By Cassandra*
Beautiful as France is, its ski resorts are filled with pesky, queue-barging coquins with all their attendant bad manners, trampling upon one's skis, and mayhem creation. It cannot help but royally tick one off after civic-mindedly and patiently waiting in a queue and/or letting others take their deserved turn. As disturbing it is to meander down to the hotel swimming pool after breakfast only to find that a contingent of Germans have staked out all of the pool chairs with their towels, never mind that they are off sightseeing on the tour bus, or being buffed and pedicured in the spa. Not dissimilar are the feats of the notorious Frigate Birds who routinely make their diets by eponymously stealing the fish caught by pelicans, boobies or other more industrious birds.
What is their common thread? For one, they are reasonable analogies for a flavor of low-latency, high-frequency, order-sniffing, front-running strategies that parasitically intermediate real buyers and sellers, but only after excising a requisite toll that CUNY's Donefer (thanks to TD at Zerohedge for posting the presentation bullet points) estimates to be in the range of $15 to 25 billion. Of course not all short-term traders are predatory. and not all predatory traders are short term. However, given the estimated sized of frigated profits, responsible, civic-minded investors should, at the very least, ask some questions about its legality. Desirability, as well as the enforceability of restrictions (not necessarily in that order) and the philosophically slippery slope and unforeseen externalities any restrictions might ultimately yield.
But before I have my say, allow me first to express my admiration at the undertaking. I admire its cleverness, its technical feats, its use of probability and game theory, and its predation upon what is essentially others' doltishness, not having yet come to terms with technology or conceived of others' misuse. Having said, that, this still doesn't mean we - the royal "we" - should admire it or even encourage it, but we can still admit it IS clever - in the same way that the locals in Hong Kong would watch the Barings booth, and sell futures whenever the Barings phone rang on the floor, having learned that most of their index arb was long stock and short futures and that a knee-jerk sale was a reasonable bet for a scalp, or like the clever URL-nappers who registered and held hostage names like HOTELLS.COM and HOTELSS.COM and all other poorly spelled permutations, re-directing mishits to other places until the purveyors grudgingly bought back the misspelled real estate. Saints or sinners - what sayeth you? Or perhaps you nihilistically matters not in the least.
But really, how should we feel about it?? That USD$15 to 25 billion is coming from somewhere - probably your mutual fund, your defined-benefit pension fund, and possibly your own pocket via your P.A. While it's true that no one dies as a result of the clever gamester-ing, almost everyone is hurt, albeit small. Is this sufficient violation of the public interest to warrant action? Let's examine the boundaries: At one end, "front-running" of the contrapreneurial sort (i.e. on 100% information) is decidedly illegal in most civilized markets. At the other end, speculative buying on reasoned information or no information (like that peddled by CNBC) is wholly acceptable and encouraged. But predatory, parasitic order-sniffing strategies lay somewhere in-between though closer to Darth Vader than Alec Guinness, for one might aptly describe it as front-running on 75% probable information where said information is cleverly inferred from quasi-public, though admittedly obscure and difficult to tease-out information. This is not an easy case to find fault or guilt, even for the likes of Solomon. Call it legal-to-the-letter, but with substantive externalities negative to the public's interest.
But perhaps there are some redeeming qualities to the undertaking of parasitic trading based upon hidden order-revelation and algorithm-spoofing that shakes the electronic tree yielding the sought-after fruit? Perhaps they add liquidity - qualitatively or quantitatively? Errrr, methinks not. Their pings, probes, posts and cancels, add nothing to market quality or integrity. Their "firm" 100-share bid or offer is a quintessential poison chalice. You taste it at your peril and ultimately with regret.
One must look outside the marketplace for their "positives". They do spawn technological advances, and neaten the parks and libraries in Stonybrook, LI while increasing the municipal coffers in Chicago. It might be thought to generate tax revenue, though if its a zero-sum game, there is no net gain systemically. It has a Randian free-to-pursue cleverness-rewarded element, but even here, the conentious-philosopheresse (with lower-case "p") might begrudgingly yield on logical grounds of harming the public interest.
