I was asked the above question the other day. It was asked in a tone as if I just happened to write about the topic that now has both the financial, as well as main stream media in an uproar. i.e., right place, right time coincidence. I thought it was a fair question for the person asking was really not that familiar with me and they themselves just became aware of this topic. So, I figured I’d explain why I have standing in this story as opposed to many that suddenly are writing, speaking, and more on a topic they seemed oblivious to just yesterday.
I’ve written and spoken many times over the years on the dangers of what has been transpiring in the markets via High Frequency Trading (HFT) as its being implemented since the financial meltdown of 2008. So for the sake of brevity here is an excerpt from one of my articles back in 2012 where I opined my thoughts specifically on HFT, the markets overall, and why one needed to think or understand the markets and anything that can jeopardize them, for after all, they truly are the greatest bastion for capitalism via free markets that the world has ever known. They’re the life’s blood of capital formation and enterprise however, they seemed to be no longer exactly that.
Implying they just might be morphing into something or already have changed into something more along the lines of a casino I was warning when hurricane Sandy threatened the East Coast and I posted the article below. To wit:
In the article I raised these points…
“How could the electronic markets be closed all day Monday when Sandy was off shore not due to reach landfall till near 8pm EST. Closed all day Tuesday when Sandy had passed and the aftermath apparent. Yet the switches are turned on at 6pm EST Monday night while Sandy was actually overhead wreaking havoc, flooding subways, businesses, and more. Only to watch the electronic markets operate what appeared as flawlessly overnight through all that destructive may lay causing massive blackouts and wind damage leaving millions of people without power.
And yet not as much as a blip. The only blips on the screens (or lack there of) seems to be caused by the continued hand wringing of whether or not to open Wednesday. Something just seems wrong with the reasoning given.”
Followed with this…
“Could it be that the markets were actually closed not because they couldn’t operate but rather that the HFT computers couldn’t operate because what they rely on for their advantage would be gone? i.e., Their proximity.
If the algo’s lost their advantage of order execution they would be at the mercy of efficient markets. You know, that thing they always say they’re responsible for. Heaven forbid there would be a Bid and Ask not generated by them with the ability to be pulled in nano seconds. Rather by an actual order placed with someone willing to actually Buy at said price or Sell. Oh the humanity if that is the case.
Would the markets themselves also have a stake in making sure the illusion of “deep markets” was perpetuated? Imagine if the markets opened and to what is normally reported 70% of all the markets trading didn’t show up because the HFT computers couldn’t play? Would something like this almost be more frightening to the markets than the chaos currently being dealt with in the aftermath of Sandy?”
At the time there were far and few between even bringing up this type of thought. Yet, as we now see, the few of us that were pounding our keyboards or fist making such claims were basically ignored. So much so that the industry itself couldn’t look in the mirror and see how much it was putting at risk the very nature we as a civilized world depended on for a way of life that allows companies to form, people to bring ideas to fruition, a bastion for retiree’s savings, home buying, computers, internet, you name it.
Everything we touch is somehow connected in one way or another to our capital markets. Sure, there will always be winners and losers, that’s capitalism, but what capitalism should never be is in bed with anything remotely resembling something “rigged.” I don’t care how much lipstick the so-called “smart crowd” wanted or wants to put on it. It’s still a pig and it stinks. Period.
As an entrepreneur myself and as one who tries and bring sanity to that field. Not saying anything is a kin to agreeing with it. And I do not. Regardless of how much money one can make in the HFT genre. Capitalism, and free markets are too damn important.
Level playing fields matter. You wouldn’t let your kid play a game where he was on the losing team game, after game, after game knowing full well they’re losing because the umpires are in the pockets of the winning side. So why in the world would you let your business, pension, and more play on a field where at any time – you can lose not because you made a bad decision, but because you were the new putz because the other team just paid more money to make you exactly that.
Truly think about that statement above. It’s not that far removed as an example of what I feel has been going on.
Personally I have no idea of exactly where or how I fit into this whole story as it’s unfolding. I am grateful for the sites that have carried my articles (e.g. Slope of Hope™, ZeroHedge™, and others) when they could have easily dismissed them as commentary running counter intuitive or unproductive to trading and all that’s related to it on Wall Street.
