01 April 2014

HFT: 60 Minutes Sanitizes Its Report - What Banks, What Exchanges?

There were some gaping holes in the 60 Minutes expose about the stock market being rigged. The story was spun in such a way to make one think that uncontrolled innovation had created some unfortunate and inadvertent technical arbitrage opportunities in exchange centers outside of Manhattan, but a clever insider, funded in part by ultimate insider David Einhorn and backed by the big dogs of Wall Street, had come up with a clever technical fix in a new and better exchange called IEX.  Protected by a spool of fiber to induce network latency.  

 Free market triumphs, mission accomplished.   And wait breathlessly for the IPO.

Don't even think about a minimum transaction tax, a speed bump rule such as a minimum order duration, or anything more comprehensive than that. A spoolful of fiber makes the medicine go down.

I was so enchanted that they allowed someone to say 'the stock market is rigged' on national television that I thought that giving it a day or two to sink in might be appropriate.  And it is rigged.  It is just not fixed, in the manner of genuine reforms.  It is a laughingstock amongst insiders. Well not everyone is laughing.

What was this 60 minutes piece, a limited hangout expose that will still be boldly and hotly denied? 

The Fight Today That Stopped Floor Trading on the NYSE

"How frightened hypocrisy hastens to defend itself."

Victor Hugo

What is coming down the road, another flash crash or a major market failure?  Or are the natives just getting restless?  Look, reform!  And it was self-regulating!  The major owner and executive chairman of CBS, Sumner Redstone, of the aptly named holding company National Amusements, could not have asked for a better script.

If you did not notice, they parsed HFT into two types.  Conventional HFT that rides on the bid ask, normally in small incremental orders, aimed at skimming and carving up the smaller orders of the retail investors.  What INEX is addressing is 'front running' HFT that games lags between exchanges to jump in front of BIG orders from powerful insiders. 

Never mind the front running, which was taking a bite from the pros,  how about the steady nibble at the bid and ask on virtually every order that is being placed?   Doesn't anyone remember the computerized transactional skimming in the movie Office Space? 

NY AG Eric Schneiderman himself praised mom and pop affecting HFT as 'providing liquidity.' I think that canard has been capably debunked in many places and much better than I can do. It is like sex in college. The kind of liquidity you get you don't want, and when you desperately need even that liquidity, its not there. Why not just praise portfolio insurance to abolish risk, and party like its 1987?

And what about the bombing of quiet markets with an avalanche of orders to brazenly manipulate the price?  We have indictments of American companies doing that from Europe to Japan, with the sexy title 'Dr. Evil strategy.'   And it is happening like clockwork, almost every day.

And as the king of Samoan metals traders, Salelologa Dave said, 'I’ll know that real change is coming to our system when the Government allows Sixty Minutes to discuss the manipulation of the gold market."

And brother, that is the truth. We can't even get the CFTC to disclose its five year study of manipulation in the silver market that we paid for.

60 Minutes Sanitizes Its Report on High Frequency Trading
By Pam Martens
April 1, 2014

Two of the chief culprits of aiding and abetting high frequency traders, the New York Stock Exchange and the Nasdaq stock exchange, failed to come under scrutiny in the much heralded 60 Minutes broadcast on how the stock market is rigged.

This past Sunday night, 60 Minutes’ Steve Kroft sat down with noted author Michael Lewis to discuss his upcoming book, “Flash Boys,” and its titillating revelations about how high frequency traders are fleecing the little guy.

Kroft says to Lewis: “What’s the headline here?” Lewis responds: “Stock market’s rigged. The United States stock market, the most iconic market in global capitalism is rigged.”

Kroft then asks Lewis to state just who it is that’s rigging the market. (This is where you need to pay close attention.) Lewis responds that it’s a “combination of these stock exchanges, the big Wall Street banks and high-frequency traders.” We never hear a word more about “the big Wall Street banks” and no hint anywhere in the program that the New York Stock Exchange and Nasdaq are involved.

60 Minutes pulls a very subtle bait and switch that most likely went unnoticed by the majority of viewers. In something akin to its own “Flash Boys” maneuver, it flashes a photo of the floor of the New York Stock Exchange as Kroft says to the public that: “Michael Lewis is not talking about the stock market that you see on television every day. That ceased to be the center of U.S. financial activity years ago, and exists today mostly as a photo op.”

That statement stands in stark contrast to the harsh reality that the New York Stock Exchange is one of the key facilitators of high frequency trading and making big bucks at it....

Read the entire piece with the details here.