Be sure to read the July Trader Magazine’s article on algorthmic flash trading, a/k/a front running:

Flash orders are also called “step up” or “pre-routing display” orders. The rationale for these order types is simple: Better me than you. They allow a venue to execute marketable orders in-house when that market is not at the national best bid or offer, instead of routing those orders to rival markets. They do this by briefly displaying information about the order to the venue’s participants and soliciting NBBO-priced responses. If there are no responses, the order can be canceled or routed to the market with the best price.

All four markets with flash orders treat these orders in a similar way. If they get a marketable buy order, for instance, that would otherwise be routed to a market quoting at the NBBO, they flash the order to some or all of their participants as a bid at the same price as the national best offer. Exactly who sees the flash, how that information is conveyed and the duration of the flash vary by market. The maximum allowable time for a flash is 500 milliseconds, or half a second, although most of the markets flash routable orders for under 30 milliseconds.

The details are worth a few minutes of your time.

Hat tip Bill King


Flash PointEquities industry clashes over flash and step-up orders
Nina Mehta
Traders Magazine, July 2009

Category: Quantitative, Trading

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

192 Responses to “Flash Trading’s Dark Volumes”

  1. manhattanguy says:

    Me thinks there is a pretty good chance we will see a rate hike before end of the year. Otherwise Fed would be making a mistake AGAIN by keeping the rates low for a long time.

    Fed Risks “Major Bout of Inflation,” Economist Warns!-Fed-Risks-%22Major-Bout-of-Inflation%22-Economist-Warns?tickers=^DJI,^GSPC,SPY,GLD,TLT,TBT,TIP&sec=topStories&pos=9&asset=&ccode=

  2. KidDynamite says:

    this sounds especially ironic as a complaint coming from the NYSE considering it’s basically a modernized version of how the NYSE specialists would verbally quote a market before executing an order – and only the guys standing in the crowd had the option to intervene.

    ie, if GE was 11.25-11.27 50k up, and you walked in to sell 50,000 shares, the specialist would say out loud “25c bid 50,000, 50,000 at 26c, SOLD.” If no one interrupted him, the trade was done. Markets have NEVER been setup such that every participant has the same opportunity to trade on every quote.

  3. dead hobo says:

    So the markets and exchanges are crooked. New Flash. Do you think you should report it? First you’ll have to find an agency that gives a damn. Good luck with that one.

    The CFTC had just noticed that wheat, as an asset class, is priced according to demand for the financial instruments that make it an asset class and not due to the value of the commodity to actual buyers and sellers. They have not yet considered the possibility this effect is common to other commodities and oil just might be priced more demand for speculative index oriented financial instruments than by actual contracts that risk delivery (aka the old fashioned way to speculate / hedge commodities).

    Re front running: I don’t expect anyone official to recognize the problem for a long time. When solutions are proposed they will ignore newly invented ways to avoid regulation. And this still won’t be for a long time. Just learn to live with it. Think of the new feature as ‘Added Liquidity’ or ‘The Return Of Investment After A Horrible Recession That Is Ending As We Speak’, or “Not Perfect But Better Than Expected’, or ‘Shut Up And Take It Up The Ass While We Think About What’s For Lunch’, or ‘Screw You, We Only Do It Because We Can And You Can’t Stop Us’.

  4. ZackAttack says:

    Easy fix… just rule that the bid/ask has to stand for 1 second. Takes away the advantage afforded by network latency.

    Why should someone whose servers are colocated in the same room, with the complicity of the exchange, have an inherent advantage over traders in, say, California or Singapore.

  5. dead hobo says:

    To me, the flash trading look a lot like an organized crime or gang oriented street tax. If you want to do business, you have to deal with some intermediary thugs who have positioned themselves in the middle. Law Enforcement is on the take via soft corruption and looks the other way while the thugs collar orders and cherry pick the best for themselves. They might even get paid a commission by an exchange for churning some volume. In principle, flash trading appears to be no different from what street gangs do, but no threats of violence are necessary to get paid. Just put your people in regulatory positions and the protection is in.

  6. KidDynamite says:

    @dead hobo – the NYSE has ALWAYS been like that… the difference is that now we pay a much much smaller spread

  7. dead hobo says:

    KidDynamite Says:
    July 22nd, 2009 at 8:59 am

    @dead hobo – the NYSE has ALWAYS been like that… the difference is that now we pay a much much smaller spread

    Perhaps. But now 70% of the volume on a daily basis is said to be controlled by about 100 computers/traders. In the not too distant past, about 30% of the market involved programmed trading. This means that not too long ago, there were far far far more market participants on a regular basis.

    Assuming the worst case and maximum corruption, that many participants would trend towards an honest market because competition would cause thieves to strike a better price and self interest is not much different from what the crooks are doing. Thus, they key to fixing things is to remove the street tax charged by an efficient gatekeeper.

  8. KidDynamite says:

    unfortunately, even though i removed my URL from my profile (cause it contained a word the filters didn’t like), my comments are still getting rejected… hopefully the authorities will push through the detailed example i gave

  9. KidDynamite says:

    @dh – HFT guys are the ULTIMATE in competition. they’re competing with each other to the point where are spreads are down to pennies. yes – they have an advantage due to their “colocation” at the exchange – guess what – anyone who wants to can get that. don’t believe all the hype you read about this – it’s the most misunderstood thing on the street.

    would you rather have all this volume banned from the market? then our volumes would go down by 70%? would that be an improvement?

  10. Transor Z says:


    But the volume allocated to “the skim” has never been this high. And the 30 millisecond flash time is enough time to give the whales a glimpse at the other hands around the table.

