed’s Hoenig speaks in Nebraska.

13:30:                                    Fed’s Goldstein speaks in North Carolina.

Since the prior close, some key stories:


–       The Bank of England kept up emergency stimulus and left its interest rate at a record low as officials debate whether to join a global push to pump more aid into the world economy. ECB due out soon. 

–       Palladium, sugar, Yen, Aussie$, baseball cards, used cars, used guitars on craigslist, gold, and 90% S&P stocks all above their 50 day moving average. 

–       House prices in UK drop most ever in September. 

–       NYT : Real Estate Collapse Spells Havoc in Dubai. 

–       Geithner calls for global cooperation of currencies, as he sells dollars like an HFT SPY market maker on May 6th. 

–       JPM tries to sell MBS. 

–       Apple readies iPhone for Verizon. 

–       Vacancies drop at US Shopping Malls- WSJ BULLISH!!!!

–       ETF’s absolutely hit all-time greatest bubble levels, as HSBC plans first ever Shariah-compliant Islamic ETF’s in the Persian Gulf Region. Market makers will be high-frequency, ownership will be veiled, and shares will be created and redeemed at the will of Allah. Wait… isn’t this what happens in US ETF’s?  

–       MAR missed forecasts after the close yesterday.

–       Samsung missed forecasts overnight.

–       Baltic Dry Index rose. I think this is meaningless, but figured I’d throw it in as everyone always puts it in when it falls for the 86th day in a row.





Pre-open:                              PEP, ISCA

After Close:                         AA, MU, NAVI, NUHC, TTO, MASC, ANGO,


Significant Movers This Morning:

ITMN +7.2% (sells danoprevir rights to Roche), WFR 4.7%, LTD 3%,  RELL +4.4% (earnings) FSLR +1.7% (guidance);BLUD -17.3% (earnings) AUMN -10.4% (equity financing of indeterminate size) ISPH -5.7% ($150M mixed shelf) AFFY -4.4% (JNJ dispute arbitration panel decision) REGN -4% (4.5M share secondary)  VNR -3.9% (4.15M unit offering) MAR -3.5% (earnings) RT -1.8% (earnings).