"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

Sunday, April 20, 2014

The Post "Flash Boys" Swelling Of Pro-HFT Bandwagoners

Back in the summer of 2007 when Reg-NMS was complete and in place, there were many keen traders who came out against the then unknown benefits of HFT.  Leading up to 2007, spreads had been tightening as electronic trading enabled market makers to handle the responsibilities more efficiently than they had been when using non-electronic systems. 

However, the only ones taking time out of their day to highlight these benefits were those who owned exchanges or worked with market making venues to improve order-matching/routing techniques.  I haven't seen any examples that mirror the onslaught of complaints from participants who were very vocal about what appeared to be a "slanted" playing field. 

Negligible Spread Improvement
Simply I am asking:
Where were all these advocates years and years ago when many of us started calling out the illegitimacy of exchange's relationships to participants desiring to be intermediaries in an effort to carry out their Saintly duties of providing liquidity and tightening spreads?  
Many of these people didn't seek to join the conversation then...it was only years later after an energized confrontation live on CNBC that we began to see a swelling influx to the conversation of those in support of Reg-NMS and the bad-algos it enabled.

If HFT is so great (again, I'm saying "if" because apparently we can't "prove" this as I highlighted here) then why was there such an uproar from participants regarding the clear alteration of the playing field back in 2007 but no simultaneous highlighting of this new and fantastic market Reg-NMS was designed to create?

Paul Wilmott back in 2009 on CNBC at the 0:49 mark in the video below said it best:
"...the way people are always jumping onto one band wagon after another, the latest one being high frequency trading"

As many of you in my Twitter and social circle know, the venture I helped co-create known as BTFDtv was brought about because of my anger at CNBC's inability to articulate what happened to the SIP during NASDARK.  The idiocy from their talking heads coupled with the clear acceptance & lack of challenge to Bob Greifeld's statements (Sorkin put words in Bobby's mouth) drove us to test the grounds of having real-traders discuss the markets live from their trading desks at no cost to the viewers (ie, no commercials or useless bullshit banter).  Misinformation. a desire to join the conversation and voice my perception drove my participation and still does.  If the those who are joining the HFT clusterfuck post Flash Boys are angry at the incorrect characterization of this new "trading style" I'd like to ask what took so long for you grow the marbles to join in?  How many merely waited to take advantage of the perception of "strength in numbers"?

Cutting through the salesmanship of this debate from both sides, it's clear to see the net impact of Reg-NMS merely by analyzing at what times the pro-HFT camp swelled.  The anti-HFT camp began to show itself and highlight the new dynamics of things like special order-types, maker-taker models, and the inherent inability of the SEC to enforce Rule 611 because of natural latency built into electronics, rendering the trade-through rule essentially null and void.  Perhaps if the new electronic trading venues were more transparent in their operations early on, they could have managed what they perceive to be nefarious behavior and bad information better.  Instead, when I reached out to O'Brien, he felt he understood our side and said this:

The problem isn't that the anti-bad-algo camp is misinformed (what we see and highlight is real and unfiltered) it's that when we started raising questions, they were ignored and since these new exchange heads decided to behave like a) they are better than the rest of us and b) treat us like we're just anonymous Twitter people, they allowed our concerns to go unchecked until such a point in time that Haim Bodek decided to blow the whistle.  It was only because of Bodek that Nasdaq decided to update information publicly about order types and only Nasdaq, no one else took initiative to publish information about special order-types.  Then about 1 week before Wall Street Code was released, Direct Edge released a video of how to use their order types.  After the update, people became aware of these special-order types and this and this happened.  Even then though, the exchanges still didn't understand order-types as the Direct Edge CEO alluded to such when addressing the new micro-structure with yours truly:

Keep this in mind, as advocates attack people like myself for highlighting the impact of this new trading structure, ask yourself where these guys were up until April 1, 2014.  Please ignore that distracting commentary from both sides and really look at the dynamics here.  Specifically the previous Direct Edge CEO & current BATS exchange President's comments about "good faith efforts" and his clear dissemination of bad information when pressed about how Direct Edge matches orders, see "BATS Admits CEO Lied About HFT On CNBC"

It's real bad when those who created exchanges are offering "good faith efforts" to explain them and then also subsequently highlighting their own inability to understand even the most basic operations of the exchanges they allowed activist HFT's to create.
Be careful my friends, recognize not all HFTs are bad and remember:
"We Risk Becoming The Best Informed Society That Has Ever Died Of Ignorance"