Is forex market controlled by someone? - page 17
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"Timestamp Fraud": A Rigged Market Explained In One Simple Animation
The topic of High-Frequency-Trading quickly dissolves into a smorgasbord of mnemonics and 'inside-baseball' technical terms - just complicated enough to lose everyone that matters or should care about its implications. Despite the fair-and-balanced defense from the mainstream media business channels (sponsored by the belief in the status quo fair markets that 'America the free' is known for), the fact is that HFT does front-run (perfectly legal under the umbrella protection of Reg NMS) order flow, but there may be one more wrinkle - one which would cement the Michael Lewis (accurate) allegation that the market is rigged.
Because if as Nanex shows below, there is in addition to everything else the element of timestamp fraud involved in the distribution of NMS "compliant" trading data for Direct Feed-to-SIP matching purposes, this means that not only is the market rigged, but its rigging goes from the very top all the way to the lowliest algo.
What's worse, the rigged system is so embedded there is nothing anyone can do about it, until it just collapses under its own weight: think May 2010 HFT-created flash crash, only without the mirror-image bounce.
Via Nanex,
Direct vs SIP Data Feed
The animation below shows how a trade or quote sent on an exchange makes its way to the SIP (Securities Information Processor) and a Direct Feed used by High Frequency Traders (HFT). Reg NMS requires that an exchange (A) send data to the SIP (C) as fast or faster than it sends that data to direct feed subscribers (B). Here's the relavent text from Regulation NMS:
This is the same rule that NYSE broke and was fined $5M by the SEC in September 2012. We have a nice write up summarizing this fine as it applies to the SIP. Unfortunately, this practice continues at other exchanges. In the animation below, note that the information sent to the SIP has to travel significantly farther distances (40 miles vs 1000 feet), on a slower network (1 GBps vs 40 GBps) with a protocol that adds more latency (TCP vs UDP) than the same information sent to the direct feed. Sometimes this latency on the input side of the SIP shows up in SIP data as fantaseconds (a term we coined to describe trades printing before quotes). See this well documented example.
Timestamp Fraud
The animation also shows something that many aren't aware of: the original timestamp gets stripped, and replaced with a fresh timestamp when the SIP transmits it to a subscriber! Watch the timestamp in the box get stripped when it enters, and replaced when it leaves, the circle labeled "SIP Tape A". Keeping original timestamps is crucial for constructing audit trails, or for detecting system delays, which is why it's integral to this solution which allows HFT and non-HFT to coexist.
Understanding the Animation
Reg NMS requires that exchanges provide core data (trades and quotes) to the SIP as fast or faster than direct feeds. In the animation above, that means a trade or quote originating at an exchange (labeled A) must arrive at the SIP (C) no later than it arrives on a direct feed (B).
The animation starts with a trade (or quote) in the symbol "F", timestamped by the exchange at exactly 9:45. One network sends it to direct feed recipients (B) which are all 1000 feet away, and the other network sends it to the SIP (C) which is about 40 miles away. When the trade arrives at the SIP, the timestamp is removed and aggregated with trades from other exchanges (not shown). Finally, at the point where the SIP transmits the trade to a SIP subscriber (blue circle) it gets a new timestamp based on the SIP clock (which could be ahead or behind the original exchange's clock).
This new timestamp, in effect, will hide any delays between the exchange (A) and the blue circle from SIP users. During the flash crash, delays of over 30 seconds occurred in many stocks and were impossible to detect, because of the altered timestamps. Had the original timestamps from the exchange remained, everyone, not just High Frequency Traders, would have been aware they were trading on stale data.
Sending data faster to HFT is against regulations. Period. Changing timestamps is just plain wrong, and one could argue that SIP subscribers are being denied the true timestamp that HFT enjoy. Keep in mind that nearly all brokerage reports on trade execution quality use the SIP and therefore, an altered timestamp.
Nearly 40% of trades are priced based on the SIP - this include practically all retail trades and most dark pools. Even Goldman Sach's Dark Pool is executes based on SIP prices. When SIP prices lock or cross (due to slow input from one of 13 exchanges or even FINRA), it causes internalizers (retail trades) to stop trading until the condition is resolved: a phenomenon made clear during the flash crash.