  11. dead hobo says:

    KidDynamite Says:
    July 22nd, 2009 at 9:11 am

    @dh – HFT guys are the ULTIMATE in competition.

    No, you are completely wrong. They are efficient gatekeepers. They see orders before anyone else. They can collar them by buying low and selling high before anyone else can see what’s going on. If you personally want to buy or sell, you have to go through them first. If you want to short then be prepared for a coordinated squeeze after they sucker you in. Except for how efficiently they can steal from the rest of us, there’s nothing competitive about them, except possibly to see who can write the best programs and own the fastest computers.

  12. Transor Z says:

    There’s another dimension to this — everyone is focusing on instantaneous (hyper short-term) transactions.

    Memory. The “liquidity providers” picking up the flash signal send those orders into memory, allowing secondary pattern-recognition algorithms to track buyer behavior over time. At this time this is information that is not generally accessible to other participants.

  13. carmen101 says:

    Here’s an earlier article about flash orders and it states clearly that the SEC is reconsidering its legality. That was 2 months ago. Time to get some answers from the SEC.


    Speaking at an industry conference last week, David Shillman, an associate director in the SEC’s Division of Trading and Markets, said flash orders “could have benefits to order senders, but, on the other side, the party being harmed is the party with the displayed limit order at that price. That goes against broad Commission policy of encouraging and rewarding those who are willing to take the risk of displaying limit orders.”

    The SEC official added that the agency is studying the issue of flash quotes as part of a broader reassessment of so-called “dark liquidity.” Shillman is the second SEC official to make public the agency’s concerns over trades done offboard in recent days.

  14. KidDynamite says:

    @DH – i ask again: “would you rather have all this volume banned from the market? then our volumes would go down by 70%? would that be an improvement?”

  15. dead hobo says:

    KidDynamite Says:
    July 22nd, 2009 at 9:35 am

    @DH – i ask again: “would you rather have all this volume banned from the market? then our volumes would go down by 70%? would that be an improvement?”

    Are you insane or just stupid? Hmmm, let me think, might crooks be keeping honest participants out of the markets? Might their antics being creating artificial prices that don’t reflect the actual market. Might their stink be limiting actual investment from happening? Throw the crooked fuckers out.

  16. Transor Z says:


    Where exactly will that banned volume go? Home to sit in the corner and sulk?

    It will go to other channels to grow, forcing money managers to actually work and research investments and stuff.

  17. wally says:

    The risk here is as dead hobo says:
    Assets may be priced for the speculative reasons that matter only to traders, but those asset prices then roll to the cost of the actual commodities like oil or wheat (and stocks, of course) and we all pay based on the speculative game, not on market demand for the commodity. The consequences should be clear after oil’s little escapade in 2008.

  18. KidDynamite says:

    OMG Transor – you can’t have it both ways! you can’t say that the HFT volume is phony parasitic volume, but then say that if you ban it, the money will be put to work with traditional money managers! FALSE! If you ban “profiting from trading” this prop strategy will just disappear.

    come on guys – this blog is the last bastion against ignorance on the internet. THINK about the allegations of HFT guys fixing prices. it’s baloney – anyone who has every traded equities is probably aware that it’s possible to make prices go higher if you have a large buy order or enough capital – that is NOT to say that it’s easy to make money doing it. The same liquidity impact you have driving the price up will drive the price down when you sell. The Themis Trading article alleging that HFT is responsible for the tight daily ranges in C, CIT and BAC is beyond absurd.

    everything we’re talking about is very much just an improvement over the way things have been done for the last 100 years in the stock market. We continue to pay less and less for trading costs and spreads. You can start a “no electronic traders” exchange with specialists posting 1/8th bid ask spreads, but i’ll stick to our modern, developed markets

    note: i’m as bearish as any of you, but if you think that restricting HFT trading will somehow make the market go down or something, you’re smoking something

  19. leftback says:

    Speaking of which:

    NEW YORK (MarketWatch) — U.S. total petroleum inventories continued to rise last week, adding to what already is a 19-year high, weekly government petroleum data showed Wednesday. Crude inventories fell by 1.8 million barrels in the week ended July 17, the Energy Information Administration reported. Gasoline inventories, however, rose 800,000 barrels, and distillate stockpiles gained 2 million barrels. Total petroleum inventories increased by 1.9 million barrels and stayed above the upper limit of the average range for this time of year.

    The long oil trade is on borrowed time here. We could see a feedback loop where oil falls, the $ strengthens, and then oil falls again as traders unwind $ hedging positions. Crude could fall 25% until the role of speculators in the market is reduced to reasonable levels. It doesn’t look promising for refiners and drillers in Q3 and 4 ’09.

  20. KidDynamite says:

    sorry boys – i keep writing replies that get eaten by the comment filter

  21. KidDynamite says:

    DH – you think HFT is manipulating prices to non-fundamental levels? do you think they are too high? or too low? i’m guessing too high… well, that’s great news for you – if you think that HFT’s are accumulating stock at unrealistic levels, you are free to take a short position against them. Even better news for you is that they will eventually have to liquidate these positions, which will drive the market down and result in a gain on your short…

    but wait – you don’t really think these guys are getting long massive amounts of stock to prop it up, right? no – you think they’re magically moving the prices higher without accumulating positions… alas, it doesn’t work like that.

    Stock prices are going up because there is a massive campaign of misinformation organized by the administration and the media – not because of HFT.

  22. KidDynamite says:

    @Transor – you can’t have it both ways – you can’t claim that the HFT volume is pure profit parasitic trading volume, but that if you ban profiting in this way it will be deployed into the markets via traditional money managers.

