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HTF and Dark Pools.


I've been following Hunsader on Twitter for some time now. I've read numerous books on HFT and Dark Pools,so I'm very familiar with what goes on.

Anyway ,here's some excerpts on HFT/Dark Pools (I suggest you read the entire article) from this link. It's not the most recent,but nevertheless ,you should read it,just to understand how serious it is.

Hunsader has been at the front lines everyday exposing these thieves, who rob you every second of the day ,including your 401K's.

For updates thru-out the day ,every day, follow Hunsader on Twitter
@nanexllc

http://www.theguardian.com/business/2014/jun/07/inside-murky-world-high-frequency-trading

"Hunsader watched and blogged what he saw as anomalies. A major HFT firm called Knight Capital, the largest stock trader in the US, imploded when a test algo was mistakenly used for live trades, buying and selling 2.6m shares per second in an electronic fit lasting 45 minutes and costing $440m. On another occasion, a mysterious "ghost algo" appeared out of nowhere, placing and cancelling orders in 25-millisecond furies up to 10.30am each morning for a week, accounting for 4% of traffic on the US stock market without executing a single trade – then vanishing. A hoax tweet claiming that President Obama had been injured in twin explosions at the White House caused another terrifying slide, which became known as the Hash Crash – because the machines were now reading Twitter. By the end of 2013, Hunsader counted an average of two dozen "mini-flash crashes" in individual stocks every day.

The numbers were now mind-boggling. In the 1960s, an average share in a company would be held for four years, a figure that had fallen to eight months by 2000, en route to two months in 2008. But now the average share was held for 20 seconds, with 10 on the horizon and the fastest machines able to fetch quotes in a millionth of a second. Within two years of the Flash Crash, HFT accounted for 70% of market activity in the US and almost 40% in Europe. Meanwhile, more than 50 so-called "dark pool" markets had risen to shelter slower traders behind anonymity, but most of these had been colonised by predator algos, with some deteriorating into "toxic dark pools", where no one was safe. Algo-designing quants now earned hundreds of thousands, even millions a year and NxCore was processing a trillion bytes of information per day. The faster the machines got, the less anyone could tell what was really going on.

Some things were clear, though. Hunsader could never attribute motives to the machines, but could see the way large pension and mutual fund bots were lured into traps: the algos probed them for signs that they were about to buy or sell, and then used superior speed to get them to sell lower or buy higher. High-frequency traders referred to their prey as "whales", "low-hanging fruit", "dumb money" or "dinner". The stock market had been designed as a means of allowing capital to flow where it could be most useful, allowing individuals with excess money to invest in the energy and ideas of others. But HFT was nothing to do with value assessment or creation: the machines' sole aim was to use speed to game the market. Ordinary savers were being robbed and traditional investors were leaving the market, forcing capitalism farther away from anything either Adam Smith or the NYSE founding fathers would recognise as virtuous.

Some trading firms were even operating from unregulated jurisdictions such as Russia and the Czech Republic. What was to stop terrorists entering the frame? On the face of it, nothing. In Money And Speed, a 2011 documentary by the Dutch film-maker Marije Meerman, the SEC's Gregg Berman made this extraordinary confession: "There is no air traffic control for the market… there is no one person or group that in real time sits and watches. Oversight would cost government and the taxpayer too much, so it won't happen."

Not only that, but the invader algos were multiplying. Nanex detected one it took to calling The Disruptor, because it slammed so many millions of orders into the system that the whole market shook. How could this be allowed? The Nobel Laureate economist Michael Spence called for an outright ban in 2011, and European MEPs threatened action; their proposals were rejected by the UK's Coalition government. When Hunsader's finance friends pointed out that nobody was driving busloads of children over cliffs, he would grab their wallet and remove a $20 bill, then hand the wallet back. "Does anyone in the world really care what just happened there?" he would ask. "It makes no difference to anyone but you, and even then not much. It's just that in a civilised society, we don't tolerate that. Civilisation breaks down when people don't follow the rules, because nobody can trust anybody else."

Or as Thomas Peterffy, the Republican billionaire founder of Interactive Brokers, put it: "Basically, the people whose money is in the large pension funds and investment accounts, they do not understand what is happening. If they understood that it is their money that the banks are basically taking from them, then they would do something about it. But the problem is that it's too complicated."

Some people think the stock market has become almost impossible for anyone to understand. Professor Neil Johnson specialises in complex systems and has been studying financial markets for years. A British academic working at the University of Miami, he previously subscribed to the conventional view that, if you wanted to understand markets, you examined long-term trends; that anything occurring on the scale of hours, minutes or seconds was just noise – statistically insignificant. When Johnson heard about Hunsader's inquiries, however, he was intrigued: he flew to Chicago, where the Nanex data thrilled and unsettled him in equal measure. Most unexpected among his discoveries was that in the runup to the 2008-2009 financial crisis, a concentration of "mini-flash crashes" occurred in banking stocks, for the likes of Goldman Sachs, Morgan Stanley, JP Morgan and Lehman Brothers.

"To be honest, that still shocks me," he says, "because it suggests a link between what goes on at a sub-second level and what happens on the scale of months. At that point it started to look like an ecological system. Because in an ecological system, you have predators of all sizes… And I think this is what we're seeing. The algorithms are all looking for and picking up some kind of weakness in those particular bank stocks, picking away at them, picking away. So I'm not saying they caused the crash, but they were like sensors of the impending bigger weakness."

