Yesterday, in "How High Frequency Traders Broke, And Manipulated, The Treasury Market On October 15, 2014 " we showed, with empirical evidence thanks to none other than the joint-staff (the Fed, Treasury, SEC and CFTC), precisely how algos broke the Treasury bond market in the morning of October 15, 2014, and specifically how at 9.34 am a blast of quote stuffing and HFT-generated volume.
The bulk of self-trading in cash and futures markets was observed among PTFs, perhaps due to the fact that such firms can run multiple separate trading algorithms simultaneously. For instance, one of these algorithms could specialize in placing buy or sell limit orders at the top of the order book while another could specialize in initiating trades given specific conditions in that market, potentially leading one algorithm to end up being matched with another algorithm from the same firm. In addition to PTFs, the cash data also showed a very small amount of selftrading by bank-dealers and hedge funds, some of which are also known to trade algorithmically.
During the event window, the data showed that the share of overall transactions resulting from self-trading was substantially higher than average. At the 10-year maturity, it reached 14.9 percent and 11.5 percent for cash and futures, respectively, during the move up in prices in the event window (Figure 3.31). During the retracement, when the price moved back down rapidly, the share of self-trading declined to 1.2 percent and 4.8 percent in cash and futures, respectively. Moreover, the concentration of self-trading volume among PTFs was very high in both markets during the event window. Another aspect of self-trading flows during the event window was its directional nature (Figures 3.32 and 3.33). For example, between 9:33 and 9:39 ET, the cumulative net aggressive buyer- minus seller-initiated self-trade volume increased by around $160 million in the cash 10-year note, accounting for close to one-fifth of the total imbalance between buyer and seller initiated trades observed over that time interval
In other words, HFTs were engaging in millions of "wash trades" in which they bought and sold from themselves at an ever faster pace, which pushed the price higher and ignited other momentum algos.
And that, in a
nutshell is what price formation has become: who can "wash trade" the fastest.
But wait a minute, isn't wash trading illegal. Yes it is. Here is the CME confirming just that :
Wash Trades Prohibited
No person shall place or accept buy and sell orders in the same product and expiration month. and, for a put or call option, the same strike price, where the person knows or reasonably should know that the purpose of the orders is to avoid taking a bona fide market position exposed to market risk (transactions commonly known or referred to as wash trades or wash sales). Buy and sell orders for different accounts with common beneficial ownership that are entered with the intent to negate market risk or price competition shall also be deemed to violate the prohibition on wash trades. Additionally, no person shall knowingly execute or accommodate the execution of such orders by direct or indirect means.
This is how the Fed, Treasury and SEC (with the CFTC too) described the clearly illegal wash trading that moved the world's most "liquid" market (from footnote 28 of the report ):
At times, self-trading may reflect unlawful conduct. For example, unlawful self-trades may constitute “wash sales.” In the futures markets, “wash sales” involve a purchase and sale of the same delivery month of the same futures contract at the same or similar price, made without an intent to take a genuine, bona fide position in the market, and instead, are intended to negate risk or price competition. In the securities markets, for example, a “wash trade” is a transaction that does not result in a change of beneficial ownership when there is a fraudulent or manipulative purpose behind the trade. This report is not making any findings on the legality of any self-trading that occurred on the days covered in this analysis.
So whose job is it to make "findings on the legality" of the wash trades that broke the treasury market on October 15? And how much do they need to be bribed by the Modern Markets Initiative so they, too, can ignore the corrupt, rigged casino that not just the stock, but the bond market, have now become?