"We risk becoming the best informed society that has ever died of ignorance"
- Rubén Blades

"You can't make up anything anymore. The world itself is a satire. All you're doing is recording it"
- Art Buchwald

"It's getting exciting now, two and one-half. Think of everything we've accomplished, man. Out these windows, we will view the collapse of financial history. One step closer to economic equilibrium"
- Tyler Durden

"It is your corrupt we claim. It is your evil that will be sought by us. With every breath, we shall hunt them down."
- Boondock Saints

Saturday, January 7, 2012

A Response To The Government Office For Science Report on "The Global Financial Markets: An Ultra-Large-Scale Systems Perspective"

This paper misses the mark on the interactions within ultra-large-scale systems.  The author seems keen on believing the regulators have supreme knowledge of the systems they oversee and that the only problem with the Flash Crash was speed and severity of price drop (not the ignoring of Reg-NMS, not the Quote Stuffing, not the Co-Location, not the Dark-Pools where assets are traded in the dark, etc).  This is what chaps us the most.  History is not only being re-written, it's also being stored and manipulated in long and drawn out analysis papers like this one that essentially go nowhere. 

We know what caused the Flash Crash and most real traders know these markets are not safe with circuit breakers.  In a world where speed is measured in milliseconds (fasta-seconds even) a paused from the circuit breaker will have dire knock-on effects as players able to prepare to sell the instant trading can begin again. 

Th kicker is that the SEC and CFTC are mentioned and not NANEX.  If a paper is 41 pages long and has what appears to be some detail to its research, how can you ignore the firm that stands alone at the top in fighting the SEC on this type of market participation.  There are blogs and others like us who help to spread the word but we think the US Gov't will be more inclined to Eric than to call us.  Trust me, the HFT community has the money to issue papers like this, initiate all types of acedemic papers and whatnot because they scam system daily.  Circuit breakers will not help.  The only logically answer that would work to restrain the HFT's from responding to incentives that are damaging to the market structure comes from the SEC arch enemy, the well informed NANEX guys (read their proposal here).

Want proof of the tight spread, liquidity providing, non-systemic threatening HFT's?
  1. Exhibit A
  2. Exhibit B
  3. Exhibit C
  4. Exhibit D
Keep in mind:
  • Circuit Breakers will not help.
  • The SEC things there is too much noise when analyzing pricing inequalities inside of 1 minute.
  • HFT claims to provide liquidity and tighten spreads, the evidence shows they do not.
  • The flash crash was a Normalcy of Deviation because of papers like the one below that provide false information and false senses of protection from government oversight bodies.
  • HFT operators have paid-access to supreme data feeds from the exchanges they are Co-Located with.  This means the HFT see your order before anyone else and can front run if its large enough.  They are able to execute at a price not advantageous for you or the market as a whole.
At this point, we're frogs in a boiling pot, death is imminent should we focus on the flames heating the pan and not the nob used to turn the gas off.  Please help us and the world by staying informed and questioning at length hit pieces like this one.  Remember the simple fool from Investment U?  Please do not be like him, know what you're talking about so as not be an accomplice to stupidity.

And in case you're the proactive type, trade around the HFT with HFT Alert Pro, this way you can see the behavior yourself and not rely on the government. 
The Global Financial Markets: An Ultra-Large-Scale Systems Perspective