>

Scott Patterson asks: Did the automatic shutdowns make the plunge worse?

“A number of high-frequency firms stopped trading Thursday in the midst of the market plunge, possibly adding to the market’s selloff.

Tradebot Systems Inc., a large high-frequency firm based in Kansas City, Mo., closed down its computer trading systems when the Dow Jones Industrial Average had dropped about 500 points, said Dave Cummings, founder and chairman of the firm. [Tradebot says it often accounts for about 5% of U.S. stock-market trading volume]. Tradeworx Inc., a N.J. firm that operates a high-frequency fund, also stopped trading during the market turmoil, according to a person familiar with the firm. . . .

The withdrawal of high-frequency firms from the market didn’t necessarily cause the downturn, but could have added to it, some market experts say . . . Technical factors that high-frequency firms and other quantitative funds use to trade likely also played a part as the selling accelerated. When the market hits certain levels as it falls, these firms’ computers are programmed to sell automatically as protection against further losses.”

HFT are like umbrellas on a sunny day. At the first sign of rain, they take their umbrellas back.

They have no market utility whatsoever — other than demonstrating the overwhelming corruption of the now publicly traded exchanges. They should not be for-profit companies, as their behavior demonstrates they are little more than whores and thieves.

I guess the commies were right — the capitalists will sell you the rope to hang them with . . .

>

>

Source:
Did Shutdowns Make Plunge Worse?
SCOTT PATTERSON
WSJ, MAY 7, 2010
http://online.wsj.com/article/SB10001424052748703686304575228721439480374.html

Category: Markets, 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.

60 Responses to “Did HFT Shutdowns Make Plunge Worse?”

  1. alfred e says:

    @BR: Did your stops get blown out?
    Why don’t you just come out and say what’s on your mind re: HFT. :>)
    Agree totally. But, hey, we got to do the trading lest we wind up part of U6. :>(
    And until we get picked clean.

    ~~~

    BR: 1) I NEVER enter stop losses into the NYSE or NASDAQ systems — that is a suckers game. We follow our own discipline, and execute our own stop losses.

    2) As noted in this space on Wednesday morning and again that night, (the day before the crash) we were 100% cash BEFORE Thursday.

  2. tranchefoot says:

    I’m not convinced that’s the whole story. There are primary dealers with HFT capacity that are contracted through the SLP to provide liquidity in just such a scenario. Where were they? The cynic in me says they went on “strike” for 15 minutes to send a message to Congress re Brown-Kauffman.

  3. wunsacon says:

    This event discredits the claim “we provide liquidity”. Anytime that claim is trotted out to defend against ideas like the Tobin tax, remember that liquidity controlled by the few can disappear at any time.

    Yet, I don’t know how we could “ban” HFT. We’re all computers now. How do we allow “good” algos but ban “bad” algos? Or maybe that’s the wrong question. Do we ever *require* people place a bid under securities? [Checking wikipedia...] Hmm…is that what we require of market makers or public exchanges? What happens if the market moves very much against those market makers and it’s not just a temporary or intraday/week blip? Does someone bail them out retroactively? Or were they supposed to maintain reserves in case of those kinds of losses?

    What does a market maker do with a stock like LEH that was liquid but insolvent and could at any moment implode? How does someone “make a market” in that stock? And, these days, “that” stock is probably the whole banking system.

  4. flipspiceland says:

    That P & G’s fundamentals couldn’t have changed by 50% in 4 minutes tells us that some kind of shenanigan, technical issue, or miscellany completely divorced from the actual value of one of the world’s finest companies was responsible for the drop.

    Aside from the scare, if allowed to go on for an hour into the close, a hell of a lot of money was to be made (made) on so many fronts including individual securities like Accenture (.01), AAPL (199), the Euro, etc. that a drop like that is what a bear would sacrifice his first born Teenager for.

    I wonder if those of us who missed the March 09 reversal wouldn’t welcome more of these and are not right this second prepared for just that eventuality. I know I am with dozens of low bids in place all over the map.

  5. Moss says:

    Absolutely agree with the comment that HFT have no useful purpose except to the parasitic ‘innovators’ who clam these techniques provide liquidity. They are simply another component of the shadow financial apparatus that is allowed to operate with complete disregard for fairness, transparency and ethics. Shame to those who turned a blind to the acceptance and proliferation of this blatantly manipulative and anti-competitive endeavor.

  6. VennData says:

    Here we are in slow-man’s land…

    Underlying the meme in this post and elsewhere is one assumption that HFT are supposed to be trading to provide liquidity. Why’s that? Why weren’t all the humans traders in there providing liquidity?

