Bear Mountain Bull

…“High Frequency Trading” from Bill King via The Big Picture. Bill also delves into the other part of this extensive automated trading discussion, and that is the program sponsored by the NYSE for “Supplemental Liquidity Providers”:

While the Street is percolating with anger and curiosity about ‘High Frequency Trading’ there is also frustration and astonishment that the media, regulators and our duly elected are not addressing what could be the biggest financial abuse story of our times, if not history.

Though the blagoshpere(sic) is all over the ‘HFT’ trading story an important piece of the puzzle has not been publicized enough. Few people realize that exchanges actually pay firms to trade against order flow when they act as a SLP – ‘Supplementary Liquidity Provider’.

Exchanges will pay firms ¼ of a penny if they ‘provide liquidity’ when an order appears in their system. This is extra incentive to front run order flow… Theoretically a firm could ‘scratch’ all day and profit. The NYSE Euronext (Oct.24, 2008): A newly announced pilot program will establish Supplemental Liquidity Providers (SLPs), a new class of upstairs, electronic, high-volume members incented to add liquidity on the NYSE.

The program will reward aggressive liquidity suppliers, who will complement and add competition to existing quote providers.

o SLPs will be obligated to maintain a bid or offer at the National Best Bid or Offer (NBBO) in each assigned security at least 5 percent of the trading day.
o The NYSE will pay a financial rebate to the SLP when the SLP posts liquidity in an assigned security that executes against incoming orders. The goal is to generate more quoting activity,
leading to tighter spreads and greater liquidity at each price level.
o SLPs will trade only for their proprietary accounts, not for public customers or on an agency
basis….

Until something changes, the markets are at the mercy of these guys and their machines…

But the Nasdaq isn’t quite so eager to play these games:

The full text of the comments by Jeffrey S. Davis of the NASDAQ Stock Market LLC is presented below, but here are some very relevant snippets:…

“NYSE fails to explain why proprietary liquidity is more valuable than agency liquidity, or why proprietary liquidity should be favored over agency liquidity. NYSE claims that the proposal is designed to prompt liquidity provision but it simultaneously disqualifies large liquidity providers…

In NASDAQ’s view, these irregularities reveal that NYSE’s true motivation for the SLP Proposals is to discriminate among its members and to burden some members’ ability to compete with NYSE…”

And who is the one and only beneficiary of this rampant disregard for almost 80 years of market regulatory practice? Who is it that has now become the de facto provider of “market liquidity” which however has much more sinister connotations when reading through the comments of not just some blogger but the NASDAQ Stock Market itself? (I think we all know, and their initials are GS — BMB).

When a firm has an 87.5% trading accuracy record, something unnatural is occurring. And we wonder why the buy side has been so docile and malleable when the money is being derived from them!

—

Anyone with a modicum of industry experience understands that ‘providing liquidity’ is at best a euphemism for front-running order flow. Anyone that regularly ‘provides liquidity’ will go broke.