What are the implications? "It's fascinating," Johnson says. "I mean, people have talked about the ecology of computer systems for years in a vague sense, in terms of worm viruses and so on. But here's a real working system that we can study. The bigger issue is that we don't know how it's working or what it could give rise to. And the attitude seems to be, 'out of sight out of mind'."

Significantly, Johnson's paper on the subject was published in the journal Nature and describes the stock market in terms of "an abrupt system-wide transition from a mixed human-machine phase to a new all-machine phase characterised by frequent black swan [ie highly unusual] events with ultrafast durations". A scenario complicated, according to the science historian George Dyson, by the fact that some companies are now allowing the algos to learn – "just letting the black box try different things, with small amounts of money, and if it works, reinforce those rules. We know that's been done. Then you actually have rules where nobody knows what the rules are: the algorithms create their own rules – you let them evolve the same way nature evolves organisms."

Could the system collapse in a monumental, global Splash Crash? The inventor and thinker Ray Kurzweil, now head of engineering at Google, has long predicted a moment he calls "the singularity", when the machines take over. Could the incubator for such an event be the unregulated stock market? The thought seems outlandish, almost too exotic to voice, and yet not one of the experts approached for this article would dismiss it out of hand.

The British quant Paul Wilmott, a crack algoman turned HFT critic, is that rarest of things: an expert who doesn't rely on the industry for a living and is free to speak his mind. He has been alarmed by this brand of trading for years, he says, but is now more concerned with the broader context. "My own stance has changed, in that I'm becoming increasingly cynical and focusing less on the mathematical modelling, worrying more about the human nature side of the thing – the way the banks find some bandwagon and try to exploit it as much as they can. And when people get worried, they claim there's nothing wrong with getting two or three years of profit out of this socially useless bandwagon, then moving on to another… We're all just servicing the banking industry now. This is what I find upsetting."

But chinks have appeared. Haim Bodek was also an elite quant, rich and successful, when the tide inexplicably turned and he started haemorrhaging money. He spent an anguished year pulling apart his algorithms, trying to work out why competitors were suddenly beating him to every trade, until, drowning his sorrows at a party one night, an amused insider let slip a secret: a cabal of favoured traders were being given preferential treatment through "special order types" – equivalent to a different code or language – which enabled them to jump the queue. The insider suggested Bodek do the same, because his algos were running through treacle compared with these favoured few.

Bodek's Jewish family had been caught up in the Holocaust, where scientists turned a blind eye to how their technology was being used, so he accepted his invitation to join the club, but was plagued by conscience and finally went to the SEC, knowing he would become a pariah. When, towards the end of 2013, a public outcry greeted news stories that the same subset of traders could pay for a private data feed that was faster than the one everyone else used (something traders had known for years), Bodek could only laugh. Nothing, as usual, was done.

The son of an experimental particle physicist, Bodek now lives in Connecticut, and is still angry. He thought long and hard before going public with his discovery and expected the issue to blow up quickly once he had. Instead, traders and exchanges argued that these secret "undocumented features", immoral as they might appear, were perfectly legal. "They don't think of themselves as criminals," Bodek says. "They think of themselves as the good guys. They don't want to believe that in the last 10 years they've just been doing securities fraud. They want to believe they've outwitted everybody."

He claims to have been effectively blacklisted from the industry for two years, and the hardest part to take was that the people from the mutual and pension funds were the most dismissive, despite being the victims of HFT. "Apparently, the idea that I saw something bad and called it out is not allowed. Acknowledging what I said would be admitting they didn't know this stuff. It's like I was this inconvenience to the victims of Wall Street." Only this year has the tide begun to turn, with Bodek's actions increasingly seen as those of a leader within the industry.

The lawyer Michael Lewis's first thought was to build a case for market manipulation and insider trading against the HFT firms. But the more he spoke to Hunsader, the more he began to accept that this would be too complicated for judges to follow. Instead, Hunsader nudged Lewis in the direction of the two most serious advantages HFT traders had been handed by exchanges: the faster language or secret order types, and the private data feeds. US stock exchanges promise to supply subscribers with timely and accurate information via their standard SIP feed, for which users pay a total of $500m a year. It appeared to Lewis that the exchanges were in breach of that contract. "The information they were providing was not timely or accurate, and wasn't fairly distributed. Here's what's happening: the real market is represented by these private data feeds. The illusory market, the market that the investor sees when he looks at his monitor, is anywhere from 1,500 to 900 milliseconds old. That doesn't sound like much, because the blink of an eye is 300ms. But that's a long, long time in the world of HFT."

Should it be allowed? "How can it possibly be allowed? The profits being made are coming out of ordinary investors' pockets."

Lewis pauses. For him, more is at stake than just the future of HFT and he will later characterise the impending litigation as "a small skirmish against the larger backdrop of the vast accumulation of wealth and political power" that is currently undermining democracy in the west. "In many ways we've all become vassals again," he says. "And it's this simple: the people who are writing the rules are winning the game. This is just one example. But we have to start somewhere."

For now, that "somewhere" is a court in the southern district of New York state, where on 22 May a class action complaint was filed against all 13 US stock exchanges and their subsidiaries, a prelude to what could be one of the most significant courtroom dramas of the century so far. The first line of the lawyers' 40-page document reads: "This is a case about broken promises."