CHARLES SCHWAB: High-Frequency Trading a “Growing Cancer… Corrupting Our Capital Market System”

The following statement has been issued by The Charles Schwab Corporation

 

Schwab serves millions of investors and has been observing the development of high-frequency trading practices over the last few years with great concern. As we noted in an opinion piece in the Wall Street Journal last summer, high-frequency trading has run amok and is corrupting our capital market system by creating an unleveled playing field for individual investors and driving the wrong incentives for our commodity and equities exchanges. The primary principle behind our markets has always been that no one should carry an unfair advantage. That simple but fundamental principle is being broken.

High-frequency traders are gaming the system, reaping billions in the process and undermining investor confidence in the fairness of the markets. It’s a growing cancer and needs to be addressed.  If confidence erodes further, the fuel of our free-enterprise system, capital formation, is at risk. We can’t allow that to happen. For sure, we still believe investing in equities is a primary path to long-term wealth creation, and we believe in the long-term structural integrity of the markets to deliver that over time for individual investors, which is all the more reason to be vigilant in removing anything that creates unfair advantage or undermines investor confidence.

On March 18, New York Attorney General Eric Schneiderman announced his intention to “continue to shine a light on unseemly practices in the markets,” referring to the practices of high-frequency trading and the support they receive from other parties including the commodities and equities exchanges. He has been a consistent watchdog on this matter. We applaud his effort and encourage the SEC to raise the urgency on the issue and do all they can to stop this infection in our capital markets. Investors are being harmed, and they shouldn’t have to wait any longer.

As Michael Lewis shows in his new book Flash Boys, the high-frequency trading cancer is deep. It has become systematic and institutionalized, with the exchanges supporting it through practices such as preferential data feeds and developing multiple order types designed to benefit high-frequency traders. These traders have become the exchanges favored clients; today they generate the majority of transactions, which create market data revenue and other fees. Data last year from the Financial Information Forum showed this is no minor blip. High-frequency trading pumped out over 300,000 trade inquiries each second last year, up from just 50,000 only seven years earlier. Yet actual trade volume on the exchanges has remained relatively flat over that period. It’s an explosion of head-fake ephemeral orders – not to lock in real trades, but to skim pennies off the public markets by the billions. Trade orders from individual investors are now pawns in a bigger chess game.

The United States capital markets have been the envy of the world in creating a vibrant, stable and fair system supported by broad public participation for decades. Technology has been a central part of that positive story, especially in the last 30 years, with considerable benefit to the individual investor. But today, manipulative high-frequency trading takes advantage of these technological advances with a growing number of complex institutional order types, enabling practitioners to gain millisecond time advantages and cut ahead in line in front of traditional orders and with access to market data not available to other market participants.

High-frequency trading isn’t providing more efficient, liquid markets; it is a technological arms race designed to pick the pockets of legitimate market participants. That flies in the face of our markets’ founding principles. Historically, regulation has sought to protect investors by giving their orders priority over professional orders. In racing to accommodate and attract high-frequency trading business to their markets, the exchanges have turned this principle on its head. Through special order types, enhanced data feeds and co-location, professionals are given special access and entitlements to jump ahead of investor orders. Last year, more than 95 percent of high-frequency trader orders were cancelled, suggesting something else besides trading is at the heart of the strategy. Some high-frequency traders have claimed to be profitable on over 99 percent of their trading days. Our understanding of statistics tells us this isn’t possible without some built in advantage. Instead of leveling the playing field, the exchanges have tilted it against investors.

Here are examples of the practices that should concern us all:

  • Advantaged treatment: Growing numbers of complex order types afford preferential treatment to professional traders’ orders, most notably to jump ahead of retail limit orders.
  • Unequal access to information: Exchanges allow high-frequency traders to purchase faster data feeds with detailed information about market trading activity and the specific trading of various types of market participants. This further tilts the playing field against the individual investor, who is already at an informational disadvantage by virtue of the slower Consolidated Data Stream that brokers are required by rule to purchase or, even worse, the 15- to 20-minute-delayed quote feed they have public access to.
  • Inappropriate use of information: Professionals are mining the detailed data feeds made available to them by the exchanges to sniff out and front-run large institutions (mutual funds and pension funds), which more often than not are investing and trading on behalf of individual investors.
  • Added systems burdens, costs and distortions of rapid-fire quote activity: Ephemeral quotes, also called “quote stuffing,” that are cancelled and reposted in milliseconds distort the tape and present risk to the resiliency and integrity of critical market data and trading infrastructure.  The tremendous added costs associated with the expanded capacity and bandwidth necessary to support this added data traffic is ultimately borne in part by individual investors.

