R.I.P. High Speed Trading

Michael Lewis’s 2014 “Flash Boys” and 60 Minutes interview were only the beginning of the slow suffocation of high speed trading. IEX, preferential ticket orders, “Occupy Wallstreet,” rising infrastructure costs, increased competition, low liquidity, and an army of communist sympathizing millennial bloggers have since all but decimated the practice.

Known in the industry as “HFT,” High-Speed Trading under 1 second has become the face of the Wall Street robber-barron that is supposedly pilfering Main Street and causing all the ills in America. Even though we know HFT actually adds liquidity and doesn’t mean anything to the retiree and his TD Amertitrade account or the stock in the average American’s 401k, HFT is sooooo politically incorrect. It matters not that the only entities shaved for pennies by HFT were larger robber-barrons. The powers that be behind the exchanges know they will eventually need the millennials to embrace investing and trading if their trade will continue.

NYSE MARKET

May 2017, enter NYSE Market exchange. Inspired by IEX’s speed bump, Market has a 350 millisecond delay of its own. Sorry high speeders. NYSE is betting that this new, more politically correct exchange will begin to un-sour the younger generations angst against Wall Street. After all, what is the address of the NYSE? Oh- right on Wall Street.

And you know, the move against high speed is beginning to be embraced by traders globally. Trading is starting to be the techy’s game, not the market analyst’s game. Unless a trading firm has the best computer people, it cannot compete in the HFT world. No matter how good their traders are. For We work with some of the very fastest HFT people in Chicago that have virtually pioneered the term. And we’ve even seen some faster. If you don’t have the capital of a huge firm or the smarts and experience of our friends, they will eat any high speed attempt alive. Period. You are not going to jump into what has become their game. Though you can get the fastest tier-1 network, microwave service, and point-to-point connection, the current players have all the odds on speed already thought out.

Additionally, exchanges actually favor certain customers that own equity in or provide a certain threshold of liquidity to those exchanges. Using preferred order types, the exchanges fill these preferred customers ahead of even the fastest HFT crowd. Even the fastest HFT people are forced to stand in line while these customers are filled first with special matching order types.

THEY SEE YOU COMING

According to present regulation, firms are not supposed to get a direct feed from the exchanges, but are supposed to get and use an SIP, or consolidated feed. The consolidated feeds take a brief amount of nano-seconds to compile. A firm with a direct feed can employ a high speed computer to quickly recognize opportunity on their direct feed and take advantage of it a few nan-seconds later when they do business on the SIP feed.

That’s where the new NYSE Market will make a big difference if it catches on across all exchanges.

IT’S A MATTER OF TIME

As we’ve been saying all along, the HFT approach has been free-falling into disfavor with both the government and consumer. Main Street, Wall Street, and even Mark Cuban hates it. So its matter of time before it ends. The SEC and other relevant regulatory firms have known about all of the above abuses but haven’t acted. They may be even slower now that conservatives occupy Washington. One can draw their own conclusions about that. And the fact that many former SEC employees have turned up in HFT firms.

But we can only hope and pray that the end of HFT will not also end liquidity in the markets and/or the ability to day trade. There are only a finite number of ways to address the problem. Speed, pulled orders, and transaction tax. So far we have resisted any transaction tax, even after the urging of the Europeans, who have already ruined their own exchanges with it. Another ruinous approach may be to mandate holding a stock or future for a certain amount of time after buying. You can figure out where that would go.

The answer contemplated by the previous administration in Washington was either regulation under 1 second or charge firms for an inordinately large number of cancelled orders (or send them to jail- damn spoofer!). About 7 years ago there were about 1.25 million quotes on the NASDAQ per day. Now there are 100 times that number. Quote stuffing. But now it looks like the exchanges themselves will self-police to maintain their own longer term survival. They must, or be taxed or legislated out of existence when the millennials turn 40.

But this is why we approach the markets like we do- by following the forces that move them. The institutional money as well as energy that Gann found. We believe that there will be opportunity like never before for the trader who masters these strategies.

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