Tagged: High Frequency Trading

Fires, Crashes and Kill Switches

Suppose the engine of your vehicle was on fire.

The logical response would be to shut it off. But what if you were traveling at highway speed and killing the fuel supply meant you had no power breaks or steering? What if your vehicle was a jet fighter?

There are ramifications.

Last Thursday and Friday stocks plunged. Monday and Tuesday this week, shares soared. I doubt most of us think that people were selling in a stampede last week and then woke up Monday and went, “Shazzam! What have we done? We should be buying!”

Context matters.

This week offers an event in similar rarified air as blood moons in the northern hemisphere. Good Friday closes markets to end the week. Between are the usual three sets of expirations: volatility derivatives, index futures, and the remaining host of options and futures set for monthly expiry (with earnings now too – another reminder for you learned IROs to avoid that mash-up if at all possible). (more…)

The Recovery

It’s all in the recovery.

That’s the philosophy put forth by a friend of mine for dealing with unpleasant facts.

I think the chief reason for the recent swoon in stocks was not anemia in the job market but a sort of investor outrage. You can’t troll a trading periodical or blog or forum without wading through rants on why Michael Lewis, author of the bombshell book Flash Boys on high-speed trading, is either guilty of torpid whimsy (a clever phrase I admit to swiping from a Wall Street Journal opinion by the Hudson Institute’s Christopher DeMuth) or the market’s messiah.

What happens next? Shares of online brokerages including TD Ameritrade, E*Trade and Schwab have suffered on apparent fear that the widespread practice at these firms of selling their orders to fast intermediaries may come under regulatory scrutiny.

What about Vanguard, Blackrock and other massive passive investors? Asset managers favor a structure built around high-speed intermediation because it transforms relentless ebbs and flows of money in retirement accounts from an investing liability to a liquidity asset. Asset management is about generating yield. Liquidity is fungible today, and it’s not just Schwab selling orders to UBS, Scottrade marketing flow to KCG and Citi or E*Trade routing 70% of its brokerage to Susquehanna.

It would require more than a literary suspension of disbelief to suppose that while retail brokers are trading orders for dollars, big asset managers are folding proverbial hands in ecclesiastical innocence. The 40% of equity volume today that’s short, or borrowed, owes much to the alacrity of Vanguard and Blackrock. The US equity market is as dependent on borrowing and intermediation as the global financial system is on the Fed’s $4 trillion balance sheet.

Hoary heads of market structure may recall that we wrote years ago about a firm that exploded onto our data radar in 2007 called “Octeg.” It was trading ten times more than the biggest banks. Tracing addresses in filings, we found Octeg based in the same office as the Global Electronic Trading Co., or GETCO. Octeg. Get it? (more…)

Flash Boys

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. (more…)


The humans are the minority.

A three-month study of internet traffic by web-security firm Incapsula found that 61.5% of page views were generated by machines. Humans managed only 38.5% of web traffic.

It seems absurd but our own experience bears it out. We receive hundreds of comments on the blog version of these overwrought homilies but the machines are more opinionated than the humans. In recent months, automated “bots” have attempted to post over 1,500 comments. We’ve approved just the handful from actual humans.

Most of you readers with comments use a dark pool. By which I mean you reply to the email version when you opine on our assertions. In this fashion, you avoid displaying your comments where others can game them. Keep those nondisplayed orders coming!

The machines are good. You could at times almost buy that a person penned the prose. Speaking of skilled machines, Virtu Financial Inc., a dominant high-speed market-maker, intends to go public. Virtu filed confidentially, meaning it posted its regulatory filing quietly in December using a provision of the 2012 JOBS Act to omit the meat investors use to weigh business merits and prospects. (more…)


It’s got to stop. Warren Buffett said so.

Until the Wall Street Journal’s Scott Patterson broke the story recently, most investor-relations professionals were unaware that Berkshire Hathaway unit Business Wire took fees from high-speed firms in trade for early delivery of news. It provoked outrage in circles including the office of the New York state attorney general.

