Thoughts: The Sit Down II and Frankie Pentangeli

The Sit Down II

 Yesterday, the Feds issued subpoenas to investigate the market crash. They will likely drag some high frequency traders before a hearing and ask: “Where you or have you ever been involved in manipulation of the US equity markets?”   And the response will be just like Frankie Pentangeli’s answer before the Senate committee in Godfather II:  “I don’t know nothing about that”.  So, why don’t they forget that route and save the tax payers money.  Instead, they need to start grilling the heads of the exchanges.  They need to start asking questions like “Have you been providing information about your long term investors strategies to the high frequency trading community?  Do you supply hidden order information to high frequency traders?”  And the answer would likely be “I don’t know know nothing about that”.  And that is  where we come in to help.  If you haven’t read it yet, check out our new white paper “Data Theft on Wall Street”.  It will certainly help the guys like Frankie Pentangeli remember a few things. http://blog.themistrading.com/wp-content/uploads/2010/05/THEMIS-Data-Theft-On-Wall-Street-05-11-10.pdf

Team HFT launched their second defense yesterday as we expected.  If you recall, the first line of defense to help prevent another crash was to enact uniform circuit breakers.  Well, this band aid doesn’t quite fix the problem.  People started asking questions like “How can you fix a problem that you haven’t even identified yet?” and “Why weren’t these circuit breakers in place across all market centers already?”  Team HFT had to scramble and bring out the second line of defense, The Liquidity Hostage defense.  Just look with Jon Stewarts’ brother, Larry Liebowitz from the NYSE had to say: “High-frequency traders who serve as designated market makers supply 10 percent of the NYSE’s liquidity. We would be stunned by the consequences” if regulators banned high-frequency trading.  These thoughts were echoed by another exchange capo, CME Chairman Terry Duffy, who said “Everybody has to understand that high-frequency trading is still liquidity,” adding that the CFTC must “be careful in not cutting them off” as it develops its proposal.  They are basically saying that the market needs the HFT liquidity and if you do anything to ban HFT, the market will suffer the consequences. Well, that didn’t take long to bring out.   We expected them to last a little longer before having to use that bazooka. 

 And by the way, is this the same NYSE that just the other day was hailed as the savior of the market since their human model was able to slow down trading?  Why is Mr. Liebowitz now doing an about face and suddenly hailing the virtues of HFT?  Well, maybe it’s because the NYSE has just invested a ton of money in a brand new, state of the art, 400,000 square foot data center set to open in Mahwah, NJ that will cater to every wish and desire of HFT.

 One other nugget of news coming out of the SEC yesterday is that they  haven’t found any evidence that the incident was triggered by computer hackers, terrorists, malicious traders or a so-called fat finger entering an oversized order.  But they have yet to rule out rabid squirrels, British soccer fans or a broken water pipe.