  23. manhattanguy says:

    “The long oil trade is on borrowed time here”

    Isn’t the whole market on borrowed time here? I suppose it’s just holding and waiting to break down until earnings season is over.

  24. KidDynamite says:

    unfortunately, we’re getting off topic again. the topic was Flash Trading – and i wrote 3 different comments that were each eaten by the filter which attempted to explain that this is just another opportunity to offer price improvement before execution, just like the NYSE has always done, which is why it’s ironic that the NYSE is complaining about it in the article above.

    when IBM was 80.25-80.30, 25,0oo up, if you walked into the specialist and said “sell 25,000 IBM, Market”, he’d shout:

    “IBM – quarter bid 25,000, 25,000 at 26c, SOLD” and you’d sell your stock at 25c unless anyone stepped in. Flash quoting is a modernized version of that

  25. leftback says:

    “Isn’t the whole market on borrowed time here?”

    Absolutely. Everywhere you look there are overpriced assets and rallies that seem driven by short covering.
    That’s pretty much what Macro Man has been saying every day in 55 different ways for a month.

    None of the media noise is worth listening to. Just watch the $. Once it rallies, we will see how much leverage was built into some of the currency hedging that has lifted these markets. A forced unwind of widespread $ hedging (everyone in the world and his grandmother are currently short the $) may prove to be almost as dramatic as last year’s unwind of the yen carry trade.

  26. CapitalistCanuck says:

    Can anyone confirm 2 hangman candlesticks on the S&P 500?

  27. constantnormal says:

    If Google can hold real-time auctions for the ad slots that appear on each and every query page, for each and every query result page that is generated, the the stock exchanges can mandate 500 millisecond auction periods for each and every transaction. If that begins to clog the machinery, then it will result in aggregation of transactions by market makers into larger bundles (this happens anyway).

    Ban immediate matching of trades, and in the extreme, institute a “trading tax” whose rate varies inversely with the duration of time a position is held, approaching zero if a position is held for as long as a minute, and 10% (of the amount, not the profit) if the position is held less than a second.

    None of this hurts the markets, it only eliminates the creation of fictitious prices via the fraudulent and of no economic utility practice of high-frequency trading.

  28. constantnormal says:

    @ Kid Dynamite 11:10 am

    “Stock prices are going up because there is a massive campaign of misinformation organized by the administration and the media”

    If you don’t think that the HFT-ers are not connected at the wallets with the administration and the media, you have a real awakening ahead of you.

  29. I-Man says:

    Not confirmed yet CC… not yet. We need a close below yesterdays low on SPX to confirm yesterdays hanging man.

    Its feeling more and more like 3 strikes you’re out on SPX 956…

    I think we got a date with 930 if this little mini double top plays out.
    (956 top, 943 confirm line… 956-943= 13… 943-13= 930)

    Also… 930 was support from last week.

  30. constantnormal says:

    The biggest problem with HFT is that it “extracts energy from the vacuum”, so to speak. It pulls profits out of the markets with no economic utility. These kinds of things are a drain on the markets, leaches that sap the profits and losses that would otherwise move the economy in one direction or the other, but are now being diverted into the pockets of the HFT-ers. It isn’t that they move the markets higher or lower, it’s that they prevent the markets from moving as high or low as they otherwise might. This is a cost that we just don’t need or want.

  31. CapitalistCanuck says:

    Thanks I-Man. I wasn’t sure if the peak of the candle stick had to be lower, or the closing price had to be lower to be a stronger signal. Jobs report tomorrow might be the catalyst for a move in either direction, although I’m expected good results from Amazon – another company that executes well.

    This lethargic action reminds me of the 3 spinning tops at the lows before the upside breakout. Also, looking at the intra-day I’ve noticed a very consistent pattern of trading for the last 5 days. Up and down within a tight range, and then a late-day breakout. Must be computer trading because there is no catalysts to drive the markets in such a choppy manner day-in, day-out.

  32. Transor Z says:


    No, I think I’m right here. The currently allocated volume is engaged in pseudo-trading and is tolerated/encouraged for the reason you provided: paring down the bid/ask spread and “providing liquidity.” Its public (i.e., non-parasitic) utility is in serious question, apparently even at SEC.

    But you didn’t answer my question: where else would the money go, if not into “traditional” investments?

    A simplistic, and I think possibly true, answer is that it will go into investments of comparable risk/ROI. To the extent that none exist, that argues that this form of “investing” contributes little and calls its legitimacy into question. If, as the “liquidity providers” like to argue, there is “considerable risk” to them in engaging in this practice — a risk maybe I just need explained to me better — then surely they can find some other equally risky investment vehicle that pays comparable returns.

  33. KidDynamite says:

    Transor – of course there is risk – the HFT guys do very well in stable markets with small movements. Think about it – they are making markets all day long – they just want people to hit their bid and lift their offer – repeatedly. they get slammed when the market moves in one direction – if you lift their offer and they then bid for stock, but can’t get the stock in, they end up short and hurt. Same thing on the downside.

    Constantnormal – do you want a return to wide bid ask spreads of the early 90′s and specialists filling the role that HFT is now filling? As i’ve said repeatedly – this “drain” that you mention is the lowest its ever been. Your argument about sapping profits is a straw man – who are you to say that the profits should be in your pocket instead of theirs? Alpha belongs to no one – it belongs to whomever captures it first.

  34. KidDynamite says:

    fahhhhk .Barry – PLEASE tell me why my comments keep getting eaten

  35. constantnormal says:

    @KD — yeah, like TZ said.

