HFT is Programmed for Disaster
Today was the release of Michael Lewis' new book "Flash Boys" about the rise of High Frequency Trading. To celebrate the occasion, the FBI opened an investigation into this industry, only about several years too late. Everyone has their own spin on this narrative, however, as usual, greed is at the root cause of this entire fiasco. When all of the stock and commodity exchanges themselves were IPO'd in the past decade and became publicly traded companies, then BIG SURPRISE, these exchanges morphed into for-profit casinos and went to work monetizing their customers at all costs. Shocking I know. The Business of Business is Profit...
I may still read Lewis' book for entertainment purposes, but the reality is that these various exchanges should have never been turned into for-profit casinos. That was the beginning of the end for "fair markets". Any society that doesn't systematically guard against conflicts of interest, will have no shortage of them...
NYSE/ICE
IPO: 2006
Nasdaq on the Nasdaq
IPO: 2002
Chicago Mercantile Exchange (CME)
IPO: 2002
Chicago Board Options Exchange
IPO: 2010
Home gamers throwing their last Bitcoins into Tesla call options have been good for earnings:
Home gamers throwing their last Bitcoins into Tesla call options have been good for earnings:
When did HFT become a major force in the markets?
Let's see, I'm going to take a wild ass guess that it was the mid-2000s:
"As of the early 2000s, HFT only accounted for roughly ~10% of total trading volume. Between 2005 and 2009, it grew by 164%...today HFT firms represent 73% of all equity orders volume"
"As of the early 2000s, HFT only accounted for roughly ~10% of total trading volume. Between 2005 and 2009, it grew by 164%...today HFT firms represent 73% of all equity orders volume"
Broken Markets
The MOST IMPORTANT FACT is that HFT-based market making is a recipe for complete disaster during a heavy market decline, because HFT bots as we've learned, are not programmed to provide liquidity when volatility and volume pick up substantially. All of which means they will simply step aside as they did in 2010 and let it crash.
"Traditional market makers have gone out of business because the new HFTs have even better/faster colocated access to the exchanges than the market makers ever had, yet the HFTs have none of the obligations to make markets i.e. buyer/seller of last resort. So, the HFTs pretend to be market makers aka. 'liquidity providers', but at the first sign of trouble they become 'liquidity takers' - dumping their positions back into the market. Whereas traditional market makers held stocks overnight and maintained 'inventory' to provide liquidity, the HFTs hold zero inventory with typical holding periods measured in seconds or less."
A Totally Artificial Market
73% of this trading volume (red line) are trades lasting milliseconds
Momentum of the Ignition
HFT + Fed Dopium + Low Volumes = Market Manipulation
As ZH consistently reports, the most shorted stocks are continual outperformers. HFT bots are programmed to seek whichever part of the market can be levitated the most easily and then throw capital at those sectors to ramp the overall market. Add in continual sector rotation and volatility compression and this market as we see from the black line above has been manipulated higher by every means possible. These contrivances have made hedging and risk management totally impossible. All of which won't matter, until volumes and volatility pick up to the downside. It will be a one way trip lower as the prices represented above by no means represent the underlying economic fundamentals or sustainable demand for stocks. In the Idiocracy, nothing matters until it collapses.
BAT Shit
The most fucked up aspect of this entire fiasco is that the only HFT firm (to date) that attempted to go public ("BATS"), had to cancel its IPO when its own stock flash crashed in the first hour of trading. And still, regulators JUST DID NOTHING. As always, you can't make this (bat) shit up.
INVEST AT YOUR OWN RISK
