Wednesday, October 10, 2012

The Big Picture Conference Finale: Sal Arnuk and Scott Patterson on High Frequency Trading

Sal Arnuk: Unfair predatory practices are now commonplace. There used to be 2 deep pools of diverse liquidity. Today there are 14 for-profit exchanges and many more dark pools. This web of chaos is held together by high frequency trading.

Market making in the HFT world is actually "pick up the rebate." Market making is the game of identifying how to get to the top of the cue of the limit order book. If they get to the top of the book in every stock, they can turn around and sell it at the same price with a rebate. It is risk free money.

Proponents will say they add liquidity and shrink spreads. The truth is that they add volume but they only come in when there is already volume and liquidity there. They provide liquidity in a monsoon and consume it in a drought.

They have not narrowed spreads, which is what proponents claim.

Reg NMS is the SEC regulation that converted NYSE into a fast market. The industry wrote Reg NMS.

HFT is a form of gaming/skimming the market. It is predatory. It creates risks for the market.

Since the flash crash over $300bn has left US equity markets. HFT is now going into currencies and bonds worldwide.

We got lucky with the flash crash. It could have been much bigger and the next one will likely be disastrous.

Scott Patterson: Began looking into GETCO, which was very hesitant to even meet with him. May 6, 2010 flash crash was the result of HFT companies pulling out.

The market maker scheme is driving the entire US stock market, and is being enabled by the exchanges.

The SEC may be waking up to this issue. Patterson has been putting this on the front page of the WSJ. Hopefully this will put sufficient pressure on the SEC to act.

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