Five Best Themis Thoughts of 2010?

Themis Thoughts December 29th, 2010


Five Thoughts Revisited


The Year-End and New Year is fast approaching, and it is a time of year when we often look back on our accomplishments and failures (well ok… we look back on our accomplishments and lay blame for our failures, but that’s not the point). Joe and I have been looking back on the last two years this week, which have been a whirlwind for us and all of you. For us it was two years ago that we wrote Toxic Equity Trading on Wall Street, although it hadn’t caused any stir until mid-year 2009, when Sergey Aleynikov was arrested on that July 4th weekend, and HFT started its march into everyday vernacular. As we have been looking back, we just wanted to let you know how much we appreciate all of you, our clients, who are the most loyal and supportive client base any business could ever ask for.

We have been writing Themis Thoughts for about a year, now, and to be truthful we never realized how much we enjoy writing in general, and writing about the business we love specifically. We have selected five of our more entertaining, and perhaps informative, morning notes from 2010. We hope you enjoy glancing at them again.


Number 5:


Themis Thoughts July 23rd, 2010

Today we are going to do a little electronic trading history lesson.  Who remembers Sheldon Maschler? or Harvey Houtkin?  They were the original SOES Bandits.  Sheldon headed up the infamous Datek Securities.  in 1989, with the help of two boy wonders, Jeff Citron and Josh Levine, they created Watcher, a software program that allowed day traders to take advantage of a weakness in the SOES system–relatively slow updating of price quotes (sound familiar to anyone?).  SOES was intended for small orders but Datek was using the system for large trades, buying stocks and then selling them again within seconds.  Datek was very successful at scalping trades and by 1996, they had 500 traders, many of them freshly out of Ivy League schools but already making as much as $750,000 a year (hmmm, take the brightest minds out of the best schools and have them perform a function with no economic value so they can earn obscene salaries…again, sound familiar to anyone?).  In 1997, Citron and Levine developed the Island ECN and with the strategy of paying rebates for posting of liquidity, Island grabbed 15% of NASDAQ trades by 1998.  They tried to take Datek public but a series of criminal and regulatory investigations prevented them from doing so.  Island was later bought by Nasdaq.  The data feed that Nasdaq now uses, ITCH, was originally created at Island. 

Harvey Houtkin was another famous SOES Bandit.  in 1998, his firm All-Tech also created an ECN called Attain.  in 2005, Attain was sold to Knight Trading.  Knight renamed it Direct Edge.  Knight then sold stakes in Direct Edge to Goldman Sachs, Citadel Investments and the ISE.

So where are we going with this?  On Wednesday, Direct Edge officially became the fourth stock exchange in the US.  It is truly amazing that an ECN that still employs pre-routed or “flash” orders was granted exchange status. They can now compete directly with the other big boys, NYSE, NASDAQ and BATS.  They have set their sights on the lucrative proprietary market data space.  These data feeds are the lifeblood of the HFT industry.  Think of them as the fuel that runs the Lamborghini.  They said they will begin selling this data to industry participants, most likely HFT firms, over the next few months.  They also have amped up their speed to 300-400 microseconds which should make the HFT traders very happy.  And one final thing, they have also announced their intentions of a future IPO of the company.

The similarities between SOES and HFT are striking and history is truly repeating itself now.

Number 4:


Themis Thoughts July 28th, 2010


Last week we had a little history lesson on electronic trading.  Today, we wish to give a quick science lesson.  Who knows what Binary Fission is?  Binary fission is the most common method of reproduction in bacteria. It is a process in which a parent cell divides to produce two equal-sized daughter cells.   The daughter cells then separate from each other and become independent. The repeating of the process results in exponential multiplication of the bacterial population. 

We bring up this science lesson because as of July 12th, a new venue, the NYSE Amex, has just started trading NASDAQ stocks.  The NYSE Amex model of parity and priority will be in effect for NASDAQ stocks (  As the NYSE Amex release states: “The parity-based system enables the DMM, any floor broker and the first order in the exchange’s order book to have equal standing in terms of execution priority at a particular price level.”  This should make for some new and very interesting HFT strategies.