There are solutions. Today there is no restriction to pumping out millions of orders in a matter of seconds, only to reverse the majority of them. It’s the life-blood of high-frequency trading. A simple solution would be to establish cancellation fees to discourage the practice of quote stuffing. The SEC and CFTC floated the idea last year. It has great merit. Make the fees high enough and they will eliminate high-frequency trading entirely. But if the practice is simply a scam, as we believe it is, an even better solution is to simply make it illegal. And exchanges should be neutral in the market. They should stop the practice of selling preferential access or data feeds and eliminate order types that allow high-frequency traders to jump ahead of legitimate order flow. These are all simply tools for scamming individual investors.

The integrity of the markets is at the heart of our economy. High-frequency trading undermines that integrity and causes the market to lose credibility and investors to lose trust. This hurts our economy and country. It is time to treat the cancer aggressively.
 

Charles Schwab, Founder and Chairman
Walt Bettinger, President and CEO

 

Hat tip: Zero Hedge

Doug Ross @ Journal

Wall Street Journal: “Scary 1929 market chart gains traction. If market follows the same script, trouble lies directly ahead.”

stockmarket-chart(Washington, D.C.) — I hope there is nothing to this. But I thought I ought to share it with you anyway.

“There are eerie parallels between the stock market’s recent behavior and how it behaved right before the 1929 crash,” says a columnist writing for the Wall Street Journal’s Market Watch. “That at least is the conclusion reached by a frightening chart that has been making the rounds on Wall Street. The chart superimposes the market’s recent performance on top of a plot of its gyrations in 1928 and 1929. The picture isn’t pretty. And it’s not as easy as you might think to wriggle out from underneath the bearish significance of this chart.”

“I should know, because I quoted a number of this chart’s skeptics in a column I wrote in early December,” notes Wall Street analyst Mark Hulburt. “Yet the market over the last two months has continued to more or less closely follow the 1928-29 pattern outlined in that two-months-ago chart. If this correlation continues, the market faces a particularly rough period later this month and in early March. (See chart, courtesy of Tom McClellan of the McClellan Market Report; he in turn gives credit to Tom DeMark, a noted technical analyst who is the founder and CEO of DeMark Analytics.)”

“One of the biggest objections I heard two months ago was that the chart is a shameless exercise  in after-the-fact retrofitting of the recent data to some past price pattern,” Hulburt notes. “But that objection has lost much of its force. The chart was first publicized in late November of last year, and the correlation since then certainly appears to be just as close as it was before. To be sure, as McClellan acknowledged: ‘Every pattern analog I have ever studied breaks correlation eventually, and often at the point when I am most counting on it to continue working. So there is no guarantee that the market has to continue following through with every step of the 1929 pattern. But between now and May 2014, there is plenty of reason for caution.’ Tom Demark added in interview that he first drew parallels with the 1928-1929 period well before last November. ‘Originally, I drew it for entertainment purposes only,’ he said—but no longer: ‘Now it’s evolved into something more serious.’”….

To read the rest of the column, please click here.

>> Please click here to read Implosion: Can American Recover From Its Economic & Spiritual Challenges In Time?

 


Joel C. Rosenberg’s Blog

Market Crash In the Works: “A Canary May Have Just Keeled Over”

canary-keeled-over

As holiday shoppers raided Black Friday sales and internet retailers ahead of Christmas, the establishment media heralded a new era of economic boom for the 2013 shopping season.

But things are not at all as they may seem if all you do is follow official government statistics and propagandized mainstream news report.

In the week leading up to Christmas, for example, retail analysis firm ShopperTalk advised that brick & mortar retail traffic was down over 20% this year.

…In-store retail sales decreased by 3.1 percent from the same week last year. Retail brick-and-mortar shopper traffic decreased by 21.2 percent compared to the same time period in 2012.

Some would argue that much of this foot traffic jumped to the internet to make their holiday purchases, but according to the National Retail Federation sales online were only slated to rise 3.9% this year, which is nothing to write home about considering annual retail sales for the last 10 years rose an average of 3.3%.

Consumers, it seems, are starting to feel the pinch of widespread job losses, wage reductions, cuts to government assistance and termination of unemployment benefits for millions.

But the cuts in consumer spending don’t just stop with traditional American holiday staples like electronics, brand name clothing and furniture.

It is affecting all consumer markets.

The National Association of Realtors reported that the month of September saw its single largest drop in signed home sales in 40 months. And that wasn’t just a one-off event. This month mortgage applications collapsed a shocking 66%, hitting a 13-year low.