    The second assumption is there’s something bad in prices dropping. That’s not true, it’s a market mechanism, and if you look at what happened, the prices shot back up. People we laughing at the NYSE for pulling their computer plugs and sticking in the “people.”

    The NYSE stopped trading to let humans in, that’s what screwed up the liquidity. If people ‘turn off their HFT” systems, new systems that can adapt will prosper tremendously. I’d like to make 30% in a minute. Wouldn’t you? Someone will come up with a program to do it. I’d suggest getting in on the ground floor.

    If Accenture goes to a penny …and if the next day at open, Accenture is still sitting at a penny, buy up all you can. ..but it won’t happen, because some smart computer trader will be looking for that from now on.

    HFTs don’t have to be in the market providing liquidity. No one does. And we especially don’t need specialists in there (who bailed in ’87 anyway.) We don’t need bid/ask spreads, we only need the best algorithms and regulated exchanges taking a small fee for the locus of exchange computer operation’s rent.

    Now if you want to make a fortune, provide liquidity when the NYSE screws up again by “switching to people” It’s simple get a text message when the NYSE switches to people and turn on your computer system. Better yet, have the text go directly to the computer. What will you do with all that dough?

    Now that we’ve seen that the price for P&G can drop by 30% in a minute, a legion of simple bots will be terracing limit buys way under the market for all time (and limits sells, above.) and myriad other algorithmic constructs that superior systems (superior to humans) will provide. Markets adapt. That’s why they are preferred to the command economy (think George Bush and his no bid contracts, or North Korean food distribution, if you disagree.)

    Computer trading will adapt and improve. They will take more and more wealth out of the system, until better computer traders take those computer’s wealth away, and so on, and so on. The computers will step in and buy ( liquidity) or sell (same) as opportunities like 2:46 are analyzed and understood. Other problems will surface in the future and computer system will adapt to those to.

    Trading is this generation’s chess. Computers are better than humans. Let them have the domain and go out and find something else to do, like starting your own HFT operation (but you better hire some computer scientists on board.) If the US regulators try to stop it (they won’t) it’ll all go offshore. No one will trade here in slow-man’s land.

    P.S. Cancelling trades is bad, why are they canceling valid trades? Who decided that? and why? If no one’s there to buy, the limit order gets it. What’s so hard about that to understand? The old model’s are dead. We don’t need people getting in the way of efficient markets. Sorry if you feel differently, but you’re wrong.

  7. crunched says:

    Great article here… Can someone please print this out, put it in an envelope, and hand deliver it to Nobama and Congress.

    http://blogs.forbes.com/greatspeculations/2010/05/08/program-trading-needs-to-be-banned/

  8. jedwards says:

    Barry – do you actually know anyone who was able to trade during the nadir of the market crash?

    All blogs from prominent active traders, and people that I personally know said that their platforms all crashed. If anyone was able to trade, it seems like it was only those who were co-located at the markets, because everyone else wouldn’t have access, and the co-located HFTs sucked up all the liquidity before it hit everyone else.

    So they really do have premium seating for when the shit hits the fan, so that they can get out first, and get back in first, whereas us retail investors bear the brunt of the aftermath.

    When we will ever have a priority catch a break from regulators and the government?

  9. wally says:

    “Thinly traded” is the other half of the problem. When the market is nothing but a half-dozen kids playing computer games and three or four of them quit, there is not much market left.

  10. Deferred Comp says:

    Barry,
    The current structure of the equity market is inherently unstable. Thursday’s action demonstrates clearly that nobody is in control. Like so much of what has been packaged and fed to us all as “innovation”, electronic market making, algorithmic trading, HFT, etc. have all led to very little improvement in market integrity. These liquidity providers have been allowed access to the inside market with no obligation to the market. There is no rational basis for conducting business at hypothetical computer speed. Disclosure : I am a former NYSE member.

  11. Tarkus says:

    Deferred Comp Said:
    “These liquidity providers have been allowed access to the inside market with no obligation to the market.”

    “Have been allowed” is the key phrase – allowed by whom and why? Did the regulators ever endorse it? Where’s Mary Shapiro former SEC commissioner Cox in all this?

  12. NormanB says:

    The Financial Casino LIVES!!!

    The good news is that they are in a zero sum game and hopefully they are just screwing each other. The last one standing will be considered the best at it and will have no one to trade against.

    I don’t understand how institutions like pension funds, foundations and endowments with long range obligations can put their money to work with these traders which are incongruent with their necessities. Greed LIVES!!

  13. peterpeter says:

    The issue was not super fast withdrawl of liquidity from HFT – it was super fast market orders triggered by less sophisticated traders (including retail).