  36. I-Man says:

    Hang in there Kid… its got to be something re: your old URL

  37. AmenRa says:


    What I-Man said. The hanging man needs confirmation. A lower close is needed. The confirmation becomes stronger if the close is below the low of the hanging man. I’ve been using 3LB to determine the trend and candles to see if the trend can continue. When I see a possible reversal candle I tighten up the trailing stop.

  38. KidDynamite says:

    @Constant – i replied to that, and to you, but the comment is lost in Big Picture FilterLand

  39. constantnormal says:

    @lb 11:33 am

    “Just watch the $. Once it rallies, …”

    What’s going to get the $ to rally? D’ya think that Bernanke will actually get people to believe he might raise rates? Even if we actually had some real inflation? Or do you believe that the deflationary forces that are loose on the planet are sufficient to support the $ ?

    I can’t see Obama or the Congress doing anything but spending more, and even if they were to actually hold the line on spending, there are already sufficient commitments to necessitate a massive increase in borrowing, and fer sure the money ain’t a-gonna be coming in the form of tax receipts for the foreseeable future.

    It sure seems like the deflationary forces might be well-met by the inexorable urge to spend more, which will be countered only by the unwillingness of others to lend us the money to spend — and that hardly seems bullish for the dollar.

    Jus’ wondering …

  40. constantnormal says:

    @KD — no problemo, there’s a lotta that going around, I think it’s some glitch in the magnificence of WordLess.

  41. constantnormal says:

    @lb — re: “dollar follies”

    Maybe it will rally in a general collapse of global markets, in a befuddled “flight to quantity”

  42. CapitalistCanuck says:

    Pretty little triangle setup on the S&P intraday could breakout to the upside. Wonder what the computers wil do.

  43. KidDynamite says:

    @Constant – bottom line: i’m a capitalist. Alpha belongs to no one. Algo’s are doing what has been done for the history of the stock market, they just do it better – and at a SMALLER cost to me, the end user, than in the past. It’s better than it has ever been before! Technology advances – first we replace auto manufacturers with machines, then bank tellers, now wall street cash traders.

  44. CapitalistCanuck says:

    It’s been decided upside breakout with new intraday high. We’ll see if it holds. Nice rise on some very tiny orders, much easier to drive prices up when humans are out to lunch. Damn am I jaded! I wouldn’t complain if I were long this crap…

  45. leftback says:

    XLF, XLE and IYR all negative today. These three groups have been the “leaders” of this new “bull market”.
    LB’s interpretation is that there isn’t much squeezing going on today. Probably not many shorts left.

  46. Thor says:

    Capitalist and all – for those of us who aren’t as stock savvy – how big of a deal is it that the S&P just reached it’s high for the year?

  47. hopeImwrong says:

    @leftback – confirming my understanding:

    Dollar up = asset prices down (all asset prices)
    Dollar up = deflation

  48. constantnormal says:

    @KD — me (capitalist) too, and when the volatility is drawn down below rational levels — look at the VIX vs the state of the global and national economies, there’s sump’tin not quite right there — it’s ultimately harmful to the functioning of the economy as a whole.

    It’s not just that the markets are higher than they ought to be in a world of perfect information — it’s that stocks that ought to be showing frothiness and bubbling are not doing very much of that, while stocks that ought to be in the deep freeze are truckin’ along as if they were not on Death’s Doorstep. This is not the way of the Tao.

    Maybe some of this can be ascribed to money fleeing all the other markets (real estate, debt markets, commodities) into the stock markets and just sloshin’ around, but when you subtract the volume of program trading (how much of that is HFT is anybody’s guess) from actual people trades (and I’ll admit that some of the PT is on the part of actual human investors, but how much is an open question), it doesn’t look like there is really all that much “real money” in the equities markets these days.

    Maybe an argument can be made in favor of HFT in that it keeps the doors open for actual human traders when they muster the courage/foolishness to venture forth. But the counter argument is that volatility drives out established mindsets, and effects the sort of inner changes that convert bears to bulls and vice versa. Maintaining the status quo is not what the markets should be about.

    A capitalist favors change. Monopolists favor the status quo.

  49. KidDynamite says:

    in case anyone other than me was eagerly waiting for my comments to appear, Barry has pushed them through.

    please look above for my point about how price improvement was previously offered via NYSE specialists, and how Flash quotes are the modern technological extension of that. (8:46am, 11:13am)

    also, DH, Transor, Constant – you can see my responses to your comments now, above. bring it on ;-)

  50. bergsten says:

    @KD — TBP uses a spam filter called Akismet. They are secretive about their algorithms (see? it isn’t only HFT that’s secretive), but one would assume they have word lists, black lists, “commonly used phrases,” etc.

    The “problem” is that these lists are constantly being updated (for reasons both good and unknown) so the behavior of Blogs appear to change randomly and arbitrarily.

    Since you aren’t totally blocked (and a local Blog administrator can also completely block or unblock somebody), one would assume you aren’t on a blacklist (you can Google “spam blacklists” to get to several services that will check your domain name, IP address, etc. out), so it could be a particular URL of yours or some word or combination that’s new to the list.

    Heck, this post could be blocked simply because it uses the word “spam” several times!

    The sad part of all of this is that the true spammers are slowly but surely making the web unusable.

    I suppose you could make YOUR Blog URL into a tinyurl and use that instead on your profile…

  51. KidDynamite says:

    @Constant – but you can’t be mad at people for refusing to act rationally. Haven’t you SEEN the spin jobs that are put on things like the bank stress tests and the economy – THAT causes innocent/ignorant people to buy – which makes the market go up. I think the market is massively overpriced – but I don’t think it’s because of price manipulation – it’s because of SENTIMENT manipulation.