I was quoted by Bloomberg’s Sam Mamudi in a related piece last Friday. What I thought was most important didn’t make the story. Sure, if something looks bad you should stop doing it, and I said so. In today’s parlance, the optics were bad.

“Quast,” you say. “They were selling our news to high-speed traders before it hit distribution channels.”

Half of every plane load today is in Group One because people get status for giving business to just one airline. It’s an early look.

“That’s flying. You don’t get in trouble for boarding early. You get locked in the poke for trading on things nobody else has got.”

That’s not true. Valuable information is the bedrock of capital-formation. Otherwise, the market would be one big index fund. And what Business Wire did wasn’t illegal.

“Are you defending it?” you say.

No. It’s bad form in an era where form, like optics, is more important than substance. But it’s like a police officer pulling somebody over for a bad taillight – which is not illegal but a safety hazard – and ignoring that the car is stolen. (more…)

Why Auctions Work

Did you know that auctioneers make bad grocery-store clerks?

So argues a GEICO TV commercial – unwittingly teaching a last lesson on high-frequency trading. I’m sure you’re ready to move on!

Ever see the movie The Red Violin? It traces a storied musical instrument through hundreds of years of handling by varied humans in different cultural steppes while interspersing scenes from the hushed confines of a high-end auction room a la Sotheby’s. There, the approved bidders are assembled hoping desperately to own it. We cut away, vignettes building to a climactic conclusion in the auction room. The bidding begins.

In auctions if you bid, you only buy if you’re the last bidder. In the stock market you get to buy when you’re the first.

In the GEICO ad, one customer outbids the other for groceries and nods with satisfaction. In the Red Violin, emotions embedded in ancestry and history push bids for the instrument ever higher. But only one party walks away with the case. It’s not a recent movie but if you’ve not seen it I won’t spoil the ending.

From movies and stocks we sweep west, panning across the high desert along the Oregon-Idaho border where the Snake River bottomlands are fertile ground for fruit orchards and sugar beets and potatoes grown by Ore-Ida for McDonald’s restaurants around the world. (more…)

MMI, not MMA

A good exit strategy. It’s always wise to have one.

With the polar vortex bearing down on the national midsection last week, our exit strategy, fortuitously, was sponsoring NIRI’s fundamentals of IR program in Santa Monica. Karen snapped this dusk photo in shirtsleeves from our 8th-floor balcony at the Loews Santa Monica Beach Hotel. Yes, we were smiling.

The letters “MMA,” as many of you know and equally many of you could hardly care less about, stands for “mixed-martial arts” and describes a contemporary take on Roman gladiators, except the people involved in it are probably less refined than their progenitors 1,500 years ago.

To us, high-frequency-trading is sort of the MMA of markets. It’s a brief, violent, high-speed contact sport. Having so uttered, I may expect now to hear from these traders’ new lobbying group called MMI – the Modern Markets Initiative – which seeks to cloak HFT in finer and more agreeable raiment.

Here’s what’s happening. Several HFT firms including Hudson River Trading and Quantlab Financial (I mentioned both in a recent MSM) have banded together, hired some former political strategists, and launched an organization intended to change public perceptions of HFT and flex HFT muscle in regulatory and political circles.

Claims the website: “High frequency trading firms and the market professionals behind them are harnessing technology to enhance price transparency and increase access to markets for investors that was previously only available to a select few.”

It’s an impressive effort to seize the agenda and refashion it. A flashy video at the site likens HFT to robotic mechanization in manufacturing – turning human tasks into ones driven by machines.

MMI recasts HFT not as arbitrage but as “automated trading technology” run by professional traders whose core purpose and function is to help everybody out by lowering trading costs, creating clearer prices and opening markets to more folks.

Well, shazam, let’s everybody hug! Right? Not exactly. We’re not criticizing the human ingenuity behind HFT. Traders didn’t create the rules requiring every node on the data network comprising the national market system to be connected in order to shuffle shares around the best price (imagine if the only differentiator in all products were price…human creativity would suddenly stampede off some permanent cliff into a gooey protozoan puddle). (more…)

The Dark Exchange

I’m reminded of a joke (groans).

