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The net result of a rigged system is the vast majority of the gains in income and wealth flow to the very tippy-top of the wealth/power pyramid.

We often hear how the system (i.e. our economy) is rigged to benefit the few at the expense of the many, but exactly how is it rigged? Longtime correspondent Zeus Y. recently highlighted two specific mechanisms that favor the top 0.01%: high frequency trading (HFT) and oligarchic inheritance, the generational transfer of immense wealth and the power it buys.

High frequency trading (HFT) is a mechanism only available to the few at the top of the wealth/power pyramid to skim money from markets–please watch the videos below for further explanation of how HFT works.

As for inheritance–we’re not talking about leaving a house or a small business to one’s offspring, or even a couple million of dollars; we’re talking about tens of millions or hundreds of millions of dollars. Some states impose an estate or inheritance tax, but at the federal level, the exemption of $11 million per person means a married couple can leave $22 million tax-free.

The number of people with more than $11 million to pass on is extremely small:

Estate tax in the United States

In 2018, the exemption doubled to $11.18 million per taxpayer due to the Tax Cuts and Jobs Act of 2017. As a result, only approximately 2,000 people (or 0.0006% of the population) in the US are currently liable for estate tax.

The mega-bucks families and billionaires practice the fine art of philanthro-capitalism, leaving their vast fortunes in so-called charitable trusts that enable power and wealth to be transferred generationally.

…click on the above link to read the rest of the article…

Power Trendlines

January 9, 2019

Power Trendlines

Market action is heavily dominated by algorithmic trading and programs. Nothing new about that and it’s a reality of the market environment. In December algos were blamed for the steep sell-off, nobody is blaming them during the massive bounce off of the December lows. Funny that.

Irony aside knowing where these algos live and where they change direction is a critical edge to decipher in today’s markets. One of the key tools we use to keep a tap on them are trend lines and in this brief video (recorded January 8) I highlight some of the fascinating ping pong action we’ve come to observe and respect in markets.

Note: News cycles and events may be triggers, but trend lines often give you a destination and potential key turning points of support and resistance. And finding these ahead of time can provide a significant edge.

Joe Saluzzi: The Markets Are Still Way Too Vulnerable To A Sudden Liquidity Disappearance

September 25, 2018

Joe Saluzzi: The Markets Are Still Way Too Vulnerable To A Sudden Liquidity Disappearance

HFTs remain a major issue

Joe Saluzzi, co-founder of Themis Trading LLC, outspoken exchange expert, and author of the excellent exposé Broken Markets, returns to give us an update on the state of high frequence trading — otherwise known as HFT.

In the past, Saluzzi has been a vocal critic of the dominant and parasitic role HFT algorithims play in today’s financial markets, siphoning off profits at the expense of the “dumb money” (i.e. retail investors) while undermining the integrity and stability of exchanges. Front running, spoofing, flash crashes — HFTs are the culprits behind them.

Saluzzi actually has some positive developments to note: namely that the obscene profits the HFTs used to make (i.e., steal) are moderating as the arms race in the industry has escalated and the players are increasingly competing with each other. Also, the SEC appears to be moving much faster now towards putting some material constraints in place.

But the unfair advantages that HFTs enjoy, as well as their threat to market stability, are still very real. If we don’t continue to fight to bring them under control, we risk a vicious downdraft during the next big market crisis should the algos instantly exit in a panic:

If the HFT algos get spooked and stop trading, then you got a major problem.

In times like this when there’s no storm out there, it’s time to fix the house now to make sure that when the storm comes the house doesn’t get knocked down. So how do you fix the house? By getting rid of the conflicts of interest, maybe adding more obligations for market makers, looking at those off-exchange venues which are considered ‘dark pools’ and learning what’s going on there, looking at all different types of the issues that continue to haunt us — most of which don’t become visible until they don’t pop up at the end.

…click on the above link to read the rest of the article…

An Unexpected Warning From Goldman Sachs: “Something Is Not Quite Right”

May 22, 2018

An Unexpected Warning From Goldman Sachs: “Something Is Not Quite Right”

It was just over 9 years ago today when we wrote “The Incredibly Shrinking Market Liquidity, Or The Upcoming Black Swan Of Black Swans” in which we explained how as a result of the growing influence of HFT, quants and central banks, the market itself was breaking. We also highlighted what the culmination of the market’s “breakage” could look like:

liquidity disruptions could and will lead to unexpected market aberrations, such as exorbitant bid/ask margins, inability to unwind large block positions, and last but not least, explosive volatility: in essence a recreation of the market conditions approximating the days of August 2007, and the days post the Lehman collapse…

We even laid out some possible catalysts for a possible market crash: “continued deleveraging in quant funds, significant pre-market volatility swings as quants rebalance their end of day positions, increasing program trading on decreasing relative overall trading volumes.”

