Glass
17th February 2011, 09:26 PM
I thought this was a pretty good analysis of how market traders take the general public for a ride
till wondering why the US (and global) stock market is nothing more than a crime scene, and an imminent catastrophe waiting to happen, supervised and regulated by a bunch of "special" porn addicts? Then read the following comment letter and wonder no more.
Subject: File No. S7-02-10
From: R T Leuchtkafer
Must read:
File No. 265–26 and Release 34-61358 File No. S7-02-10
On a cloudy autumn afternoon in 1870, the Chicago White Stockings, a team that would evolve into the present day hapless Chicago Cubs, played an exhibition baseball game against a hastily assembled gang of amateurs calling itself the Board of Trade Scalpers. It was a rout. In nine innings of play at Dexter Park, next door to Chicago's new stockyards, the White Stockings crushed the Scalpers by a score of 30 to 2, likely the only time scalpers on the Chicago futures exchanges were so convincingly restrained.
140 years later, almost to the day, U.S. Commodity Futures Trading Commission Chief Economist Andrei Kirilenko and several co-authors published a paper called "The Flash Crash: The Impact of High Frequency Trading on an Electronic Market," to date the definitive examination of high frequency market makers. What Kirilenko reported is deeply troubling for U.S. markets, implying structural instability, crashes and liquidity crises large and small, toxic quotes and price discovery in the public markets, and the uncertainty of any order's likely effect on prices. His breakthrough paper is a decisive empirical justification for reforming how high frequency market makers operate in today's markets.
Scalpers
Though he doesn't use the word, Kirilenko's study is the latest U.S. government agency report on scalpers. Perhaps the earliest was by the Federal Trade Commission (FTC) in a seven volume report on grain trading, published over six years beginning in 1920. Defining a "scalper" as a firm that "typically buys and sells in large quantities, expecting to hold the trade open only a very short time" and that "intends to be even as to quantities bought and sold at the close of the business day and is reluctant to carry a trade over night," the U.S. government's 1920 definition of scalping tracks what today's high frequency market maker firms say about themselves almost word for word.
While market makers in the futures markets have long fit the government's definition of a scalper, in U.S. equities in the recent past old-fashioned market makers carried inventory and committed capital overnight -- even several nights -- to smooth buying and selling pressures. They were required to post competitive quotes and to trade sparingly in the exchange markets. No more. They don't exist. They were too expensive and corruptible, and a series of well-intentioned reforms squeezed or priced them out, unwittingly opening the door to scalpers from the futures markets.
More than a few high frequency equities market maker firms today were founded by "locals" (scalpers) from the futures markets, particularly the Chicago futures markets. "Scalper" is not an endearment, so these firms gussy up by calling themselves "liquidity providers" or "market makers" or "principal traders" instead. The FTC observed the same in 1920, saying "There is a preference for designations that sound well. Nobody calls himself a pit scalper." Though "liquidity provider" and "market maker" are stripped of their former meaning in the equities markets, high frequency firms wear these designations as if they were a rented tux.
In his autopsy of e-mini SP 500 futures trading around the May 6, 2010 Flash Crash, Kirilenko describes how these firms destabilize markets. There's a tipping point in volatile markets when, in an instant, high frequency market makers stampede to rebalance their inventories, even cascading positions from firm to firm, while prices collapse. Kirilenko calls this "hot potato" trading, but it's an interdealer panic, a market maker fratricide. His conclusions extend to any volatile episode, because, as he wrote, high frequency market makers "did not change their trading behavior during the Flash Crash."
Just as there were few restraints on the fund group whose selling Kirilenko shows tipped the Flash Crash, there were few restraints on the high frequency market maker algorithms that bought from it. Markets crashed when high frequency market makers hit internal inventory limits and unloaded onto the next market maker, which then hit limits and unloaded onto the next one, and so on, driving the market down by almost $1 trillion dollars in a few minutes.
Kirilenko studied e-mini trading in the futures market, but the CFTC and U.S. Securities and Exchange Commission staff report on the Flash Crash showed the same behavior at work in the equities markets, doubtless from many of the same firms.
"Market Structure as a Joke"
The scalper's destabilizing practices are that it can quote as it pleases and trade as aggressively as it pleases and still carry the regulatory imprimatur and privileges of a market maker. As recently as the late 1990s, little of this was true in the equities markets. As the cash equities market automated, moved to decimals, deregulated and fragmented in the last 10 years, scalpers moved in with a soon-to-dominate business model, one they learned in the futures pits -- aggressive and often frenetic trading, keeping little or no inventory.
