Update: within minutes of publishing this article news hit that the FBI is launching a probe into HFT. QED

For all the talk about how High Frequency Trading has rigged markets, most seem to be ignoring the two most obvious questions: why now and what happens next?

After all, Zero Hedge may have been ahead of the curve in exposing the parasitism of HFT (anyone who still doesn’t get it should read the following primer in two parts from Credit Suisse), but we were hardly alone and over the years many others joined along to expose what is clear market manipulation aided and abeted by not only the exchanges but by the regulators themselves who passed Reg NMS – the regulation that ushered in today’s fragmented and broken market – with much fanfare nearly a decade ago. And yet, it took over five years before our heretical view would become mainstream canon.

One logical explanation is the dramatic and sudden about face by none other than Goldman Sachs, which from one of the biggest proponents of quant trading strategies including algo trading, and which used to make a killing courtesy of HFT (who can possibly forget Goldman’s charges against Sergey Aleynikov’s code theft which alleged “there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways“), has in recent weeks unleashed a de facto war on HFT, first with the Gary Cohn HFT-bashing op-ed, and then with the implicit backing of the IEX pseudo dark pool exchange, whose employee just mysteriously also is the protagonist of the Michael Lewis book that has raised the issue of HFT to a fever pitch.

So does Goldman know something the rest of us don’t that it is now ready to give up on the HFT goldmine which lost money on just one day in 1238? Why of course it does. And one would imagine that judging by the dramatic turnaround exhibited by Goldman that said something is very adverse to the ongoing future profitability of the HFT industry. The amusement factor only rises by several notches when one considers that Goldman also happens to be lead underwriter on the Virtu IPO offering: one wonders what they uncovered and/or what they know about the industry that nobody else does, and just how the VRTU IPO will fare now that Goldman is so openly against HFT.

But what does all of that mean for the big picture? We hinted at it yesterday, on twitter when we had the following exchange.

Could it indeed be that the only reason why HFT – which has constantly been in the background of broken market structure culprits but never really taken such a prominent role until last night, is because the market is being primed for a crash, and just like with the May 2010 “Flash Crash” it will all be the algos’ fault?

This is precisely the angle that Rick Santelli took earlier today, during his earlier monolog asking “Why is HFT tolerated.” We show it below, but here is Rick’s punchline:

Are regulators stupid when it comes to high frequency trade? Well, i think that there was a time where they were a bit slow to the party. But i don’t think it’s stupidity or ignorance or not paying attention. So let’s wipe that off. So the question i’m asking is, why do they let it continue?

 

Why is it that anybody would want HFT to be unchallenged or at least not challenge it now? My reason, this is just my reason, when i look at the stock market it’s basically at historic highs. When i look at what the federal reserve is doing, it’s mostly to put stocks on all-time highs. When i look at all the debt and all the programs that don’t seem to be making a difference except for putting stocks on all-time highs, i see that you have this tower of power with regard to the stock market. And nobody wants to challenge or alter hft because it is good to go that many days without having a loss. So my guess is when the stock market eventually deals with reality and pricing, which will come at a time when there’s not a zero interest rate policy and we’re long past QE, I think they’ll address it.

Rick’s full clip:

Precisely: when reality reasserts itself – a reality which Rick accurately points out has been suspended due to 5 years and counting of Fed central-planning – HFT will be “addressed.” How? As the scapegoat of course. Because since virtually nobody really understands what HFT does, it can just as easily be flipped from innocent market bystander which “provides liquidity” to the root of all evil.

In other words: the high freaks are about to become the most convenient, and “misunderstood” scapegoat, for when the market finally does crash. Which means that those HFT-associated terms which very few recognize now, especially those on either side of the pro/anti-HFT debate who have very strong opinions but zero factual grasp of the matter, such as the following…

  • Frontrunning: needs no explanation
  • Subpennying: providing a “better” bid or offer in a fraction of penny to force the underlying order to move up or down.
  • Quote Stuffing: the HFT trader sends huge numbers of orders and cancels
  • Layering: multiple, large orders are placed passively with the goal of “pushing” the book away
  • Order Book Fade: lightning-fast reactions to news and order book pressure lead to disappearing liquidity
  • Momentum ignition: an HFT trader detects a large order targeting a percentage of volume, and front-runs it.