Something is amiss, and despite claims of economic recovery emanating from pundits far and wide, the numbers on Main Street, where they really matter, suggest that we are in for a rough ride.

Eric Peters Autos, which analyzes political and economic trends, notes that trouble is brewing all over and it may soon have an overt impact on what many consider to be the only measure of economic health in America: rising stock markets.

A canary may have just keeled over. Not in the coal mine – but in the stock market.

Shares of Ford – healthiest of the Big Three automakers – are down 8 percent, according to Bloomberg. And it’s not just Ford, either. GM, Honda and Toyota stocks are down, too.

Could it be related to the gloomy news that the number of new mortgage applications has just hit a 13 year low? That the yield on 10-year U.S. Treasuries is a barely break-even-with-inflation 3 percent? That there are almost1.5 million fewer Americans employed full-time today than there were in 2006, even as the population has increased by 16 million since then?

The buying power of the average American – not just his ability but his inclination – is the decisive factor. And the buying power of the average American is going down – not up. Lower household income; higher cost of necessaries (food especially). Higher – and new – taxes (in particular, the ObamaTax). The very real specter of Zimbabwean inflation at any moment. It is enough to give a sensible person pause.

Interest rates? Forget about it. When they begin their inevitable uptick – expect this to happen by summer – it will be impossible to sweep under the rug.

And it will probably do to the car industry’s fortunes what Bernie Madoff did to his “investors.”

Grab onto something. It’s going to get bumpy.

(Read the full commentary)

Any way you slice it, whether it’s car sales, home sales, retail sales, employment, or monetary stimulus, the warnings are everywhere. The canary in the coal mine is going into cardiac arrest.

Back in 2007 trend forecaster Gerald Celente warned the world of the “Crash of 2008.” He based his analysis on many of the aforementioned data points. We’re seeing a similar pattern develop in late 2013, suggesting that 2014 could be the year it all goes critical:

There’s fear and hysteria running through the entire global financial community, because as everybody knows all they did was postpone the inevitable.

I’m saying to everybody out there, If you don’t have your money in your pocket it’s not yours.

And as for the international scene… the whole thing is collapsing.

That’s our forecast.

We are saying that by the second quarter of 2014, we expect the bottom to fall out… or something to divert our attention as it falls out.

Moreover, if you were to compare stock market charts from 1929 to present day, you’d note that they are eerily similar:

major-stock-market-crash-in-january
Chart by McClellan Financial Publications via Modern Survival Blog

Our economy as it exists today is wholly unsustainable. The government and Federal Reserve will soon run out of bullets and their efforts to stabilize the system will be revealed for the abject failures they really are.

Is 2014 the year?

We’ll soon find out.


SHTF Plan – When It Hits The Fan, Don’t Say We Didn’t Warn You

Stunnning Chart: Today’s Stock Market is Eerily Reminiscent of 1929…

With the Holiday shopping season off to a slow start according to preliminary retail sales numbers and with the stock market sitting near all time highs, one can’t help but wonder what will happen when investors realize the economy isn’t really doing as well as we’ve been told by the experts.

The evidence suggests that we can expect devastating global economic changes in 2014 as a result of our national debt, further impoverishment of the working class, and massive new tax burdens resulting from President Obama’s health care legislation. The fundamentals, by most accounts, are indicative of an economy on the cusp of a total detonation within the next year.

Now, with the prospect of an abysmal shopping season for retailers because of tapped out consumers, the first quarter of 2014 could cause serious problems in financial markets as a result of lackluster performance in corporate earnings.

What’s more, the trajectory of our stock markets over the last eighteen months has been eerily reminiscent of markets back in 1929, right before the crash that led to a decade’s long depression in America.

Ken Jorgustin of Modern Survival Blog writes:

Is there a major financial crash in our near future? You must check out this stunning analogy between the current day Dow Jones Industrial Index compared with the time period 1928-1929 leading up to the memorable stock market crash…

The pattern of stock price movements looks VERY close to the lead-up to the 1929 top.

A lead-up to just any old top is one thing, but the 1929 top was followed by a memorable decline, which makes it all the more worthy of our attention…

Ken stops short of predicting that stock markets will do the same thing this January as they did in 1929, but take a look at this amazing comparison and decide for yourself if it’s possible that this whole thing will break wide open on or around January 14th of 2014:

major-stock-market-crash-in-january
Chart by McClellan Financial Publications via Modern Survival Blog

Could be nothin’… But what if?


SHTF Plan – When It Hits The Fan, Don’t Say We Didn’t Warn You