"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

Monday, February 6, 2012

Financial Markets: Down For The Count

The amazing wizards from Nanex, which are by far the best, has released an animated graph which shows the ever increasing levels of HFT churning with in the fragmented and broken financial markets.  Many of the trusted heads of banks and governments have defended HFT, claiming they add liquidity and tighten spreads.  We've highlighted a plethora of instances where this is simply not true and even the complete opposite in most instances.  Ever since the exchanges began selling enriched data feeds to co-located firms, the market has been tilted and the "fair" environment our President always talks about is non-existent.  We've seen the co-located machines front run Chicago PMI data (here), the Michigan Consumer Confidence index (here), RIMM errant news (here), and the list goes on.  The retail investor can not play in this market.  Should HFT be restricted, we would expect to see markets stop, enabling the evidence of a 100% computer driven market to be displayed in everyone's faces.  

For a recent Swedish TV show, Kalla Ifakta, Paul Wilmott (of Money and Speed and Quants: The Alchemists of Wall Street fame) spoke regarding HFT:
As a trader running a black box system you don't care about the value [of the stock you are trading], you care about how much money you can make in the next few seconds. And if your trading causes the share price to fall from $40 down to 10 cents, you don't care, you made some money along the way.
Anybody who's now making money from HFT, whether it's exchanges, or banks, or whoever; they will all be saying "Oh, don't worry, don't worry". And they'll be looking at their watches and thinking "I just have to keep saying don't worry for another two years, because in two years I will have made all the money I need to make and the opportunity will be gone". So, I'll just keep saying there's nothing to worry about and keep an eye on my watch.
That is the mentality that lead to today's fragmented and severely injured financial markets

The following animated GIF chronicles the rise of the HFT Algo Machines from January 2007 through January 2012.