    Human market makers in the face of a wave of market sell orders would not have just stood there with bids on the books any more than the machines did. Look at the action on the Chicago futures pits on Thursday, which is all human…. it crashed as well.

    For the markets to trade down, someone needs to be hitting the falling bids on issues like P&G and Accenture… and that was not HFT with their finely tuned limit orders. They may have liquidated positions during the downturn because they saw unusual activity, but no materially important HFT was selling Accenture or P&G at the bottom. That blame falls squarely on the shoulders of retail investors using market sell orders and stop loss orders.

    It is blog posts like the following:
    http://www.ritholtz.com/blog/2010/05/volatile-markets-call-for-stop-loss-orders/
    which encourage retail to place stop loss orders. Had those orders not been triggered, noone would have taken out the extremely low bids on the ECNs, and all that would have happened is that bid/ask spreads for a few minutes might have increased dramatically, but the trades on the tape would not have tanked.

    Everyone pointing the finger at HFT ignores that last Thursday was basically a repeat of the 87 crash. The only difference is that there were waves of stop losses triggered instead of “portfolio insurance” – but they are the same concept. Set trigger points, have them exceeded, and sell blindly into *any* bid regardless of price. Drive down the price, trigger the next wave of stop loss orders. Wash rinse repeat.

    The blame here is difuse, but most certainly does not rest with parties that saw an incredibly unstable market and stopped trading. It lies with those who saw an unstable market and continued to sell down, either because they got scared, or because they had pre-programmed their brokers computers to do their selling.

    If you had a stop loss triggered causing a realized loss last Thursday – you should look in the mirror when searching for the cause of the selloff.

    ~~~

    BR: Understand the difference between having stops and entering stop loss orders. I NEVER advocate putting stop losses into the system where they can be picked off.

    There is an enormous difference between a capital preservation discipline, and playing poker with an open hand. Stop loss orders are a suckers game.

    It continually amazes me how easily stuff is misinterpreted. by the brain damaged. I NEVER said put orders in.

  14. rktbrkr says:

    Frau Merkel lost her majority today while the Euro Finance ministers were meeting to develop a plan to hold off the anti Euro “wolfpack”. The Kraut in the strasse hates the pols bailout of Greece.

    This political situations in UK and The Fatherland led to this Sunday night special?

    Think next week will be interesting?

    http://www.bloomberg.com/apps/news?pid=20601087&sid=a8cW7dRkIhN8&pos=1

  15. Money Mischief says:

    So Nasdaq is going to only cancel trades where the price was 60+% down from previous day’s close? So a trader who bought at 60% down and later sold at 40% down gets the first half of his trade canceled and he ends up with a short position and a massive loss?

  16. AnotherGuy says:

    Why is HFT different than LFT? They both seek to make money off “trading”, essentially being an intermediate, where no intermediate is really required. A lot of the people crying “foul” are those trying to skim the market in other ways and now they’re being out-skimmed. Everyone here knows what this “recovery” really is so if you’re buying into it as a speculation (I do, a bit) admit it and face the possible consequences.

    In a free market, as long as there’s a buyer and seller and they agree to a price, why should I care?
    The only exception is when there’s fraud going on, e.g.:
    1. The thing being sold is misrepresented, mislabeled, not properly disclosed etc. (see accounting standards).
    2. The person buying has taken a loan that he knows he can’t return. Leverage…
    3. The person buying knows he will be “bailed out” if he loses the trade. Government intervention. I classify this as fraud as well.

    The classic example is to imagine an HFT robot calling you and offering you $10 for you $1M house. Do you panic and sell? We have to deal with the fraud, increase transparency, ensure shareholders can excersize control over the companies they own. This will fix the market.

    Sustainability is what will fix the economy but we’re not there yet. Probably need to crash further to the edge of a dark age to get there.

    ~~~

    BR: The difference is the exchanges let the HFT see your orders before the market does. If you believe in fair and free markets, then you should recognize that this arrangement subverts free markets.

  17. franklin411 says:

    “I guess the commies were right — the capitalists will sell you the rope to hang them with . . . ”

    My sentiments exactly! Hopefully the crash will spur Congress to impose sensible regulations to save capitalism from the capitalists, just like FDR’s New Deal did in the 1930s. Business is no different from an overgrown baby–they think you’re hurting them when you take them to the doctor for a vaccination (impose sensible regulation). When they grow up, they won’t thank you for saving them (get “big government” off my back!). But the second they get in trouble, guess who goes running to mommy and daddy?

  18. wunsacon says:

    “The only winning move is not to play.”