Full article..... (http://www.zerohedge.com/article/comment-letter-our-crime-scene-stock-market)
Theres a fair bit more at the link.
till wondering why the US (and global) stock market is nothing more than a crime scene, and an imminent catastrophe waiting to happen, supervised and regulated by a bunch of "special" porn addicts? Then read the following comment letter and wonder no more.
Subject: File No. S7-02-10
From: R T Leuchtkafer
Must read:
File No. 265–26 and Release 34-61358 File No. S7-02-10
On a cloudy autumn afternoon in 1870, the Chicago White Stockings, a team that would evolve into the present day hapless Chicago Cubs, played an exhibition baseball game against a hastily assembled gang of amateurs calling itself the Board of Trade Scalpers. It was a rout. In nine innings of play at Dexter Park, next door to Chicago's new stockyards, the White Stockings crushed the Scalpers by a score of 30 to 2, likely the only time scalpers on the Chicago futures exchanges were so convincingly restrained.
140 years later, almost to the day, U.S. Commodity Futures Trading Commission Chief Economist Andrei Kirilenko and several co-authors published a paper called "The Flash Crash: The Impact of High Frequency Trading on an Electronic Market," to date the definitive examination of high frequency market makers. What Kirilenko reported is deeply troubling for U.S. markets, implying structural instability, crashes and liquidity crises large and small, toxic quotes and price discovery in the public markets, and the uncertainty of any order's likely effect on prices. His breakthrough paper is a decisive empirical justification for reforming how high frequency market makers operate in today's markets.
Scalpers
Though he doesn't use the word, Kirilenko's study is the latest U.S. government agency report on scalpers. Perhaps the earliest was by the Federal Trade Commission (FTC) in a seven volume report on grain trading, published over six years beginning in 1920. Defining a "scalper" as a firm that "typically buys and sells in large quantities, expecting to hold the trade open only a very short time" and that "intends to be even as to quantities bought and sold at the close of the business day and is reluctant to carry a trade over night," the U.S. government's 1920 definition of scalping tracks what today's high frequency market maker firms say about themselves almost word for word.
While market makers in the futures markets have long fit the government's definition of a scalper, in U.S. equities in the recent past old-fashioned market makers carried inventory and committed capital overnight -- even several nights -- to smooth buying and selling pressures. They were required to post competitive quotes and to trade sparingly in the exchange markets. No more. They don't exist. They were too expensive and corruptible, and a series of well-intentioned reforms squeezed or priced them out, unwittingly opening the door to scalpers from the futures markets.
More than a few high frequency equities market maker firms today were founded by "locals" (scalpers) from the futures markets, particularly the Chicago futures markets. "Scalper" is not an endearment, so these firms gussy up by calling themselves "liquidity providers" or "market makers" or "principal traders" instead. The FTC observed the same in 1920, saying "There is a preference for designations that sound well. Nobody calls himself a pit scalper." Though "liquidity provider" and "market maker" are stripped of their former meaning in the equities markets, high frequency firms wear these designations as if they were a rented tux.
In his autopsy of e-mini SP 500 futures trading around the May 6, 2010 Flash Crash, Kirilenko describes how these firms destabilize markets. There's a tipping point in volatile markets when, in an instant, high frequency market makers stampede to rebalance their inventories, even cascading positions from firm to firm, while prices collapse. Kirilenko calls this "hot potato" trading, but it's an interdealer panic, a market maker fratricide. His conclusions extend to any volatile episode, because, as he wrote, high frequency market makers "did not change their trading behavior during the Flash Crash."
Just as there were few restraints on the fund group whose selling Kirilenko shows tipped the Flash Crash, there were few restraints on the high frequency market maker algorithms that bought from it. Markets crashed when high frequency market makers hit internal inventory limits and unloaded onto the next market maker, which then hit limits and unloaded onto the next one, and so on, driving the market down by almost $1 trillion dollars in a few minutes.
Kirilenko studied e-mini trading in the futures market, but the CFTC and U.S. Securities and Exchange Commission staff report on the Flash Crash showed the same behavior at work in the equities markets, doubtless from many of the same firms.
"Market Structure as a Joke"
The scalper's destabilizing practices are that it can quote as it pleases and trade as aggressively as it pleases and still carry the regulatory imprimatur and privileges of a market maker. As recently as the late 1990s, little of this was true in the equities markets. As the cash equities market automated, moved to decimals, deregulated and fragmented in the last 10 years, scalpers moved in with a soon-to-dominate business model, one they learned in the futures pits -- aggressive and often frenetic trading, keeping little or no inventory.
Full article..... (http://www.zerohedge.com/article/comment-letter-our-crime-scene-stock-market)
Theres a fair bit more at the link.