Might the main exchange itself have something civically useful to say about this? Sadly, the civic incentives of the exchange were jettisoned long ago, and are now somewhat shortsightedly intent upon solely maximizing turnover and volume, on behalf of its shareholders rather than pandering to the interests of such pedestrian constituents as the listed companies and their investors - irrespective of their primacy to game itself. Sympathy for the buccaneers runs deep, however - perhaps by tradition for specialists were themselves monopolists who systematically abused privileged information -however inimical this was to the community at large.
In the realm of The Trade , it's hard enough for bona-fide buyers and sellers (with horizons of longer than intra-day) to locate each other and maximize achieved results, or minimize slippage, without service providers themselves and all the minions privileged to transaction information front-running (whether large or small) without a dedicated army of thieves kitted-out with the highest-tech gear, and the shortest and quickest lines to the exchange tripping you up, knee-capping you, picking your pockets, at any and every opportunity. In this sense, they are not merely annoying gnats to be waved aside, nor even pesky mosquitoes, but nasty flesh-tearing financial midges or black-flies inflicting real damage. "Ouuch....f*&k that hurt!!"
Which begs the question: in the absence of pecuniary restrictions (message fees, fees for cancels? Tobin taxes? etc) or other yet-to-be-conceived outright heavy-handed rule-making, how can normal participants fight back, and snooker them in return. Hidden cameras watch the croupiers and box-men, keeping them honest. Surveillance exists on the few remaining pits, ostensibly though ineffectually to try to catch the covert shin-kicks, ear-pulls and information abuse that was rife anywhere rules or privileged information could possibly be capitalized into a dollars. But employ a series of probing orders, or a cute predictive algorithm upon a numerical sequence that does nearly the same thing (albeit with an element of risk and uncertainty) with the same intention, and Presto! one is sanitized and legitimate and courted by the very exchange whose constituents one preys upon. Hmmmm. Something doesn't seem quite right. They serve no purpose, even if purposefulness is over-rated.
Still, the uproar outside rantings of ZeroHedge is decidedly muted. Exchanges make money. Brokers make money. Libertarians dislike any regulation or restriction. Perhaps regulation is simply not possible and pecuniary control is not desirable. But there remain weapons at the disposal of both perturbed traders, and the daring and the bold. Guerilla tactics. In simpler times, when Atari elicited a "wow" instead of a "huh?", this might have been achieved by leaving sizable but plausible limit, stop or MOC orders, then pulling them to see who and how much was leaning on them. Now more cunning is required. Torquemada-like fear and surprise. Spoof them back. Double-spoof. Triple spoof. In size. BOOOO!! Randomize. Maybe relax or eliminate all restrictions upon transaction etiquette, thereby allowing trade with oneself to paint the tape as required shake the parasites, perhaps leveling the playing field. Or merely to make it more like quick-sand. Declare all-out war so anything goes. Let - no, encourage the 'bots to fight and predate each other. "Greetings, Mr Anderson". Is this real or are we in the Matrix??! Hunt the hunter. "Kill the bear" as Anthony Hopkins rallied in The Edge. "What one man can do - another man can do!!" Heck, it's not about investing anymore (if ever it was) - its about winning the game, and as this time of The Quickening approaches, an algorithmic battle to the death, an epic battle cannot be far behind, leaving in its wake, RAIDs, bandwidth, over-educated Russians with no scruples, recursive bloodshed and, then yes, SkyNet...
And all the while, the thoughtful genuine investors, will watch with morbid fascination while exiting such venues and making greater use of alternative auctions that somehow keep out the riff-raff, reveal less and more optimally perform the true role of the exchange - to raise capital for growing enterprises, to match true buyers and sellers in the secondary markets.
*not her real name. Cassandra is an investment banker who authors the blog Cassandra does Tokyo.
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