While we have now 4 major equity exchanges in the US, each one has been undergoing a “binary fission” process.  The NYSE now has NYSE “classic”, NYSE ARCA and NYSE Amex.  NASDAQ has NASDAQ OMX, NASDAQ BX and is pending the launch of NASDAQ PSX.  Direct Edge has EDGA and EDGX.  BATS has its current BZX and is pending approval of the new BYX.  So, our 4 US exchanges are really 10 destinations.  When you add the smaller exchanges like NSX and CHX, and then throw in a few  ECN’s, like FLOW, we see how the number  of  “lit” destinations  keep multiplying like bacteria,  and fragmenting the market. Lets not even get into the more than 40 dark pools.  Why are the exchanges doing this?  If you ask them, they will likely say to give the customer choice. We think that they are all trying to create new hyper-trading arbitrage opportunities, needs of investors be damned. This also creates an ever increasing need to co-locate at the highest levels, buy increasingly expensive direct feeds, as well as a need to keep buying new Cisco servers. We alsothink a quote by an industry consultant, Sang Lee, sums it up best:  “It’s a hypercompetitive environment…You’re literally gouging each other’s eyes out for a sort of single-digit market share.”

With that type of loss of perspective and “eat what you kill” attitude, it’s no wonder that investor confidence is at all time lows.




Number 3:


Themis Thoughts November 26th, 2010

Breakdown of Turkey Day in Connecticut.

06:30am:         Awaken and let three whining dogs out.

07:00am:         Eat stale Mini-wheats and nurse old fat back in hot tub.

07:30am:         Awaken Numbers 1, 2, and 3. Take them to DD for crap breakfast.

08:00am:         Drive Numbers 1, 2, and 3 to Brooklyn to see my folks.

09:00am:         Exchange emails with Joe in Florida about high freaks in Europe. WTF.

09:30am:         Enjoy quality time talking with my dad while Number 1 and 3 shriek and fight on the living room floor. Number 2 quietly socially networks on his iPhone.

10:00am:         Number 2 calls Number 1 immature. Number 1 insults Number 2’s girlfriend.

10:30am:         Embark from Brooklyn to Fairfield Connecticut, to see other grandparents. Fairfield is the home of Wasps, Mimosas, and Judgment.

12:00noon:      Walk through in-laws front door. Comment on how great the food smells, and ask if I can help with anything.

12:05pm:         In-laws show me the lawnmower, the rakes, the black tarp on which to place 8,000 cubic tons of leaves, and the area out front to which I must drag the tarp.

12:30pm:         Walk inside and ask boys to come out and help. Number 1 is happy to help. Number 2 is Meh. Number 2 nonchalantly pokes leaves with rake in one hand while texting his gal, Nadia. Number 1 again insults Number 2’s girlfriend.

01:20pm:         Father-in-law comes outside and asks when will we be done, because he wants to drink the wine we brought, but Nancy said he had to wait for us.

01:30pm:         Father-in-law tells us for the 186th time how his cousins called him Donnie when he was young, and he wanted to be called Don. Pours second glass of Farniente Chardonnay.

02:00pm:         Play hoops with Number 1. Number 1 is 6’2” and 210lbs. He hacks like Sir Charles and I hit pavement groaning in fetal position.

02:15pm:         Walk by some wasps house and my bride asks me why I can’t dress distinguished like the handsome wasp in the khakis, button down, and blue blazer who is my age and walking outside with his young kids.

02:16pm:         I ask my wife why her butt is so fat that she misses calls on her iPhone because she can’t feel it vibrate.

02:20pm:         I lie down while Number 1 gets me ice.

02:30pm:         A glass of wine warms my bones. Father-in-law tells us for the 187th time how his cousins called him Donnie when he was young, and he wanted to be called Don. Pours fourth glass of Farniente Chardonnay.   

03:00pm:         Watch some football! Catch a twenty minute nap that feels like heaven.

03:30pm:         Father-in-law wakes me from said nap, asking me if I want to look at his financial statements. Pours fifth glass of chardonnay and starts again about freaking Don versus Donnie.

04:00pm:         Eat an incredible meal. I admit I am less about the turkey and much more about the beans, mashed potatoes, cranberry sauce, apple sauce, and stuffing.

04:30pm:         Drink coffee and embark on my drive back from Fairfield to Chatham NJ in the rain, with Number 1, Number 2, and two of my dogs in tow.

07:00pm:         Write this note while it is fresh in my mind and prepare for the Jets. Wahoo!



By the Way, Just a Little High Freak For Y’all

Over the Thanksgiving Holiday, we see this piece in Reuters: Computerized trades in EU face tougher rules (Click Here To Read). While high frequency trading in Europe is only running 30%, apparently they don’t like what they see. French Economic Minister Lagarde, and Britain’s Director of Markets at the FSA, Justham, both acknowledge that while they are not there to turn back the clock, they need to be sure that the cars can brake as fast as they speed. Some gems from the regulators perspective:

–       may need banning in some cases.

–       After a cost benefit analysis of HFT methods, maybe it should be forbidden outright.

–       The proliferation of dark pools was a tragic error.

One high frequency firm, who incidentally recently hired away a regulator from the FSA to be on their legal staff (regulatory capture strikes again. YAY), had a director, comment:

–       “High frequency trading firms are market makers who utilize technology to provide liquidity to the market in a more efficient way than pit or phone trading.”