    Just look at the reactions that are stirred up by the garbage that Themis Trading puts out – it’s PURE drivel, yet people read it and run around like chickens with their heads cut off. This same phenomenon explains why stocks are overpriced – people listen when the gov’t says max employment will be 8.5% and they buy stocks…

  52. I-Man says:

    @ Thor:

    Its all about support and resistance. Place any new high’s (and lows) in the context of those… not in the context of YTD.

  53. KidDynamite says:

    thanks bergsten. i just did that tinyurl tip.

    guys – barry pushed through my old comments – please see them above – especially the examples about how specialists used to do the same thing that this post is talking about

  54. KidDynamite says:

    thanks for the tip Bergsten

  55. KidDynamite says:

    please see my original 8:46am comment, which is now up, and again at 11:13am

  56. KidDynamite says:

    and if anyone wants to continue this debate, see the other comments i posted above which have now been pushed through, responding to your earlier shots at me (yeah DH – i’m talking to you ;-)

  57. leftback says:

    @ hope asked:

    “Dollar up = asset prices down (all asset prices)
    Dollar up = deflation” ??

    Precisely. Exhibit A: October 2008. Not saying we will see deleveraging on that scale again, but you never know.

    LB believes that if double digit inflation were indeed an imminent threat, then the bond market would already be destroyed and gold would be in orbit, due to the ability of market participants to see beyond the end of their nose.
    Hours worked, Baltic Dry, wage and salary freezes (everywhere except GS and MS) seem to tell a different tale.

    ….meanwhile the Spoos are making a new high. UFB.

  58. bergsten says:


    And another thing. The “blocked” posts are put into a “holding pen” — they aren’t just tossed (well, maybe some are…). Somebody authorized has to wander into the WordPress Dashboard and sort through them.

    The result is that posts can “vanish” for a time then suddenly “appear” (when approved). Depending on how things are sorted, these can pop up back in the discussion where nobody sees them.

    What madness causes a particular post to be held, but let through when resubmitted is anyone’s guess (one theory is that some systems just let things through if they can’t get to the rules databases for one reason or another).


  59. KidDynamite says:

    @bergsten – I actually had Google shut my own blog down a few years ago because they thought i was SPAM… and i send so many emails to my friends that Yahoo thinks i’m SPAM… brutal

  60. I-Man says:

    All good Left…

    Hey, since we’re the only shorts left, maybe we should just combine forces…
    Dreadenfreude… or Schadendread… you can pick.

  61. wally says:

    “Your argument about sapping profits is a straw man – who are you to say that the profits should be in your pocket instead of theirs? Alpha belongs to no one – it belongs to whomever captures it first.”

    True if you regard stock trading as a game. However, the growth and success of the market since the 1980s is built on selling the ordinary small investor on the idea that money invested in stocks will make money (whether true or not is another question). If it is obvious that there is somehow a ‘Goldman tax’ or anything else that puts profits in another pocket while a small investor’s holding sit there and stink, those investors will not invest anymore.
    Las Vegas learned long ago that they can fleece the world as long as they maintain the APPEARANCE of a fair shake. Wall Street – the uptown equivalent of Vegas – must learn the same if they want to keep sucking in the rubes. Big banks cannot make money back-and-forth off themselves with smart-ass games.

  62. KidDynamite says:

    @ Wally – well put, but I’ll say it again – the small investor does MUCH better under today’s market structure, with ten dollar trades via online brokers and 1c spreads than he has at any other time in our lives.

  63. leftback says:

    You got it, man. We can start our own HFT operation and then kick back and open a case of Red Stripe.
    LB is liking I-Man’s idea of a drop to 910 from here. Of course that would bring in Johnny R, “for the value”.

    “Big banks cannot make money back-and-forth off themselves with smart-ass games.”
    MS prop desk on the wrong side of all GS trades?

  64. dead hobo says:

    KidDynamite Says:
    July 22nd, 2009 at 12:55 pm

    and if anyone wants to continue this debate, see the other comments i posted above which have now been pushed through, responding to your earlier shots at me (yeah DH – i’m talking to you ;-)

    This isn’t a problem that needs to be over-intellectualized. No matter how much you claim it doesn’t, shit still stinks. Replace the visible gatekeepers with the invisible hand and watch the economy improve. Crooks that choose to act benign are still crooks, even if they provide persuasive arguments that prove their antics are good for you.

  65. CapitalistCanuck says:

    Bonds are also holding steady which is not typical of the earlier rally – I take this signal as skepticism. IF people actually believed in a 2nd half recovery 10-30yr yields would be much higher. Volume has generally been low, bears aren’t willing to come to the table and short they’ve been burned too often, and retail investors still sitting on the sidelines. Only half the market is playing this game.

    “Big banks cannot make money back-and-forth off themselves with smart-ass games.”

  66. carmen101 says:

    Would you agree with the assertion that the game remains the same but is now played with different toys? But today, the same as yesterday, those who don’t know what’s involved risk losing their shirts. So don’t play if you can’t live with the game. Now, it’s likely that the regulators are missing something regarding how the new toys are changing the game unfairly to some, so it’s about time they step in and make sure that robbers don’t get into the game. At the end is a question of balance.

  67. dead hobo says:

    leftback Says:
    July 22nd, 2009 at 1:20 pm

    MS prop desk on the wrong side of all GS trades?

