Hijacking the Stock Market with High Frequency Trading

FT

At an industrial estate on the edge of Tseung Kwan O, a new town connected by road tunnel to Kowloon, work has started on a data centre where traders of stocks, futures, options and currencies will place their computers next to Hong Kong Exchanges’ own systems.

The idea is that by having their equipment only metres away from where the operator of the territory’s securities markets handles the trades, those for whom speed is everything can shave milliseconds off the time it takes for a transaction to be completed. It is a far cry from the days when shares were bought and sold by humans on a trading floor.

The concept – known as co-location – is growing fast. Last week, NYSE Euronext completed the move of trading in thousands of New York Stock Exchange-listed companies to a similar data centre in New Jersey. The Hong Kong facility is being built by the local exchange as one of its “strategic business initiatives”. The same is happening in India, where the National Stock Exchange has rented out racks of computer space for traders. In Australia, ASX plans a centre offering co-location by next August.

The speed with which exchanges are building such facilities is a sign of the global spread of a phenomenon gripping the markets: “high-frequency trading” (HFT). The phrase describes a style of electronic dealing that uses algorithms to dip automatically in and out of markets hundreds of times faster than the blink of a human eye.

The practice is controversial. In the US, HFT has chilling associations with the “flash crash” of May 6, when rapid, computer-driven orders were seen as a main culprit in sending the Dow Jones Industrial Average down by 1,000 points in 20 minutes – a fall unprecedented in its depth and speed.

Ted Kaufman, a US senator for Delaware, where many of America’s listed companies are incorporated, wrote to the Securities and Exchange Commission last month arguing that “excessive messaging traffic, the dissemination of proprietary market data catering to high-frequency traders, and order-routing inducements all may be combining in ways that cast doubts on the depth of liquidity, stability, transparency and fairness of our equity markets”.

Regulators such as the SEC are still puzzling over exactly what caused the flash crash. But what is clear is that it exposed fundamental flaws in the mechanics of today’s markets – and, some maintain, in the rules that govern them. High-frequency traders are by and large privately held, have no clients and trade using their own money. That has led, some believe, to a point where there has been a dangerous breakdown in investor trust in the way markets work.

Christian Thwaites, chief executive of Sentinel Investment Companies, a US asset manager, says: “The mystery and mystique of HFT, the lack of clarity and therefore opacity has meant that retail investors – who have obviously been terribly burned over the last few years – look at this and say: ‘this whole Wall Street thing is just rigged against me’.”

But like an invasive species in the natural world, HFT had grown rapidly before the wider public even noticed. Tabb Group, a consultancy, estimates that HFT now accounts for 56 per cent of all equity trades in the US and 38 per cent by value in Europe. Another sign that Asia is the latest growth spot came this week as traders and technology companies gathered for a Hong Kong conference billed as Asia’s first high-frequency trading event.

At the same time, changing regulations and increasing competition have created a complex matrix in the US of nine exchanges and dozens of other types of venue, including networks run by banks and brokers, and “dark pools” set up to handle large blocks of shares away from public markets. Exchanges now compete not only with each other for their order flow but also with bank and broker networks, including dark pools.

In Europe the same pattern has played out thanks to the Markets in Financial Instruments Directive, a European Commission regulation that broke the national monopolies of exchanges. Mifid allowed the emergence of rival platforms such as Chi-X Europe, fragmenting trading across many venues: the London Stock Exchange now accounts for only 55 per cent of trading in the stocks that comprise the FTSE 100 index.

Such fragmentation has been a driving force behind the growth of HFT, since it produces a variety of trading venues each with slightly different trading systems, speeds and fee schedules. This allows traders to exploit these differences by using computer algorithms to trade back and forth from one platform to another.

Concern is therefore growing that the markets may be morphing into little more than a playground for a specialised type of trading that has minimal economic benefit and contributes little if anything to capital formation – the traditional function of stock exchanges.

Established market users – such as the asset managers that take care of pension funds – say HFT, coupled with the fragmentation of trading across venues, makes it harder to rely on one of the most basic functions of the markets: orderly and fair price formation.

