'It's all about one class of people who are not following the rules. It's that simple.'
-- Eric Hunsader, CEO of Nanex on High-Frequency Trading
-- Photo by William Banzai7
Guest post by John Titus, producer of Bailout.
HFT Mocks Law, Allows Elite To Steal Even More
High-frequency computer trading now accounts for between 70% and 84% of volume on the New York Stock Exchange, yet receives scant attention in the popular media. And with good reason: HFT represents yet another triumph of criminals over the Rule of Law whereby the ultra-wealthy use HFT to steal from the rest of us via illegal practices like quote-stuffing and front-running with the assistance of the government.
Call it Criminal Welfare Chic.
Below, Lauren Lyster of Capital Account interviews Eric Hunsader, whose firm Nanex gathers, analyzes, and packages exchange data that summarize high-frequency trading activity in the markets.
Hunsader has been in the data collection business since the advent of high-frequency trading in 1987—three months before the record-breaking market crash in October of that year (a record of which Hunsader has memorialized on a floppy diskette). This makes Hunsader one of the world’s leading experts—if not the leading expert--on high-frequency trading.
Lyster, who is easily the best interviewer in all of daily financial television, does a superb job of eliciting jargon-free disclosures from Hunsader that cut to the core of high-frequency trading. Like virtually all other "markets" today, HFT is characterized by regulations that are selectively enforced, i.e., the rich and powerful break the law with complete impunity, stealing from everyone else while regulators look the other way and apply regulations punitively to little people (not big enough to have cabinet members and congressmen on speed dial).
Towards the end of the interview, Hunsader exposes the one essential truth that’s altogether ignored in the regulation-deregulation debates that rage in their internecine promotion of the Left-Right divide: “if you’re not going to enforce regulations that you already have, you have no business creating new ones.”
Again we see an instance where the Left, which complains about too much corporate power, and the Right, which complains about too much government, are mysteriously blind to the fact that they are both correct now that corporations and the state have merged into a single entity politely known as Fascism, wherein the interests of a tiny elite are advanced through rampant illegality.
At the end of the interview, Lyster and Hunsader finger the real reason behind the overtly coordinated crackdown on Occupy Wall Street, namely, its organically viable threat to unite under one flag two forces that the Corporate State absolutely needs to be at each other’s throats: those who demand transparent and fair markets free of officious government intermeddling, and those who demand that lawless mega-corporate predators be reigned in:
"High-frequency trading is the poster child that the Occupy Wall Street protesters have been looking for. You just don’t know it yet."
Lauren Lyster interviews Nanex Chief Eric Hunsader - Oct. 18, 2012
LL: When did it [high-frequency trading] really explode?
EH: July of ’87 was the first footprints of when we saw them testing these new algos that were blasting lots of fake orders in the market.
[Ed.—To frame that, Paul Volcker stepped down as Chairman of the Federal Reserve and was replaced by Alan Greenspan in August 1987, and the stock market experienced its biggest one-day crash ever—22% down—on October 18, 1987 (a record that stands to this day).]
LL: After the passage of Reg. NMS, you saw kind of an explosion [of HFT] go on. Why was that a pivotal turning point?
EH: Well, Reg. NMS is regulations that were debated in the industry in 2006 and—well, in 2006. And it was passed in February of 2007, and that really changed the structure of the market. It took them about a couple of months to learn how to exploit it.
LL: But then exploit away they did, right?
LL: So then let’s talk about some of the issues, and the concerns surrounding high-frequency trading from market participants—both for individual investors, retail investors, but also the impact on the market as a whole, because it’s hard for me to imagine that it’s good for the ecosystem.
EH: Well, it’s destroyed the diversity of participants. It boils down to: they chased away everybody who can’t compete on speed, people who aren’t willing to invest in millions of dollars in equipment, hire a staff of quants, et cetera, et cetera. Basically you have to do that now to have the same informational—on par that you did before Reg. NMS.
LL: What about for the average trader, though? Should it matter to them that they can’t exploit a millisecond?
EH: No, not at all. The problem is, is that—well, there are a couple problems. One is, without diversity in participants, whenever something unexpected happens—like perhaps, Google this afternoon—it can severely impact the market in way that could cause prices based on stock market closing prices. It could severely affect the economy.
EH: And so that risk is there because people—the diversity of participants who have different viewpoints on the market, and may be willing to buy the market [when it’s] 10% down, aren’t gonna be there to do that because the information that they’re receiving is delayed or is untrusted or the exchanges might selectively cancel some orders and others. They’re going to be reluctant to pull the trigger. And so you don’t really have that buying power available. It’s not there any more.
LL: And is there a problem, too, that without those folks in the market, you have the algos that are all reacting, that are providing the illusion of liquidity, and that they’re all programmed to pull out when they catch any sign that things are awry?
