Reuters: U.S. stock markets are rigged, says author Michael Lewis

[JMS]

1.  I was going to let this thread die, but I can't pass this up.  Please explain by what mechanisms HFTs caused markets to crash due to twitter rumors?  You can even use the incorrect model of HFTs that you were using through out this tread (and you've never really addressed my questions due to it).  Do HFTs have access to twitter?  Please explain it to us.  And since, I had to make that comment, I'll go ahead and address the other points.

Yes Pete, evidently on April 23, 2013 the associated press's twitter account was hacked. A false report about the white house being attacked and Obama being injured was posted.

HFT monitoring social programs including twitter feeds from news organizations like the Associated Press, evidently that was a new SEC ruling just last year.

(*) I wonder who close to the release date of White House Down or that other movie this twitter hack occurred?

 

High-frequency traders have turned to social media as the next frontier, raising a new set of regulatory concerns. The SEC’s recent decision to allow companies to use social media to release company and financial information to investors provided another high-frequency trading profit opportunity. However, social media can also cause market disruption: On April 23, 2013, the Dow Jones Industrial Average dropped temporarily by 150 points based on erroneous information posted on a hacked Associated Press Twitter account. Algorithmic programs exacerbated the problem by abruptly pulling liquidity from the market.

Bloomberg

http://about.bgov.com/2013-08-13/high-frequency-traders-are-speed-bumps-needed/

 

2. After 2010, there were circuit breakers put in place so there are reasons to believe that type of event won't happen again and wouldn't happen today so even if we assume that the 2010 issues was due ONLY or even primarily due to HFTs (which isn't clear), there are reasons to believe it won't happen again.  And if you and/or Michael Lewis weren't aware of this, then this conversation is more useless than even I thought.

There were no regulatory actions taken after the 2010 flash crash, the 2012 flash crash, or the 2013 flash crash.

 

5. Even if HFTs CAN cause a crash their ability to cause a crash is directly related to their importance to the market. Using something like a tax that decreases that amount of HFT going on will decrease the likelihood that they will cause a crash while maintaining some of the benefits of HFTs.

Even if? HFT's are involved with the majority of trades across our stock, commodities, and derivatives markets and have already been the cause of several crashes.

 

Though realistically, I'm done. I just couldn't pass on the idea that HFTs are reading twitter.

HFT'ers are looking for any edge to save them money. Why wouldn't you monitor Twitter? If you can get a twitter feed and suspend your trading and avoid a dip in the market, from the HFT company's perspective why wouldn't you?

I mean from a nations perspective wishing to avoid crashing our entire stock market of coarse it makes sense for regulators not to permit it only they decided to permit it in 2013,  Twitter is now a SEC recognized carrier for market moving information..... From a HFT company it makes perfect sense..

 

How Many HFT Firms Actually Use Twitter to Trade?

Tuesday’s fake tweet from the Associated Press’s hacked Twitter account, reporting explosions at the White House that injured President Obama, has sparked renewed criticism of high frequency trading, specifically how some computer traders use social media as an input into their trading strategies.

Though it’ll be months before we know exactly what happened, the consensus is that a handful of trading algorithms responded to the fake tweet by selling a broad range of stocks, bonds, and commodities. As message traffic spiked and prices started declining, HFT firms started backing out of the market, just as they did during the May 2010 Flash Crash. As a result, liquidity dried up, as you can see here in this chart from Nanex. Since there were suddenly relatively few buy orders to match against all those sell orders flooding the market, the dip picked up speed.

“When the amount of bids and offers thins out like that, it takes very little volume to move the market in a big way,” says Manoj Narang, chief executive officer and founder of Tradeworx, a Red Bank (N.J.)-based HFT firm. When he noticed the sudden spike in messaging traffic, Narang instructed his traders to back off the number of orders they were sending into the market. “When you’re in the business of posting bids and offers and something is up that you don’t know about, you back off.”

While there are trading firms that have begun dabbling in aggregation and analysis tools to scour news feeds for useful information, most of them aren’t trading directly off that information. And fewer still are actually trading off Twitter, even though less than a month ago, social media received the blessing of regulators to be a conduit for market-moving news.

...

Gonzalez says some of his clients have told him that a handful of high-frequency trading firms forgo filtering and pour Twitter data directly into their algorithms. “There are a few HFT firms that have, I would argue, irresponsibly added raw Twitter feeds into their systems,” says Gonzalez. He says he doesn’t know the name of any firm that does so. Neither does Narang. “I’m sure there are a few, but I’m skeptical there are many of them, or that they’re very big,” says Narang.

http://www.businessweek.com/articles/2013-04-24/how-many-hft-firms-actually-use-twitter-to-trade

[PeterMP]

Circuit breakers added after the 2010 flash crash:

 

http://blogs.wsj.com/marketbeat/2012/06/01/new-circuit-breakers-would-have-halted-flash-crash/

 

So we have people that don't do HFT saying that HFTs use twitter, but nobody can actually give the name of a company that does so.