“Because of the predatory nature of some participants we have no incentive to post liquidity,” Kevin Cronin, head of equity trading at fund manager Invesco, told a hearing into the flash crash last month. “There are 40 places where stocks are transacted and none of us has clarity of supply and demand on most [equity] issues. These are fundamental issues as to what the value of a securities market is.”

One worry is the use in HFT of algorithms to direct trades automatically, often to several market centres at once. Not only do such algorithms generate huge volumes of trades, but they can – like any machinery – go wrong. The past six months have brought three cases where an algorithm has run amok – and those are only the ones that have been revealed publicly. The latest came last month when the Osaka Stock Exchange handed an “admonition” to Deutsche Bank for not having “a sufficient degree of control” over an algorithm trading Nikkei 225 index futures.

Mr Cronin is not alone in suspecting that certain kinds of algorithms are actually predatory. Analysts at Nanex, a Chicago market data company, say high-frequency traders may be using algorithms to send unusually heavy traffic to exchanges and other platforms in a deliberate attempt to slow down their data systems.

Knowing that a certain exchange’s system is about to run more slowly gives a trader an opportunity to set up a buy or sell order in advance. The process is called “quote stuffing” and is used in a strategy known as “latency arbitrage” – latency referring to the speed at which message traffic moves through a system.

In its analysis of the flash crash, Nanex managed to plot how the bursts of traffic looked visually on graphs. Many appeared as distinct geometric patterns, such as jagged shapes that Nanex dubbed “Bandsaw II”, and another pattern called the “Boston Zapper”. “There’s no economic justification for it,” says Eric Scott Hunsader, founder of Nanex. “If this is OK by everybody, the market is not going to function in a very short period of time.”

Some go further and suggest outright wrongdoing. “When orders get pinged out to multiple trading venues, there is at least circumstantial evidence that there’s quite widespread use of that information to front-run trades,” Jim McCaughan, chief executive of Principal Global Investors, a large US asset manager, told CNBC last month.

Yet for regulators it is hard to figure out who is behind any of the activity. That is because high-frequency traders can operate with minimal supervision. In Britain, for example, all it takes to set up a HFT operation is a company registration and the necessary technology.

Trading systems can be bought off the shelf from a number of specialist companies. Registration with the Financial Services Authority, the UK markets watchdog, is not needed under a long-standing exemption for people trading on their own account – as high-frequency traders do – unless they present themselves as marketmakers. Similarly, in the US some are registered as broker-dealers but many are not. “Some of the people who are doing the really big volumes are completely unregulated,” says one lawyer familiar with the business. “Now, they have become a potential systemic risk. That’s the issue.”

Many exchanges say they have ­controls in place that can detect unusual trading patterns before they cause trouble. Rolande Bellegarde, head of European execution at NYSE Euronext, says that a month ago the exchange disconnected the algorithm that a trader was using, after software detected that his dealings deviated significantly from the normal pattern the exchange had observed over time.

F  or their part, the few HFT firms willing to show their face in public are at increasing pains to demonstrate that their business is beneficial to markets in providing liquidity and tighter bid-ask spreads.

Firms such as Getco, based in Chicago and formed by a pair of former pit traders, and peers in Europe including Optiver of the Netherlands, argue that high-frequency trading is a label used too loosely to describe almost any kind of rapid electronic trading, whether beneficial to markets or not. Getco and other US firms – excluding the banks and hedge funds that are equally big in HFT – recently formed an association to make their case more coherently.

Getco rejects allegations that high-frequency traders’ interests are at odds with those of ordinary investors. “While the story line may be a compelling narrative, there is no reliable evidence to suggest that this conflict exists. To the contrary, most retail brokers … intentionally route a majority of their customers’ marketable orders to firms that engage in high-frequency trading.”

Some studies back up their assertions. Woodbine Associates, a Connecticut consultancy, found in a study of US equity markets over 2008-09 that HFT had “improved execution quality”. Matt Samelson, a principal at the company, says that if there are any high-frequency traders “gaming the market”, then “we don’t think that constitutes the majority of HFT”.

But many asset managers remain unconvinced that the liquidity high-frequency traders provide is as valuable as they claim. For one thing, many exited the market during the flash crash. That has led to calls for regulators to impose as yet undefined obligations on marketmakers, including high-frequency traders. According to an online poll on FT Trading Room, a section of the Financial Times’ website focused on market structures, a clear majority (56 per cent) favours the move.