  19. Steve Barry says:

    Just my personal opinion…my gut instinct tells me that the true insanity of program trading occurred not on Thursday, but in the year long rally that brought the market to incredible extremes in bullish sentiment, overbought technicals and 1929 level of normalized valuation. Amid otherwise anemic volume, the HFT programs steadily outbid eachother bit by bit, driving stocks up, at the same time their technology advantage acted like a small tax on ever other market participant. I warned over and over (to the point where I stopped posting) of the insanity of the rally and of being long during it.

    To me, a society that thinks it can build wealth by having computers flip paper every microsecond is seriously deluded. We cannot rule out an even bigger crash in the days ahead

  20. Steve Barry says:

    Of course very few complain about a market-distorting mechanism on the way up.

  21. red_pill says:

    a conspiracy theory which I don’t believe but can’t help considering (and no I don’t believe in the PPT) …what if the initial drop was caused by an effort to stem the drop up until that point (-415 dow points by 2.40 pm) but was executed erroneously (either human or computer). realizing the mistake in direction and/or magnitude, the same entity causes just as mighty a bounce back in the other direction. very very improbable and not worthy of real analysis but could make a good Hollywood script.

  22. Mike in Nola says:

    Looks like many of us aren’t doing much for Mother’s Day. It’s seems that the statement about thieves and whores could be applied to most of the for-profit financial institutions out their; it’s not about providing a service to individuals or buinesses, it’s about skimming as much as you can from the system.

  23. Boots or Hearts says:

    Truth be told. Not much will be done about it though as we know. Empty rhetoric and an few more lobbyists in DC is guaranteed.

    H.F.T. Time for an replacement acronym contest, such as Huge F. Trainwreck or the like.

  24. grashopa says:

    If someone wants to stop trading go ahead, its up to the brokers to protect clients from market orders that execture at a penny. Real problem is no one will step in to a falling market now because if you win they break your trades. If you lose they won’t. Great odds.

  25. call me ahab says:

    “I guess the commies were right — the capitalists will sell you the rope to hang themselves with . . .”

    or as Stephen Colbert said-

    “he is 100% a capitalist unless he can profit from capitalism’s demise”

    and SB makes an excellent observation- no-one cares how or why the market goes up- as long as it goes up- ponzi or no ponzi- who cares- the investigation only comes after it falls apart

  26. Transor Z says:

    Speak for yourself, Mike. Transor is bringin’ the magic today. :-)

    If this whole stock market thing has been a black comedy farce straight out of “Weekend at Bernie’s,” May 6th was the part where Bernie’s head flopped back to touch the middle of his back and everyone at the party gasped.

  27. constantnormal says:

    It seems unlikely that HFT can be eliminated. In the end, it is just the expression of available technology, and that tech has transcended the world view of the design of the existing markets. Such a thing always has unpleasant side effects, until the markets adapt.

    The most that can be (reasonably) done is to adopt measures to damp out the wild swings while at the same time doing as little as possible to retain changes in prices. Perhaps something like limit up/down on price changes for individual stocks, using a sliding scale of limits based on market cap or number of shares outstanding (pick another metric if you don’t like these, I’m not married to the concept, just fishing for ideas). The thing you want to get rid of is insane volatility that drives people completely out of the markets. Killing off the markets benefits no one, and that what swings from X to 0.01 (and back?) will do.

    Trust and confidence are required if markets are to function, and insane volatility destroys confidence.

    but at the same time, when a company implodes itself, the stock price has got to be allowed to sink at a quite rapid pace, so this is clearly a half-bnaked notion.

    But it’s better than the existing system, unless the goal is to shrink the markets as a source of capital for the economy as a whole. After all, the Real Purpose behind the equity markets is to allow public ownership of corporations, and to maintain fluid valuations of those companies. It’s not supposed to be an all-or-nothing minute-by-minute casino where valuations swing from infinity to zero and back on the tick of the minute hand..

  28. constantnormal says:

    That reads poorly, instead of “doing as little as possible to retain changes in prices”, it should read “doing as little as possible to impede changes in prices”

  29. constantnormal says:

    ps — I fully agree with VennData that rolling back trades is madness, it’s just moral hazard wearing a mask, and encourages the idiots playing stickball on the interstate to right back out there and do it again. If you do something stoopid and get hurt, you really oughta feel some serious pain, and maybe get killed. People don’t seem to learn by any other method.

    OTOH, I had trades pop between 2:43 and 2:45, and came out OK, (without rollbacks) — so I’m not exactly a disinterested party.

  30. rktbrkr says:

    Steve Barry,
    Exactly, the market was massaged up on low volume trading near day end and after. And there won’t be a full explanation of what happened – especially the miraculous rebound 1.5 points short of -1000.