A man is sent to prison. As he settles into his captive routine he’s struck by a midafternoon affair among his jailed fellows. One would shout out, “Number 4!” The others would laugh.

His cellmate, seeing the newbie’s consternation, explained: “We’ve been here so long we’ve numbered the jokes instead of saying the whole thing. Here, you try. Number 7 is a really funny one.”

“What, just shout it?”

“Yeah, exactly.”

“Number 7!”


The cellmate shook his head. He said, “Some people just can’t tell a joke.”

Speaking of numbered jokes, the NYSE filed with regulators to offer new order types – regulated ways to trade stocks – designed to attract large institutional orders now flowing to “dark pools,” or marketplaces operated by brokers where prices aren’t displayed. The exchange has long battled rules in markets that promote trading in dark pools, arguing that these shadowy elements of the national market system inhibit price-discovery.

Let’s translate to English. The NYSE is a big stock supermarket with aisles carrying the products your equity shopper needs, where prices and amounts for sale are clearly displayed. Across the parking lot there’s an unmarked warehouse, pitch black inside, with doors at both ends.

You can duck into the supermarket and check prices and supplies for particular products, and then hurry over to the warehouse and run through it holding out your hands. You might emerge with the products you wanted at prices matching those in the supermarket. (more…)

Kansas and Your Stock

We were in Kansas again.

We set a personal record, visiting the state twice last week. Even Wichita is nice this time of year, as this photo shows Saturday from our downtown Hyatt Regency room on the Arkansas River – don’t ask me why that river’s in Kansas.

IR pros, you’re not in Kansas anymore. The phrase popularized by Wizard of Oz author Frank Baum in 1900 remains metaphorically relevant. It means: “Things are not what they used to be,” or even better, “Rather than complaining, recognize reality and deal with it.”

It’s apropos to your stock. A vital but overlooked fact about stock prices is what actually sets them. It’s rarely investors alone. Ever heard a stock recap on the news that said stocks were up because intermediaries bid up short-term prices to trick investors? It happens all the time.

Growing up on a cattle ranch in eastern Oregon, we raised 300 hundred tons of hay. That’s a lot. But feeding 50 pounds of it per animal every day for five months to a herd of a thousand head, it’s a fraction of what’s needed.

So you buy. You may use a hay broker or you might go direct to growers, and it could take more than one. You want the right quality. Not grass, but alfalfa with its higher protein content, better for the hard winters in the Snake River Breaks.

Then you have to move it from Nevada or Georgia where you bought it. You might get a package deal, with the hay shipped and stacked for an all-in per-ton price. You might truck it separately if the deal’s better. But you’ll need truckers.

Costs are complicated. The weather during growing season, the supply of cattle in the market carrying over the winter, competition in the hay-growing industry, the price of fuel, government deals with foreign countries impacting the expected price for beef in the spring – all these determine what you pay for hay. My dad used to crunch numbers in his model for carrying costs to the target sale date. Expenses for feeding cattle could fluctuate wildly, sometimes doubling from one season to the next, requiring careful management. (more…)

Market Electrolysis

Have you seen those Pure Michigan ads? Compelling. Summer in Colorado could be a brand too, as these views of Hanging Lake near Glenwood Springs and Vail at morning last week attest. We seize every chance to savor the high country.

Speaking of chance, high-frequency trading (HFT) is back in the news. When you read about HFT in the financial press, it refers to stock orders from proprietary traders (firms using their own money rather than executing orders for customers) using powerful machines to trade in fractions of seconds.

But that description propagates an incorrect perception of what’s happening. It’s a vision of anonymous and rapacious rapscallions hiding behind banks of computers and cackling evilly while out-sprinting hapless investors from trade to trade, looting financial markets.

The truth is simpler and less execrable. Investor relations pros, you need to understand not just what HFT is, but why it exists and what’s both good and bad about it.

I was just reading a blog post by John Tamny extolling the virtues of HFT. Mr. Tamny is a regular commentator on TV financial programs, a free-market kind of guy. I routinely encounter folks opposed to “banning” HFT because it’s free-market behavior. (more…)