 

The problem with feeding twitter into HFT is the size and amount of the data and its value.  HFTs trade on speed, on micro-second market differences. Taking something like twitter data and using it in an HFT program isn't going to be useful because by the time you can convert that information into something the program can understand the HFT will be on to its next set of trades.

 

How long do you think it takes to compile useful information from twitter and alter the programs trading practices from that?

 

From your one link:

 

"As message traffic spiked and prices started declining, HFT firms started backing out of the market, just as they did during the May 2010 Flash Crash. As a result, liquidity dried up, as you can see here in this chart from Nanex. Since there were suddenly relatively few buy orders to match against all those sell orders flooding the market, the dip picked up speed."

 

The prices started to decline, and then the HFTs pulled back. As HFTs increase liquidity, then when they pull back it dries up. Low liquidity is bad (generally HFTs are good).

I do suspect there are other trading algorithms (non-HFT) that are using twitter.

[JMS]

Let's just put this to bed right now...   Pete's already bleeding coiled up in the fetal position on the floor with his eyes closed and his hands over his ears refusing to read or comprehend any verbiage which disagrees with his ivory tower image of HFT....
 
Let's review the NYTime's coverage on HFT over the last say.. 6 months.
 

* OCT. 13, 2013
Jacob Goldstein It's the Economy column notes high-frequency traders often can foil long-term investors by trading ahead of slower players; says new trading platform IEX, founded by Brad Katsuyama, seeks to limit advantages for high-frequency traders by offering everyone opportunity to get market information at same time.
http://www.nytimes.com/2013/10/13/magazine/high-frequency-traders.html
 
* JUL. 13, 2013
James B Stewart Common Sense column holds that agreement barring Thompson Reuters from selling early glimpse of financial reports seems to have had immediate effect, citing steep decline in flash trades following release of Consumer Sentiment Index; notes move is just first step as regulators investigate media companies who charge fees for early access to financial information.
http://www.nytimes.com/2013/07/13/business/the-ethics-of-a-split-second-advantage-for-traders.html
 
 * FEB. 22, 2013

Floyd Norris High & Low Finance column notes that much of Europe is poised to begin taxing financial transactions, move that would have a minimal effect on traditional investors while discouraging high-frequency trading.
http://www.nytimes.com/2013/02/22/business/a-tax-that-could-change-the-trading-game.html
 
 * DEC. 4, 2012

Commodity Futures Trading Commission chief economist Andrei Kirilenko concludes that high-speed trading firms are taking significant profits from traditional investors; states traders make average profit of as much as $5.05 each time they go up against small traders buying and selling widely used financial 
http://www.nytimes.com/2012/12/04/business/high-speed-trades-hurt-investors-a-study-says.html
 
* OCT. 19, 2012
Floyd Norris High & Low Finance column examines the destructive history of computer-based transactions in the stock market, beginning with the infamous crash of 1987; says that trend has reached a nadir in the current age of computerized high-frequency trading, which has been accompanied by a steep decline in human judgement.
http://www.nytimes.com/2012/10/19/business/a-computer-lesson-from-1987-still-unlearned-by-wall-street.html
 
* OCT. 8, 2012
Securities and Exchange Commission is paying high-frequency trading firm Tradeworx for software that will give the agency its first real-time window on an increasingly sophisticated stock market; program is part of broader effort to monitor proliferation of new technologies and to crack down on practices that give traders advantage over ordinary investors.
http://www.nytimes.com/2012/10/08/business/sec-regulators-turn-to-high-speed-trading-firm.html
 
 * OCT. 2, 2012
Op-Ed article by author Roger Lowenstein notes that American regulators are finally examining the dangers posed by high-frequency trading, which has caused several market disasters in the past year; contends that strong measures are needed to curb practice, which has changed the stock market from a source of liquidity into hub for fast-paced gambling.
http://www.nytimes.com/2012/10/02/opinion/putting-the-brakes-on-high-frequency-trading.html

* AUG. 18, 2012
Joe Nocera Op-Ed column weighs in on the Standard Chartered banking scandal, the dangers of high-frequency trading
http://www.nytimes.com/2012/08/18/opinion/nocera-ever-hear-the-one-about.html

[PeterMP]

* FEB. 22, 2013

Floyd Norris High & Low Finance column notes that much of Europe is poised to begin taxing financial transactions, move that would have a minimal effect on traditional investors while discouraging high-frequency trading.

http://www.nytimes.com/2013/02/22/business/a-tax-that-could-change-the-trading-game.html

I have no idea what your point is, but this is the idea (that I stole from Dean Baker) that I presented and referred to, earlier in the thread.

Oh and this one:

"Op-Ed article by author Roger Lowenstein notes that American regulators are finally examining the dangers posed by high-frequency trading, which has caused several market disasters in the past year; contends that strong measures are needed to curb practice, which has changed the stock market from a source of liquidity into hub for fast-paced gambling."