    No, they’re probably just playing the gimp today. GS probably poured a little Red Bull on their machines, which then proceeded to crap on MS at will, causing MS to debate the unfairness of it all. They just don’t want to pony up and pay the Goldman Tax.

  68. constantnormal says:

    @leftback — would it be close to your way of thinking to say that you expect a wave of collapses (OK, maybe just “severe corrections”) in equities, bonds, corporations, municipalities, states and finally Uncle Sam hisself, with each domino causing money to flee along the chain into the good ol’ USD?

    And that when Uncle Sam finally has the hot potato, there is no one for him to throw it do, and we finally reach rock bottom and inflation at last ensues, as the USD becomes the last domino to fall? (With deflation reigning supremem all along the way there, of course)

    Or do you see a less than apocalyptic process in motion here?

  69. KidDynamite says:

    the best part of the MS earnings report was how they had to take a loss writing UP the value of their own debt – which had resulted in a big gain in prior quarters when they wrote down their own obligations and took a big gain.

  70. Good debate KD. I have only one small point to make:

    As i’ve said repeatedly – this “drain” that you mention is the lowest its ever been. Your argument about sapping profits is a straw man – who are you to say that the profits should be in your pocket instead of theirs?

    It may be the lowest spread it has ever been but what is better: 10 cents on 1 million shares or 1 cent on 100 million?

    With today’s higher volumes I’ll bet the MMs of the world are making more cash than ever on the smaller skim so the appearance of a better deal is somewhat of a facade. Also, the smaller spread is probably why the volumes are higher these days. One thing may be leading or forcing another


    Re front running: I don’t expect anyone official to recognize the problem for a long time.

    The day the common man can benefit from that trade there will be investigations!!

  71. manhattanguy says:

    Blame the weakness in dollar for the market highs. SPY made a double top at 96.1. Let’s see how the market closes today. I still bet on the downside.

  72. ben22 says:


    Sorry man but you are wasting your time here. You obviously have knowledge on the subject of HFT and you are arguing with people that don’t. Trying to make a point about something like this in the comments section of a blog is most likely a losing battle for you. I thought you would have learned that after your attempt to do the same at Zero Hedge. That was just as fun to read as this thread.

    As an aside, it does worry me a little that so many people are starting to catch on to the dollar being the thing to pay attention to as part of the “all one trade” theme, and I’m also worried that too many people are looking for the 5th wave down in the dollar. Most likely as more people discuss it something else will end up playing out, just like we saw recently with the H&S which led to the monster short squeeze.

    Still, I’m a dollar bull over the next year or two.

  73. CapitalistCanuck says:


    It’s always been a rigged game, this is money we are dealing with. People were willing to accept Wall Street earn a share of profit for the perceived mutual benefit. But whatever happened to the traditional profit centers. You know? Selling mutual funds, M&A or underwriting?

    The economic crisis revealed the emperor indeed had no clothes, even GS was on the ropes. WS was losing the trust of Main St. long ago hence the real estate bubble. It’s lost now completely. All those mutual fund managers and with their buy and hold strategy, diversified, hedged risk, actively managed proved they were no better than the market as a whole – so why was Johnny Retail paying all of those fees for?

    I believe WS has simply thrown in the towel and stopped pretending. It’s more efficient and profitable just to trade through HFT. F— innovation, employment and investment nahh too much work.

    I believe it was Roubini who pointed out that Wallstreet’s losses on subprime alone have surpassed the total of 25 years of investment returns. Even GS had to be bailed out.

    What the bears are ultimately hoping for is reform. If a dollar is a vote, I’m voting for change.

  74. ben22 says:

    If people are claiming that retail isn’t in the game right now I don’t know what they are talking about. Every single retail rep that I talk with a lot is bullish right now (just as they were last year) and has been advising clients to DCA back into equity. This group I typically speak with is collectively in control of close to 700-800 million in AUM. I highly doubt they are the only retail reps that are bullish, as if that isn’t where the majority is right now. They have a very easy, and very wrong story to tell clients right now, I think the new favorite line is becoming how easy it will be to beat numbers in Q3 and 4 due to how bad things were last year. lol.

    Perhaps some home gamer retail investors haven’t gotten in yet but I doubt that too. TD is showing massive day trading in recent reports and I know all those tools are trying to catch C, BAC, etc.

  75. leftback says:

    @constant: “Or do you see a less than apocalyptic process in motion here?”

    I don’t see an apocalypse, and for society’s sake let’s hope there isn’t one, although it would certainly be oddly fascinating to watch an uncontrolled melt of equities, corporate bonds and munis.

    I see an ongoing “Deleveraging process”, not an outright crash but a gradual bumping down the stairs over several years, alternating deflation and reflation (via QE, Japanese style), until we reach a sort of financial Ice Age, where participation by individuals is almost zero, trading volume is thin, volatility is non-existent, and eventually a new bull market is born.

    The $ going straight to hell crowd are correct, in the long run – but in the short term are neglecting the problems of other Western economies and Japan, and underestimating the importance of the $ as reserve currency.

    During this period there will be good and bad times to hold the $ and govies. I believe that this is one of them. January clearly was not. We will have to be nimble but I believe that this market is survivable. Remember that a flight to perceived quality will take place whenever there is stress in the market and occurs toward relative safety within an asset class. (AUD/NZD to JPY/USD, junk bonds to Treasuries, MBS to Treasuries etc…)

  76. carmen101 says:


    I hear what you are saying:

    “Danger, Will Robinson.”

