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Desperation in HFT defenses

13

November, 2009

At this point we have all become accustomed to the HFT defense playbook. The defenses:

 –     HFT adds liquidity and reduces spreads

–       HFT aids in price discovery

–       HFT lowers transaction costs for all

–       HFT is market-making evolved

–       There are no studies that show HFT to be harmful

are repeated ad nauseum by HFT practitioners, well-known industry veterans who sit on these firms’ boards of directors, consulting firms whose bread is buttered by these firms, as well as exchange and ATS heads. Magazine articles and SEC comment letters also relate how, in the 2008 stock market meltdown, these firms stabilized the market. We diligently work to debunk everyone of these claims, and will continue to do so as they arise. We feel that while the market has room for all kinds of players, it never the less needs to be returned, in general, to the long term stakeholders for equilibrium to again be achieved. Certainly from a helicopter view, we need to get back to our country’s markets being conducive to capital formation.

The newest defense we have come across is chronicled in a recent Traders Magazine article titled “High Frequency Traders Under Scrutiny”. It begs for questioning:

An executive at one high-frequency trading firm argues that market making in its present form is superior to the way it used to be practiced. On the floor of the New York, for instance, specialists had an information advantage, as most of the orders collected at the specialists’ posts, said Cameron Smith, general counsel at Quantlab Financial.

Today, “everyone is seeing everything at the same time,” Smith told the Aite crowd. “No one really has a time and place advantage anymore. That makes it much more difficult to provide liquidity, but the markets are flat and fair for the most part.”

 http://www.tradersmagazine.com/issues/20_300/high-frequency-traders-arbitrage-market-making-104595-1.html?pg=3

 This is just false. Does he really expect anybody to believe that “everyone is seeing everything at the same time” and that there is no speed advantage in high frequency trading?

 We want Seth Meyers and Amy Poehler to lend their talents here… ie their back and forth “REALLY” routine:

 “I mean really… there is no latency arbitrage? Really? And HFT firms are not paying DirectEdge colocation rents  for server space in a three-football-field-sized facility in New Jersey, according to a radio special in the UK? Please don’t expect us to believe that… I mean really… Really? No HFT firms have arranged for space in the NYSE’s 400,000 square foot Mahwah facility, so as to be closer to that exchange’s servers? Let’s be real… really?”

 Thankfully we have some help in refuting Mr. Smith’s laughable claim. Here is a recent article in Securities Industry News titled “The Un(?)fair Advantage of Latency Arbitrage”:

 Technologically advanced traders are giving themselves an advantage that some people feel is just that unfair. Using techniques and technologies I’ll describe below, they squeeze every last microsecond of latency out of their market data feeds and trading systems to give themselves a sneak peak of market prices that’s measured in milliseconds. Thanks to powerful algorithms and high-speed order executions systems that’s enough time for them to engage in “latency arbitrage” – the buying and selling of equities based on small price changes that have not yet been broadly recognized due to the varying speeds of market data delivery systems.

 http://www.securitiesindustry.com/issues/19_100/-23732-1.html

 The playbook is getting tired. As you see, we now have blatant falsehoods introduced, that the HFT players hope those that are “less sophisticated” than they are won’t catch. We have their SEC comment letters that “encourage the Commission to ignore public and political pressures”. They are one step removed from desperation. They are trying to prolong business models that steal (currently still legally… although this may change), in the face of  increasing scrutiny by the public.

 Oh by the way I think we found the final step of desperation. A Chief Executive Officer at a major ATS told a conference crowd this week, and we paraphrase, “It’s only a penny or two.  And to a long term investor, this shouldn’t matter”.  This is so troubling on several levels. 

First, it does matter. These pennies add up to a multi-billion dollar a year businesses for HFT firms, exchanges, and consultants alike. The pennies are being siphoned off of real investors who have their nest eggs staked in 401k and pension money. We are confident that most of these folks don’t even realize that they are being ripped off. After all, some of the institutions responsible for guarding that money themselves don’t even realize that they are getting ripped off.  The algorithms and smart routers that are provided to them by their brokers are not reading the market data as fast as the high frequency traders are.

 Second, the fact that ATS CEO’s are even conceding in public that their biggest customers are stealing from long term stakeholders (just in small amounts) is downright frightening in terms of brazenness and gall. Desperate? Yep.

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