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Fed/Treasury Worried High-Frequency-Trading "Hurts Market Function"

Just days after China bans Citadel (and its high frequency trading) from trading Chinese markets, US Treasury and Federal Reserve officials have been forced to admit they "need to consider whether the race for speed, at this already advanced stage, helps or hurts market functioning." As WSJ reports, Fed governor Jerome Powell and Antonio Weiss, a senior counselor to U.S. Treasury Secretary Jacob Lew, said Monday that the government should re-evaluate the structure of U.S. markets in light of recent events. They are growing more concerned about signs that financial markets have grown more volatile with the growth of fast trading. As Weiss concludes, "the constant pursuit to save one more millisecond not only consumes resources potentially better invested elsewhere, but increases the pressure on the plumbing of the system to handle ever-increasing speeds and messaging traffic."

As we previously noted, Citadel gets busted in China (and banned)... after "The firm has recently expanded its quantitative hedge funds there, and its securities trading business traded options this year in a trial program on the China Financial Futures Exchange."

Chinese media reported over the weekend that one of the restricted accounts was co-owned by Citadel and major Chinese brokerage firm Citic Securities. Citic Securities said Sunday it invested in the account in 2010, but it sold off its stake in November 2014 and no longer owns stock in the account, according to China’s official Xinhua News Agency. Citic Securities didn’t immediately reply to a request for comment.

And while a Citadel spokesman didn’t respond to a request for comment on which side of the firm’s business was affected by the suspension, it appears that Citadel's infatuation with market rigging via algos and "automated trading" is what set China off. Or rather the "selling" via automated trading.

Moments ago Bloomberg confirmed as much when it reported that an official Chinese regulator urges further algorithm trading regulation, adding that China should be prudent on developing algorithm trading, Shanghai Securities News cites an unidentified official with China Securities Regulatory Commission as saying.

Market stability were “seriously damaged” by algorithm trading combined with some abnormal trading activities, the official was cited as saying. Algorithm trading may lead to systematic risks and result would be catastrophic when algorithm trading was used to manipulate market, the official was cited as saying.

Why are none of these risks ever brought up vis-a-vis Citadel's market manipulation in the US?

The answer is glaringly simple: because in the US, unlike China, Citadel always manipulates the market higher.

And now, as The Wall Street Journal reports, regulators in the US are less excited about the impact of HFT as perhaps they fear the same about to happen here...

Senior officials at the Treasury Department and Federal Reserve questioned the benefits of high-frequency trading in U.S. Treasury markets, suggesting market overseers are building the case for new rules targeting the firms.

 

Fed governor Jerome Powell and Antonio Weiss, a senior counselor to U.S. Treasury Secretary Jacob Lew, said Monday that the government should re-evaluate the structure of U.S. Treasury markets in light of recent events that suggest they are more prone to swings.

 

The remarks, made at an event hosted by the Brookings Institution think tank, were the latest evidence that Washington is growing more concerned about signs that financial markets have grown more volatile with the growth of fast trading. Officials have lately focused on a huge 12-minute swing in the yield of a key U.S. Treasury bond on Oct. 15—the Treasury market’s version of the 2010 stock price dive known as the “Flash Crash.”

 

...

 

Mr. Powell, who has an influential voice as a member of a Fed board that sets rules for large banks, didn’t endorse any specific rule changes, but said the current market structure, which encourages superfast trading, could be less resilient than in the past. “One can certainly question how socially useful it is to build optic fiber or microwave networks just to trade at microseconds or nanoseconds rather than milliseconds,” he said.

 

"If trading is at nanoseconds, there won't be a lot of 'fundamental' news to trade on or much time to formulate views about the long-run value of an asset; instead, trading at these speeds can become a game played against order books and the market rules," Powell said

Of course - it's easy - as Volcker did recently, to fob blame off on HFTs alone...

But some on Wall Street say new regulations are to blame for more fragile markets because they have made it harder for big banks to act as middlemen between buyers and sellers.

 

U.S. officials don’t appear convinced their rules are the problem. Mr. Powell said regulations “may be one factor driving recent changes in market making,” but added “these same regulations have also materially lowered banks’ probabilities of default and the chances of another financial crisis.”

 

Another significant change in Treasury markets: The Federal Reserve now is holding far more Treasury bonds as part of its programs to stimulate the economy.

And, as Reuters adds, Antonio Weiss, counselor to the U.S. Treasury secretary, was blunter.

“We need to consider whether the race for speed, at this already advanced stage, helps or hurts market functioning,” Mr. Weiss said.

 

"The constant pursuit to save one more millisecond not only consumes resources potentially better invested elsewhere, but increases the pressure on the plumbing of the system to handle ever-increasing speeds and messaging traffic," he said in a speech prepared for deliver to the panel.

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Which leads to an even more interesting, follow up question: if Citadel's HFT algos were indeed caught red-handed selling in China, then someone in the US must have given the local Citadel brokerage the green light to spoof Chinese stocks lower. And since by definition Citadel does not do anything market-moving without the Fed's preapproval, one wonders if China's paranoia that foreigners are eager to crush its market is not at least partially grounded in reality?

*  *  *

In other words - all the time HFT manipulation presses prices higher, everything is fine and ignored... but when bonds are aggressively bid or stocks aggressively sold by the flash-crashing vicious-cycling HFTs then something has to be done about it!!