  77. Mr Objective says:

    ben @ 2:02
    Great comment on retail. I’ve found over the years that you don’t need a large sample size to get a sense of what the investment community is thinking. Because of the immense herding of the community, all it takes is a know a few who don’t have the ability to recognize that they are herding to get a sense for the whole community.

  78. Transor Z says:

    As a frightened and ignorant unfrozen caveman lawyer, I need you to break this down for me (seriously).

    This much I think I get:

    1) Buyer places a buy order in the NYSE queue for 100 shares of Stock X @ 10.00 – 10.25 from Seller.

    2) NYSE’s computer flashes B’s order for 30 milliseconds to tip off liquidity providers (LPs).

    3) The LP computers place a “frontrunning” buy order to acquire 100 shares of Stock X for 10.01. – 10.25.

    4) LP buys the shares and then turns around and sells them for the same purchase price to Buyer.

    5) NYSE pays LP $.0025 x 100 for the purchase from Seller and LP nets $.0125 x 100 for the sale to buyer, for a total of $.50 in this example. LPs computers do many millions of these transactions each year.

    Benevolent Rationale: In the old days there was always a spread of at least $.125 so Buyer could never have gotten 100 shares @ 10.01. Best price would have been 10.125, with Specialists “parasitically” keeping the difference. Thus, Buyer benefits by having penny increments and the “parasitical” aspect is minimized.

    Q: At which points here (assuming I’ve got it right) does the LP encounter the risks you cited? What exactly prevents the LP from using limits/stops in place to eliminate those risks?

    if you lift their offer and they then bid for stock, but can’t get the stock in, they end up short and hurt. Same thing on the downside.

    Can you break this down for me, please? I’m not understanding it.

    Q: How long does each of these transactions take to complete? 1 second? 2 seconds?

  79. constantnormal says:

    @leftback 2:08 pm

    thanks. I think your view is in many ways scarier than the “apocalypse now” view. But you have been so precisely correct so often that I want to be sure of how I interpret the words of the oracle.

  80. ben22 says:

    @carmen and Mr. O,

    All we have to do is watch a few on CNBC, they represent the retail reps you never see on tv pretty well b/c this is where many of these reps get their bullish talking points. They don’t actually have an opinion on any market most of these retail reps so they get someone elses and the bullish story is easier to tell than the bearish. This is the same reason they tell you to diversify, they don’t have any opinions so best just to spread it out to “smooth out the ride”. It is herding at it’s best. The clients just blindly follow too, it amazes me b/c I know these reps lost people a lot of money last year and people are still listening to them.

    This is why I can only laugh when people come to TBP and talk about all of us crazy bearish people, as if that is representative of the majority opinion right now.

    There is another new line now being pushed by the Ron Insana’s of the world which is “the crash already happened” in reference to bears still looking for another major leg down. His attempt to make anyone trying to say that look stupid. Retail loves that shit.

  81. Transor Z says:


    Well, contrary to what ben22 might think, I don’t think you’re wasting your time. In fact, I very much appreciate you taking the time to shed some light on this very hot topic.

    I just posted a long-ish post to ask you to break things down for me so that I can follow them and to correct misunderstandings I have. I suspect other people might be able to benefit from your explanations.

    Unfortunately, the post is in WordPress limbo for a while.

  82. Onlooker from Troy says:

    The hottest sectors today seem to be consumer discretionary, homebuilders and the transports. Based on the SPDRs.

    Yeah – right. It’s the continued delusion of the recovery theme, minus the commodity speculation.

  83. ben22 says:


    Sorry if I came across rude there but I didn’t get the impression from above that you were trying to correct misunderstandings you had about HFT in your convo with KD, he made what I believe to be very valid points above and you came back to him with:

    No, I think I’m right here.

    and I don’t see you post again after 11:49 until I say something about it. If that is in fact what you were doing though then I’m just plain wrong and sorry about that. Always a little hard on-line as I can’t hear the tone of any of these conversations.

  84. leftback says:

    @ben22: Right on, bro.

    Now think about this, where were Ron Insana and Dennis Kneale* in March at the Kass Bottom/LB Lows, when many traders here were becoming strongly risk-oriented? Under the table crying for their mama, that’s where. Right now we are seeing all of the classic elements of the late stages of rally transfer dynamic (traders-institutions-retail), including the bear-baiting – an inducement to retail investors to join the “winners”.

    @ constant: It’s a view shared by many here, for me it’s based on my assumption that we see a replay of Japan 1990s, with some elements of UK 1930s (China is US, 1930s), and a dash of uniquely American flavor mixed in.

    * aka Baghdad Bob.

  85. Onlooker from Troy says:


    I find it amusing too when people go to blogs like this one and say that there are still too many bears out there so the market will continue up.

    First of all you really can’t make that judgment based on this demo selection. Where would that have gotten you a year ago? You shouldn’t be fading the contrarians, unless you want to be in the herd.

    Second, you’re never going to get everyone either bearish or bullish. So you can’t just look anywhere, see a small sample, and make a judgment that sentiment isn’t extreme enough. Also, sentiment only really works at the extremes. It will tend to then go to the other extreme, traversing neutral ground while following the trend set in motion at the extreme. Look at how fast sentiment swung from bearish to bullish in the crowd not long after this rally first started. Trying to use that swing just got you killed, thinking that things were too bullish.

  86. Transor Z says:


    NP, and I make enough smart-ass bitter remarks in other contexts that I can’t complain when people read that in to something I write even though I don’t mean it.

    Still think I’ve got the better argument about allocation of investment dollars though. :)

    I have a lot of respect for KD’s comments. His Don Quixote stint on ZH impressed me also and he talked me back from the edge of drawing pseudo-knowledge conclusions and jumping on the SLP-as-PPT bandwagon.

