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Joe Saluzzi Exposes ‘Theft on Wall Street’

Posted by Larry Doyle on May 14, 2010 9:17 AM |

Themis Trading’s Joe Saluzzi was designated a Sense on Cents Hall of Fame medalist this past January. Mr. Saluzzi has once again distinguished himself by providing a significant degree of transparency into the technical structures of our seriously flawed equity exchanges.

A recently released white paper, Exchanges and Data Feeds: Data Theft on Wall Street,written by Joe and his colleague Sal Arnuk at Themis Trading is getting a LOT of attention on Wall Street and in Washington. I welcome highlighting and bringing this 3-page paper to Main Street. If you have any interest in the markets and our economy, this paper is a MUST read. Allow me to whet your appetite:

How many average Americans have been victims of identity theft? A Sun Microsystems survey a few years back actually placed that number at 33%. In that same survey a majority of those victims said that “they are likely to stop shopping and banking with institutions that put their personal data at risk.”

We can tell you flat out that if an institution played loosey-goosey with our personal data, they would not be earning our business and we would be lobbying hard to make our outrage known with government regulators and lawmakers, so that they could put an end to the malfeasance.

Now, to take this further, what if you found out that an institution, which should be protecting your information and identity, was providing information regarding your transactions in data reports to their other customers as part of their every day business strategy? Not exactly identity theft, perhaps, but clearly theft of highly proprietary information.

In our previous white paper (“Latency Arbitrage: The Real Power Behind Predatory High Frequency Trading”), we illustrated how the exchanges provide raw data feeds that help high frequency trader’s (HFT’s) figure out market directions. Now, we have discovered that at least two of the exchanges, in addition to providing that information, also provide data that enable HFT’s to track specific trade orders, putting trading strategies at further risk.

Put simply, every day, certain market centers are marketing and providing data feeds where they are revealing more information than just the original order, depth of book and trade executions. This is being done legally as a by-product of a market structure that has gone horribly wrong. However, unlike personal identity theft, where nearly all Americans and stakeholders are aware of the practice, the vast majority of institutional and retail traders are not aware that this is being done legally as they enter their order flow.

Thus, instead of traditionally collecting listing and transaction (commission) fees, some market centers are generating revenue by selling co-location, and providing low-latency enhanced market data feeds which contain sensitive trader information. Information in these feeds allows high frequency trading firms to track when an investor changes price on his order, how much stock the investor is buying or selling in accumulation, as well as the ascertaining of hidden order flow. This information assists HFT’s in predicting short term price movements with near certainty.

Exchanges will argue that this information is public and available to all investors. Technically, this may be true, however, realistically, not many retail or institutional investors have the capital to invest in the type of computer systems needed to access this information and most are not even aware that it exists at all. They also are not aware that the information is being provided to HFT’s revealing critical information about trading intentions. In this report we have identified two situations where this is occurring: the BATS Exchange direct feed known as BATS PITCH and the NASDAQ direct feed known as TotalView-ITCH.

So, I ask the following:
1. Do you, as an investor, believe the exchanges are working to make sure the field is balanced and fair for ALL parties?

2. Do you question how those charged with regulating markets could knowingly allow this data theft to develop? Even worse, were the regulators totally clueless?

3. Do you detect a strong sense of Wall Street-Washington incest here?

Do you want to trade at exchanges that would promote these practice of data theft?

5. Do you really believe the bulls&%t argument of providing liquidity put forth by high frequency trading operations? Where was the liquidity on May 6th?

Hats off to Joe Saluzzi and Sal Arnuk of Themis Trading for providing real transparency into the structure of our equity exchanges.  Would anybody from BATS, the Nasdaq, or a high frequency trading operation like to provide a response?


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