We saw all of the above elements briefly come together when on February 5 the market finally did break in one spam of exploding volatility, as its topology was torn apart by various, disparate elements, resulting in virtually all of the above materializing, if only for a short time, and blowing up the VIX, which soared by the most on record, rising from the lower teens to above 50 in the span of hours, while bankrupting countless vol sellers.

Since then, the same elements that coalesced in 2017 to pressure and keep the VIX at its lowest level in history reemerged, and the “selling of volatility” once again reappeared as a dominant trading strategy, but not before Goldman Sachs wrote a report in March in which it echoed everything that we warned about over 9 years ago, and which increasingly many have said in the past decade, namely that the advent of algo trading and HFTs have collapsed market liquidity to the point where the market itself has become precariously brittle, prompting increasingly frequent flash crashes, and leading Goldman to conclude that, when it comes to market risk factors, “liquidity is the new leverage” in a world in which HFTs are the marginal price setters:

…click on the above link to read the rest of the article…

On Guard Against The Banks

September 12, 2017

On Guard Against The Banks

Following the events of yesterday, it seems wise this morning to take an in-depth look at the charts in order to discern what moves The Banks may take next in the hope of stemming this rally and reversing the trends.

Let’s start with Comex Digital Gold. It has been in an UPtrend since July 10 and this rally has carried it $150 or about 12.5%. In doing so, The Commercials on the CoT have increased their NET short position by 182,000 contracts and, specifically, the 24 Banks of the Bank Participation Report have doubled their NET short position, going from 104,748 contracts NET short in July to 213,746 NET short last week.

This places the CoT in its “worst” position since last September and this BPR reveals the largest NET short position on record. Therefore, you KNOW that The Banks will do just about anything at this point to reverse the trend and begin flushing The Specs back out of paper gold. Though they are clearly capable of pulling this off, it may take them a while to do it. Why, you ask?

For CDG, it’s all about the moving averages. We noted early last week that CDG’s 50-day had bullishly crossed UP and through both its 10-day and 200-day MAs. This is a very bullish trend indicator and, most importantly, it sets the Spec HFTs into a “buy the dip mode”. You can see this playing out already when you look at the daily chart.

Also last week, we began to discuss the significance of the $1331 level as support in any pullback. This was the level of resistance and then support in late August so we hoped/expected that same action on any pullback. And look what has happened thus far this week! Even though the all-important USDJPY is up another 50 pips today and pressing against 110, Comex gold is hanging firm at….$1332! For us, this is clear evidence of the HFTs buying the dip.

…click on the above link to read the rest of the article…

Total G-3 Central Bank Control – Craig Hemke

August 30, 2017

Total G-3 Central Bank Control – Craig Hemke

There’s a lot of amazement and wonder at how the “stock market” can be up today with the devastating news out of Texas and the latest North Korean missile launch. Longtime readers of TFMR know exactly how this market levitation is accomplished so this post is designed as a public service in order to better educate and inform everyone else.

Let’s just keep it simple…

In 2017…and, actually, since 2008…the “markets” don’t actually exist. Oh sure, there are trades and prices but in terms of what the markets were 20 years ago?…those days are long gone. Instead, what we have now is total HFT domination. Over 90% of all volume on the NYSE and NASDAQ is now done through HFT machines that swap positions back and forth. This is common knowledge and if you and I know this, then you can be assured that The Fed, The ECB and the BoJ ( known henceforth as the G-3) know this, too.

To that end, since the G-3 are dedicated to market stability and the wealth effect, these central banks clearly seek to influence the direction of the equity markets by influencing the two key drivers of the HFT machines. And what are these drivers? The currency pair of USDJPY and the volatility index known as the VIX. Simply stated, if your wish is to drive “the stock market” higher, all you need to do is buy the USDJPY while at the same time selling the VIX. It truly is that simple.

To that end, daily observation of trading patterns allows us to observe a clear and obvious, algo-driven program in the all-important USDJPY. Because of the sheer size of the forex market (up to $7T/day), any algorithm put in place to manage this pair could only come from pockets deep enough to make it happen….namely, the G-3.

