Several Wall Street investment bank traders munched on their lunch, which was hand-delivered from Delmonico’s directly to their desks. The topic of discussion du jour was the SEC/CFTC’s report concerning the May 6th flash crash. Their mood was unsettled, even after pulling down several million dollars earlier in the day through high frequency algorithmic (HFA) trading. Here are some snippets of their conversation.
“I can’t believe a mutual fund in bumfuck Kansas caused us to temporarily pull our bids and closeout our long positions. Instead of putting their computers to good use as we do, these assholes tried to hedge their long positions all at once and clogged up the whole goddamn system. Thank God, we incorporate multiple safety valves in our algos to automatically detect an imbalance so we don’t get waxed in a meltdown. The last thing we need is pain-in-the-ass government bureaucrats thinking they have to do something to placate the public, when we know and they know, they can’t do anything to stop us. HFA trading is here to stay. They can’t un-ring the bell without bringing down the whole fucking global economy.
“Yeah, we also have those pointy-headed quants giving us fits as they try to wring out a few bucks using their probabilistic models. They churn out massive volume just to cherry-pick a perceived mathematical disparity in the market. Fuck that rocket science crap. With so many damn computers and algorithms doing their own thing, traffic is getting congested. It’s too easy to trip over each other and cause a dislocation like the flash crash. Don’t get me wrong. I’m not saying I want a traffic cop looking over our shoulder; I just want these rookies to get the hell out of our way.
“These yo-yos don’t understand that the expressway to easy profits on a day-in, day-out basis is old-fashioned pump-and-dump algorithms. I love the word ‘algorithm’. Eyes glaze over immediately when people hear that word. It’s like swinging a watch in front of their faces. They should only know that algorithms are nothing more than simple software routines, which a high-school dropout with half-a-brain can easily put together in his most inebriated state. Fortunately, our firm wants guys like us with advanced business degrees and computer skills to run their proprietary trading desk. It gives the appearance that we are savvy street traders who have an uncanny ability to discern the prospects of the companies we trade. Our real skill, however, is knowing how to juke investors out of a few pennies in high volume 24/7. We are rainmakers. Our cheerleaders over at CNBC think we are geniuses. Our bosses love us and our benefactors in the government love us. After all, we provide a valuable service to humanity. We keep the market from crashing and protect American investments in the process. Therefore, we deserve the right to exact a ‘tax’ on investors. Our friends over at the Fed and the Treasury understand this and will pull out all the stops to protect our enterprise. It’s a win-win situation. They use us as an invaluable tool to implement economic policy and we get to bag big-time profits every single trading day. Some call it market manipulation, but that is nothing but a jealous slur on our professional integrity. I prefer to call it nuanced trading. Although, I have to admit flash trading is a little over-the-top. We get to look at a player’s hand before we make a move. God bless the SEC though. They have been studying this for years and still haven’t banned it. That’s how in the tank they are. Even if they weren’t in the tank, those idiots couldn’t hit their ass with either hand with the lights turned on.
“Getting back to the flash crash for a second, I am worried that this whole thing can come crashing down around our ears. Next time, the market might plummet and stay down through no fault of our own. Our computers are programmed to react instantaneously if a dislocation is detected in the market. In some cases, like that which occurred on May 6th, we just don’t know what is causing the imbalance between buy and sell orders. The safest thing to do is step out of the way until the dust settles. The problem is our competitors are doing the same exact thing at the same exact time. Taking away 70% of the volume creates an instantaneous paucity of bid orders and causes the bottom to drop out of the market. It’s that simple and it’s not our fault.
“Although we have a nice thing going, we can’t afford another crash, even a temporary one, because the public, and certainly the media, will blame us. They are already asking questions. The outcry will make our lives miserable, even with the government running interference for us. The explanation that HFA trading provides needed market liquidity, which narrows the spread between bid and ask prices, is wearing thin. The truth is most of our nuanced strategies would be totally useless without high volume, high frequency trading. The suits in our front office are excellent at deflecting criticism but the tenor of public opinion is decidedly against us. We’re already in the doghouse.
“Listen, this conversation is giving me indigestion. We are safe. There is no way the regulators are going to admit they allowed nuanced HFA trading to go on for years and then suddenly discover it is illegal. The public would be outraged and take to the streets, especially after that Madoff fiasco. If they haven’t banned flash trading yet, which is out-and-out cheating, why does anyone think the SEC is going to ban our bread-and-butter pump-and-dump, front-running trading strategies? No fucking way. Besides, HFA trading is 70% of market volume. If it dries up, the market crashes. That’s just what the government does not want. We have them by the short hairs. Besides, we kick over a nice piece of our hard-earned profits to fund politicians of both parties. We are golden. We are untouchable. We are too-fucking-big-to-fail. Now, please excuse me while I wolf down this steak sandwich.”
That’s why the wise guys always win.
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