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Back in the mid 90's there was a new regulatory push at NASDAQ. The resulting intervention brought with it new order handling rules. Does anyone remember those changes or the reasons given for making them?
The limit order display rule said that a desk had to display customers limit orders in the market. The trading community deserved this one as in some cases desks would trade through undisplayed customer limits and not take the customer with...that should be against the rules. On my desk, prior to the rule change, I would take the customer out at the best price tick possible at any level that I traded above their limit and I would stop them at their limit worst case scenario....but I never displayed their orders to the street as once they where visible in the system they would be sitting duck liquidity for the other participants. I remember getting calls from salesmen saying that their order was to sell MSFT at 54 1/4 their confirm said 56 1/8....to which I'd respond, do you want me to correct that?
Liquidity is a tool. Knowledge of little pools of liquidity back then was a nice little arrow for the quiver. I can explain more about that dynamic, the background and how it worked if anyone cares.
So now you hear retail traders and investors lament about "they" ran my stops...well no $h!t. The regulators took away a competitive edge that one desk would have over another desk in a way that they thought would bolster the customers position in the market against a few butt holes that where screwing everyone they could. The regulators because they are dumb, used a shotgun approach when a sniper rifle was the right tool. I mean do you think the guy at SALB cares about a price improvement or best fill of a MLCO client...NO! So the regulator took the order out of hands that care and put it on display for other desks to exploit...DUMB!
I was going to run through other rule changes and how they hammered, not helped retail but I want to go fishing this morning. If anyone cares, let me know and I'll share my view from the "inside"
One of the points...I'm forgetting them...was that these mid-90's rule changes mostly did the opposite of what the brainiac regulators intended...and they, among other things, set the table for the HFT phenomena.
Look at who this industry is tapping now...the physics Ph. D's are going into finance. Programmers think they are and are becoming traders. Every new change will bring with it new and bigger opportunities ...for someone. Thinking you can stay ahead of that is futile. We just have to adapt and roll with the punches.
Can you help answer these questions from other members on NexusFi?
some of the background as to what was going on to create that environment and the other two big rule changes at that time.
First, since I think I've seen his name on futures.io (formerly BMT), the guy at NASDAQ in charge of this segment at the time was John Tognino. Tog, was a great trader, a true advocate, and a good guy, none of the lunacy rested with him. He did everything he could and his extra effort for me made all kinds of difference.
Prior to these "changes" being forced through the pipe, (what is the literary term for a nicer more acceptable way to describe something) there had been a new technology that was a response to the previous set of "new rules".
The Small Order Execution System or SOES as it was called was developed to be a special system to provide retail liquidity on orders less than 1000 shares. At this time market makers where required to post bid and ask prices in their stocks and trade 1000 shares at EACH price level they displayed.
The street, at least nasdaq market making desks, where using software that was way way behind what could be developed by smart guys not associated with nasdaq or under it's direct management or regulation. The "SOES bandit" emerged to exploit the well meaning but stupid rules...it was like none of those people had ever spent a day on a desk and did not know anything about the dynamic of how the market worked...but that is what you expect from government.
So my market making software prior to SOES was such that you set your market size in thousands and your price decrement size in 1/8ths. What this meant is that if another participant came through the system to hit your bid, you would buy 1000 (or your size) and then get an alert that your size had been executed against your bid your price, do you want to move? You where viewed by the street as a reproductive organ if your dec size was more than 1/8th....just saying....and nobody used the new auto dec feature to move your market out of the way.
Because of the nature of the game and the traders desire to trade multiple stocks (I traded between 10 and 12) your machines where generally set to auto accept orders against your market. BUT and I know this is hard to believe, each order was independent and there was no cumulative measure of the orders that you are accepting while on "auto". This was safe because there was a protocol, a method as to how things where done among participants at the time.
So the "bandits" figured this out that if a machine at a market maker was not set to auto dec they could hit a MM bid for 999 shares until someone saw what was happening and moved the displayed market away. Now at this time most NASDAQ trades between desks would occur over the telephone so imagine the speed of right now over an intel 486 versus an actual telephone call. The screen would light up like a Christmas tree. There where times where we would have over 100 "orders in" and under the rules we where stuck because of our displayed market at the time the order was received and our machine was on auto accept. This created all kinds of problems for the then efficient status quo. We had to turn off auto accept within the first two weeks. Imagine how that slowed things down.
So after almost a year of fooling around what we end up with is less liquidity at price, relatively feeble inside markets, we are slower and less efficient...what we get is the opposite of what the rules wanted AND more price volatility.
The professional traders became just as good at responding. We'd send guys to the $2500 SOES bandit training sessions to learn the "secrets of the pros", we'd discover their method and how they where "keying" their wave of orders and we'd line them up for slaughter. The new regs, once again hurt where they where supposed to help. The sky was falling then too. That was the end of the world for trading. So I think smart guys will continue to discover...the markets and the ability of smart people to find a way are not going away anytime soon.
Leaving out some detail as I was starting to just type. Every time there is a regulatory or a technological game change the smart ones will discover and adapt.
The FED has been flooding the banks (hft dealers) with money. Better days than ever to be on the inside of a bulge bracket investment bank. I would truly prefer a great depression than this to big to fail socialism. F the system.
I don't know about stocks, but this doesn't seem to be the case for futures.....a common sense awareness of seasonality and volatility (for which one only needs a rudimentary volume picture) gives me an idea of when to trade small and when to lever up. I downloaded the depth and width data from 2009 from CME and a simplistic picture tells me what I need to see to enter the market......the pdf separates all the markets...but the last page has combined data that I pulled into plots - if someone said the futures markets is dead and impossible to play in because of hfts, algos, bots et al..at this stage I would disagree.
Depth & Width both down from the nutty days of 2007, 2008 - but certainly not fallen off a cliff. Depth in EuroDollar & Corn has recently spiked so I have a log chart to make everything look proportional. As usual depth in Notes and ES dwarfs the others.
PS - I have never truly believed the Fed money printing ballyhoo that is currently accepted as gospel everywhere. There are other things to consider.
Does anybody know what’s been driving down daily US trading volumes in recent years?…
That chart is from the Credit Suisse Trading Strategy team, who write in a note that at 6.49 billion shares a day, volumes are at their lowest level since December 2007.
The analysts add:
Here’s a chart (via Google Finance) showing the S&P 500 since 1998, the same starting point as the chart above:
At a quick glance, it seems an inverse relationship didn’t actually start until 2008, when trading volumes started climbing as prices plummeted, and the reverse started happening in 2010: volumes fell as prices increased.
Of course it’s been choppy climb since the S&P bottomed at 667, and we’d like to see something more granular, perhaps with volume modeled against volatility. But we do look forward to reading this report, and we’re especially curious if Credit Suisse can find a causal rather than coincidental relationship.
The New York Times floated a few possible explanations in a long article, and Josh Brown addshis thoughts in a good post as well.
But it seems that nobody really knows, though the most plausible guess (to us) is that we’ve been approaching (and have now begun) the boomer retirement, err, boom, driving more flows into bonds and less to equities and equity ETFs:
That, and/or retail investors remain freaked out. Hard to blame them.