Asset managers worry that their interest in depth of liquidity and making long-term bets on company fundamentals is being crowded out by traders interested only in speed – cheered on by exchanges eager to offer incentives to attract such participants in order to stay ahead of rival platforms in the battle for liquidity. Exchanges have little incentive to discourage HFT since, aside from the fees it generates, they have found a new revenue stream in the rent they charge for rack space in data centres such as the ones emerging across Asia.

However, according to Mr McCaughan, investors are being put off by the volatility that phenomena such as HFT can cause. NYSE volumes were the lowest last week since 2006 – a fact that he attributes in part to a loss of trust in US equity market structures. “Our business is Main Street, not Wall Street,” he says, noting that Principal looks after “millions of people’s” pension schemes.

“We want to be able to look them in the eye and say the market is fair. And unfortunately, at the moment it’s quite difficult to do that.”

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Estados Unidos Sí negocia con Terroristas y Narcos

Por Luis R. Miranda

¿Ha escuchado usted los rumores de que los EE.UU. son el principal comerciante de drogas en todo el mundo? ¿Qué tal el rumor que cuenta cómo el ex jefe de New York Stock Exchange se fue a Colombia para pedir a los narcos que invirtieran en la Bolsa de Nueva York? Que rumores, ¿verdad? Nope. Hay pruebas suficientes para saber que, efectivamente, los Estados Unidos no sólo es el mayor operador y co-productor de drogas del mundo. También existen pruebas suficientes de que Richard Grasso, ex jefe de la Bolsa de Nueva York viajó a Colombia para reunirse con jefes del narcotráfico local para ofrecer que intercambiaran sus drogas por dinero para alimentar el mercado financiero.

En la actualidad, los Estados Unidos vigila y ayuda en el cultivo de cocaína en Afganistán,-según lo informado por Fox News y Gerald

El Ejército Norteamericano vigila sigilosamente los campos cultivados en Afganistán.

o Rivera. Hay por supuesto una buena explicación para la doble moral. Si los EE.UU. no ayuda al hermano del presidente Karzai para ganarse la vida de la venta de drogas, entonces los terroristas lo harían y usarían el dinero para atacar al “mundo libre”. Casualmente, esto es exactamente lo que ocurre en Colombia. Como informó el Washington Post, el hermano del presidente colombiano, Santiago Uribe, era el jefe de un escuadrón de la muerte en la parte norte del país, que operaba desde una finca que perteneció a la familia Uribe. Santiago, también conocido por sus vínculos con cárteles de la droga, asesinaba delincuentes menores, simpatizantes de la guerrilla y sospechosos de subversión.

Pero las negociaciones con los narcos no se limita a Colombia o Afganistán. La “gloriosa” guerra contra las drogas llega a los más altos mandatarios de la actual administración Obama. El asesor de Obama, George Soros es un hombre de negocios conocido por su intención de querer legalizar todas las drogas. Como parte de la guerra contra las drogas, Colombia entregó parte de un territorio montañoso a las FARC, un grupo paramilitar que estaba entonces supuestamente siendo desmantelado como parte del proceso de negociación para poner fin al comercio de la guerra.

Richard Grasso abraza al jefe de las FARC, Raul Reyes en 1999.

Como el documental American Drug Waro Guerra Contra Las Drogas en America expone, los EE.UU. tiene una larga historia de traficar drogas en todos los continentes, especialmente de América del Sur al Norte, y más recientemente de Asia a América. Desde que el presidente Nixon legalizó el tráfico de drogas por el gobierno de los EE.UU. a través del establecimiento de la guerra contra las drogas, el negocio de la trata y el transporte de drogas ha crecido de manera exponencial y el resultado ha sido el blanqueo de miles de millones de dólares por los bancos de Wall Street, que se utilizan para financiar operaciones secretas ilegales en todo el mundo. Estas operaciones se llevan a cabo para capturar países que no colaboran, o sea, no se rinden ante los banqueros; y son llevadas a cabo con guerrillas y contratistas militares de operaciones especiales.

