More Evidence of the Master Trading Algorithm
by Jeff Nielson, March 23, 2015
Why is the assertion that "all markets are manipulated" generally greeted with scorn and derision? Because while manipulating any particular, single market is a relatively straightforward matter – using "tools" for financial crime honed through centuries of practice – rigging markets collectively has always been viewed as an endeavour infinitely more difficult than herding cats.
Markets diverge. It's what they do. While overall economic fundamentals affect all markets, and all sectors, these fundamentals affect markets/sectors/companies unevenly. Coupled with that, every individual sector/market has its own, unique collection of economic fundamentals – almost entirely independent of the general fundamentals of the economy.
This absolute absence of homogeneity means that, in legitimate markets, we will always see most sectors (and individual companies) moving not only with varying degrees of magnitude, but frequently in opposite directions. This is what must happen in any/all legitimate markets, on most days. It is only at times where the general fundamentals are extreme (i.e. extremely bad or extremely good) where we will ever see markets exhibit herd movement patterns.
What do we see in the Western-dominated markets of the 21st century? We see this herd movement not just occasionally, but virtually every hour of every trading day – something which is absolutely impossible. Suddenly our herd of cats is behaving – every hour of every day – like rats following a Pied Piper. Obviously when we see a herd of cats behaving like rats following a Pied Piper, this directly and necessarily implies the existence of a Pied Piper.
Enter so-called "high-frequency trading" (HFT): the Pied Piper. The disinformation which both the general public and the puppet regulators have been fed is that this market-rigging apparatus is supposedly aimed at nothing other than bringing greater "speed and efficiency" to our markets. The reality is that this was never more than a minor consideration, and the One Bank's "HFT" innovations were always aimed at totally and completely manipulating markets: its virtual Pied Piper.
This is very similar, in kind, to the lies fed to us by the bankers when they wanted to introduce "short selling" into our markets. It would induce "better price discovery" in markets, and thus "make markets more efficient", they told us. The reality is that (until the One Bank perfected its Pied Piper trading algorithm) massive, manipulative short selling was the bankers' most important and most often used weapon for distorting (and thus rigging) markets.
These two campaigns of lies, used to "justify" two of the banksters' most formidable weapons for market manipulation, have several factors in common:
1) Both can/would only have a benign impact on markets if used in extreme moderation.
2) Both have obvious manipulative potential.
3) Neither has any legal/statutory limits as to the quantity of such trading which infests our markets.
4) Neither is subject to any meaningful degree of oversight by our blind/deaf/dumb "regulators".
To call this a recipe for disaster is the ultimate of understatements. This is not merely allowing the fox into the henhouse. It's allowing an unlimited/infinite number of foxes to enter the henhouse – all with unsupervised access. It is recklessness to an extreme which directly and necessarily implies corruption. No one can be this blind.
Yet, to this point, all of the evidence of a Master Trading Algorithm is theoretical – the process of necessary, logical deduction. We see a herd of cats behaving like mesmerized rats, ergo we know there is a Pied Piper. It is "circumstantial evidence", and circumstantial evidence is the primary basis for the vast majority of all convictions in our criminal justice system. Strangely, however, the Average Person gives this evidence very little heed when encountered outside the courtroom, and then spends all his/her nights soaking up this evidence as they watch their crime dramas.
For those readers, however, we now have far more than (merely conclusive) circumstantial evidence to offer, and can now supplement inevitable logic with overwhelming empirical evidence. First there was the evidence offered in a lawsuit against the Chicago Mercantile Exchange, global focal point of commodities trading.
In that suit, the plaintiffs asserted they had evidence that half of all trades at the CME are "wash trades", phony and illegal trading activity which has no purpose other than to manipulate markets (in this case, all the world's commodity markets). Billions of phony/illegal trades every year. Half of all trading at the CME amounts to approximately 100 illegal trades per second – something utterly beyond human capacity. But not beyond the capacity of a computerized trading algorithm.
This is old news now, however. More recently, we have the first real attempt to study the obvious manipulative potential of so-called HFT trading. The findings are stunning (to most), and unequivocal. Researchers found vast quantities of what they euphemistically termed "quote stuffing", and then they went on to spend 50 pages dissecting the various ways in which this quote stuffing distorted markets – and thus manipulated markets.