  31. constantnormal says:

    BTW, was there ANY retail broker who did not have their web-based trading systems pack it in when mortals would be most interested in participating? Just curious. I know that both Schwab and Fidelity folded up, and am guessing that everyone else did as well, but have to data to support that belief.

  32. rktbrkr says:

    Money Mischief…those arbitrary trade cancellations could create interesting situations this week if hedge funds on the wrong side of the 60% golden rule are forced to liquidate, maybe waves of margin calls while they take their -59% trades to arbitration (AKA, go pound sand)

  33. constantnormal says:

    that’s “no data to support that belief” … fingers aren’t working very well today on the unalterable WordLess comment facility.

  34. constantnormal says:

    @peterpeter 2:30pm

    Stop losses did not cause the plunge. Eliminating stop loss orders is pretty close to the Pakistani approaches of banning shorts, then banning sales altogether. Neither of those actions stopped their plunge back in 2008.

    But it might be interesting to try preventing any transaction from taking place at a price point below any existing stop loss order, transforming a stop loss from a guaranteed sale to a guaranteed sale at a guaranteed price. We have the technology. We can make it faster, stronger, … (The Six Million Dollar Trade)

    Again, this is just another of my half-baked notions, tossing it out here to see just how dumb it really is.

  35. R. Cain says:

    10 million trades/day on a sub-exchange?
    how did we live without computers?

    AP:
    ‘Direct Edge, the third-largest U.S. exchange, reviewed some of the 10 million trades made Thursday …’

    http://www.washingtonpost.com/wp-dyn/content/article/2010/05/09/AR2010050901238.html

  36. Deferred Comp says:

    Dear Mr. VennData,
    If no one is supposed to be in the market providing liquidity, where does liquidity come from when markets become dislocated ? Think about it ?

  37. TakBak04 says:

    I’ve posted on here before, that I’m not a trader but a Value, Buy and Hold for Dividends.

    An example of how HFT’s and Traders play is stocks is shown by one stock I own. Abbot.

    I don’t know how to post charts here but I’ll give you the “52 Wk MA that will clue you about how traders mess with us value/B&H’ers.

    http://finance.yahoo.com/echarts?s=ABT+Interactive#chart2:symbol=abt;range=1y;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=onhttp://finance.yahoo.com/echarts?s=ABT+Interactive#chart2:symbol=abt;range=1y;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on

    More On ABT
    Quotes

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    GET CHART

    Abbott Laboratories Common Stoc
    (NYSE: ABT)

    After Hours: 48.98 Up 0.26 (0.53%) 6:54PM EDT
    Last Trade: 48.72
    Trade Time: May 7
    Change: Down 0.28 (0.57%)
    Prev Close: 49.00
    Open: 49.02
    Bid: N/A
    Ask: N/A
    1y Target Est: 62.06
    Day’s Range: 48.00 – 49.16
    52wk Range: 42.75 – 56.79
    Volume: 12,056,195
    Avg Vol (3m): 8,303,000
    Market Cap: 75.20B
    P/E (ttm): 14.28
    EPS (ttm): 3.41
    Div & Yield: 1.76 (3.60%)

    I bought ABT at 48. After I bought it went down then it went up to almost $988.00 within a few months. I should have sold it out and taken the profit and paid the capital gains tax on my profit. (Remember, I’m not a “Trader” but an individual invester in a higher tax bracket who is not retired.

    So….I held onto ABT for the Dividend…and ABT went up and then crashed down below what I bought it in a few months. The TRADERS were pumping up that stock…there was nothing in the fundamentals that would have given it an over 900 pt run. They took it up and took it down.

    That’s what those of us out here who aren’t traders and don’t want to be traders are faced with in the SM these days.

    IT’s NOT FAIR…and IT’S JUST NOT FUNDAMENTAL as to how investing should work for all of us in a “Capitalist Society”……..Or……IS IT?

  38. The Curmudgeon says:

    Did Mrs. O’ Malley’s cow cause Chicago to go up in flames? Maybe, but it had to kick over that lantern in a tinder box of wooden structures just waiting on a good starter to set the city ablaze. Same’s true of the markets last week. If it was HFT or a fat finger or whatever, the whole thing was a tinderbox waiting to burn.

