Joseph Saluzzi (jsaluzzi-at-ThemisTrading.com) and Sal L. Arnuk (sarnuk-at-ThemisTrading.com) are co-heads of the equity trading desk at Themis Trading LLC (www.themistrading.com), an independent, no conflict agency brokerage firm specializing in trading listed and OTC equities for institutions. Prior to founding Themis, Sal and Joe worked for more than 10 years at Instinet Corporation, pioneers in the field of electronic trading, and at Morgan Stanley.
First of all let me apologize for my morning note yesterday; it did hit 864 on the BIX (bitter index). For reference please note that Joe’s morning notes routinely register at a BIX of 900 or greater, but I digress.
The theme for our morning discussion comes to all of you courtesy of our friend, Kevin Olsen. Let’s dive right in, then, shall we? And by the way, I do realize we like to talk about HFT and introduce analogies to insects like locusts, etc., but trust me, it is applicable this morning (with flies anyway)!
Over two years ago we wrote a mini white paper, and article for Advanced Trading, titled “What Ails Us About High Frequency Trading.” In that paper, one of our points was that we were concerned about high frequency trading (HFT) causing a disconnect between market prices and real asset values. If 60-70% of the market activity is computerized algobots bouncing off each other, then is there a positive feedback loop type thing going on? High frequency proprietary trading and market-making takes some security price as a reference point, and shoots off of it with rapid speed, always keeping the algobot competitive. While this system lets you buy and sell Citigroup with just a penny spread, what about the fact that their reference points are all in turn reference points created by them?
This brings us to this morning’s note!
Sadly, algobots don’t only price Citigroup, and they don’t only price stocks in the CBSX High Freak High Rebate Enticement HFT We Love You program: Latest CBSX HFT Schedule. They also price goods and services on EBAY and AMAZON. Read this article on CNN’s website: AMZN Lists Book at $23,700,000…plus shipping.
It seems a Mr. Eisen, an evolutionary biologist who works at UCal Berkeley, noticed that two algobots are responsible for pricing a book he was interested in, The Making of a Fly. One algobot priced its book at 127% of the second algobot, and the second algobot kept pricing its book at 99.83% of the first algobot, in order to undercut it in price (and provide liquidity and create a tighter book spread for you LOL). The two bots chased each other such that the price of the book rose on AMAZON to $23,698,655.93 plus $3.99 shipping. I guess the $3.99 shipping charge would be analogous to the SEC fee we pay in the stock market?
Oh, and it is not a one-time event; the bots have reset, and even this morning the paperback is on the rise again, apparently with some type of price breaker or “volatility guard”, as the price has risen to only $976.98 for the paperback version. Again plus $3.99 for the SE…errr shipping.
So, now we have Flash Crashes and Flash Dashes outside the stock market! Is everything being priced in the universe today, not with forethought, but rather as some relation to another price, which in turn is set in relation to yet another price? All without human intervention? Is this wise? Is anyone doing the thinking? Is anyone doing “the work” in our stock markets, as well as on AMAZON? On the eve of the May 6th Flash Crash, perhaps it is wise to think about that question.
In the meantime, I’ll see you close to the open; I am out to buy some Dunkin Donuts coffee. The Chatham DD is selling a medium milk one Splenda for 98.86% of the one in neighboring Madison, NJ.