You mean curbing, like making it occur less, not making it illegal like I've pointed out multiple times in this thread.

Well lying bleeding on the floor must not be a bad a position when the other person ends up making a post with multiple links that support your point of view.

[JMS]

The problem with feeding twitter into HFT is the size and amount of the data and its value.  HFTs trade on speed, on micro-second market differences. Taking something like twitter data and using it in an HFT program isn't going to be useful because by the time you can convert that information into something the program can understand the HFT will be on to its next set of trades.

 

Yes computers are terrible at efficiently processing large amounts of textual data..  Just terrible at it...   Reality is if you are looking to get a jump on the market and react to some catastrophic event in the real world,   having your HFT program monitor a twitter feed makes perfect sense.   Suggesting twitter,  designed for human consumption would impact a system designed to out pace other computerized transactions isn't realistic...  Computers with the ability to execute millions of instructions per second wouldn't be impacted even a microsecond scanning through twitter.    They only commands which would impact computer performance in such an exercise would be if the algorithm were bottlenecked waiting for resources.. ( network, HD,  etc) and all such resource bottlenecks could be easily removed from the algorithm with software engineering techniques.    Traversing Twitter doesn't need to occur on the same thread, process, CPU, or computer system to be able to inform your HFT system to sell everything immediately.

"Op-Ed article by author Roger Lowenstein notes that American regulators are finally examining the dangers posed by high-frequency trading, which has caused several market disasters in the past year; contends that strong measures are needed to curb practice, which has changed the stock market from a source of liquidity into hub for fast-paced gambling."

You mean curbing, like making it occur less, not making it illegal like I've pointed out multiple times in this thread.

 

Read the article...  I think they mean regulating it so HFT'ers can't front load trades on slower investors but have to take risks in the market like everybody else.   Take away the guaranteed profits and make them work for their money like everybody else.     Take away the speed advantage they have to trade around individual investors would do the trick nicely.

I have no idea what your point is, but this is the idea (that I stole from Dean Baker) that I presented and referred to, earlier in the thread.

 

I'm just playing with you pete... you know I love and respect you man....

Circuit breakers added after the 2010 flash crash:

 

http://blogs.wsj.com/marketbeat/2012/06/01/new-circuit-breakers-would-have-halted-flash-crash/

 

Good find.   I didn't realize the SEC had mandated circuit breakers in 2012 to go into effect in 2013..   But it does seem that tripping them off when S&P goes down 7%  is still being called a crash as happened in 2012 and 2013.

[PeterMP]

Read the article...  I think they mean regulating it so HFT'ers can't front load trades on slower investors but have to take risks in the market like everybody else.   Take away the guaranteed profits and make them work for their money like everybody else.

I suggest you read the article:

"But the better way to discourage this excessive, short-term market myopia is to take a page from anti-tobacco efforts: let high taxes discourage the antisocial behavior.

We already encourage long-term investing by taxing capital gains on investments held for more than a year at a rate of just 15 percent — in contrast to short-term capital gains, which are assessed at much higher rates. We could simply fine-tune that incentive even more. Intraday trades should be taxed at 50 percent. And “investments” that mature in 60 seconds should be regarded as, in effect, electronic errors — with any profit going to the government. This will greatly reduce high-speed trading and divert its remaining gains to the public."

Oh wait a tax on transactions that will reduce the amount of the HFT.

Sounds like a good idea.

And increasing liquidity at some level good:

"The “liquidity” H.F.T. provides is long past the point of being helpful. When high-speed trading was new, trading costs for all investors seemed to dip, but that trend has stopped, suggesting a point of diminished returns. Volume on the New York Stock Exchange now is four times the level it was in 1999 — a year with so much excess liquidity that it witnessed the greatest stock market bubble in history."

Some HFT okay:

"A well-functioning market can accommodate some hyperactive turnstile traders as long as it has enough legitimate investors — people who are thinking about the outlook for companies down the road."

There's very little in that article I disagree with.  I wouldn't make cases where it is held for less than 60 seconds 100% of profits going to the government.  I think that likely would have unintended consequences (you'd end up with companies hold stocks for 60 seconds, and then trading them, and I'm not sure what affect that would have, but I'm not sure it would be good), but I don't have an issue with making it a large amount of money.

And nothing about making it illegal.

[JMS]

I suggest you read the article:

"But the better way to discourage this excessive, short-term market myopia is to take a page from anti-tobacco efforts: let high taxes discourage the antisocial behavior.

 

 

And again Pete if you tax the behavior you institutionalize it.  You legitimize it.    That's a very attractive solution...   A non solution which allows business as usual to continue with tens of billions of dollars changing hands....  That's a solution worthy of our kleptocracy...

 

I just think a better solution is to create a single transaction time which would not allow market insiders to prey on the 99.999% of investors who on the outside of these deals.    Nobody should be allowed to create risk free investments on the backs of the core investor without who's trust the market goes away.   Without who's trust the market goes away.   I always thought that's why we have regulators to stop such a rigged game.