Who's Afraid of HFT?

Posted On Oct 10, 2012 By Addison Wiggin

October 10, 2012

  • “Media sensationalism”: Why the “mysterious algorithm generating 4% of stock quote activity” is nothing to worry about…
  • Persian petrogold: A no-Westerners-allowed club of nations uses Iranian oil to dump the dollar and switch to gold
  • The War on You, continued: SWAT team busts into home of innocent family, terrorizes 8-year-old girl
  • The “Kony 2012” mastermind tries to rebuild his reputation… The 5 accused of “cheap, crap-low road attack”… a side of Vancouver we didn’t know about… and more!


  Uh oh… The “bots” are at it again.

“A single mysterious computer program that placed orders — and then subsequently canceled them — made up 4% of all quote traffic in the U.S. stock market last week,” CNBC reports.

The market data firm Nanex — which tracks high-frequency trading more closely than anyone else — spotted orders on about 500 stocks, placed in 25-millisecond bursts.

The motive? That’s murky. “The ultimate goal of many of these programs,” CNBC speculates, “is to gum up the system so it slows down the quote feed to others and allows the computer traders (with their co-located servers at the exchanges) to gain a moneymaking arbitrage opportunity.”

“Just goes to show you,” says Nanex chief Eric Hunsader, “how just one person can have such an outsized impact on the market.”

The blogosphere is on fire: “The markets are not for you, nor are they for honest companies,” says one representative post. “They have been stolen by the Wall Street bandits and now are used as a tool to screw you and everyone else.”

We take a back seat to no one in our suspicion of the Street. But in today’s 5, we pause to take a deep breath…

  “Most talk about high-frequency trading is media sensationalism,” says Jonas Elmerraji, one of our resident traders and technicians.

“It sounds scary and conspiratorial, but in reality, the vast majority of HF trading algorithms don’t exist to trade against individual investors. They exist to keep the real investors at big mutual funds from blowing up the market when they need to put a big order through.”

Consider, Jonas says, SPY — the S&P 500 ETF. “It’s the biggest ETF in the world. It’s got close to $109 billion in stocks. If it needs to sell a position (say, if a stock is dropped from the index), it could materially impact trading volumes for the day and ruin the prices it gets for its shareholders. So the managers at SPY use HFT algos to ensure that any liquidations happen without hurting themselves.”

Consider also that the mystery algorithm didn’t execute any trades. “That means that by definition,” Jonas explains, “it didn’t impact the market — it never made a print on any of those 500 stocks.

“In fact, it sounds like it was maybe there to fake other HFT bots into making poor trades. If that’s the case, then it means that individual investors probably got better fills than the bots.

“I think for my Halloween costume this year, I’m going to be a trading algorithm. Any of my friends who watch CNBC will be terrified!”

  Still, the latest HFT episode spotlights some common-sense advice.

HFT alarmists say when it comes to your own buying and selling, it’s best to avoid the first 15 minutes of the trading day from 9:30-9:45 Eastern Time, and again between 9:55-10:15, when many economic numbers are released.

True, says the other member of our trading and technical team, Greg Guenthner: “The morning bell until 10:30 is usually referred to as ‘amateur hour’ — Everyone is jockeying for position and trying to figure out the mood of the day. Data or news that looked ‘good’ at 8 a.m. might not be seen as good by the collective market once trading begins. Early morning mood swings are common — which is enough reason to avoid buying unless you’re a day trader.”

“I always wait until 10 a.m. to execute a trade,” adds Jonas, “even if something is moving against me. Exceptions include the big names like Apple or GE that have very active premarket trading with narrow bid-ask spreads anyway.”

And avoid market orders. “There’s just no reason to use them,” Jonas says.

100  Major U.S. stock indexes opened the day mixed. The Dow’s dropped 40 points on top of yesterday’s 110-point loss, while the Nasdaq is up slightly.

Later today the Federal Reserve releases its Beige Book survey of the economy in each of its 12 regions.

After a midday drop yesterday, gold is stabilizing today at $1,763. Silver hangs on to the $34 handle by a thread…

  Add a new entry to the “reasons for a gold currency” list.

When last we checked in on the Shanghai Cooperation Organization (SCO) — a no-Westerners-allowed club of China, Russia and most of the “Stan” countries — they’d issued a statement declaring, “The current set of reserve currencies and the main reserve currency — the U.S. dollar — have failed to function as they should.”