Furthermore, speed differences between the direct feed and the SIP can lead to other undesirable market behaviors, such as momentum ignition, which have become quite common (we detailed one market-wide momentum ignition event here). Simply put, when prices suddenly move, those who can act earlier (HFT using direct feeds), will profit at the expense of those who cannot, such as internalizers and Dark Pool that are based on the SIP. With nearly 40% of trading based on the SIP, the profitability of this manipulative strategy can be great enough that the cost of inducing price shifts (momentum ignition) is worth the economic and regulatory risk.
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So it means that we have no chance at all to get something at a best price?
Combined with what some brokers do, it is not looking good
Barclays to wind down commodities trading
Barclays, one of the world’s biggest commodities traders, is planning to exit large parts of its metals, agricultural and energy business in a move expected to be announced this week.
The shake-up comes as commodity trading suffers a sharp slide in revenues and attracts greater scrutiny from regulators, which has already led to the withdrawal of several big banks from the area.
Chief executive Antony Jenkins is preparing a strategic update for investors on May 8 and is expected to slash several thousand jobs by cutting Barclays’ exposure to areas that do not generate returns above their cost of capital. These are likely to be moved into an internal “bad bank” and either sold or closed down.
But the retreat from parts of its commodities business is due to be announced on Tuesday. Barclays declined to comment.
Precious metals trading is likely to move into the bank’s foreign exchange trading business. There are expected to be heavy job cuts among the 160 staff in its global commodities trading, sales and research operations, many of them in London.
Barclays is one of the top five banks in commodities –which together controlled about 70 per cent of the commodities trading pot last year. But several are shrinking or disposing of these businesses, including Morgan Stanley, Deutsche Bank, UBS and Royal Bank of Scotland.
The retreat is being driven by tighter regulation, fresh capital constraints and lower profitability due to stable prices for oil and other commodities. Coalition, a consultancy, estimates the revenues of the top 10 banks in commodities fell last year to $4.5bn from a record $14.1bn in 2008.
In the most prominent example to date, Mercuria, a Geneva-based trading house founded a decade ago by two former Goldman Sachs traders, agreed to buy JPMorgan Chase’s physical commodities business for $3.5bn.
Only Goldman Sachs, one of the first banks to enter commodities markets 30 years ago, seems to be strategically committed to the sector, this year deeming it “too important to clients to exit”.
Regulators, including the US Federal Reserve, are reviewing whether to curb banks’ commodities trading operations after they were accused of manipulating markets for electricity, aluminium and other materials for their own profit.
Barclays closed its US and European power trading operations in February after it was fined a record $470m for allegedly manipulating power prices by the US Federal Energy Regulatory Commission. Barclays has refused to pay the fine, shifting the dispute to a federal court.
Separately, Barclays is combining its equities and bond trading units, in a radical departure from the traditional way investment banks organise trading businesses.
In a first step, the bank will merge responsibilities for global equities and credit trading under the helm of Joe Corcoran, previously head of equities, according to an internal memorandum sent out last Thursday and seen by the Financial Times.
The reshuffle presages cuts across a range of trading units by bringing them closer together and creating shared infrastructures.
“The intent is to drive efficiencies and synergies between the businesses,” one person close to the decision said. “You have to break down the silos.”
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Mr Jenkins has come under pressure to fix the investment bank after he angered investors with a rise in staff bonuses despite falling profits. The unit failed to meet its cost of capital last year with a return on equity of 8.2 per cent.
At a shareholder meeting this week, Mr Jenkins faces the prospect of a protest vote over the bank’s bonus increase last year.
Banks are out - volume is out - volatility is out - HFT is in - who is going to stay without the money? It is a single choice question
U.S. alleges insider trading in eBay deal
The U.S. government on Friday filed criminal and civil charges accusing a former GSI Commerce Inc executive of insider trading in advance of eBay Inc's purchase of the e-commerce company.
The case marks the first time the U.S. Securities and Exchange Commision has reached a so-called "non-prosecution" agreement with an individual, an unnamed trader who it said provided "extraordinary" cooperation.
The SEC said Christopher Saridakis, 45, who had led the marketing solutions division of GSI Commerce, gave non public information to two relatives and two friends about eBay's plan to buy his company, and encouraged them to trade on it, leading to more than $300,000 of illegal profit.