More damning was the endemic nature of this quote stuffing. The data indicated that 74% of all U.S. equities (it was a U.S. study) showed significant evidence of quote stuffing (i.e. market-rigging). Obviously when one speaks of "manipulating all markets", on an individual basis it's only necessary to manipulate important equities. Now we know what percentage of (U.S.) equities the One Bank considers "important": 74%.
Note that this study proceeded with the assumption that there was no pattern to this quote stuffing, i.e. no Invisible Hand which was engaging in this quote stuffing on a systematic basis. Yet despite the assumption of a lack of such master control, the researchers also found:
"an abnormal correlation in message flow"
In other words, while the premise of this research was that such market manipulation was "micro" in nature, i.e. taking place separately, on an equity-by-equity basis, what they actually observed was a pattern to this manipulative trading: a Pied Piper. Not only is market manipulation via HFT trading massive, it is also systemic.
At this point, it's necessary to remind readers of more comprehensive research, which has been referred to in many previous commentaries. Using a data sample of more than 10 million corporate and personal entities, a trio of Swiss researchers concluded that a single "super-entity" (a collection of more than 140 corporate fronts) controlled, by itself, 40% of the entire global economy. Furthermore, the researchers found that "3/4 of the core (i.e. super-entity) are financial intermediaries". The Mega-Monopoly discovered by Swiss researchers is primarily a banking monopoly – hence the name "the One Bank".
Putting together the results of these two very detailed studies along with the evidence introduced into the lawsuit against the CME brings us to this. We have empirical evidence of a single financial entity (the One Bank) manipulating all U.S. equity markets, and all U.S. commodity markets. Furthermore, this most recent study is conclusive that the majority of this market-rigging is perpetrated though the massive and systematic use of manipulative HFT trading: the Pied Piper trading algorithm of the One Bank.
Markets cannot move in synch, every hour, every day. Our "markets" do move in synch, every hour of every day; ipso facto we do not have markets. Rather, we have a totally rigged casino, where a single Pied Piper controls all of the bets, and thus all of the bettors.
Theory tells us that nothing other than an endemic, computerized trading algorithm could transform a herd of cats (our markets) into a pack of docile, mesmerized rats, marching day after day in near-perfect synchronicity. Empirical evidence shows us how this is actually taking place. The prosecution rests.
Lawsuit Stunner: Half of Futures Trades in Chicago Are Illegal Wash Trades
by Pam Martens: July 24, 2014 – Wall Street on Parade
Terrence Duffy of the CME Group Testifying Before the Senate on May 13, 2014
Since March 30 of this year, when bestselling author Michael Lewis appeared on 60 Minutes to explain the findings of his latest book, Flash Boys, as "stock market's rigged," America has been learning some very uncomfortable truths about the tilted playing field against the public stock investor.
Throughout this time, no one has been more adamant than Terrence (Terry) Duffy, the Executive Chairman and President of the CME Group, which operates the largest futures exchange in the world in Chicago, that the charges made by Lewis about the stock market have nothing to do with his market. The futures markets are pristine, according to testimony Duffy gave before the U.S. Senate Agriculture Committee on May 13.
On Tuesday of this week, Duffy's credibility and the honesty of the futures exchanges he runs came into serious question when lawyers for three traders filed a Second Amended Complaint in Federal Court against Duffy, the Chicago Mercantile Exchange, the Chicago Board of Trade and other individuals involved in leadership roles at the CME Group.
The conduct alleged in the lawsuit, backed by very specific examples, reads more like an organized crime rap sheet than the conduct of what is thought by the public to be a highly regulated futures exchange in the U.S.
The lawyers for the traders begin, correctly, by informing the court of the "vital public function" that is supposed to be played by these exchanges in "providing price discovery and risk transfer." They then methodically show how that public purpose has been disfigured beyond recognition through secret deals and "clandestine" side agreements made with the knowledge of Duffy and his management team.
The most stunning allegation in the lawsuit is that an estimated 50 percent of all trading on the Chicago Mercantile Exchange is derived from illegal wash trades.
Wash trades were a practice by the Wall Street pool operators that rigged the late 1920s stock market, leading to the great stock market crash from 1929 through 1932 and the Great Depression. Wash trades occur when the same beneficial owner is both the buyer and the seller. Wash trades are banned under United States law because they can falsely suggest volume and price movement.