EH: Oh, yes. We saw that today. We saw liquidity just evaporate—from Google! Which was pretty surprising to see it impact the market like it did. We went from a pretty moderate, okay day to absolute—absolute, well, we were on the edge. As long as no other bad news came out for the rest of the day, we’d be fine. But one day we’re not gonna be so lucky. We’re not gonna get away from that.
EH: The other thing that the average investor has to face now, every once in awhile, when they go to buy or sell, they’re going to be facing this pocket of liquidity where all of a sudden, if they make a mistake, like for example use a market order, which by the way, when a regulator tells you that you’re not supposed to use market orders, it’s usually a pretty good sign that you don’t have a market anymore. Let’s say he makes a mistake, or he doesn’t have his supercomputers on and he’s not processing the data fast enough and he makes a mistake and enters in the wrong price, today he’s gonna get that—if the price is not in his favor—he’s gonna get that price.
* * *
LL: Which is the more exploitative or the edge, really, coming from? Is it coming from the algorithmic software or is it coming more from the speed?
EH: You know, it’s not really whether it’s algorithmic or high-frequency or some kind of a phone [ph.]. It’s about exploiting the regulations. It’s about not following the rules. Reg. NMS lays out the rules, and it’s—we’re mainly concerned with—we’re not concerned with how fast trading goes. We’re concerned with those who break the rules.
* * *
LL: One of the things that I often hear from folks that watch this is that it’s just gotten so fast, and regulators are just so behind, and so late to the party. I wanna know your view on that especially since last month we did get a fine from the S.E.C. to the New York Stock Exchange from them getting information more quickly to proprietary—the people who have their proprietary fee versus everyone else. So what do you think is the state of the regulation of this industry?
EH: Well, you know, the high-frequency trading debate, you don’t have to understand microseconds or high technology. It’s really all about one class of people who are not following the rules. It’s that simple. And the fine levied by the S.E.C. was simply enforcing the rules for the first time since Reg. NMS passed.
EH: And probably more important than the fine itself was the worrying in [sic: about] the fine, which spelled out: you can’t do this; these things are not legal. These things have become some commonplace that, you know, my fear was that the S.E.C. was gonna go full tilt and now start enforcing this. Well, we’re not going to have anyone trading the next day on Wall Street, because it’s that common.
LL: Wow. But do you see an impact when you’re looking at your screens after we have that enforcement action, or there was another against a firm for layering and Knight Capital, [S.E.C. Chairman] Mary Schapiro wouldn’t cancel the trades for Knight. So what impact do you see?
EH: Well, that’s interesting. So I don’t know about you, but I don’t I have a private—Mary Schapiro’s private number, and I can’t call her up when my trade goes bad. I mean, the gall that he would even make that phone call is like, wow. It just shows you: there are two classes of people here.
EH: We have seen significant changes—improvements—on the data side. And we suspect—my suspicion is that the reason you’re seeing some of these high-frequency trading firms close up is because these—they see the writing on the wall. They know if they can’t exploit (break) the rule, if they can’t, that would not lead to profitability. They’re gonna pull out.
EH: And it’s interesting. They’re claiming that it’s not profitable now when it wasn’t very long ago that some of them had 90 days straight, in a row, of profitability, which is just unbelievable that they would announce that. You’d think they’d throw a couple of negative days in there just, um [laughs], so people didn’t raise their eyebrows.
LL: Right, right. So you think that these stories about high-frequency trading firms shutting because they can’t be as profitable any more. You think it’s actually more tied to the fact that they’re starting to be regulated, you think?
EH: Yes. I’m sure of it. I’m sure of it.
LL: Wow. And you actually do notice a difference in the manipulative processes on your screen since these enforcement actions?
EH: Absolutely. It’s crystal clear. Night and day.
LL: Wow. So do you think there needs to be more actions, kill switch or transaction tax, or do you think that these just need to be enforced—what’s on the books?
EH: If we would enforce what’s on the books, we wouldn’t need a transaction tax. We wouldn’t need a minimum quote life. We wouldn’t need any of the things that they’re proposing.
EH: And really, if they’re going to try to pass new regulations, when they’re not going to enforce existing regulations, who’s going to take them seriously? I wouldn’t take them seriously. I mean, if you’re not going to enforce regulations that you already have, you have no business creating new ones.
LL: I totally hear you there. Real quickly before we go, then, what ‘s your best advice for the average investor if they want to have a fair market?
EH: Call your congressman and demand that the rules be followed. It’s that simple.
LL: And I just want one more second before we go. Should Occupy Wall Street be on the street protesting this? You mentioned them.
EH: High-frequency trading is the poster child that the Occupy Wall Street protesters have been looking for. You just don’t know it yet.