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Posts Tagged ‘how does high frequency program trading work’

Sense on Cents Interviews Joe Saluzzi Regarding High Frequency Program Trading

Posted by Larry Doyle on July 29th, 2009 7:07 AM |

High frequency program trading is the single hottest topic on Wall Street today. No individual has generated greater focus on this topic than Joe Saluzzi of Themis Trading.

I look forward to interviewing Mr. Saluzzi this Sunday evening, August 2nd from 8-9pm on NoQuarter Radio’s Sense on Cents with Larry Doyle.

This show will comprehensively cover the gamut of issues and topics involved in this highly controversial trading activity. Does high frequency program trading engage in front-running? Are retail and institutional investors disadvantaged? Are the exchanges and regulators looking the other way? What were the developments in the marketplace which brought us to this point?

NQR’s Sense on Cents with Larry Doyle will address these questions and more with the man ‘in the arena’ and at the center of the debate, Joe Saluzzi.

The show is available as a podcast on iTunes, and also archived in an audio player right here at Sense on Cents so it should serve as a tremendous informational resource as we continue to navigate the economic landscape.

Please share with friends and colleagues.

LD

Editor’s Note, 8.03.09: For a full review of this broadcast, please visit Review of Sense on Cents Interview with Joe Saluzzi on High Frequency Trading.

Related Sense on Cents Commentary:

High Frequency Trading Debate: Mano a Mano (July 24, 2009)

Is Uncle Sam Manipulating the Equity Markets? (July 1, 2009)

Wall Street Has a Problem as High Frequency Trading Moves to Main Street

Posted by Larry Doyle on July 24th, 2009 6:54 AM |

I am not here to rain on the parade, but I do think developments overnight have the potential to dramatically change the nature of our markets if not our economy. I am referring to issues surrounding high frequency program trading.

Until now, the debate over high frequency trading has largely been relegated to Wall Street periodicals, financial news outlets, and blogs, including Sense on Cents.

Well, this morning America awakens to see this high frequency debate course across the front page of The New York Times, Traders Profit With Computers Set at High Speed:

It is the hot new thing on Wall Street, a way for a handful of traders to master the stock market, peek at investors’ orders and, critics say, even subtly manipulate share prices.

It is called high-frequency trading — and it is suddenly one of the most talked-about and mysterious forces in the markets.

Powerful computers, some housed right next to the machines that drive marketplaces like the New York Stock Exchange, enable high-frequency traders to transmit millions of orders at lightning speed and, their detractors contend, reap billions at everyone else’s expense.

These systems are so fast they can outsmart or outrun other investors, humans and computers alike. And after growing in the shadows for years, they are generating lots of talk.

Nearly everyone on Wall Street is wondering how hedge funds and large banks like Goldman Sachs are making so much money so soon after the financial system nearly collapsed. High-frequency trading is one answer.

This article is likely sweeping the globe at this very minute and, in my opinion, is particularly devastating in its tone and delivery . . . and justifiably so.

I can only imagine the commentary this evening at the local Rotary Club, Knights of Columbus, Lions Club, town carnivals, and church fairs. Probably something along these lines:

“Have you heard how Wall Street is screwing us?”

“I knew that game was never on the up and up.”

“What a bunch of thieves.”

Without entering into a debate over the merits or lack thereof of this high frequency program trading, I think Wall Street has a huge problem on its hands. Why? A question of fundamental fairness. With the publication and dissemination of this article, try to explain to the average Joe looking to buy 50 shares of IBM how he is being treated equitably.

As the New York Times reports:

“You want to encourage innovation, and you want to reward companies that have invested in technology and ideas that make the markets more efficient,” said Andrew M. Brooks, head of United States equity trading at T. Rowe Price, a mutual fund and investment company that often competes with and uses high-frequency techniques. “But we’re moving toward a two-tiered marketplace of the high-frequency arbitrage guys, and everyone else. People want to know they have a legitimate shot at getting a fair deal. Otherwise, the markets lose their integrity.” (LD’s highlight)

What do you think? Please share your thoughts and opinions.

LD

Related Commentary

Is Uncle Sam Manipulating the Markets?  July 1, 2009

Is Uncle Sam Manipulating the Markets?  Part II July 6, 2009

Is Uncle Sam Manipulating the Markets?  Part III July 8, 2009

Why High Frequency Program Trading Smells  July 14, 2009

High Frequency Trading: Point-Counterpoint July 17, 2009

Can We ‘TRACE’ JP Morgan’s Business?

Posted by Larry Doyle on July 17th, 2009 9:09 AM |

On Wall Street, information is everything!! Access to the information is invaluable. Why? Given the speed with which markets move, any early hint of developing news is priceless in terms of the ability to transact quickly and profitably.

Why is ‘high frequency program trading’ viewed with such skepticism? Select participants with advanced computer programs gain access to market flows prior to other participants and are able to act on it. That playing field is not level. I shared my disdain for this practice in writing, “Why High Frequency Program Trading Smells.”

What other battles are being waged by Wall Street firms looking to defend their turf at the expense of consumers and investors? Credit cards and credit derivatives. Which Wall Street firm has the greatest combined exposure to these businesses? None other than JP Morgan Chase.

The Financial Times highlights how JP Morgan Chief Hits at Credit Card Rules:

Jamie Dimon, chief executive of JP Morgan Chase, on Thursday hit out at strict rules on US credit cards, saying they would cost the bank’s lossmaking card unit up to $700m next year.