Sigh. We had not  heard that defense before.


Number 2:


Themis Thoughts May 7th, 2010

The Emperor Has No Clothes; We Need A New Mousetrap

15 Stocks fell more than 50% from high to low.

61 Stocks fell more than 20% from high to low.

Exchanges solution: Bust Trades > 60%

Some Thoughts:

In my personal portfolio I own Phillip Morris (PA) and Boston Beer (SAM), makers of Marlboro smokes and Sam Adams beer. I was feelin’ allright when I stepped outside to grab a smoke and a brew (I do my best trading after a few  Sam Lights and a few Marlboro Reds). OK. I really didn’t do that. And I don’t really own those two stocks either. But if I did, then yesterday afternoon I would have smoked a pack and drank a case.

Phillip Morris High/Low/Last = $48.92/ $16.74/ $46.75

Boston Beer Co Inc. High/Low/Last = $63.17/ $00.01/ $55.43

Today’s action left us amazed, and we have been warning about this stuff since December 2008. Where do we even start? Yesterday afternoon and evening all the business programming focused on how the markets were in turmoil, and Greece this, and overdue correction that, and fat finger the other thing. They couldn’t even recognize the story, as even the business media doesn’t understand that the markets are a changed structure and beast. The story is not a key-punch error. The story is a failed market structure. The market failed today.

The market melted down and “liquidity providers” quickly pulled all bids. According to today’s Wall Street Journal, high frequency firm, Tradebot, closed down its computer systems completely, as did New Jersey’s own Tradeworx, who was so critical of our silly market structure comments in their SEC comment letter. By the way, if you don’t know who or what Tradebot is, it is the proprietary trading engine that used to be part of the BATS exchange. In fact the reason BATS was rolled out as an exchange to begin with was to lower costs and facilitate trades for Tradebot (Tradebot’s 1251 NW Briarcliff Pkwy Kansas City address is next door to BATS’s North Mulberry Drive address fyi). In the WSJ article Mr. Cummings said his Tradebot system was designed to stop trading when the market becomes too volatile, because he “doesn’t want to compound the problem.” Too bad he doesn’t understand that that was and is the problem. To make matters worse, while some high frequency firms shut down yesterday and pulled their bids, as we warned they would do for over a year and a half, other high frequency firms turned from being liquidity providers to liquidity demanders, as they turned around and indiscriminately hit bids like Randolph and Mortimer Duke.

We are just plain outraged, and think every investor and market participant in the USA should share this outrage. They were sold a lie. How many times over the last year have we all heard that HFT liquidity was a blessing that lowered costs and helped investors, and that it would be there in stressful markets just like the market makers and specialists they replaced were there? How many times have you read in the big media that HFT helped the markets perform brilliantly during the global meltdown in 2008 and 2009? We said it before and we say it now. Lies.

Not so long ago, if our markets experienced severe stress, and certainly a “fat finger”, human wisdom would intervene. Reasons for the stress would be ascertained, trading in affected stocks would be slowed or halted, stabilizing bids would be initiated as needed, and severe volatility would be dealt with in a calm and reasoned manner. Today, the human specialist model has been replaced by an automated market maker model. Our market structure has evolved. It has evolved, not by design,
or a well-thought and reasoned plan, but it has evolved to cater to masters of expensive technology, deployed unfettered by participants whose only concern is to squeeze out every last picosecond and fractional cent before they move on to other countries’ markets and asset classes. The for-profit exchange model at every chance sacrifices the protection of long term investor interests for the profitability of serving hyper-leveraged intraday speculators. By the way FLASH orders are still utilized at Direct Edge, but that is here nor there.

Today’s price swings in a great number of stocks highlight the inherent and systemic risk of our automated stock market, which has few checks and balances in place.  Once the market sensed stress, the bids were cancelled and market sell orders chased prices down to the lowest possible point. Investors who thought they were protecting themselves with the prudent use of stop orders were left with fills that were far away from the closing price. In some stocks like our SAM example above, this was $0.01. We warned of the potential for HFT to behave this way when we met with and showed our regulators the NY Fed study that highlighted HFT’s vanishing act around stressful news announcements in the currency markets.

We read this in a recent comment letter to the SEC about HFT and couldn’t agree more: “When markets are in equilibrium these new participants increase available liquidity and tighten spreads. When markets face liquidity demands these new participants increase spreads and price volatility and savage investor confidence.”