El ex detective de Narcóticos de la Policía de Los Ángeles, Mike Ruppert, envió ondas de choque alrededor de los Estados Unidos cuando le dijo al director de la CIA John Deutch y una sala llena de reporteros, que la organización había encabezado el trafico de drogas por mucho tiempo. Amadeus, Pegaso y Atalaya son los nombres de tres operaciones que la CIA utilizó para comercializar drogas en todo Estados Unidos. Él mismo había sido reclutado para ayudar a proteger las operaciones de la agencia. Ruppert desafió a Deutch a investigar las operaciones secretas de y decir la verdad al público.

Catherine Austin Fitts-, ex Secretaria Asistente de Vivienda-Comisionado Federal de Vivienda en la primera Administración Bush, describe la visita de Grasso a Colombia:

Supongo que el viaje de Grasso no tuvo éxito en cambiar el curso del flujo de caja. Por lo tanto, el Plan Colombia se introdujo para mantener un buen ritmo para tratar de mover los depósitos narco fuera del control de las FARC y de nuevo al control de nuestros aliados tradicionales y, si esto no funciona, se aumenta la cuota de mercado de Citibank y la de los otros bancos de EE.UU. en América Latina.

En su ensayo Narco Dólares, Fitts expone cómo funciona el trasiego de dinero en el comercio de drogas ilícitas. Según Fitts, el poder de Narco Dólares viene cuando se combina el tráfico de drogas con el Mercado de Valores. Señala que las drogas no son siempre un bien, pero a veces se convierten en una moneda. Cuando la industria militar vende armas a un grupo terrorista, por ejemplo, se puede o no pagar en dólares. Cuando el papel moneda es escaso, existe la opción de pagar con las drogas. Es por eso que la CIA lleva drogas a los EE.UU. como pago por la venta secreta de armas a Colombia y otros gobiernos títeres en América Latina.

Todos recordamos el escándalo Irán-Contra. El corazón del escándalo es el hecho de que Oliver North y la Casa Blanca (Consejo Nacional de Seguridad) comercializó drogas a través de Mena, Arkansas para facilitar envíos de armas. Mena fue por supuesto un gran contribuyente a Bill y Hillary Clinton en varias campañas a nivel local regional y nacional.Otros ejemplos en los que las drogas se usaron para el comercio de armas son los conflictos en Vietnam, Kosovo, México, y así sucesivamente. En todos estos casos, las drogas, el petróleo, el gas y las armas son las monedas utilizadas para el intercambio. “Si se añade el oro, una moneda y la cuota de mercado de los bancos y usted tiene mi lista para entender cómo el dinero funciona en cualquier guerra o” conflicto de baja intensidad “en todo el mundo”, dice Fitts.

Todos recordamos el escándalo Irán-Contra. El corazón del escándalo es el hecho de que Oliver North y la Casa Blanca (Consejo Nacional de Seguridad) comercializó drogas a través de Mena, Arkansas para facilitar envíos de armas. Mena fue por supuesto un gran contribuyente a Bill y Hillary Clinton en varias campañas a nivel local regional y nacional.Otros ejemplos en los que las drogas se usaron para el comercio de armas son los conflictos en Vietnam, Kosovo, México, y así sucesivamente. En todos estos casos, las drogas, el petróleo, el gas y las armas son las monedas utilizadas para el intercambio. “Si se añade el oro, una moneda y la cuota de mercado de los bancos y usted tiene mi lista para entender cómo el dinero funciona en cualquier guerra o” conflicto de baja intensidad “en todo el mundo”, dice Fitts.

En el otro lado de la moneda tenemos los Bush. George H.W. Bush fue director de la CIA y presidente de Estados Unidos. Sus hijos Jeb y

Junto con los Clintons, la familia Bush es una de las más corruptas en la historia Estadounidense.

George W. fueron los gobernadores de dos de los mayores mercados de drogas en los Estados Unidos: Texas y Florida. Los otros dos estados son Nueva York y California. Más tarde, George W. Bush se convirtió en presidente de los Estados Unidos. ¿Puede ser una coincidencia que los hijos de un ex jefe de la mafia ocuparon exitosamente esas funciones durante uno de los períodos de tráfico de drogas más intenso en la historia del país?

