Tagged: High Frequency Trading

Follow the Money

If you appeal a parking ticket to the Parking Department, what’s your expectation of objectivity? The Parking Department collects revenues.

Which brings us to word circulating last week from CEO Duncan Niederauer that NYSE Euronext and other exchanges are confronting the growing problem of off-exchange trading. “It impacts the quality and integrity of the U.S. capital market – and ultimately the ability of markets to enable companies like yours to raise capital efficiently,” Niederaur wrote in a letter to issuers (which a variety of alert readers passed along to me).

Shouldn’t we first ask why money has fled displayed markets? Private equity is working great. It’s a non-displayed market. Pensions and endowments have nearly twice as much money in private equity than public equity today. Investors aren’t forced to transact off the exchanges. They choose to.

Now exchanges want regulators to herd them back to displayed markets…for your good? Or for theirs? There’s a biblical proverb that says, “The first to present his case seems right, until another comes forward to question him.”

I think fragmented markets are a problem. But the reason the NYSE and other exchanges want trading between brokers to move back to exchanges isn’t for capital-formation purposes. It’s because the NYSE and other exchanges are data and technology vendors. NYSE Technologies last year generated $473 million of revenue supplying data, circuits and technologies to those trading your shares. (more…)

Lulled by Markets

Palo Alto is a great town.

While there sponsoring IR Magazine’s West Coast Think Tank last week we feasted at Evvia and Fuki Sushi. Denver’s got fine sushi. Our Sushi Den on South Pearl Street flat demoralizes Bryant Park’s Koi. Proprietors Toshi and Yasu Kizaki each day fly in hand-picked selections from the Tokyo fish market. You gotta get up pretty early to beat our fish. Fuki Sushi apparently rises at dawn. We ate to dullness.

Speaking of lulled, exchanges began introducing new SEC-approved Limit-Up/Limit-Down (LULD) single-stock circuit breakers Monday, smartly easing the program into effect. More will be added until the largest 2,000 are covered by late May and the rest of the market through August.

“It sounds simple, but for firms managing thousands of customer orders, you have to program how you’ll manage them, how you’ll deal with quotes and trades across 50 destinations, routing decisions and execution quality,” Chris Concannon, partner at high-frequency trading firm Virtu Financial, told Bloomberg reporter Nina Mehta.

Under LULD, stocks won’t be permitted to trade more than a certain percentage from their rolling five-minute average prices. The SEC mandated these changes after the Flash Crash of May 6, 2010, sent the S&P 500 plunging over a hundred points and the Dow Industrials a thousand points, before both rebounded, all in roughly twenty minutes. (more…)

The IR Jetsons

What surprised me most was how twice as many people knew “high-frequency trading” compared to “dark pools.”

The Nasdaq’s Mike Sokoll, Liquidnet’s Nicole Olson and I kicked off a session on how equity markets work at NIRI’s conference on IR fundamentals in Santa Monica yesterday. As we were unfolding the map of market behavior, we polled the audience:

How many of you have heard of “high-frequency trading?”

It appeared to me that two-thirds of the hands in the room went up, and there were between 80-100 investor-relations and treasury professionals in the ballroom at the Loews Beach Hotel.

And yes. It was lovely there, above Muscle Beach (I walked from the sandy side of the hotel to the front for a cab back to the airport, five minutes in the lovely January sea air in suit and tie).

When we asked how many had heard of dark pools, only a third said so. That may change soon. One big reason more people know about high-frequency trading is that the media have given it ink. Yesterday, FINRA announced plans to scrutinize dark pools over whether gaming occurs, where traders may post orders on stock exchanges that create arbitrage opportunity in members-only markets where no price information is offered (dark pools).

Which leads us to IR 101 in 2013. I was trading notes recently with a friend and fellow IR veteran about the Nasdaq buying Thomson Financial and The ICE buying the NYSE, and we got to talking about what’s changed and what hasn’t in our profession.

Fifteen years ago it was 1998. eBay went public Sept 24 and closed up 163% at $47.38 (raising $63 million on 3.5 million shares offered). IR pros were doing the Big Four (positioning their companies in the capital markets, shaping internal and external financial communications, building capital-markets relationships, monitoring how equity is traded). (more…)

Bourbon Street Market

The equity market is like Bourbon Street.

No, we don’t mean the stock market is home to “Big Daddy’s World Famous Love Acts.” We mean it’s a bit off, a party, somewhat wanton, full of folks in disguise doing things they wouldn’t do anywhere else. Fantastical.

I interviewed Joe Saluzzi at the NIRI Southwest Regional Conference last week in New Orleans. Joe and co-founder Sal Arnuk at Themis Trading are the reason we all know about “high frequency trading.” Their white paper on toxic equity trading went viral in 2008, and the rest is history.

We sat down Charlie-Rose-style at the Hotel Monteleone and talked candidly about Joe’s new book, “Broken Markets: How High Frequency Trading and Predatory Practices on Wall Street Are Destroying Investor Confidence.”

If you haven’t done so, buy it for yourself (I have it on my Kindle) and get a copy for your CFO or CEO. Everybody who at some time utters the word “equity” should read it.

If you’re in the IR chair, executives expect you to deliver a story to investors that advances shareholder value. You want a market that supports those efforts by helping risk-taking capital connect to the opportunity in your shares. Most executives generally conclude that it’s working. Stocks seem to be trading comparably to historical S&P 500 earnings multiples.

So why would Joe and Sal argue that markets are broken? (more…)

Losing Facebook

What’s green and brown, and rolls? The terrain south of Santa Fe where we rode 103 miles on bikes Sunday, averaging 15.6 mph through 4,500 feet of climbing and insistent New Mexico winds. Icing: We saw the eclipse, glimpsed through a combination of my Droid and some passerby’s strip of roll-film. We were pleased.