… will become part of the daily jargon as the anti-HFT wave sweeps through the land.

Why? Well to redirect anger from the real culprit for the manipulated market of course: the Federal Reserve. Because while what HFT does is or should be illegal, in performing its daily duties, it actively facilitates and assists the Fed’s underlying purpose: to boost asset prices to ever greater record highs in hopes that some of this paper wealth will eventually trickle down, contrary to five years of evidence that the wealth is merely being concentrated making the wealthiest even richer.

Amusingly some get it, such as the former chairman of Morgan Stanley Asia, Stephen Roach, who in the clip below laid it out perfectly in an interview with Bloomberg TV earlier today (he begins 1:30 into the linked clip), and explains precisely why HFT will be the next big Lehman-type fall guy, just after the next market crash happens. To wit: “flash traders are bit players compared to the biggest rigger of all which is the Fed.” Because after the next crash, which is only a matter of time, everything will be done to deflect attention from the “biggest rigger of all.”

So, dear HFT firms, enjoy your one trading day loss in 1238. Those days are about to come to a very abrupt, and unhappy, end.

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Original source at: zero hedge - on a long enough timeline, the survival rate for everyone drops to zero | http://www.zerohedge.com/news/2014-03-31/high-frequency-trading-why-now-and-what-happens-next

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After over two years of over 200 posts discussing the dangers of High Frequency Trading on Zero Hedge, the mainstream media (and its comedy-finance fusion Comcast offshoot) has finally made its goal in life to destroy HFT. The only reason for that, of course, is that HFT, by definition, tends to accentuate moves. And while it did so to the upside, nobody but Zero Hedge and a very few other blogs, most notably Themis Trading, cared (and a whole lot of other “experts” ridiculed our views of HFT as liquidity extracting, because yes they are, rebate chasing, sub penny frontrunning parasites). Now that the tables have turned, everyone, up to and including that caricature Jim Cramer can’t get enough of bashing it. Which is why for anyone still relatively new, and thus unjaded, to the topic, we present this informative and succinct six-part videoclip series just released by Securities Technology Monitor titled “High Frequency Minutes” discussing all the latest paradigms in the world of modern cutthroat, nanosecond trading.

HIGH-FREQUENCY MINUTES: Do Microseconds Matter?

Why trading that occurs in microseconds should not matter to Aunt Minnie in Lenexa, Kansas.

Securities Technology Monitor editor-in-chief Tom Steinert-Threlkeld is interviewed by Peter Fednysnky, New York correspondent for the Voice of America.


 

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HIGH-FREQUENCY MINUTES: How Microseconds Matter

What is a millisecond? Why does it matter? Particularly, when what really counts is the microsecond — and a distance of 20 miles could mean your exchange is in the wrong place.
 
Securities Technology Monitor editor-in-chief Tom Steinert-Threlkeld is interviewed by Peter Fednysnky, New York correspondent for the Voice of America.


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HIGH-FREQUENCY MINUTES: The Hidden Story of High-Speed Trading

It takes no time to create a trade. But three days to settle it.  Securities Technology Monitor editor-in-chief Tom Steinert-Threlkeld is interviewed by Peter Fednysnky, New York correspondent for the Voice of America.

 

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HIGH-FREQUENCY MINUTES: Preventing the Runaway Algorithm

Why a runaway algorithm that wreaks havoc on volatile markets may be inevitable — and whether algorithms should be tested before put in use. Securities Technology Monitor editor-in-chief Tom Steinert-Threlkeld is interviewed by Peter Fednysnky, New York correspondent for the Voice of America.

 
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HIGH-FREQUENCY MINUTES: High-Speed Regulation

The sooner the SEC gets on with instituting a system for monitoring all trading at the same speed that it takes place, the better. Securities Technology Monitor editor-in-chief Tom Steinert-Threlkeld is interviewed by Peter Fedysnky, New York correspondent for the Voice of America.


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HIGH-FREQUENCY MINUTES: The Next Second

This final segment of this six-part series looks at how algorithmic trading is about making a profit in the next second. Not the long haul. What is the implication? Securities Technology Monitor editor-in-chief Tom Steinert-Threlkeld is interviewed by Peter Fedysnky, New York
correspondent for the Voice of America.