¿Por qué las personas que usaro drogas son enviadas a la cárcel, entonces? Bueno, el narcotráfico es un negocio redondo. Las mismas corporaciones que se benefician del tráfico de drogas también se benefician del sistema penitenciario. Tomemos por ejemplo la CCA, o Corrections Corporation of America. En su página web auto califican su trabajo como un servicio para construir y administrar las cárceles. “Nuestro enfoque de asociación público-privada en las prisiones combina el ahorro de costes y la innovación de las empresas con las estrictas directrices y la supervisión constante del gobierno.” De los más de 2 millones de personas en prisión en los Estados Unidos, más del 80 por ciento están en la cárcel por fumar, vender o comprar marihuana, por ejemplo. El negocio del tráfico de drogas, simplemente recoge los beneficios de todos los puntos posibles. Desde la plantación, hasta la cosecha, el transporte, la venta y el encarcelamiento de quienes las usan. Por supuesto, no es suficiente que la gente sea enviada a la cárcel. Mientras están ahí, estos infractores también son obligados a trabajar en los campos de esclavos con el fin de multiplicar los beneficios que obtiene el complejo industrial de prisiones. ¿Es esto un monopolio criminal o no?

As it turns out, the U.S. does negotiate with Terrorists and Drug Traffickers

By Luis R. Miranda

Have you heard the rumors that the U.S. is the main carrier of drugs around the world?  How about the one that tells how the former New York Stock Exchange boss went to Colombia to ask the Narcos to invest in the NYSE?  All rumors, right?  Nope.  There are enough trails to know that indeed the United States is not only the largest carrier and co-grower of drugs in the world.  There is also enough proof that Richard Grasso, the former NYSE’s head traveled to Colombia to meet with local narcotrafficking bosses to offer ‘his exchange’ to hide their money.

The U.S. military closely guards the largest poppy plantation in the world.

Currently, the United States guards and aids in the growth of poppies in Afghanistan, -as reported by Fox News’s Geraldo Rivera.  There is of course a good explanation for the double standard.  If the U.S. does not help President Karzai’s brother to make a living of it, then terrorists would grow it and use the money to attack the ‘free world.’  Coincidentally, this is exactly what happens in Colombia.  As reported by the Washington Post, Colombian president’s brother, Santiado Uribe, was the head of an infamous death squad in the northern part of the country, right out of a estate that belonged to the Uribe family.  Santiago, also known for his ties to drug cartels, took it upon himself to murder petty thieves, guerrilla sympathizers and suspected subversives.

But negotiating with Narcos is not limited to Colombia or Afghanistan.  The ‘glorious’ war on drugs reaches the highest heads of the current Obama administration.  Obama’s advisor George Soros is a known narco businessman too.  Soros is one of the most vocal people who want all illegal drugs to be legalized.  As part of the drug war, Colombia surrendered part of a mountainous territory to the FARC, a paramilitary group which was then allegedly dismantled as part of the negotiating process to end the war trade.

NYSE Richard Grasso embracing FARC leader Raul Reyes in 1999.

As the documentary American Drug War exposes, the U.S. has a long history of running drugs across the continents, especially from South America to the North, and more recently from Asia to America.  Since President Nixon legalized the trafficking of drugs by the U.S. government through the establishment of the war on drugs, the business of dealing and transporting drugs has grown exponentially and the result has been the laundering of billions of dollars by Wall Street banks which is then used to finance illegal intelligence secret operations around the globe.  Such operations are carried out to capture non collaborating countries, using guerrilla forces and special-ops military contractors.

Former Los Angeles Police Narcotics Detective Mike Ruppert sent shockwaves around the United States when he told CIA Director John Deutch and a room full of reporters that the organization he headed had been running drugs for a while.  Amadeus, Pegasus and Watch Tower are the names of three operations the CIA used to run drugs around the United States.  He himself had been recruited to help protect the agency’s dealing of drugs.  Ruppert challenged Deutch to investigate classified operations and to tell the truth to the public.

Catherine Austin-Fitts, a former Assistant Secretary of Housing-Federal Housing Commissioner in the first Bush Administration, says of Grasso’s visit to Colombia:

I presume Grasso’s trip was not successful in turning the cash flow tide. Hence, Plan Colombia is proceeding apace to try to move narco deposits out of FARC’s control and back to the control of our traditional allies and, even if that does not work, to move Citibank’s market share and that of the other large US banks and financial institutions steadily up in Latin America.