  39. KidDynamite says:

    “They should not be for-profit companies, as their behavior demonstrates they are little more than whores and thieves.”

    really barry? i’ll bite, even though this seems like a troll post… HFT players are doing the same thing you’re doing – only they’re doing it faster… speaking of “Commies” – it’s awfully communist to decide that you can try to make profits trading but someone who’s doing it faster than you can’t!

    everyone should read PeterPeter’s comment above (2:30pm)

    come on barry – you’re way to smart to write posts like this. the problem, if there is one, is fragmented ELECTRONIC markets – not high frequency trading.

    there’s a really easy solution to all of this: BAN MARKET ORDERS. think about it. it’s not hard, and it’s not crazy. when people say “market,” they don’t mean market… and yes, constantnormal – this includes stop loss orders. all orders should have price limits associated with them.. the alternative, of course, is that there’s no crying after the fact when your market order gets filled at a penny because there were NO BIDS.

    barry – i’m begging you – read what i’ve written on this subject.

    ~~~

    BR: I’ve read it. You are advocating for is legalized theft. That is what occurs when the exchanges allow HFT to see orders before they hit the exchange and trade ahead.

    I am against that particular form of wealth transfer.

  40. Transor Z says:

    @takbak04:

    http://www.investopedia.com/articles/financial-theory/09/history-of-fraud.asp

    See the entry for Daniel Drew.

    What has been will be again,
    what has been done will be done again;
    there is nothing new under the sun.

  41. KidDynamite says:

    oh – ps – back to the WSJ article Barry was referencing: this is also a hilarious theme… people complain that HFT serves no purpose, and they want it banned… then, when the HFT guys shut off their algos because the market is acting all whacky, the same people complain that the HFT algos aren’t there anymore!!!

    have your cake and eat it to…i guess.

    again, folks, HFT players are not paid to provide liquidity. they are not REQUIRED to provide liquidity. they are paid IF and WHEN they provide liquidity…. when they shut their algos off it should have cleared the path for the traditional, slow, old school traders to provide all the liquidity they wanted with no competition… how’d that work out?

    and ps – no – I don’t run a HFT algo, so i’m not just talking my book.

    ~~~

    BR: You are misinterpreting.

    1. Liquidity is the reason given for why HFT adds social utility and are desirable for exchanges.

    2. Only they didn’t add liquidity — they pulled out of the market in a crisis.

    3. Hence, the reason claimed for existence is false . . .

  42. izimbra says:

    When Barry wrote, “They should not be for-profit companies, as their behavior demonstrates they are little more than whores and thieves,” I think his “they” in that sentence referred to the exchanges.

  43. KidDynamite says:

    thanks izimbra – i noticed that upon rereading it…

  44. bergsten says:

    This entire mess (and those soon to come) can be easily remedied.

    Eliminate ALL of the exchanges. We don’t travel by horseback anymore and we have instant communication — there is no need for these groups to get a piece of every trade for negative value.

    Setup an “eBay-like” entity (or three) where, instead of goods, stocks can be bought and sold. Another (or three) that hold the ownership records.

    Any stocks can be bought or sold — public or private. Any buyer — institutional or retail can participate. No leveraging (credit to buy must be sought elsewhere). You can only “short” what you actually own.

    Companies post daily numbers on their “eBay” listing. They can lie all they like — but they’ll get rated, by the buyers. Companies can offer to sell or buy as much stock as they want.

    No more “brokerages” — though people can act as financial managers/agents and can setup their own entities to create funds (which would also be bought/sold on “eBay” too).

    The current system is fundamentally broken — it’s time to throw it all out!

    You heard it first here, folks, but I bet it doesn’t happen!

  45. bergsten says:

    Goddamn HTML. Sorry for all of the italics following “any buyer.”

  46. wally says:

    “Of course very few complain about a market-distorting mechanism on the way up.”

    Exactly so. Nor did people complain when they were able to sell their houses for too much money in 2006. Nor did the Greeks complain much when they loaded up on goodies as their credit exploded. Nor did the EU complain when they could buy all those vacation and retirement condos in Spain.
    And why not? Because we’re so much smarter now. We know that old standards of financing and borrowing were just schemes to keep us all from having a real good time. Now we know that we can just have a lot of stuff and do whatever we want and never have to pay for it. We’ve innovated.

  47. Andy T says:

    Ditch the faux populist stuff BR. It doesn’t fit you. I know it’s good for page views, etc, but it seems contrived. Leave that to the Zero Hedge’s of the world.

    Stay smart.

    The HFT programs are one of the reasons the market ‘levitated’ the last several months and made you some “alpha.” Don’t bite at the hand that Fed you. (Get it?)

  48. Andy T says:

    “Understand the difference between having stops and entering stop loss orders. I NEVER advocate putting stop losses into the system where they can be picked off.

    There is an enormous difference between a capital preservation discipline, and playing poker with an open hand. Stop loss orders are a suckers game.

