Entries Tagged 'Bats' ↓
April 2nd, 2014 — The Market Structure Map
I don’t skateboard. But the title of Michael Lewis’s new book on high-speed trading, Flash Boys, made me think Lewis could’ve called it DC-town & Flash Boys.
Legendary skateboarder Stacy Peralta directed the 2001 documentary Dogtown & Z-boys chronicling the meteoric rise of a craze involving slapping wheels on little boards and engaging in aerobatic feats using public infrastructure such as steps and handrails. From Dogtown, slang for south Santa Monica near Venice Beach, Peralta’s Sean-Penn-narrated film tracked the groundbreaking (and wrist-breaking) 1978 exploits of the Zephyr skateboarding team, thus the “Z-boys.”
Skateboarding has got nothing to do with trading, save that both are frantic activities with dubious social benefit. We’ve been declaiming on these pages for more than a half-decade how fast intermediaries are stock-market cholesterol. So, more attention is great if the examiner’s light shines in the right place.
If you missed it, literary gadfly Lewis, whose works as the Oscar Wilde of nonfictional exposé include Moneyball (loved the movie), Blindside, Liar’s Poker and the Big Short, last week told 60 Minutes the US stock market is rigged.
The high-frequency trading crowd was caught flat-footed. But yesterday Brad Katsuyama from IEX, a dark pool for long investors that rose out of RBC, dusted it up on CNBC with Bill O’Brien from BATS/Direct Edge, an exchange catering to fast orders.
Which brings us to why Lewis might’ve called his book DC-town & Flash Boys. The exploitation of speedy small orders goes back to 1988. In the wake of the 1987 crash, volumes dropped because people feared markets. The NASD (FINRA today) created the Small Order Execution System (SOES – pronounced “soze”) both to give small investors a chance to trade 100 shares electronically, and to stimulate volume. Banditry blossomed. Professionals with computers began trading in wee increments. Volume returned. The little guy? Hm.
Regulators have always wanted to give the little guy opportunity to execute orders like the big guys. It’s admirable. It’s also impossible. Purchasing power is king. Attempt to make $1 and $1,000 equal in how trades execute, and what will happen is the big guys will shift to doing things $1 at a time. The little guy will still lose out but now your market is mayhem confusing busy with productive.
These benighted gaffes seem eerily to originate in Washington DC. Michael Lewis says big banks, high-speed traders and exchanges have rigged markets. We agree these three set prices for everybody. But they’re following the rules.
It’s like basketball. Rules now say that every play-stoppage in the last two minutes of a game must be reviewed. So in the final 2.3 seconds of the Wisconsin-Arizona game, an epic and nearly perfect sports achievement up until that moment, play was halted for FIVE MINUTES while referees scrutinized film for who touched the ball last. Basketball depends on tempo. Alter rules, and you change the game.
Regulation National Market System similarly confuses the purpose of the enterprise. Reg NMS linked markets around a national best price, forcing competitors to share orders and to undercut each other, while perversely rewarding data revenues to exchanges setting the price most often.
What did we get? Pandemonium in pursuit of price-setting that coalesced into a game controlled by big banks, HFT firms and exchanges. But we should single out the refs. The SEC. Penalizing people for adroit rule-following is – well, as dubious as HFT.
Look, I like the folks there. They’re eminently approachable and they mean well. Give the little guy a shot. But we can all see that the entire purpose of the enterprise has been altered for an objective that is unachievable.
Maybe it’s time we pulled the plug on Reg NMS. HFT would then be a sideshow. And I bet the SEC would throw in monthly ownership and daily trading data for public companies. That would be face-saving. So now is the time to ask!
And, thank you, Michael Lewis!
PS – Come join us at the Philly NIRI chapter April 10 as we discuss this in part, and whether the case ahead for markets is bullish or bearish. Should be interesting!
October 31st, 2012 — The Market Structure Map
What a Halloween week. To our many friends, clients and colleagues on the Atlantic seaboard assailed by Hurricane Sandy, we in Denver are rushing sunshine your direction.