In her essay Narco Dollars for Dummies, Fitts exposes how the money works in the illicit drug trade.  According to Fitts, the power of Narco Dollars comes when you combine drug trafficking with the Stock Market.  She points out that drugs are not always a commodity, but sometimes it becomes a currency.  When the military industry sells weapons to a terrorist group, for example, they may or may not pay in dollars.  When the green back is scarce, there is the option of paying with drugs.  That is why the CIA brings drugs into the U.S. as payment for the secret sale of arms to Colombia and other puppet governments in Latin America.

We all remember the Iran-Contra scandal.  The heart of the scandal was the fact that Oliver North and the White House (National Security Council) dealt drugs through Mena, Arkansas to facilitate arms shipments. Mena was of course a large contributor to Bill and Hillary Clinton’s multiple campaigns at the local regional and national levels.  Other examples of the drugs for arms trade are the conflicts in Vietnam, Kosovo, Mexico, and so on.  In all these cases, drugs, oil, gas and arms are the currencies used to deal.  “Add gold, currency and bank market share and you have the top of my checklist for understanding how the money works on any war or “low intensity conflict” around the globe,” says Fitts.

Along with Bill Clinton, the Bushes are some of the most corrupt elements of the American elites.

On the other side of the coin we have the Bushes.  George H.W. Bush was CIA director and U.S. President.  His sons Jeb and George W. were the governors of two of the largest drug markets in the United States: Texas and Florida.  The other two states are New York and California.  Later, George W. Bush became president of Unites States.  Can it be a coincidence that the sons of a former CIA Mafia boss successfully held office during one of the most intense drug trafficking period in the history of the country?

Why are people who used drugs put in jail then?  Well, drug trafficking is a round business.  The same corporations who benefit of the drug trade also run the prison system.   Take for example the CCA, or Corrections Corporation of America.  On its website they label their work as a service to build and run prisons.  “Our approach to public-private partnership in corrections combines the cost savings and innovation of business with the strict guidelines and consistent oversight of government.”  From the more than 2 million people in prison in the United States, more than 80 percent are non-violent offenders, who are in jail for smoking, selling or buying marihuana, for example.  The drug trade business simply collects profits from every possible point.  It plants the drugs, harvests them, transports them, sells them and imprisons those who use them.  Of course it is not enough with sending people to prison.  While innocent or non-violent offenders are inside the gulags, they are also obligated to work in slavery camps in order to multiple the profits for the prison industrial complex.  Is that a monopoly or what?

Stock Market Plunges 1,000 points in minutes

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AP

Stocks plunged Thursday as investors succumbed to fears that Greece’s debt problems would halt the global economic recovery. Themarket Dow Jones industrials slid almost 1,000 points before recovering to a loss of 328.

The sudden drop was a painful flashback to the worst days of the 2008financial crisis. Computer programs intensified the selling while investors watched protests in the streets of Athens on TV. Fears are running high in the financial markets that the Greek government will not be able to implement austerity measures that would enable it to contain its debt problems. And, in turn, that the country’s problems will hurt other economies in Europe and even the U.S.

The Dow’s gyrations showed the high emotions in the markets. Down 998.50 points in mid-afternoon, it recovered less than an hour later to a loss of 328. Meanwhile, interest rates on Treasurys soared as investors sought the safety of U.S. government debt. The yield on the benchmark 10-year note, which moves oppoosite its price, fell to 3.37 percent from late Wednesday’s 3.54 percent.

“The market is now realizing that Greece is going to go through a depression over the next couple of years,” said Peter Boockvar, equity strategist at Miller Tabak. “Europe is a major trading partner of ours, and this threatens the entire global growth story.”

The stock market has had periodic bouts of anxiety about the European economies during the past few months. They have intensified over the past week even as Greece appeared to be moving closer to getting a bailout package from some of its neighbors.

The fear now is that other countries will also be overwhelmed by their debt, and the recovery that is in its early stages will be wiped out. That would almost inevitably affect the U.S. recovery.

The losses in stocks were so widespread that just 161 stocks rose on the New York Stock Exchange, compared to 3,008 that fell. The major indexes were all down more than 3 percent.