…click on the above link to read the rest of the article…

Our Brave New ”’Markets”’

July 30, 2017

Our Brave New ”’Markets”’

How HFT algorithims risk a massive sudden sell-off

One thing is clear: These aren’t your daddy’s markets anymore.

Why? Because about 10 years ago the Rise of the Machines (aka high frequency trading algorithms) completely altered the terrain of what we call the ‘capital markets.’

Let’s look at this as a before and after story.

Before the machines, markets were a place that humans with roughly equal information and reflexes set the prices of financial assets by buying and selling. Fundamentals mattered.

After the machines took over, markets became dominated — in terms of volume, liquidity and pricing — by machines that operate in time frames of a millionth of a second. The machines and their algorithms use remorseless routines and trickery — quote stuffing, spoofing, price manipulations — to ‘get their way.’

Fundamentals no longer matter; only endless central bank-supplied liquidity does. Because such machines and their coders are very expensive and require a lot of funding.

The various financial markets are so distorted that I first resorted to putting that word in quotes – “markets” – to signify that they are not at all the same as in the past. In recent years I’ve taken to putting double quote marks – “”markets”” – in attempt to drive home their gross distortion. Not only are todays “”markets”” something the human traders of a generation ago would fail to recognize, they’re no longer a place where human actions of any sort have much of a remaining role.

Why care about this? Two big reasons:

Such “”markets”” are easily manipulated by central banks and other state actors by virtue of their automated responses to liquidity injections. Are the markets going down when you don’t want them to? Just use any one of several highly leveraged means of signaling to the computers that it’s time to buy instead of sell. Common leverage points include the Japanese Yen-to-USD price level, selling VIX to lower volatility, and buying massive quantities of index futures ‘all at once.’

…click on the above link to read the rest of the article…

The Machines Are Going Mad – HFT Quote-Stuffing Desperation Spikes To Record High

January 14, 2016

The Machines Are Going Mad – HFT Quote-Stuffing Desperation Spikes To Record High

It appears – for now – that the machines are losing control. Amid the chaos of the last few days in US equities, Johnny 5 and his ilk have been quote-stuffing in desperation at the highest rate in history… but it’s not working!!

Source: @NanexLLC

One Way to Unrig Stock Trading

December 25, 2015

One Way to Unrig Stock Trading

AMERICA’S equity markets are broken. Individuals and institutions make transactions in rigged markets favoring short-term players. The root cause of the problem is that stocks trade on numerous venues, including 11 traditional exchanges and dozens of so-called dark pools that allow buyers and sellers to work out of the public eye. This market fragmentation allows high-frequency traders and exchanges to profit at the expense of long-term investors.

Individual investors, trading through brokers like Charles Schwab, E-Trade and TD Ameritrade, suffer first as the brokers profit by hundreds of millions of dollars from selling their retail orders to high-frequency traders and again as those traders take advantage of the orders they bought.

Market depth, critically important to investors who trade large blocks of securities, also suffers in the world of high-frequency traders. Startling evidence for the lack of robustness in today’s market comes from a 2013 Securities and Exchange Commission report that found order cancellation rates as high as 95 to 97 percent, a result of high-frequency traders’ playing their cat and mouse game. Market depth is an illusion that fades in the face of real buying and selling.

Brad Katsuyama, founder of IEX, testified about the state of U.S. stock markets last year on Capitol Hill.CreditDoug Mills/The New York Times

Securities markets work best as a central clearinghouse where all buyers and sellers of stocks come together. Not so long ago, when the New York Stock Exchange and the Nasdaq operated as virtual monopolies, American equity markets were the envy of the world. Until 2000, Nasdaq was wholly owned by a nonprofit corporation; the New York Stock Exchange was nonprofit until 2006. To ensure that they would operate in the public interest, they were treated much like public utilities.

…click on the above link to read the rest of the article…

In Latest Market-Rigging Scandal, ITG Busted For Frontrunning Clients In Its Dark Pool

July 29, 2015

In Latest Market-Rigging Scandal, ITG Busted For Frontrunning Clients In Its Dark Pool

Last year, first in the aftermath of NYAG’s lawsuit against Barclays followed promptly by Michael Lewis’ “Flash Boys” (which over a year later is still a better seller than “GS Elevator’s” attempt to be this generation’s Tucker Max) exposing High Frequency Trading for being nothing more than a sophisticated gimmick enabling market rigging and bulk order frontrunning while pretending to “provide liquidity”, the revulsion against HFTs hit a fever pitch that forced Virtu to postpone its IPO.

