Willy Sutton Selling Bank Alarm Systems?

One year ago today, on my 20th wedding anniversary, I hopped a train to Washington DC to participate on an SEC Roundtable Panel on high frequency trading. I was a little intimidated with the whole invitation, although not nervous, as I knew I was just going to go tell the truth. I remember sitting on the Amtrak on the way down, talking with Joe Biden (kidding), and reading the Themis Thoughts on my Blackberry that Joe had sent out. It made me tear up. My friend and partner had written this:

We thought today would also be a good day to explain why we named our firm, Themis Trading.  When we started the firm 8 years ago, lots of firms were using the mythological theme.  We started searching around and stumbled on Themis.  Themis was the Goddess of Justice (the picture above depicts Themis). Even though she is most often associated with the legal profession, we thought she represented how we wanted our firm to be viewed. The goal of our firm was to align ourselves with the buy side and represent their interests. We always believed that in the end fairness, trust and justice would win against greed and the short-term mentality that many Wall Street brokers had built their business model around.  We expect that today Sal will prove that point at the roundtable

Well, on that Rountable I sat with Kevin Cronin (Invesco), David Cushing (Wellington), Michael Goldstein (Babson), Rich Gorelick (RGM Advisors), Mark Grier (Prudential), Steve Schuler (Getco), and Jeff Wecker (Lime Brokerage). It was a balanced panel. Kevin and Mark gave riveting arguments why the markets will fail miserably if they are all tooled to short term traders and not long term investors, and Dave Cushing and Gus Sauter made strong arguments defending HFT as beneficial, as HFT tightened spreads, and one was an idiot if he did not colocate. Rich Gorelick, an HFT practitioner, insisted that HFT benefited everyone, lowered costs for all, and that there was nothing wrong with the predatory types of trading that we can only guess his firm participated in. Getco’s CEO Schuler insisted that his firm was benefiting the market, and that HFT was an evolution of other trading, and that the liquidity-providing market making that his firm primarily did was good for all. More on this in a bit!

What a difference a year makes!

A year ago Joe and I had dinner with the CEO and assistant at a large Crossing Dark Pool, who told us that we were too black and white, and that if we had our way we would still be conducting trades by phone. Their tune today  in public is very different from the one they both had in that meeting.

Back then Joe was set up on an STA (our own industry advocacy group, which has been hijacked by those with HFT interests), and lambasted by Chris Concannon, former NASDAQ executive and current VIRTU executive for “airing the industry’s dirty laundry in public.” Not one participant on that call defended Joe or the points we were making. Incidentally, Chris Concannon, while at NASDAQ, had a not-insignificant hand in selling NASDAQ’s Instinet to Silver Lake for $200m, who then turned around and flipped it for FIVE TIMES THAT within the year. Silver Lake owns a stake in Virtu today. Today NASDAQ and its special interests are well understood by most on The Street.

A year ago, the big banks/brokers had very large HFT operations (they still do). They never discussed their prop operations, and they all sang from the same “HFT tightens spreads” playbook. Now they all tout “anti-gaming” logic for their algos to protect you from the HFT that they all swore was not damaging.

A year ago, we were among the very few (very, very few) who took the anti-HFT stance in the media. If only we had a nickel for every editorial in industry rags back then that sang the virtues of HFT by staked players! You do remember this one, from Cameron Smith, of Quantlab Financial, in Traders Magazine, in which he Likens HFT to Saving Drowning Boy While Mom Complains About Lost Cap? We were so galled that we responded the very next day with this editorial: Don’t Pee On My Shoes And Tell Me It’s Raining.

A year ago dark pools were defended vigorously, even the internalization pools (this was pre Joint CFTC SEC Flash Crash Report which points the fingers at those very same internalizers). Today we have brokers like CSFB readying Institution Friendly Dark Pools (LightPool).

With all the new anti-gaming logic, new LightPools, and more balanced media hits, we are pleasantly surprised how the pendulum has swung back towards the middle. We are not naïve to think it is due to profit-motivated folks waking up and Getting Religion. We think it has more to do with HFT ravaging through the field, which is now 90% barren, with little left to consume.

Which brings us to our last about-face. Getco, arguably the largest high frequency trading firm/market maker in the world, wants to sell you all algorithms that protect you against… umm…high frequency trading.

Just think about that last statement for a minute. Make it two.

When Getco became a DMM on the NYSE a short while back, Gus Sauter from Vanguard was quoted as follows: “The fact that they are using technology doesn’t scare me”, and “I don’t see this as a negative development”, and “it all comes down to trusting the NYSE”. May I respectfully suggest to Getco who their first prospect should be?

 

Where we left off 4:00pm EST:

INDU              12,290.14                                -279.65

SPX                 1,314.55                                  -30.65

CCMP             2,769.19                                  -66.11

Futures now at 7:30 am EST:

DJA                             +32 

SPA                             +4.10

NDA                           +10.00

Key Data out today:

 

08:30:                          Non-Farm Productivity

08:30:                          Initial Jobless Claims

08:30:                          Continuing Claims

10:00:                          Factory Orders

Since the prior close, some key stories:

 

–       Byron Wien is buying; Birinyi sees chance of 10% correction.

–       Orbitz up 40% as Court orders AA to put fares back on its site.

–       Education stocks all up strong.

–       Stress tests for European Financials will be delayed until July. Yawn.

–       Microsoft giving peek at Windows for Tablets. Yawn.

–       NJ Gov. Christie takes state helicopter to son’s baseball game; insists it costs nobody anything, as the pilots were training. Really?

–       SEC unlikely to act on FLASH in 2011. Amazing.

–       Getco to sell the buy-side anti-Getco algos (see Thoughts commentary above)

–       Mutual Fund flows: Significant equity outflows for week ending May 25th, with significant inflows into fixed income and money markets.

–       JP Morgan cuts US GDP numbers for 2nd time in 2 weeks late yesterday.

–       OPEC increasing supply.

–       Boehner wants debt ceiling resolved within month.

–       Romney to throw hat in the ring today.

–       Moody’s downgraded Greece. Yawn.

 

Earnings:

 

Pre-market:  ENS, TFM, JOSB, JOYG, UNFI, UTIW

After the Close: ABM, DMND, SAI, and PAY

 

Significant Movers This Morning:

OWW +40%, COCO +19%, ESI +14%, EDMC +9%, STRA + 9%, DV +7%, BPI +7%, BRCD +4%, JOYG +4%, ASCA -3%, XIDE -10%, VRA -11%, OXGN -6%