While Mr. Dimon is railing on new legislation aimed to protect consumer interests in the credit card space, he conveniently avoids mentioning how both JP Morgan Chase and Bank of America are already implementing procedures to skirt that legislation. How might these financial behemoths do that? Shift from fixed rate credit cards to variable rate. I exposed this maneuver a few weeks back in writing, “Banks Build Better Mousetrap.”

Dimon continues his defense of JP Morgan’s franchise:

He singled out the credit card provisions, which from February (2010..LD’s edit) will constrain lenders’ ability to raise rates for risky borrowers, and rules that propose to move most derivatives trading on to exchanges as two contentious areas.

The tough stance by JPMorgan reflects Wall Street’s new-found confidence in lobbying regulators and the government. After keeping a low profile during the crisis, many of the banks that repaid the bail-out funds are becoming more aggressive in Washington.

In regard to derivatives activity, JP Morgan has a dominant position in the market. Why? Their strong capital position, enormous balance sheet, and strong credit rating make them an attractive counterparty for customers. Make no mistake, JP Morgan has a license to ‘print’ money, and a lot of it, across the entire derivatives platform.

While Washington will tout how they are increasing regulation of the derivatives space, this business is truly multi-pronged. There are plain vanilla derivatives in more highly liquid sectors of the market. These ‘standardized’ derivatives will most certainly move to an exchange to create total transparency. Value added for customers will be minimal only because these markets are already fairly well defined and exposed. JP Morgan and other Wall Street firms will cede this ‘standardized’ space while they fight tooth and nail to maintain their enormously advantageous position in the area of ‘customized’ derivatives.

There is little to no transparency in the world of customized derivatives and as a result the bid-ask spreads are very wide. Cha-ching, cha-ching. Jamie and his friends on Wall Street are working extremely hard to keep it this way.

In their defense, it is likely not functionally feasible to move many customized derivatives to an exchange. What should regulators compel them to do? JP Morgan and every other financial firm on Wall Street should have to report every derivatives transaction to a system known as TRACE, which stands for Trade Reporting and Compliance Engine.  This system currently only covers transactions within the cash markets and not derivatives.  What does that mean for investors? No transparency and price discovery for investors in the customized derivatives space. As such, Jamie and friends can keep those bid-ask spreads nice and wide and ring up huge profits in the process.

I won’t make many friends on Wall Street, and perhaps lose some of my current friends, but TRACE should be implemented across all product lines. For those involved in the markets, please access the TRACE system to gain a wealth of pricing data while keeping your brokers and financial planners honest!!

LD

Why High Frequency Program Trading Smells

Posted by Larry Doyle on July 14th, 2009 2:24 PM |

Who does not want the American dream?

Get a decent job, save a few bucks, make some reasonable investments, and try to get ahead. As part of that process, there is a premise that our government officials and market regulators will keep the playing field level.

Why are an increasing number of investors in our country questioning the integrity of our markets? The perception that the playing field is not necessarily level.

Is the field level? Is that perception actually a reality?

I commend Joe Saluzzi of Themis Trading for exposing a few weeks back the questionable integrity of  ‘high frequency program trading.’  The nature of the trading involved in these high frequency programs is consistent with my feeling that the equity markets are following technical analysis to a much greater extent than fundamental valuations.

I commend Joe and his colleagues at Themis again today for highlighting an example of the effect of high frequency program trading on their ability to execute equity transactions on their customers’ behalf. From the Themis website today, Real Life HFT Hijinks Example:

I am trading a small cap stock for a customer today (I leave out the ticker for anonymity purposes). It has traded 4,300 shares so far today. I have 75,000 shares to buy.

The scenario: 100 shares offered at $11.16, and 400 shares offered at $11.17. I place an order to buy 1,000 shares at 11.17.  You would think that I should get at least 500 shares executed (100 at $11.16 and 400 at $11.17). Sigh. I get none. As soon as I hit enter, those offers vanish. No trades on tape even. The HFT players offering the stock have convinced the market centers (ECN’s, Exchanges,  and ATS’s) to cater to them and “show” them my order before they have to execute, thereby giving them the split-second option to back away from their offers without honoring them.

Market makers have to honor their quotes, and even have to do so a certain percentage of the time. The HFT’s have to honor NOTHING. In fact, they can back away and even run ahead of your orders!  So much for their liquidity. Again the real danger is that fund managers assume that the markets can handle their 250,000 share small cap position, and that they can exit with a predictable minimal trade cost.

God, I hope we don’t retest.

There is nothing level about that field. This high frequency program trading is done with the blessing of the exchanges and the SEC.

It smells.

I welcome any market participants involved in high frequency program trading to make the case for the defense. Since Joe Saluzzi truly brought this issue out into the open earlier this month, I have yet to see any case, let alone a reasonable one, made in defense of this activity.

Thus, with overall liquidity in the marketplace less than what it may appear, investors should factor that into their overall risk assessment when making investment decisions in the equity and commodity markets.

Challenge your brokers and financial planners on this topic. I’d love to hear their responses. Please share this post with them. Please share their thoughts on this topic, if they are even aware of it.

I think we will all learn who is truly looking out for investors’ interests as we navigate the economic landscape.

LD






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