The “prophets” from Themis Trading, Joe Saluzzi and Sal Arnuk, have released a book highlighting what they can prove is our broken market structure. In the past I have enjoyed my exposure to HFT as one ripe with the premise that High Frequency Traders (HFT) are colluding to misinform the general public. As the debate goes on and as I myself learn more it has become evident to me we have much deeper dynamics at play. After watching numerous clips and interviews over the years of Themis debating only a handful of HFT’s on info-tainment station CNBC and the real financial news network of Bloomberg, it has become evident that the HFT community is being represented by a few firms that very well may not be acting in a henious and manipulative way that Nanex, Themis, Zerohedge, and myself have exposed in near real-time.
I heavily doubt that Minoj Narang or Irene Aldridge are utilizing information and computing ability in the same way that Steve “Don’t Call Me Stevie” Cohen from SAC or Michael Milken may be utilizing them. However, Minoj and Irene are the typical advocates of High Frequency Trading that challenge Themis and Nanex in the public forum. Minoj does not publish research or proof of how HFT have improved the mechanics or efficiency of our markets designed for capital formation.
Nanex has prided themselves on using the very feeds disseminated by the “lit” US exchanges and has released ample information highlighting the various shortfalls in the feeds relative to latency introduced by co-location and exchange produced “enhanced data feeds”. HFT pay HUGE sums of money to be the first to get information quickly, process it fastest, and execute it before everyone else. On the surface this is how all traders work on Wall Street. The difference is that the bad algo’s have access to non-public, material information regarding trades and the behavior of those who place them. Consider this snippet from page 102 in Broken Markets:
“Private data feeds also supply information on revisions and cancellations. They can tell you what time an order was placed and whether it was revised. They can tell you whether an order had a partial fill and then cancelled. They can tell you whether an order revised its price and how often. Most of this tracking is done by order identification numbers that monitor the life of an order. Think of it as if [sic] a video recorder attached to your favorite ATM. Every keystroke you make is captured. Then your bank sells or gives away the video to firms that can deconstruct what you did in your bank account to help predict the next time you will withdraw or deposit money and for how much“.
Information regarding individual behavior around order placement and activity is expensive and difficult to decipher. Only high speed computers and firms with a large capital arsenal are able to squeeze ROI from these “enhanced data feeds”. Again, this is material, non-public information and trading on it constitutes insider trading. By participating in the market in this fashion, price discovery is not aided in the historical sense. Price discovery now rests on nano-second interpretations of the order book and the participants. It has nothing to do with a firms management or its earnings ability. This dynamic is what hurts the long-term investor. Opening and closing prices on a daily basis are set by HFT’s and not long-term investors.
Taking this a step further, long-term investors can not rest comfortably knowing that the asset(s) they hold represent(s) a price paid by 80 or 90% of the transactions made. All of these prices represent trades made on “lit” exchanges, where only 30% of the volume is estimated to be. This means that 70% of the volume in a given US listed asset is priced and traded in dark pools, where trades happen through various types of auctions (EOD auctions, 15 minute interval auctions, trades executed at prices with in a given band of volume traded, etc). The very essence of capitalism’s markets has been perverted by the for-profit exchanges and lucrative windfall benefits to HFT’s provided by a perception dislocation that market dynamics are similar if not the same as they always have been, which they are not.
Below is an exchange from July 24, 2009 where Joe Saluzzi and Irene Aldridge debate HFT on CNBC. Can you spot which participant is confident in their facts and which one is attempting to not only justify their existence but is also attempting to mislead “retail” viewers? Note at 2:56 where Irene claims HFT and front-running are completely separate. Consider the colocation, the machine readable news, the understanding of quote stuffing and time stamping relative to order queue positions, etc. Enjoy!
Lastly, given her premise, since drug use is illegal, it must not be a problem or even be happening – same with murder, insider trading, speeding, and lying on your taxes.