Several months later, because the market kept going higher, people quickly forgot why they were angry at a bunch of vacuum tubes, and Virtu not only re-IPOed (adding another year without a single trading day loss to its roster) but it was taken public by that “humanitarian” protagonist of Flash Boys, Goldman Sachs itself (which was so aghast at the scourge that is HFT it almost, almost, ended its own dark pool and HFT ambitions… before it decided to double down on HFT).

However, since the market is once again on the verge of a terminal liquidity seizure with its associated side-effects (see China for details), the authorities needed to remind the “market” just who the scapegoat will be when the next crash finally does come. Which is why earlier today in an unexpected “preliminary second quarter guidance” release, ITG, owner of the Posit dark pool, was just busted with a $22.6 million potential SEC settlement for what appears to have been blatant frontrunning of company clients in its own prop trading pod.

From the release:

During the second quarter of 2015, ITG commenced settlement discussions with the Staff of the Division of Enforcement of the SEC (the “SEC Enforcement Division”) in connection with the SEC’s investigation into a proprietary trading pilot operated within ITG’s AlterNet Securities, Inc. (“AlterNet”) subsidiary for sixteen months in 2010 through mid-2011.

…click on the above link to read the rest of the article…

Banks Rig Treasury Market

July 26, 2015

Banks Rig Treasury Market

Boston’s public sector pension fund accuses all of the biggest US banks – the so-called “primary dealers” which transact directly with the United States Treasury Department and “have a special obligation to ensure the efficient function” of the American treasury bond market – of colluding to manipulate the $12.5 trillion U.S. Treasury market. The complaint alleges:

Defendants employed a two-pronged scheme to manipulate the Treasury securities market. First, Defendants used electronic chatrooms, instant messaging, and other electronic and telephonic methods to exchange confidential customer information, coordinate trading strategies, and increase the bid-ask spread in the when-issued market to inflate prices of Treasury securities they sold to the Class. Second, Defendants used the same means to rig the Treasury auction bidding process to deflate prices at which they bought Treasury securities to cover their pre-auction sales. Recent reports confirm that traders at some of these primary dealers “talked with counterparts at other banks via online chatrooms” and “swapped gossip about clients’ Treasury orders.

By engaging in this unlawful conduct, Defendants maximized the spread not only for transactions in the when-issued market, but also between their buy (auction) price and sell (when-issued) price.

***

This conduct lined the pockets of Defendants while raising prices to investors trading Treasury securities in the when-issued market, investors trading Treasury security-based futures and options, and investors transacting in instruments benchmarked to the prices of Treasury securities determined at auction, including certain bonds and other asset- backed securities and interest rate swaps.

Given the tight correlation between the Treasury securities prices in the spot market and futures markets, Defendants’ manipulation of the auction prices for Treasury securities also directly and proximately caused injury to individuals and entities that traded in Treasury futures and options on U.S. exchanges, including the Chicago Mercantile Exchange.

High-frequency trading has also long been used to manipulate the treasury market.

…click on the above link to read the rest of the article…

HFT, inept regulators & Fed distortion = more flash crashes

May 3, 2015

HFT, inept regulators & Fed distortion = more flash crashes

As luck would have it, we had Joe Saluzzi lined up to record a podcast the day the news broke recently that the suspected culprit for the 2010 flash crash, Navinder Singh Sarao, had been arrested. Saluzzi is co-founder of Themis Trading LLC, long-time cautionary on the dangers of high-frequency algorithmic trading, and co-author of Broken Markets: How High Frequency Trading and Predatory Practices on Wall Street Are Destroying Investor Confidence and Your Portfolio.

In this discussion, Joe shares his suspicions about Sarao (a contributor to the crash, but highly unlikely to be the actual cause) and then provides his expert assessment of what has been done in the intervening years since the flash crash to safeguard the market against a similar failure (precious little). In his opinion, a winner-take-all high-tech arms race, clueless and toothless regulators, and central bank price distortion are conspiring to make us more vulnerable — not less — to another systemic breakdown:

What’s happened is the markets have evolved and they’ve obviously embraced computerization and technology. Some things have been very good for the markets and brought down cost. But regulators don’t seem to have evolved. They don’t seem to have caught up with times and they don’t necessarily have the eyes and ears out there to monitor things on a micro-second or nano-second level.