The EXCHANGES’s response late yesterday was to cancel trades that moved by more than 60%. Yes 60%. SO if you bought a stock at $21, put in a stop-loss market order at $20 (expecting to get filled in a market decline of somewhere less than but close to $20), and got filled at $10 (yes this happened and worse), your trade stands! And if you bought this same company’s stock (that fell from $20 to $3 before closing back at $18) at $3 and sold it at $14 thinking you made a big profit, your buy is cancelled, you are short stock at $14, you have a loss, and the futures are green this morning. Inspires investor confidence, right? With this wise remedy and redress by our exchanges, along with their other maneuvers (stay tuned for our coming Data Feed White Paper), one can’t help but be confident in playing ball on this level playing field. NOT.

Today’s severe market drop should never have happened.  The US equity market had at been hailed as the best, most liquid market in the world. 
The market action of May 6th has demonstrated that our equity market has major systemic risks built into it.  There was a time today when folks didn’t know the true price and value of a stock. The price discovery process ceased to exist. High frequency firms have always insisted that their mini-scalping activities stabilized markets and provided liquidity, and on May 6th they just shut down. They pulled the plug, as we always said they would, and they even admit it in the papers this morning. We need a new mousetrap. This is not an isolated incident, and it will happen again.

Number 1:


Themis Thoughts November 12th, 2010

A recent paper titled “Relativistic Statistical Arbitrage” ( tackles the subject of how HFT’s can best optimize their co-location. The authors recommend that, to maximize profits, HFT’s should try to locate their computers at the midpoint between two exchanges.  So, if you were trying to arbitrage prices created in London vs New York, then the best place to locate your computers would be somewhere in the middle of the Atlantic Ocean.  We were wondering where the best place to locate a computer would be if you were trying to arbitrage price between Beijing and New York.  Since these two cities are on opposite sides of the earth, what if you simply drilled a hole from one end of the earth to the other and located your computer in the center of the earth. Some people believe that the earth’s core is where Hell is located.  So the best place for HFT to colocate is Hell.  Go to Hell, HFT.


Speaking of HFT, according to the WSJ, this week Nomura Securities, “launched the linchpin of its new U.S. high-frequency trading operations: a super-fast platform designed with its most sophisticated electronic trading clients in mind. Behind the platform’s creation is a host of former Lehman Brothers employees who spent more than a year building a new system from the core of what once powered Lehman’s fastest trading.”  Back in 2008, Nomura purchased some assets from the bankrupt Lehman Brothers.  Put the words “Lehman” and “high frequency trading” in the same sentence and you got the making of a great Matt Taibbi style piece.  Words like blood-sucking, bubble machine come to mind.

After we read this, it did clear up a piece of news that we received earlier in the week that was quite puzzling.  Each month Nasdaq publishes its top 10 liquidity providers

( . Most of the time you will see names like GETCO, Citadel, and Wedbush on this list .  But last month, we noticed a new name on the list.  None other than our ex-employer, Instinet.  There is still a special place in our heart for Instinet.  There is quite the alumni network of Instinet employees and we still keep in touch with many of them.  We were initially happy to see that they were doing so well.  But after thinking about it, we wondered how they could have broken into such a list that included some of the biggest HFT firms on the street.  But then we saw the Nomura/Lehman high frequency trading story and it all made sense.  If you recall, back in November 2006, Nomura also purchased Instinet from a private equity group. 







Where we left off 4:00pm EST:

INDU               11,575.54                    +20.51

SPX                 1,258.51                                  +0.97

CCMP              2,662.88                                  -2.89

Futures now at 7:30am EST:

DJA                             +14

SPA                             +1.20

NDA                            +5.50

Key Data out today:



Since the prior close, some key stories:


–       Stocks climb in European and around the globe to near 2-year highs.

–       Snow response in the New York tri-state is criticized heavily, particularly in the outer boroughs.

–       Munis have worst quarter in 16 years.

–       China has lowered export quotas on “rare earth” out of its concern for the environment. Cough.

–       Nudity sells. Ask Picasso. $106.5 million. To an anonymous phone bidder. I’m guessing a large HFT firm.

–       China is spending a billion dollars on a missile system that can take out aircraft carriers.  Why? All they need to do is repossess them.

–       BLK to launch internal “crossing system” (i.e. dark pool).

–       Groupon is talking IPO

–       NY and Ohio pension funds suing BP.

–       Barrons positive on EXPE.

–       iPad panel shipments to reach 65 million in 2011, exceeding 48 million industry estimate. I guess Apple is optimistic. Cramer sure is.

–       BG warns of higher grain prices for an extended period.

–       Facebook may be forced to come public, as SEC is scrutinizing all the private trading going on in its shares. Getco raises its hand and asks to be the DMM.





Pre-market:  None


After the Close: None



Significant Movers This Morning:

BJ +10% (private equity interest speculated)