    It continually amazes me how easily stuff is misinterpreted by the brain damaged. I NEVER said put orders in.”

    ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
    Whoa. Someone touched a nerve….

    Barry, I know exactly what you’re saying and I can tell you it’s a “nuanced” message to 90% of your readership. How do you respond to the ‘retail’ guy out there who reads your blog and DOES NOT sit behind a trading desk all day? What avenue does he have other than place protective sell stops below the market before he heads off to his office or worksite? How else could he have interpreted your message?

    The people who read your blog AND sit behind a trading desk DON’T read your blog for trading advice. I know it hurts, but it’s true.

    So, when you toss out your pearls of wisdom on trading (‘er investing), assume it’s someone who doesn’t have a Bloomberg Terminal….

    ~~~

    BR: I find the hardest part of writing is guessing how what I say will be misinterpreted. This is a classic example.

  49. Boots or Hearts says:

    In reference to the last post: How about the ubiquitous Iphone/smart phone applications available to the average retail person today. I do not agree that they have no choice but to use stop loss orders. This thread was “hijacked” as they say.

  50. I think it is disgusting that you would denigrate whores and thieves that way Barry. At least use lawyers and politicians.

    Computer trading will adapt and improve. They will take more and more wealth out of the system, until better computer traders take those computer’s wealth away, and so on, and so on. The computers will step in and buy ( liquidity) or sell (same) as opportunities like 2:46 are analyzed and understood. Other problems will surface in the future and computer system will adapt to those to.

    That’s all well and good but the day I see a computer driving down the street in a porsche with a woman in one hand and a vodka in another, I’m still smashing it!

    @jedwards Says: May 9th, 2010 at 1:54 pm

    Barry – do you actually know anyone who was able to trade during the nadir of the market crash?

    I was able to trade through my browser (someone also asked about that) though I did try to phone my broker and wasn’t able to get through. I had a bid on an option I had shorted (covered call) that filled before I realized it. I was trying to make the trade again (I didn’t realize my order was still standing) but my cash was lower than it should have been so I checked my list order screen and saw that I had already been filled on the trade. It was around the crash time but not necessarily at the crash time. It was in a gold stock and it didn’t get taken for a ride so the trade wasn’t called back

  51. What avenue does he have other than place protective sell stops below the market before he heads off to his office or worksite?

    Buy good stocks that reflect the true value of the company and either babysit the things daily or only look at them every couple weeks

  52. Max Keiser says:

    “May 6th was an unequivocal act of domestic financial terrorism in America. A day that will live in infamy.

    To scare the lawmakers, themselves large owners of the very banks and stocks that they are supposed to be regulating, a financial Weapon of Mass Destruction was put to their head and they acquiesced.

    As the inventor of the continuous double-action, market-making technology (VST tech. US pat. no. 5950176) that is referenced 132 times by program trading and HFT patents since 1996, I can tell you that Goldman, JP Morgan and the gang simply pulled the ‘buys’ from their computer trading programs and manufactured a crash. And when the coast was clear, and it was clear the politicians were not going to vote for anything that would break up the ‘too big to fail’ banks; all the ’sells’ were pulled from the computers and the market roared back.

    This is a Manchurian Candidate market where program trading bots start the ball rolling in whatever direction Wall St. wants the market to go – and then hundreds of thousands of day-traders watching Cramer on CNBC jump on the momentum bandwagon and commit the crime for the Wall St. financial terrorists, who then say, ‘It wasn’t us, it was ‘the market!’”

  53. Apparently I’m in the minority here. The consensus seems to be, “We love the liquidity (and stability) you provide us to make massive trades without shocking the markets on “normal” days, but because you (gasp) have a sense of self-preservation and decide to stand on the sidelines when the markets don’t favor your style of trading, we hate you.”

    Here’s a suggestion for you: Shutdown the HFT’s for the next year, see how much market volitility hurts the average guy on the street (although many others who profit from volitility will greatly rejoice), and then tell me if you still think the HFT’s are evil.

  54. KidDynamite says:

    barry wrote:

    “BR: You are misinterpreting.

    1. Liquidity is the reason given for why HFT adds social utility and are desirable for exchanges.

    2. Only they didn’t add liquidity — they pulled out of the market in a crisis.

    3. Hence, the reason claimed for existence is false . . .”

    come on barry – EVERYONE pulls their liquidity in a market crisis! it’s always happened, and it will always happen! that’s exactly the point. it doesn’t matter if the market maker is HAL900, Ben Bernanke, or Johnny Trader Superstar. No one steps in to get run over by a freight train. again, you’ve already posted the SPU pit audio that PROVES this.

    actually, i take it back – ben bernanke DOES step in front of a freight train and just prints all the money he wants to set a price… but that’s a different subject.

