"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

Tuesday, April 3, 2012

Cable Boom And HFT Exponential Leap in Manipulation

I was talking with a research fellow from Casey Research and realized the power of metaphors when discussing bad algorithms and the way they are designed to trip traders and market participants.  

When my girlfriend and I want to go out at night she sometimes has trouble making up her mind.  This leads her to genuinely ask to change plans, maybe invite more friends to dinner, maybe change our dinner time, etc.  When this happens I'm ok with it.  Once she begins doing this as a means to trick me and game me so she can get exactly what she wants, I get frustrated.  That's Quote Fluttering.  Changing and tricking the opposition.  Here's an example of KORS stock on Valentines day this year:

For more detail, see Nanex's original write up here

Now she could offer me a thousand possible combinations like 3 friends, the movies, and a drink after or she could suggest it be just her and I going for dinner then the movie.  Or perhaps she could just want to go out with her girlfriends for a night of dancing.  These options are all genuine on their own but again, once this information is being sent to me at a rapid fire pace, with the intent of overloading me to the point of frustration, it becomes manipulative and I wouldn't stand for it in the relationship and we won't stand for it in our financial markets.

The world is growing and becoming more connected.  Look around at how pissed people become when their iPad or iPhone takes an extra 2 or 3 seconds to load a weather map, or the latest Draw Something image....they lose their minds.  It's like this on the street.  Ever get a slow page load on the BLS during the Labor releases, it'll drive you nuts!  That's one reason many people have been calling for a new transcontinental fiber line, because disruptions in transmissions from global regions have sever drawbacks on economies and trades/transactions.  The redundancy and speed are being promoted as a way to provide backups should cables be cut or broken in anyway, which is fine and good, I want that.  

What I don't want is some Russian Mafioso (Rabbit-Hole here) or some Al-Qaeda financial terrorist (Elgindy) having the ability to jeopardize our exchange integrity more easily.  It’s not a secret that this transcontinental fiber is for HFT first, everything else second.  It’s also not a secret that the SEC is just terrible at their job, leaving us to rest on Nanex for accurate information about market anomalies.  The media and simpleminded writers will extol the virtues to be showered upon the common man but this is not for him, it’s for the big dogs, the Linda Green banks, the TARP and LTRO institutions, and the physicists we're all trading with.

But what about the retail investors that keep feeding this monetary Ponzi scheme, how will they gain from the shaving of a handful of milliseconds?  Will the average Joe trading on Scottrade, E*Trade, etc benefit from this?  No.  The institutions and co-located machines will benefit, which blatantly exposes the two-speeds on Wall Street.  HFT essentially are able to bet on a horse race that has already taken place.

The SEC has no grip on HFT or even acknowledges that bad algo’s manipulate sub-second levels of trading.  The CFTC is complacent in regular market robberies, maintaining their slow position to recognize the vulnerability of our exchanges and national market places to manipulative behavior.