    My main question goes to the utility of having 70% of NYSE volume being allocated for this purpose, whether you want to call it necessary-evil parasitical, gaming the system, or providing liquidity. I am also very skeptical that the true mechanism is being disclosed to/understood by people charged with oversight.

    I interpreted KD as saying taking away flash trading would cause a market collapse. I think the money would just go someplace else. It doesn’t just disappear. I don’t understand why that is “having it both ways.”

  87. ben22 says:


    I get it man, my comment wasn’t really directed at you anyway. I’m sure I’ll get it for this but the whole “the game is full of crooks” “everything is manipulated” stuff from some people is getting a little old for me. It’s always been full of crooks, isn’t every business? I say give it a rest, the idea to pay attention to that sort of thing is just out there more now due to what has happened since late 07, we should all expect this sort of response. You saying that the SEC is just now starting to look at it should be telling enough. Guess what, if you stop HFT there will be a new things the crooks find, it’s the way it is. But hey, not my blog, people can say whatever they want so I just have to deal with it, sort of like the market.


    yeah, lots of current bulls were probably going to cash in March. Clearly a lot of people were, huge spike in cash allocation right at the bottom in the allocation survey. Still though, when you look at the cash allocation I wouldn’t have described it as extreme back at the March low based on the size and scope of the issues here, I’d expect the desire to hold cash to be much higher than that before this is all over, we are clearly still in a stock ownership society, with all the tools trying to catch the huge gain just like the co-worker they know that bot C at .97. That co-worker just didn’t reveal they also bot at 40, 30, 20, and 10.


    nice observations at 2:43

  88. leftback says:

    Hark! Is that a turn upwards in Ye Olde Greenback?

  89. ben22 says:

    maybe lefty, and look at stocks follow. However, seems like we could see a 77 handle on the index before the bottom is really put in for the buck. I do not think we will see the 7/15 figure re-visited from last summer though.

  90. Thor says:

    LB – interesting observation on China (re: US in the 1930′s). I’ve heard the argument made in a few other places as well. Considering no one really has any idea what’s really going on inside the Chinese economy it’ll be interesting to see if that theory pans out. My personal guess is China is more like South Asia in the 80′s and 90′s. Too many people, too many upcoming demographic and cultural nightmares around the corner for them to navigate successfully – imho

  91. Onlooker from Troy says:

    Good podcast re: Goldman Sachs with Matt Taibbi and an apologist for Goldman and the industry in general, Charles Ellis

    Taibbi did really well here presenting the case. Ellis just made a transparent attempt to deflect & distract, using the regular talking points and just downright B.S. (e.g. TARP wasn’t a bail out of banks, it was a bail out of Main Street). It made me want to reach right in and smack him.

  92. ben22 says:

    TARP wasn’t a bail out of banks, it was a bail out of Main Street

    How can anyone even say that with a straight face. Look around schmo. Unemployment keeps going up and GS employees are getting paid record bonuses. Of course, our boy Franklin thinks he’s touring wreckage on wall st. right now. lol. Try Flint Michigan pal.

  93. Onlooker from Troy says:


    Absolutely; outrageous. It made me want to scream (Ellis’ self serving line of B.S.). There’s really nothing revelatory in the show but it’s interesting to see how it’s making it’s way into the populace and how it will affect sentiment. There are some callers who reflect that outrage, including one who’s a long time IB’er and former GS guy himself (ostensibly, although he did sound credible).

  94. ben22 says:


    I might have told this story here but I was at a family wedding about a month and half ago and one of my wife’s uncles was telling me how great it was that the banks were all paying TARP back. I didn’t even bother trying to explain to him how wrong he was about what was going on, instead I headed straight for another drink.

  95. leftback says:

    @Thor: My personal guess is that the Chinese stock market and business world is absolutely rife with corruption and that eventually a crash of massive proportions will reveal fraud on an (almost) unprecedented scale.

    People who are about to exhaust their eligibility for unemployment benefits sure don’t feel bailed out by the TARP. TARP was a great boost for NYC strippers and coke dealers.

  96. I-Man says:

    That was awesome…

    I love seeing Mr Market reject the pump… just love it.

  97. Onlooker from Troy says:

    One other thing from the podcast. I can see now why they let Lehman go down the tubes. It allows them to now claim that capitalism really worked. Those who failed paid the price, etc. And therefore by inference that those who didn’t go down and are now prospering are being rewarded for not having done business poorly and didn’t go bankrupt like Lehman. That’s one line of crap that Ellis was peddling.

    Pure B.S. and a very thin and easily refuted argument. But it will work on a lot of people, no doubt

  98. Onlooker from Troy says:


    Yeah, it is frustrating trying to explain these things to most people. They just can’t comprehend it. They don’t have the proper foundation to process these things and you can end up just sounding like a paranoid alarmist. And that of course is what the bankers et al are counting on as they lobby to keep the status quo.

    Mostly you get that kind of reaction from those who just haven’t been directly affected enough by things to really be taking notice of the crap that’s going on. As the number of people that go into financial distress grows I think that trend will change.

  99. leftback says:

    onlooker said: “I can see now why they let Lehman go down the tubes”

    Because GS was able to step into the void left by LEH in the muni market and pick up the underwriting business !!

  100. Onlooker from Troy says:


    Indeed, there are many reasons they let Lehman fall. I should have phrased that differently. I just came to realize yet another one. My problem sometimes is not thinking deviously enough. It is a failing of mine. :)