I am also grateful to the very few others voices that kept shouting and pounding in unison similar thoughts or observations I was making. Barry Ritholtz is one, Mark Cuban another and there are others however, there were very few. For a clue on just how few look at the number clamoring and circling the wagons that has taken place throughout the media in defense of HFT. It seems like a thousand to one.
It finally took a writer with enough intellectual and literary standing combined with the testicular fortitude to argue face to face with the financial elite and tell them honestly and forthright when they say: they’re making ice cream, to respond back – who are you kidding? That’s not ice cream and it stinks! And if it’s so good, here – you eat it!
Michael Lewis has been a breath of fresh air with his candor and his tenacity to not only defend his book and the positions he’s taken in it, but to throw all the detractors accusations back at them and make them defend theirs. To that I say bravo.
So again as to answer the initial question I’ll let that be up to you. For it doesn’t really matter what I think in the end as much as it matters what you think. But let me add the following for you consideration.
As of Sunday night of this week the issue of HFT wasn’t even on the radar screen for most of Main St. The issue itself of possible wrong doing or unfair tactics was blatantly dismissed by HFT, the financial media, and Wall Street at large.
By Monday it was topic De-jure across the financial media. By Tuesday afternoon it was still being defended wildly as a “necessity” or “providing a valuable service to the financial markets.” I wrote, then posted my article on this (my own) blog right about noon time and near immediately it was getting hits from across the globe. Then at approx 4pm EST it hit the front page of THE website of record ZeroHedge on this very topic. The headline?
If Algos Were People They’d Be Perp Walked
Nobody, and I mean nobody was making that type of statement. However, it seemed to have struck a chord. For only hours later Bloomberg reported the delay of the most anticipated HFT firms IPO. (link to original story here) And contained within that story the following line: “New York Attorney General Eric Schneiderman is examining privileges such as enhanced data feeds marketed to high-speed firms, while the Federal Bureau of Investigation is looking into whether those traders are breaking U.S. laws by acting on nonpublic information.”
Add to that as of today the following:
And that’s not all. Currently as I’m typing this post it is being reported: The Nasdaq OMX suddenly dropped in a mini-flash crash . Original story link here) Along with BATS you know that HFT company whose CEO took the airwaves and blasted Michael Lewis and Mr. Katsuyama for spewing untruths, only to have the firm publicly state and recant in the press the one who was lying was the CEO himself. Yes that company. (Link to article here) Looks like all that “efficiency” isn’t all that efficient. To wit:
Market Breaks: BATS, NASDAQ Declare Self-Help Against Chicago (link to original article here)
But don’t worry, they play a valuable service as they’re so vehemently wanting to tell everyone.
We all just better hope they have a line to the repair crew that’s just as fast to the exchanges for if not…
We’re all in trouble.
© 2014 Mark St.Cyr
Addendum: I was reminded by a reader after I posted the article of the exchange between Michael Lewis and Jon Stewart on The Daily Show® (Comedy Central) that evening. The exchange was quite candid but what was interesting were the points Mr. Stewart and the phrasing of them that caught this viewers ears. They said: “It sounded like he was reading the points you made in your article verbatim. I nearly fell over!”
Honestly I have no idea. Coincidence? Sure. All I’ll say too that is this. No one was making that case, put that way, using that terminology, especially within the time of the release of Mr. Lewis’ book and that interview to my knowledge, but me. If you look at the clips you can see Mr. Lewis himself seems to be hearing it put precisely that way for the first time as he thinks and answers. All I can say is my points were on the site of record that has been THE leading edge for bringing this subject to light for nearly 5 years and relentlessly making the case where no one else would. So would the writers of that show go there as to get background on this subject and possibly have read my points and decided to use them? Sure why not. But again, it doesn’t matter what I think, it’s what you think that matters in the end. I’ll post the 2 clips below and you can judge for yourself.
I tried getting the source code for the clips however for what it’s worth I’ll just post the link where they ran on ZeroHedge and you can see them there. Sorry for so many links but in retrospect it’s just easier.