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Original source at: zero hedge - on a long enough timeline, the survival rate for everyone drops to zero | http://www.zerohedge.com/news/high-frequency-minutes-hft-explained-6-short-video-clips

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In another case of purely coincidental serendipity, three days ago Zero Hedge informed readers that the “NYSE Boerse [sic] has just announced its purchase of Kingsbury International Ltd., which surveys managers for the Chicago Business Barometer, also known as the company that hosts the Chicago PMI data, in order to bring PMI data direct to feed subscribers. Net result: expect even more market volatility at each PMI release, now that the market is not two but three-tiered, and consisting of regular HFTs, HFTs with access to the Deutsche Boerse feed, and everyone else.” We concluded: “It is unclear if the ultra-speed, HFT friendly feed would be activated before its next release on June 30. That said, we will certainly coordinate with our friends at Nanex for any trading abnormalities, primarily in the critical ES futures, this Thursday at 9:42am, keeping a close eye on the tape, and indicating precisely when the tiered data release hits.” Well, as promised here is the Nanex data. As expected, it’s a stunner.

The shocker, however, resides not in the stock arena, but in what is now becoming the go to place for bulk frontrunning high frequency trading algorithms to chase what little volatility is left in the equity market: options, which, as previously noted, we now are confident will be the cause for the next big market wipe out.

Per Nanex:

Approximately 1/2 second before the 9:42 release of the Chicago PMI report, the option market exploded setting new records in quote rates, saturation, and delays. We have not yet determined why the equity market did not see a record explosion of quote traffic; rather it experienced the normal saturation/delay that happens all too frequently every trading day.

The electronic S&P 500 futures experienced a withdrawal of liquidity beginning about a minute before the release of the PMI number. At approximately 9:41:59.550, 1275 contracts cleared through 4 levels of the offer side of the order book. This coincided with the explosion in OPRA quote traffic.

The first image shows quote message rates for each of the 12 CQS data lines that carry data for NYSE, AMEX, and ARCA equities and ETFs in 2ms intervals. Notice how quickly activity drops after the peak compared to the OPRA images below it. Normally, options activity follows equity activity very closely.

The images that follow, show each of the 48 lines individually along with the total, so that you can clearly see the saturation events and estimate the duration and extent of the delay for each line. The flat-top areas you see on the charts are caused by something gating, or queuing the data. Since OPRA, like CQS, timestamps after data exits the queue — right before it’s transmitted to subscribers — it is impossible to know the exact duration of these hidden delays, but 500ms to well over 1 full second is a conservative estimate. We believe OPRA capacity would have to increase at least 3 times, to 12 million/second, in order to avoid these significant delays. However, at those message rates, a significant number of quotes would have already expired before they even left the exchange networks. (for all source images, please go to the Nanex site)

Several individual OPRA data lines show gaps which we believe are exhaustion events. These quiet periods of no quotes are common, can last 20 milliseconds, and almost always follow a spike in activity. We have verified that there were no drops in the data and that the charts accurately show the quote traffic rates. Several lines, noteably #37, show a period of fluttering between a high rate and zero which seem to appear during times of severe saturation.

While it is impossible to determine if this is indeed a case of broad embargo breach, it is imperative that Kingsbury International and the Deutsche Boerse immediately announce are precisely what moment they releasaed the PMI data to i) subscribers of Alpha Stream, and ii) to subscribers of the PMI service, who up until now thought they were getting a bargin by frontrunning the general population by three minutes courtesy of a public embargo, and now seems are themselves being frontrun by almost 500 milliseconds.

Furthermore, if no advance data release is confirmed, can OPRA please explain what the reason for this bizarro frontrunning activity is as traditionally a massive burst of trading action in advance of news dissemination indicates something is terminally broken with the checks and balances in the system. While we know that is the case, with the aid of Nanex, we will continue exposing each and every act of public data frontrunning going forward until every last retail investor is permanently out of the market and central banks and primary dealers can throw the hot ponzi grenade amongst themselves.

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Original source at: zero hedge - on a long enough timeline, the survival rate for everyone drops to zero | http://www.zerohedge.com/article/caught-act-hft-option-algos-observed-frontrunning-todays-pmi-release

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