…click on the above link to read the rest of the article…

“Another Crisis Is Coming”: Jamie Dimon Warns Of The Next Market Crash

April 10, 2015

“Another Crisis Is Coming”: Jamie Dimon Warns Of The Next Market Crash

Last October’s Treasury flash crash — which Gregg Berman will tell you wasn’t the fault of HFT and which will likely repeat at some point or another thanks to the fact that Fed purchases have reduced market depth — may no longer be a once every three billion year occurrence as statistics would dictate, Jamie Dimon observes, in his latest letter to JPM shareholders, before suggesting that the event “should make you question statistics.” Amusingly, Dimon seems to confuse cause and effect a bit, as it’s really not the fault of “statistics” per se, but rather the fault of shifting market dynamics (and by “dynamics” we mean increased manipulation and never-before-seen distortions and dislocations) that have rendered the old statistical models obsolete. But at least Dimon sees the event, and recent similar shakeups in FX markets for what they are: “warning shots across the bow.” Here’s Dimon:

Recent activity in the Treasury markets and the currency markets is a warning shot across the bow

Treasury markets were quite turbulent in the spring and summer of 2013, when the Fed hinted that it soon would slow its asset purchases. Then on one day, October 15, 2014, Treasury securities moved 40 basis points, statistically 7 to 8 standard deviations – an unprecedented move – an event that is supposed to happen only once in every 3 billion years or so (the Treasury market has only been around for 200 years or so – of course, this should make you question statistics to begin with).Some currencies recently have had similar large moves. Importantly, Treasuries and major country currencies are considered the most standardized and liquid financial instruments in the world.

…click on the above link to read the rest of the article…

How HFT Destroys Markets: 50 Pages Of Evidence

March 21, 2015

How HFT Destroys Markets: 50 Pages Of Evidence

Back in 2009, when aside from a few insiders, nobody had heard of HFT, Zero Hedge launched its crusade to expose the algorithmic scourge that has since then caused an equity, treasury and now US Dollar flash crash, and has been the subject of a Michael Lewis bestseller and resulted in countless market halts and failures.

More importantly, there is now roughly 50 pages of just bibliography citing the evidence-based, academic research that has shown just how pervasively, maliciously and premeditatedly HFTs manipulate, destabilize, impair and otherwise destroy every single market in which they participate, and what’s worse: result in incremental costs to investors, debunking the biggest lie HFTs spread about themselves – that they, being the gregarious humanist vacuum tubes they are, make trading cheaper and more accessible for the small investor.

And the biggest paradox: despite all this proof – which we urge every readers to sent to their favorite SEC regulator – America’s corrupt enforcers of securities laws continue to turn a blind eye to all the crime that takes place every single day. Why? Because they collect a portion of the proceeds, of course, and because they need a scapegoat to blame once the market crashes.

We are grateful to “R. T. Leuchtkafer” who put it all together.

…click on the above link to read the rest of the article…

Troy Will Burn – the Big Deal about Big Data

March 17, 2015

Troy Will Burn – the Big Deal about Big Data

I know, I know … I’m a broken record and a Cassandra, with 2 successive notes on Big Data. But I don’t care. This is a much larger structural risk for markets and investors than HFT and the whole Flash Boys brouhaha, it’s just totally under the radar and hasn’t surfaced yet. And unfortunately, just as I think Jeb Bush speaks for most Americans – Democrat and Republican alike – when he says that he doesn’t get what all the fuss is about when it comes to metadata collection and Big Data technologies, so do I think that most investors – institutional and individual alike – are blithely unaware of how their market identities can be stolen and their market behaviors influenced, all in plain sight.

Jeb Bush should know better. I think he probably does. Investors may not know better yet, but they will soon, one way or another. As you read this note, a small group of hedge fund managers are doing to you exactly what the NSA is doing to “terrorists”.

Today a handful of governments use Big Data to identify individual behavioral patterns so that certain individuals can be killed. Today a handful of hedge funds use Big Data to identify investor behavioral patterns so that certain investors can be crushed. Today Big Data is primarily an instrument of social information gathering, with a powerful but punctuated impact on those individuals on the receiving end of a drone strike or a targeted trade.

…click on the above link to read the rest of the article…

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