Monday, May 17, 2010

More High Frequency Trading

I had a discussion recently with an old friend regarding the issue of high frequency trading (HFT). He wanted to know what it was all about and how it affected the melt down on May 6.

Our conversation then morphed into what to do about it the blatant wrongs that come with HFT. I am no expert on HFT and probably know just enough to be dangerous so stand advised that I realize this is a very complex subject. Given this and based on my understanding of the HFT game I have some strongly held beliefs which many in the field would considered simpletonian at best. I on the other hand prefer the idea that simple is elegant. Simple is understandable. Simple prevents you from getting taken to the cleaners. Now remember, this all assumes one has a room temp IQ to start with.

From what I have be able to dig up the HFT firms account for less than 5% of firms involved in the trading of markets but account for approximately 60-70% of all trading volume. I read recently that the holding period for many positions is less than 10 seconds but I cannot confirm this. These numbers should scare the wits out of any moron let alone a highly decorated Harvard MBA. These high frequency trading firms rely on the proximity of their servers being as close as possible to the servers of the exchanges where they do business for their edge.

So based on this here is my fix.

This is a free country, you want to trade the capital markets based on a computer program, a ouija board, sunspots, or the traffic patterns of downtown Madrid go right ahead. You want to close out your positions and shut everything down if a black cat suddenly crosses your path on the the way to Subway go right ahead, you are free to do so.

No one, and this applies to all market participants, gets a geographic proximity advantage with the exchange over anyone else. That means that Firm A's server cannot be located any closer to the exchange than Firm B's thereby negating the advantage this currently provides. No if ands or buts about it. If we cannot implement technology to referee the game properly and keep the playing field level for all then technology cannot play. PERIOD !! Spare me the diatribe. We got along fine without this shit before and will again.

No one get to see anyone else's buy or sell, long or short orders until entered and submitted into the exchange database which then becomes public info and can be seen by all participants.

Orders entered must remain entered for a minimum time period without exception or exemption (ie: my father-in-law is Duncan Niederauer is no longer an acceptable exemption) and is subject to a Draconian cancellation fee if cancelled prior to this period's expiration, again no if and or buts about it.

As for those saught after trading rebates from the exchanges to players for providing all this vaunted liquidity. Don't make me laugh as that is too hilarious for even my itty bitty cranium to buy. How does this rebate program strike you? None, nada, zilch, zip, zero, piss off. Got it now.
You want a rebate call Apple or Verizon.

This is just one idiot bloggers ultra-simpleton solution to the high frequency trading dilemma.

Now if a HFT firm can go 4 years without a loss under my rules, well, more power to em'! But be forewarned that if you circumvent these rules you (the principals of said firm) won't pay a paltry,nominally inconsequential monetary penalty. Rather you will pay for your crimes dearly via capital punishment. This is also know as consequences and also serve as a deterent (imagine that!).

Just so we're clear, and I mean crystal clear you can and should peruse many of the books and websites outlining the forms of medieval punishment for a primer on what could be in store for those who violate the rules.

This might make you re consider the age old defence of pleading guilty and paying a paltry monetary fine while neither admitting nor denying wrongdoing while riding off into a nirvanic sunset with your loot.

Housekeeping notes:

I want to get defensive and adjust my stops on a couple of positions.

First up I want to move my stops upward on my TLT positions to break even on each.

Next up I want to adjust my stop down on my CRM position to break even which is $87.35

Lastly I want to adjust my stop up on my long UUP position to break even at $22.52

Good speculating to you all and please remember to never forget that "an investor is a speculator who made a mistake and will not admit it".

Open Positions:
Long 1 unit Direxion Large Cap 3X Bear ticker BGZ @ $19.34
Long 2 units Direxion Small Cap 3X Bear ticker TZA @ $12.06
Long 1 unit Direxion Emerging Mkts 3X Bear ticker EDZ @ $60.50
Long 2 units Direxion Financial 3X Bear ticker FAZ @ $19.65
Long 2 units Ultrashort Xinhua China ticker FXP @ $42.45
Long 1 unit Ultrashort Real Estate ticker SRS @ $49.10
Long 2 units Direxion Tech 3X Bear ticker TYP @ $10.52
Long 1 unit US Dollar Bull ticker UUP @ $22.52 stop @ $22.52
Long 1 unit ishares Barclays 20yr Treas ticker TLT @ 92.15 stop @ $92.15
Long 1 unit ishares Barclays 20yr Treas ticker TLT @ 93.48 stop @93.48
Short 1 unit ticker CRM @ $87.35 stop @ $87.35

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