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Themis Trading 2012 Market Structure Predictions – Graded

24

December, 2012

In 2011 Themis Trading issued its list of US market structure predictions. We failed miserably, going only 1 for 10. We are proud, however, to announce that we fared better in 2012! Looking at our 2012 predictions, we went a solid 1.5 for 10! WIN! Taste It:

1) A major stock exchange will introduce options that expire in one hour.

FAIL. This did not happen in 2012. Instead we saw the introduction of 60-second options!

2) Sal and Joe will publish a book about “how to HFT” from one’s own home. Algorithms on Amazon will get caught in a predatory feedback loop and bid the price of the book up to $23,698,656.9301, beating the price those same algos set back in 2011 for The Making of the Fly by one hundredth of a penny.

FAIL. Sal and Joe instead published a book highly critical of US equity market structure, titled Broken Markets that Trader’s Magazine listed one of its 12 Great Trading Books For The Holidays.

3) The SEC will finalize its dark pool proposal, and mandate that all orders must be price improved by at least THREE thousandths of a penny, or otherwise be sent within a one-second time period through a smart order router eventually to the exchanges.

FAIL. The SEC finalized no such proposal, and dark pool trading is as nebulous as it could possibly be.

4) A major exchange will propose a SEC rule that will require corporate issuers to rebate and subsidize HFT market makers for making markets in ETF’s that contain their company’s stock. Oh wait…Nasdaq did this in 2011.

SUCCESS. While NASDAQ proposed this in 2011, NYSE ARCA joined the club with a similar proposal in 2012.

5) Exchanges will lower the price of co-location, trying to expand the appeal to retail traders, however they will also institute rules that automatically allow Liquidity Partners to be at the top of book a set percentage of the time, kind of like a “lifeline” that the LP’s can utilize, rendering colocation useless, and that percentage at the top of book will be directly related to the frequency the Liquidity Partners were within 25% of the NBBO over a trailing 3 month period with those statistics calculated every three weeks and published monthly in physical form in the SEC’s Public Reference Room.

SUCCESS KINDOF! Stock exchanges were exposed by an HFT whistleblower in 2012, who demonstrated how certain special order types were given to Ultra HFT Market Makers that allowed them to jump the queue.

6) A new product, called the Mutual Fund, will revolutionize investing by pooling investor’s money into a fund operated by a portfolio manager, who will then turn around and invest those funds for the long term into equity shares. Funding/redemption will take place once/day.

FAIL. What’s a mutual fund?

7) “Liquidity” will be added to the FCC’s list of dirty words you can’t say on TV.

FAIL. Liquidity is still considered the measure of success of the SEC’s Grand Master Plan – by those in the SEC’s Division of Trading and Markets.

8 ) An ETF will be created that tracks the differential between the performance of VWAP strategies and Steve Cohen’s gut, as well as options on those ETF’s.

FAIL. Ask the SEC’s Enforcement Division about this one.

9) The Deutsche Bourse and the NYSE will finally merge, and after a long contest, will be renamed Sprocket Exchange. Touch my monkey.

FAIL. This merger was struck down, and instead replaced late in 2012 with the proposed merger of the ICE and the NYSE. Derivatives are still the driver though…

10) NASDAQ OMX, not to be outdone, will propose a merger with the newly-formed Sprocket Exchange, but will fail, as a major Chicago HFT firm will swoop in and take over the two parties.

FAIL. NASDAQ decided to shock everybody and perform their grand stage event in May 2012 with their handling of the Facebook IPO. And a major HFT firm instead decided to swoop in and take over Knight Capital.

Stay tuned for our 2013 predictions.

 

 

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