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Euclid 08-01-2009 01:39 PM

Hi smisachu,
Quote:

I think high frequency stat arb is high tech front running. This will be the next biggest blow out according to me.
Could you explain what you mean by this? Are you referring to "Flash Trading"
or the whole of HFT?

smisachu 08-01-2009 07:34 PM

Quote:

Originally Posted by Euclid (Post 583920)
Hi smisachu,

Could you explain what you mean by this? Are you referring to "Flash Trading"
or the whole of HFT?

Yes Flash trading, ELP (enhanced liquidity program), direct access trading and even other program trading. The programs seek out discreet blocks that are being routed into the market and front run them. The main culprit according to many is GS. And to acheive a significant alpha the size and leverage are huge. Some program with a bug will dump a lot of shares on the market some day and before any one can react. Here is an article on some info that was made available only to bloomberg users.

"Lime Brokerage: "The Next 'Long Term Capital' Meltdown Will Happen In
A Five-Minute Time Period."

Posted by Tyler Durden at 11:25 AM
A recent Bloomberg piece that for some reason was made available only
to terminal subscribers, provides a very interesting discussion on the
dangers of sponsored access, how the associated pre-trade vs post-
trade monitoring deliberations by "regulators" will influence short
selling curbs, and not surprisingly, the desire by Goldman to not only
dominate this yet another aspect of high-frequency trading, but to
dictate market policy at will.
What is sponsored access:

In sponsored access, a broker-dealer lends its market participation
identification (MPID) number to clients for them to trade on exchanges
without going through the broker's trading system, to avoid slowing
down the execution. That places responsibility on the broker-dealer to
make sure the participant abides by securities regulations, and that
its trading, which can involve hundreds or thousands of orders a
second, does not run amok.

Is it thus surprising, that none other than Goldman Sachs is muscling
its way into providing not only a sponsored access platform to its
clients, but a new form of sponsored access that needs the blessing of
regulators:

Wall Street heavyweight Goldman Sachs, now launching its own sponsored-
access service to lend clients its identification to access securities
exchanges directly, said last week it favors monitoring client orders
prior to execution.


"Our view is that there is a real need for pre-trade checks in the use
of sponsored access to fulfill [broker-dealers'] regulatory
responsibilities," said Greg Tusar, managing director at Goldman.


Goldman's stand in favor of pre-trade instead of post-trade monitoring
of sponsored clients' activity is one side of a debate in which
regulators may choose a middle ground. The regulators' decision on how
to monitor sponsored access may also influence their deliberations on
restricting short sales.

What is the difference between pre-trade and post-trade monitoring? In
brief:

Pre-trade

Compliant with Reg SHO
Nip problems before they happen
View activity across exchanges

Post-trade

Faster order executions
Pre-trade systems still fallible
And another tidbit:

In traditional sponsored-access arrangements, a broker-dealer
determines a client's suitability to access market centers directly
and then allows the client to trade without monitoring its individual
orders prior to execution.

In other words, the Goldman endorsed pre-trade approach will allow
"monitoring of individual orders prior to execution." Whether or not
pre-trade checks provide the capacity to observe not just wholesale
exchange activity in the context of sponsored access but from a much
broader market angle is a discussion for another time, although this
could be one place where Sergey Aleynikov could shed an infinite
amount of light, especially as pertains to Goldman's sponsored-access
service. Conveniently, his gag order will prevent him from saying much
if anything until such time as there is an appetizing settlement to
keep him gagged in perpetuity. The bottom line is that with a pre-
trade environment, the sponsored access providers will be able to have
the potential to front run all those who use their platforms. The
residual question of how far they go to comply with regulations to
prevent this from happening, and remain true to their ethics standards
is also a topic for another day.

Going back to the topic at hand. Here is why sponsored access could
easily be quite a bother to capital markets sooner rather than later:

Unchecked errors or unintended repeat orders could deplete broker-
dealers' capital, and potentially wreak havoc in the broader market.
Concerns have arisen, however, about whether all broker-dealers are
able to fulfill that duty in today's electronic trading environment,
and according to which standards.

And here Goldman chimes in to not only promote their proposed
architecture but to expound on the virtues of pre-trade checking.

"In the case of high-frequency trading, in particular guarding against
technology failures, oversized orders and other situations where
there's potentially systemic market impact, we believe strongly that
pre-trade checks are a prerequisite," Tusar says.

Nasdaq's proposal as well as Securities and Exchange Commission
officials' speeches a few months ago appeared to lean toward
bolstering the traditional approach.


"We don't believe that's strong enough or what the regulators want
now, because of the potentially dire consequences, and because we-as
broker-dealers-bear much of that risk," Tusar says.


Now the reason why this is very relevant in the context of not just
potential front running, but also market structure is that Regulation
SHO, which is the primary regulatory framework for short selling (and
the purvey of potential Uptick Rule reinstatement, which will happen
once the market is allowed to hit a bid) is a post-trade
architecture.

Wedbush [Morgan] routinely tests clients' systems to ensure they are
compliant with Reg SHO. In addition, he says, the brokerage sets
limits on clients available locates-as well as credit and trading
limits--before the start of each trading day that its system tracks,
prohibiting shorts without locates and providing a type of pre-trade
check.

Or as has recently become the case, seeing rolling buy ins in the
middle of the day as borrowable shares in even the most liquid stocks
mysteriously disappear (look at today's market action for yet another
blatant example of this practice).