The new development: “Any doubts we may have on the matter have now been dispelled as a result of the U.S. government’s monetary sanctions on Iran,” writes Alasdair Macleod at GoldMoney.

“The Iranian situation is already undermining the position of the dollar as the international currency in the context of pan-Asian settlements, because oil is simply more important…

“The consequence has been to force Iran to settle some of her trade in gold, giving SCO members both a de facto remonetization of gold, and a solid reason to want higher prices for it in U.S. dollar terms, so that it buys more.

“This creates a dilemma for the U.S. If she escalates her attacks on Iran, she threatens the interests of China, India and other SCO members. At this stage, it is too early to judge the political reactions of the SCO members to this threat, but there are broadly two possibilities: either military or economic.

  What does “Persian petrogold” tell us?

“Gold is now a strategic metal for present and future SCO governments,” Macleod explains, “which between them have over 40% of the world’s population; and now that the price of gold is re-establishing its rising trend, understanding its future role as a replacement for the U.S. dollar is increasingly urgent, because gold is wealth and this wealth is being transferred from west to east.”

Between the SCO countries alone, “they produce about 26% of the world’s gold, none of which leaves the SCO.”

And it doesn’t stop there, “Other nations accepted as future members are India, Iran, Pakistan, Mongolia, and as soon as NATO leaves, Afghanistan. Belarus and Sri Lanka are on the waiting list. It is no less than the economic unification of most of Asia, with a combined population of 3 billion. All their central banks are buying gold, and the gold imported by the citizens of just two of them (India and China) accounts for all but 400-500 tonnes of the rest of the world’s mine production — and some of that (particularly in Africa) is now also controlled by China…

“Attempts over the years by Western central banks to bluff us out of gold ownership have given China and its SCO affiliates a tremendous wealth-transfer windfall, as we may be about to discover. That’s what the geopolitics of gold is actually about,” GoldMoney concludes, “and it is a pity our leaders seem to be blind and deaf to it.”

So the “rich white guys with no life” had it right after all, eh?

  I’m lying on the garage floor at gunpoint and they are invading my home terrorizing my family,” says Steve Tuppeny in today’s installment of what we’re calling “The War on You.”

The home invaders were a SWAT team from the Wilmington, Del., Police Dept. They showed up early Thursday morning. Mr. Tuppeny’s wife Jennifer was still asleep, as was the couple’s 8-year-old daughter, awakened by “men dressed in black with guns shining flashlights in her face,” as Jennifer Tuppeny recalls.

The Tuppenys, standing at what’s left of their front door…

We should back up a bit. The Tuppenys bought their home four years ago. The guy who sold it to them appears to have a wayward son — one who during a court date last month stated the house was his current address. A common occurrence, everyday lowlifes lying about their current address.

Police had identified the wayward son as “person of interest” in a homicide case. They got a search warrant authorizing them to get a DNA sample — not even to arrest him.

Without bothering to confirm whether he actually lived there, the SWAT team went in, guns drawn, commando-style.

“I’m just so upset,” says Jennifer Tuppeny, “and my daughter is traumatized.”

You think?

No one keeps figures on so-called “wrong house raids.” But they happen often enough to be a regular feature on the blogs of writers like Reason contributor Radley Balko.

We do know this: According to research we cited in Apogee Advisory last year, SWAT raids nationwide numbered only 3,000 in the early 1980s. By the mid-2000 — when Eastern Kentucky University criminologist Peter Kraska stopped counting — the number had exploded to 50,000. That’s more than 135 per day.

With numbers like that “If you’ve done nothing wrong, you have nothing to worry about” no longer seems to apply. One question jumps immediately to mind: Who’s watching the watchers?

  “I had an out-of-body-experience,” Kony 2012 founder Jason Russell told Oprah Winfrey with an unusual twist in the unusually suspicious Kony story we covered earlier this year. The last time we checked in on him (in March), the filmmaker had just been found running naked in the streets screaming incoherent jumbles of F-bombs and rants about the devil.

So that’s what an out-of-body experience looks like…interesting…

Now, after some reflection, he’s back a new man.

“It’s hard to describe to people who have never had an out-of-body experience, but it really wasn’t me,” he told Oprah on her OWN show last week. “That wasn’t me. That person on the street corner, ranting and raving and naked, is not me. That’s not who I am.”