Exchanges are hoping for sunshine too as trading resumes. It hinges on opening auctions. That gives us the creepy-crawlies, as though black cats were crisscrossing ahead as we ducked from ladder to ladder to avoid the falling sky.
Why? BATS Exchange saw its IPO torpedoed when the opening auction went awry. Flaws in the Facebook opening auction at the Nasdaq delayed quotes, and the fiasco lingers in recriminations and lawsuits. Knight Capital Group had bad software derail an algorithm hitting opening auctions.
We should note “closing auctions” too, since trading days begin and end with them. Some, like the Nasdaq, call them the opening and closing “cross” – not as though it’s catechism but because of what happens.
As Sandy stomped through Long Island Sound, the big equity exchanges including NYSE, Nasdaq, Direct Edge and BATS, were plotting how to get a good auction going today to restart markets dormant since Friday.
Now, stay with me. We have one aim: To explain why the Halloween auction is vital – and risky – and why auctions are both linchpins to price-discovery and the market’s Achilles Heel. Continue reading →
August 15th, 2012 — The Market Structure Map
If our stock reverts to the mean, I don’t see that high-frequency trading matters.
I’m paraphrasing what many CEOs and CFOs believe. The market is complicated. There’s volatility. Trading is global. ETFs and derivatives probably affect volume. But I’m trading at a reasonable multiple of forward earnings, so who cares?
I hear that question sometimes. More often, reporters tell me they hear it from CEOs and CFOs. What difference does it make that 60% of my volume is the same shares trading over and over? So we had 7,800 public companies in the Wilshire 5000 in 1997 and now there are 3,600 in it. My stock trades at 16 times earnings. That’s about right.
So long as my house goes up in value, what do I care that people are getting these really ridiculous variable-rate, no-money-down mortgages for 125% of the home’s value, which means they’re financing the furniture over 30 years? What difference does it make to me? My house is still up 15% in value.
According to the ETF Industry Association, at July 2012 there were 1,486 exchange-traded products (ETPs), up from zero about 15 years ago, give or take, and fast approaching one ETP for every two stocks. The industry had net July inflows of $17.1 billion, mostly to equity ETFs. Continue reading →
April 4th, 2012 — The Market Structure Map
It was 85 degrees Sunday in Denver when Karen and I rode up local landmark Lookout Mountain on bikes to pay respects at Buffalo Bill’s grave. We woke to snow Tuesday.
Speaking of hot and cold, we told clients to expect a good start Monday for the new quarter, followed by the strong likelihood of a big move Tuesday or Wednesday as imbalances from the quarter exited broker-dealers. The Dow was down more than 100 points intraday Tuesday.
Why are these outcomes predictable?
In answer, ever heard of Mexican film maker Alejandro Gonzalez Inarritu and writer Guillermo Arriaga? The duo sadly parted ways after making Babel (Brad Pitt, Cate Blanchett), the third film following Amores Perros (Benicio del Toro) and 21 Grams (Naomi Watts, Sean Penn) with disparate threads woven into haunting themes on life and meaning.
Markets have recently given us disparate threads that can be loomed into predictive thematic raiment. Rumblings continue about the dramatic BATS Exchange IPO debacle March 23. The market-structure bugs at Zero Hedge advanced a theory that a deliberate algorithmic tactic torpedoed the IPO. Continue reading →
January 4th, 2012 — The Market Structure Map
Happy New Year! If the holidays this year seemed sweeter, the air more welcome to the well-caroled note, it’s probably because I’ve been quiet for two straight weeks.
And with good reason. The lovely KQ and I winged southward with fellow wayfarers for time over the keel on the cayes and reefs of Belize. At Queens Cayes east off Placencia past the wildlife preserve at Laughing Bird Caye, we found what one friend called “your own Corona commercial.” As the sun faded toward dusk there, we caught this grand view of our boats on Dec 11. Our companions below the surface included this delightful fellow, a spotted eagle ray. The Eagle Ray Club is a good name for a rock band. Continue reading →