GSI's agreement to be acquired by eBay was announced on March 28, 2011, causing GSI's share price to rise more than 50 percent, the SEC said.
The SEC said Saridakis agreed to pay $664,822 and accept a ban from serving as an officer and director to settle its charges.
It also said federal prosecutors in Pennsylvania have brought related criminal charges. Saridakis lives in Greenville, Delaware, court papers show.
Meanwhile, the cooperating individual and five other traders agreed to pay more than $490,000 to settle related charges.
The SEC said three of the traders received tips about GSI directly or indirectly from Saridakis, while the other two traders received it from a different source.
"Although Saridakis' tips spun a web of illegal trading, some of the downstream tippees substantially assisted in our investigation while others hindered it," said Andrew Ceresney, head of the SEC enforcement division.
"The reduction in penalties for those tippees who assisted us, together with the non-prosecution agreement for one of the traders, demonstrate the benefits of cooperating with our investigations."
Details about the criminal case were not immediately available. A spokeswoman for U.S. Attorney Zane Memeger in Philadelphia had no immediate comment. GSI was based in nearby King of Prussia, Pennsylvania.
"Mr. Saridakis accepts responsibility for his actions and regrets any harm he may have caused to family and friends," his lawyer Ivan Knauer Of Pepper Hamilton LLP said. "He is pleased to have been able to resolve this matter with the SEC."
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Traders Join Exodus as Forex Probes Add Pressure on Costs
The ranks of foreign-exchange traders are rapidly thinning as a probe into alleged manipulation of benchmark rates widens and pressure mounts on the industry to reduce costs.
More than 30 traders from 11 firms have been fired, suspended, taken leaves of absence or retired since October, when regulators said they were investigating the market, according to data compiled by Bloomberg. London-based Barclays Plc and Zurich-based UBS AG have been the worst-hit, each suspending at least half a dozen employees, the data show.
“That’s a considerable percentage of the workforce,” said Brad Bechtel, managing director at Faros Trading LLC in Stamford, Connecticut, who estimated the world’s largest banks have 80 to 160 voice traders for spot rates in the currencies market. “That explains the lack of liquidity in the market, and why what would normally be considered a small trade can actually push the market around more than normal.”
Regulators around the world are investigating allegations traders colluded to rig key foreign-exchange benchmarks used by investors and companies by pushing through trades before and during the 60-second windows when the WM/Reuters rates are set. At the same time, banks are trying to fight shrinking margins by replacing humans with computers, accelerating a longer-term shift in trading onto electronic platforms.
About 200 traders at smaller firms focus on spot exchange rates, Bechtel estimated in an e-mail.
‘The Mafia’
Authorities are examining whether bank traders communicated with dealers at other firms and timed trades to influence benchmarks and maximize profits. Some exchanged information on instant-message groups with names such as “The Cartel,” “The Bandits’ Club,” “One Team, One Dream” and “The Mafia.” No firms or traders have been accused of wrongdoing by government authorities.
Regulators from Bern, Switzerland, to Washington opened inquiries into the $5.3 trillion-a-day market after Bloomberg News reported in June that traders colluded to rig the WM/Reuters rates. No firms or traders have been accused of wrongdoing by government authorities.
Chris Ashton, global head of spot trading at Barclays, was suspended last year along with other spot traders at the bank in London and New York. New York-based Citigroup Inc. said in January it fired its head of European spot trading, Rohan Ramchandani.
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Is not control by someone but large orders and traders on one direction
Did you read any of the posts explaining how it is controlled (rigged)?
Broken Benchmarks
Imagine a “benchmark” as a notch on a carpenter’s bench used to measure. Simple enough. But what if the carpenter cheated, moving his marks to be able to charge a little more for a piece of lumber? In their role in modern financial markets, benchmarks set by traders help establish costs for mortgages, gasoline and money itself. They’re hard to understand and easy to manipulate. At the heart of the problem lies an inherent conflict: The figures are determined by the very firms that have the most to gain from where they’re set. Regulators agree that the main financial benchmarks are broken.