And now? Russell is trying to organize a march on the White House Nov. 17 to demand Joseph Kony, the Ugandan rebel leader, be brought to justice.

Presumably, the marchers would be clothed…

  “It is annoying,” writes an annoyed reader, “that nothing by readers of The 5 who might be termed ‘liberal’ is printed in your section of readers’ responses. That you would print the following, as written by one of what you refer to as one of your regulars, changes the tone from annoying to obscene:

‘Tell Mr. Keynes and his acolytes in the Obama government that I will give up my “barbarous relics” when people stop acting so barbarously. And until Obama, Hillary, with perhaps help from Kim Jong Il, Pol Pot and Robespierre bring in that utopia that by all accounts is just around the corner, I’ll cling on to my barbarous relics.’

“While you profess to be taking no sides in the ongoing politics, you often print garbage like this from your readers. Any ass who seeks to group Obama, Hillary, Kim Jong Il, Pol Pot and Robespierre is unworthy of drawing breath, let alone being published.

“Please either quit this dirty stealth campaigning entirely or come out of the closet and admit that you support this sort of cheap, crap-low road attack.

“President Obama has been laboring to get this country out of what is perhaps the worst financial mess in which it has ever been. He’s done it while saddled with Republicans in Congress who admit that they far prefer damage to his record to allowing anything good for our country. To a large extent, it was Republican attitudes and efforts that ran us into the iceberg. Now, it’s been the primary goal of those Republicans to attack and maim anyone trying to bail us out.

“Pretending that Barak Obama is a socialist is somewhere between grossly ignorant and totally dishonest. The same goes for such an effort with regard to Hillary Clinton. Which of those describes the ‘one of our regulars’ to whom you give space? Or is it both? And do both terms apply to you too?

“Though I know no point of view such as mine will make it to print in your publication, a courtesy of an honest reply would be much appreciated.”

The 5: Oy. You must’ve checked out last summer when we gave ample space to readers who jumped all over us for our take on Obama’s “You didn’t build that” speech.

On the subject of “dirty stealth campaigning,” we take flak from the other side too…

 It seems that all you can do is say there’s no difference between Obama and Romney because your boy Ron Paul lost.

“Get over it, because you’re doing a good job of supporting Obama’s change.”

The 5: Ron Paul is “our boy” as much as Obama or Romney. An instrument has yet to be invented that can measure our level of interest in electoral politics. In fact, today’s Laissez Faire Club “e-book of the week” is a nifty book titled None of the Above.


  “I grow tired of the folks who bitch about the political comments in The 5,” chimes in another voice. “I don’t care one way or the other what the comments are — they are generally very interesting.

“The main point is this. My future is tied up in a 401(k) plan. I wish I could abandon it, but not right now. My 401(k) fluctuates dollar for dollar with the S&P 500; I would suggest that the broad market is directly related to macroeconomic themes, so is directly related to politics. These points allow the ability to make decisions to be invested in cash. Those are the only real choices in these plans.

“So quit the bitching. If you want investment advice and individual picks, subscribe to the paid publications. And use The 5 as great entertainment.”


Addison Wiggin

The 5 Min. Forecast

P.S. Laissez Faire’s Jeffrey Tucker will be interviewing economist Dr. Steve Hanke, the go-to guy on Iranian inflation, in a live Whiskey Bar chat today at 3 p.m. Be sure to catch the interview live, here.

P.P.S. “There’s a flip side to Vancouver,” freelance writer Mitch Moxley says at Huffington Post: “It’s boring. (Cue indignant comments.)

“The city’s nightlife is so lame, its music venues so few and far between, its liquor laws so archaic and arbitrary, its citizenry so cliquey and cold that Vancouver, host of the 2010 Winter Olympics, has over the years earned the nickname ‘No Fun City.'”

This is even though Moxley acknowledges “Vancouver is a beautiful city. Gorgeous. It’s got mountains and oceans and parks and beaches. The city is green and pleasant. The air is fresh, the winters tolerable. People with toned calves and fashionable outdoor clothes bike and hike and walk and run.”

Somehow, we manage to have considerable fun each year at the Agora Financial Investment Symposium. The “arbitrary and archaic” liquor laws? Heh, they’ve never gotten in our way.

The earliest of early-bird registration for the 2013 Symposium is now open. For dates and other essential details, please review this invite from Symposium director Bruce Robertson.

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