Less pleased were buyers of Facebook shares. Another market-structure lesson, IR folks.

Remember the Infinite Monkey Theorem (now also a winery here in CO)? The notion was that infinite monkeys randomly clicking keys of infinite typewriters – dating the era from whence this theory arose – could reproduce our great literary works by accident.

Whether ‘twas to be or not, the Infinite Monkey Theorem tripped up trading at the Nasdaq in Facebook. With trades machinating through theoretically infinite combinations of data points, it was impossible for Nasdaq engineers to anticipate every erroneous outcome. Thus, hypothetical monkeys pounding figurative keys bumbled into an unanticipated event.

Part B. Confusion over who owned what when the music died shouts through a bullhorn at us about the way markets work. Most trades are intermediated using shares that, for lack of a better descriptor, are rented. The buying and selling is often (60%+) not real.

You’ve seen an auction, right? “Do I hear $42?” Somebody raises a finger, and the price of the thing up for auction becomes $42. Is that what the buyer pays? No. It’s a bid. (more…)

The Emperor’s ETF Clothes

If somebody tells you he has a plan to improve your financial condition by borrowing your credit card and buying himself a bunch of stuff with it, be suspicious.

With that setup, we have a story to tell you. In a minute.

First, we said last week: “Overall sentiment is surprisingly good in money behind client shares. Stocks may recover quickly.”

Spot on. It shows how data-analytics help us understand market behavior. But remember our qualifier: “The DXY dollar index shows the same fissures it had last summer when the Euro nearly came undone. This currency crisis is coming back in weeks or months.”

We stand by that. The Infinite Elasticity Theorem posited by central banks is about to snap. It goes like this: “In times of crisis, expand the supply of money until the problem disappears under a pile of paper, because we can’t handle the truth, so we don’t want you to either.”

To our story. The Nasdaq has asked the SEC to approve its Market Quality Program, in which sponsors of thinly traded (under 2m shares daily) Exchange Traded Funds would pay market makers to trade the ETFs. The Nasdaq says these payments will stimulate trading in the ETFs, thus narrowing spreads, making markets efficient, enhancing market confidence and integrity, and boosting volumes in issuer components of the ETFs. (more…)

Clouds and Wind Without Rain

We’re in glorious Cincinnati where the land is rushing headlong into spring. Even a photo snapped in haste northward at night from Covington at the John Roebling Bridge seems cast in ethereal light.

Speaking of rushing headlong, if you’re here in the heartland, join us at the noon NIRI Tri-State chapter meeting today. We’ll talk about what’s got markets hasting.

There’s a saying from the bible: “Like clouds and wind without rain is a man who boasts of a gift he does not give.”

It made me think of volume. Enough of you have written asking about what may underlie declines in market volume that it deserves a community answer. We hope ours will do.

In 1980, Wilshire Associates was tracking about 3,500 publicly traded companies in its index that would become the Wilshire 5000, the category-leading total-market index. The Dow Jones Industrial Average closed that year at 963. Average daily trading volume was 45 million shares on the NYSE.

By 1990, the Wilshire 5000 had over 5,000 companies as IPOs outpaced consolidation. Average daily volume across the NYSE, Nasdaq and American Stock Exchange was 302 million shares, and the Dow Jones Index closed at 2,633.

In 2000, total companies had slipped from the 1998 zenith of 7,460. But daily volume had mushroomed to 2.8 billion shares. The Dow concluded Y2K at 10,786.

Volume built to helium-laughter level of about 7 billion shares daily in 2009. But in 2012 so far, markets are averaging 3.6 billion shares daily. The Dow is up. But the number of public companies is down. Way down. Care to guess how many make up the Wilshire 5000 in 2012? (more…)

Trading at the Speed of Light

When you were a kid, did you lie on your back on the lawn and look for shapes in the clouds?

Nanex finds Charlie Brown and unicorns in trading data. Or maybe goblins and Jack the Ripper. IR professionals should know about Nanex. In Boston last month, I asked for a show of hands from IR folks who’d heard the name. No one had.

Nanex is the electronic microscope for markets, zooming in on trades and quotes in thousandths and millionths of a second. They find shapes, patterns. What Nanex calls crop circles.

These are footprints of algorithms. On September 15, 2011, at 12.48.54.600 hours Eastern Time, Nanex discovered that in one second of trading in YHOO, encompassing some 19,000 quotes and 3,000 trade-executions, a number of trades matched at quotes that didn’t exist until 190 milliseconds after the trades occurred. Nanex termed this apparent evidence of time-travel in trades “0.19 fantoseconds.”

Sure, laugh it up. When asked what might limit it, Illinois Institute of Technology HFT expert Ben Van Vliet responded: “The speed of light.” (more…)

Let’s Think of Something to Say

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. (more…)

Why Vanguard Likes High Frequency Trading

Editorial Note: This Market Structure Map first ran June 29, 2010. It’s reprinting because Tim Quast is following the lead of congresspersons by taking a “fact-finding junket” aboard a sailing vessel off the coast of Belize. It’s in the public interest.

Oscar Wilde said that illusion is the first of all pleasures. Of course he also wrote that anyone who lives within his means suffers from a lack of imagination.

Buttressed on either side with those brackets about illusion and means, let’s look today at what’s afflicting our market and why some institutions like transient trading when others don’t.

Vanguard, an institutional investor focused on passively managed funds, supports high-frequency trading. George Sauter, CIO for the Vanguard Group, wrote in the firm’s comment letter to the SEC on market structure that high-frequency volumes reduce trading costs through competition and tighter spreads. He quantifies the benefit to investors at roughly 10% over a decade. A passive fund providing 9% returns per annum would deliver only 8% returns without HFT. (more…)