The Situation
Recent scandals have revealed traders manipulating the numbers to boost their own profits. Fiddling in the London interbank offered rate, or Libor, came to light in 2008, culminating in record fines for collusion by banks including Royal Bank of Scotland and UBS. E-mails and instant messages showed that dealers contributing to the rate-setting pool agreed to make submissions that suited their trading positions. Benchmarks used in oil, gold and derivatives have also been shown to be vulnerable to abuse, and are being investigated for evidence of wrongdoing. Now regulators are examining potentially the biggest rate-rigging scandal of them all. The U.S. Justice Department, the European Union and the Swiss Competition Commission are looking into whether foreign-exchange rates — long considered immune from tampering because of the sheer size of the $5.3 trillion-a-day currency market — were compromised. The Bank of England is investigating whether its officials heeded warnings about potential manipulation from 2006. So far more than two dozen traders have been placed on leave or fired from banks including Citigroup, JPMorgan Chase, and Barclays. As the probes came to light, several banks banned multidealer chat rooms, the electronic forums used by traders to talk business and exchange wisecracks with their colleagues, customers and counterparts at other firms.
The Background
Benchmarks were developed to underpin rates in contracts or to assign standard end-of-day values to particular holdings, and are set by a variety of methods. Libor is based on a daily survey of about a dozen big banks that estimate their short-term borrowing costs; the London Gold Fix is set on a private telephone call of five people; currency benchmarks, known as WM/Reuters rates, are calculated from the median of all trades in a 60-second period. Yet they share fundamental characteristics that have left them prone to manipulation: a system of self-regulation, tradition-bound and often unchanged for decades with little or no oversight. With the reputation of bankers tarnished by the financial crisis, regulators and politicians agree that it’s no longer acceptable for control of key benchmarks to stay in the hands of a few. In July, officials from more than 50 countries published a set of principles to make the rates more transparent, including using data from real trades wherever possible, minimizing conflicts of interest and making specific individuals responsible for rate-setting at each firm. The U.K. introduced criminal sanctions for anyone knowingly making false or misleading statements relating to benchmark-setting.
The Argument
Traders caught up in the rate-rigging probes argue that they were following long-standing banking practices passed down to them, and that they shouldn’t be judged through the prism of today’s more rigorous standards. For their part, banks have tried to paint the problem as the behavior of a few rogue traders. That line rings hollow, as senior managers are alleged to have been involved in rigging both Libor and foreign-exchange rates. While regulators are introducing more safeguards, the benchmarks are so widely used in financial markets that they can’t be changed in ways that could invalidate existing contracts or introduce greater volatility. Until the conflicts are cleared completely, traders will still have an incentive to game the system. It took a Bloomberg News investigation in June to uncover the potential problems in currencies, where spikes in rates before the 4 p.m. London fixing are under scrutiny.
The Reference Shelf
Goldman Sachs confirms investigations
Goldman Sachs on Friday confirmed the investment bank is under examination for its high-frequency trading and whether its hiring procedures comply with a U.S. anti-bribery law.
The disclosure in a Securities and Exchange Commission filing also said Goldman Sachs is among many defendants named in a putative federal class-action lawsuit over high-frequency trading. Filed April 18 in Manhattan federal court, the suit alleges violations of securities laws that bar market manipulation and insider trading.
The SEC, U.S. Department of Justice, FBI and New York State Attorney General’s office are investigating whether high-frequency traders have unfair advantages over other market participants. The issue has drawn increased public attention following the publication of Flash Boys, a book in which author Michael Lewis alleged that financial markets are rigged.
Several media organizations have reported that U.S. regulators are examining hiring practices in Asia by major U.S. banks. The Foreign Corrupt Practices Act bars companies from making improper payments to foreign government officials to gain or keep business.
Goldman also confirmed it has been named with other defendants in putative anti-trust lawsuits related to foreign-exchange market trading. The actions allege a conspiracy among foreign-exchange traders to manipulate rates for their own profit. Regulators are also examining the banks currency trading, Goldman disclosed last year.
The foreign-exchange investigations cover numerous major banks and focus in part on whether bank traders conspired to use inside information about clients’ pending transactions to rig currency rates.
Goldman reported that the high end of reasonably possible losses from the investigations totaled $3.7 billion above the funds already set aside in litigation reserves.
Goldman shares were down fractionally at $156.56 in early afternoon trading Friday.
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