  55. KidDynamite says:

    BR – i thought you might find this interesting – a comment from my blog illustrating the back and forth blame game between the electronic exchanges and the NYSE – this comment is from a co-head of electronic trading at a big bank. his point is that the NYSE uses the LRP as a claim of market control, but that in reality it’s an excuse so that the specialists can avoid getting run over.

    “I think in general far too little attention is being given to the NYSE’s LRP. The net effect of the LRP on Thursday was that the specialist, whose responsibility is to be the liquidity provider of last resort, was essentially able to remove themselves from the market and abdicate their role as liquidity provider. With the NYSE out of the picture and the HF liquidity out of the picture bids on the remaining protected market centers were quickly exhausted and you had the nonsensical situation of stocks printing at .01. Ironically, I have been in several meetings with NYSE executives who were trying to make the case to me for more of our flow to be sent to the floor and one of their selling points was that in times of great volatility you wanted to be in the specialists book since he would always provide consistent and liquid markets. What a joke. One more point about the NYSE…during this whole LRP period which the NYSE claims was the right way to react; the NYSE’s own electronic exchange ARCA continued to trade and ignored the LRP. So the next time you see Duncan Niederauer on CNBC talking about how the electronic markets(NASDAQ, BATS, etc) were at fault remember that his own electronic market was trading the same way and it was only the good old boys on the floor that got their protection from bidding into a crashing market.”

  56. dedalus says:

    When Barry concludes:

    “I guess the commies were right — the capitalists will sell you the rope to hang them with . . .”

    one is left to wonder if he’s referring to Marx’s early musings in “The Economic & Philosophic Manuscripts of 1844″ or to the later revisionism of those ideas by people like Edouard Bernstein and Isaac Steinberg.

    Please Barry,

    Say more about what you “guess the commies were right” to believe, for any blogger as familiar with communist ideology as yourself has the bona fides to pronounce upon more mundane issues, like HFT liquidity effects.

  57. [...] afternoon, I’m on Bloomberg TV, between 2pm and 2:45pm  discussing the market crash, whether HFT was to blame, and the SEC vs Goldman Sachs [...]

  58. ahd says:

    Haven’t read all the comments, but a quick scan doesn’t show the obvious conclusion: That the HFT players do provide liquidity, exactly as they claim… We’re told that the HFT guys, whose trades are small but very frequent, pulled out in the midst of the market plunge. Note that the trades required to pull out would 1) be fairly small since the HFT players don’t typically carry large positions and 2) are more likely to have been buys since they’re reputed to be momentum players who would have been biased to be short since the mkt was already down 3%. So they pulled out and it got worse?! How can that be laid at their feet, other than as a convenient, already disliked scape goat? Ridiculous….

  59. KidDynamite says:

    “BR: I’ve read it. You are advocating for is legalized theft. That is what occurs when the exchanges allow HFT to see orders before they hit the exchange and trade ahead.

    I am against that particular form of wealth transfer.”

    jeez barry – you’re back on Flash Trading? come on – that’s so 2009. and I thought you already admitted that I’d schooled you on that one… Flash trading is a total non event – and it’s not what we’re talking about here.

    here’s a simple claim: if there were no market orders, we wouldn’t have seen the price action we saw. ban market orders. there is no reason for them to exist. we must protect people from themselves, apparently

  60. KidDynamite says:

    @2:50pm:

    “BR: The difference is the exchanges let the HFT see your orders before the market does. If you believe in fair and free markets, then you should recognize that this arrangement subverts free markets.”

    Barry – what are you talking about here? are you talking about flash trading – where the person who enters the order HAS A CHOICE if their order will be flashed or not? (and may choose “yes” in order to save order routing costs) or are you talking about co-location?

    i hate to be a nudge in this thread and dwell on this, but you are a very smart man with a very wide audience, and you do everyone a disservice by mis-educating them.

    It’s true that systems that are co-located will see orders before people who are located further away – that’s a simple electronic fact of life – the data has less distance to travel. This is true REGARDLESS of the existence of HFT or colocation. People in NY will always see the data before people in San Fran. People downtown will see it before people uptown. The important point is that there are no restriction as to WHO can co-locate. you don’t have to work at Goldman Sachs or belong to a special club -it’s open to anyone who wants to invest in the business.

    “but I, the little guy, can’t invest in a colocated HFT business,” you say… SO WHAT? so there will ALWAYS be people who see data and react to it before you do! but please don’t confuse this with being frontrun, illegal activities, or subverting free markets.