The lawsuit says Duffy and his management team are tolerating wash trades "because they comprise by some estimates fifty percent of the Exchange Defendants' total trading volume and also because HFT transactions account for up to thirty percent of the CME Group's revenue."
The complaint indicates that the plaintiffs have a "Confidential Witness A," a high-frequency trader, who has given them a statement that wash trades are used by high-frequency traders as part of a regular strategy to detect market direction and "to exit adverse trades when the market goes against their positions."
The strategy works like this, according to the complaint:
"HFTs [high-frequency traders] continuously place small bids and offers (called bait) at the back of order queues to gain directional clues. If the bait orders are hit, the algorithm will place follow-up orders to either accumulate favorable positions or exit 'toxic' risks, a process which leverages bait orders to gain valuable directional clues as to which way the market will likely move. The initial bait orders are very small while subsequent orders, once market direction has been identified, are very large. A portion of the large orders that follow the smaller bait orders are wash trades."Another very serious charge is that some of the defendants in the lawsuit who are in leadership roles in management at the futures exchanges, have "equity interests" in the very high-frequency trading firms that are benefitting from these wash trades. The complaint states:
"The Exchange Defendants profit from the occurrence of wash trades and have a vested interest in not having more robust safeguards against them because they contribute significantly to the Exchange Defendants' volume numbers and revenue. Were the volume of wash trades excluded from the Exchange Defendants' volume and revenue numbers, the radically reduced volume numbers would exert adverse pressure on the CME Group's stock price, not to mention the revenue to members of CME Group's governance who have equity interests in participating HFTs in addition to stock ownership in the CME Group, Inc."In addition to wash trades, the lawsuit charges that the CME Group has entered into "clandestine" incentive agreements.
"Defendants have entered into clandestine incentive/rebate agreements in established and heavily traded contract markets with favored firms such as DRW Trading Group and Allston Trading, paying up to $750,000.00 per month in one of the most heavily traded futures contracts in the world. At no time during the Class Period have Defendants voluntarily revealed to the trading public that these material agreements exist in established markets. Defendants through their lawyers have repeatedly ridiculed the suggestion that clandestine agreements exist."The complaint identifies another "Confidential Witness B" who has provided information on "the existence of a clandestine rebate agreement between the CME and a very large volume HFT firm that trades in the S&P500 E-Mini contract." That's a stunning allegation, since the S&P500 E-Mini was thought to be one of the most liquid contracts in the U.S. The complaint correctly notes that "there can be no economically justified reason, such as to develop thinly traded markets, that would justify the CME and CME Group to maintain clandestine incentive agreements in this particular market, other than the improper intent."
Another trick to get an early peek at trading information is referred to in the complaint as the "Latency Loophole," which "allows certain market participants to know that orders they entered were executed and at what price, and to enter many subsequent orders, all before the rest of the market participants found out the status of their own initial orders."
The complaint explains that the ability to continuously enter orders and get trade confirmations "of the price at which these orders are filled, before the rest of the public even knows about the executed trades," empowers high-frequency traders with "a massive informational and time advantage in discerning actual price, market direction and order flow before anyone else."
By providing just a select group of market participants and high-frequency traders with this "sneak peek" advantage, says the complaint, the defendants engaged in a "fraud on the marketplace."
The Justice Department and FBI have opened investigations into high-frequency trading. Let's hope that includes both stock and futures exchanges.
The traders bringing the lawsuit, which is filed as a class action, are William Charles Braman, Mark Mendelson and John Simms. Lawyers for the plaintiffs are R. Tamara de Silva, who maintains a private practice, and lawyers from O'Rourke & Moody.
The suit was filed in the U.S. District Court for the Northern District of Illinois. The Civil Docket for the case is #: 1:14-cv-02646 and has been assigned to Judge Charles P. Kocoras. The CME Group is represented by the law firm Skadden, Arps, Slate, Meagher & Flom, LLP.
Wash Trades (Max Keiser - E633: July 29, 2014)
Illegal Wash Trades Dominate US Market
Terry Duffy Discusses Regulation and High-Frequency Trading
Global Corporate "Super-Entity" = Rothschild Monopoly - Organized Crime Syndicate - The One Bank Is a Gigantic Parasite - Corporate Media "World's Richest" Lists Are Propaganda
RBC Sued by U.S. Regulators Over Wash Trades (Bloomberg)