Anticipating the regulators' likely response, one should not be
surprised to see them siding with Goldman and against shorters:

As the SEC also seeks to appease investor concerns over rampant short
selling, especially naked short selling, new sponsored-access
standards may provide part of the solution. Given that day-traders may
be the last remaining culprits of such activity,, increasing and
standardizing scrutiny over their trading may reduce uncovered (and
illegal) shorts even further.

How about appeasing concerns over rampant, unjustified buying? When
will the downtick buy rule be implemented? But we jest.

And I digress again. Why should all this be concerning to advocates of
stability of high-frequency trading:

The mother of all concerns is a sponsored firm's algorithm going awry
and executing thousands of problematic trades across a range of
securities and market centers.

Well, this is not really a problem when it happens to the upside as
has been the case for months now - it is only a threat when Joe
Sixpack's 401(k) may be impacted, i.e., to the downside.

And here is where a SEC Comment submitted by broker Lime Brokerage is
a very troubling must read by all who naively claim that High-
frequency trading is a boon to an efficient market (which doesn't
provide . Well, yes and no - it is, until such moment that it causes
the market to, literally, break. I will post a critical excerpt from
the Lime submission, and leave the rest to our readers' independent
analysis:

Lime's familiarity with high speed trading allows us to benchmark some
of the fastest computer traders on the planet, and we have seen CDT
(Computerized Day Trading) order placement rates easily exceed 1,000
orders per second. Should a CDT algorithm go awry, where a large
amount of orders are placed erroneously or where the orders should not
have passed order validation, the Sponsor will incur a substantial
timelag in addressing the issue. From the moment the Sponsor’s
representative detects the problem until the time the problematic
orders can be addressed by the Sponsor, at least two mintues will have
passed. The Sponsor’s only tools to control Sponsored Access flow are
to log into the Trading Center’s website (if available), place a phone
call to the Trading Center, or call the Sponsee to disable trading and
cancel these erroneous orders – all sub-optimal processes which
require human intervention. With a two minute delay to cancel these
erroneous orders, 120,000 orders could have gone into the market and
been executed, even though an order validation problem was detected
previously. At 1,000 shares per order and an average price of $20 per
share, $2.4 billion of improper trades could be executed in this short
timeframe. The sheer volume of activity in a concentrated period of
time is extremely disruptive to the process of maintaining a “fair and
orderly” market. This shortcoming needs to be addressed if the
practice of Naked Access is going to be permitted to continue;
otherwise, the next “Long Term Capital” meltdown will happen in a five-
minute time period.

smisachu 08-04-2009 06:42 PM

SEC Moving towards banning Flash Trading
 
See what I mean. More than stat-arb, the HFT programs keep looking for pattrens in order flow and front run them. Thats why you have lattice trading and when a fund wants to sell a big block, they dont even go to the exchanges. they pick up the phone and call someone "upstairs"


SEC moving toward banning flash orders - Yahoo! Finance

hope4gc 01-21-2011 03:58 PM

Quote:

Originally Posted by smisachu (Post 605115)
See what I mean. More than stat-arb, the HFT programs keep looking for pattrens in order flow and front run them. Thats why you have lattice trading and when a fund wants to sell a big block, they dont even go to the exchanges. they pick up the phone and call someone "upstairs"


SEC moving toward banning flash orders - Yahoo! Finance

smisachu,
You seemed to be a Pro with so much of information.
I know this is a pretty old thread, but interested to find out if you give some tips on starting this business on a H1B and how i can withdraw profits from that?
Any help is appreciated.
Thanks

smisachu 01-21-2011 06:25 PM

Quote:

Originally Posted by hope4gc (Post 2259777)
smisachu,
You seemed to be a Pro with so much of information.
I know this is a pretty old thread, but interested to find out if you give some tips on starting this business on a H1B and how i can withdraw profits from that?
Any help is appreciated.
Thanks

What exactly do you mean when you say starting this business? Do you want to open a trading account on your own and trade? Join a day trading firm? Or open a Fund? Each one will have different implications on H1. You can open your own investment account with a brokerage firm and trade your own money, no problem with H1 what so ever.
If you join a day trading firm you will have to be on H1 with them. Very few ones do but I know of a couple who will do it. In fact a classmate of mine is working as a Trader/Analyst with a small trading firm in NYC. They have sponsored his H1.
Starting a fund, (if you can get the seed money :D), you open a LLC and sponsor yourself. You will be an employee of the company and draw a salary. You tell me what you have in mind and I will tell you what to do or what I did.

hope4gc 01-21-2011 10:39 PM

Quote:

Originally Posted by smisachu (Post 2260198)
What exactly do you mean when you say starting this business? Do you want to open a trading account on your own and trade? Join a day trading firm? Or open a Fund? Each one will have different implications on H1. You can open your own investment account with a brokerage firm and trade your own money, no problem with H1 what so ever.
If you join a day trading firm you will have to be on H1 with them. Very few ones do but I know of a couple who will do it. In fact a classmate of mine is working as a Trader/Analyst with a small trading firm in NYC. They have sponsored his H1.
Starting a fund, (if you can get the seed money :D), you open a LLC and sponsor yourself. You will be an employee of the company and draw a salary. You tell me what you have in mind and I will tell you what to do or what I did.

smisachu,
Thanks for that Info, here is my requirement
I am on H1B and plan to have my own company as a trader to trade stocks.
I will be the owner and wish to draw profits, may not have employee in my company for now(please advice, if i need to)
I need inputs to know what type of company should that be (LLC, S Corporation.. e.t.c.)?
Is it advisable to have a GC holder/citizen as partner?
What form of income should i withdraw(salary/profits/dividends/Interest..) How is the income considered when i file my taxes?
I am not aware of anyone who can sponsor my H1 as a trader atleast for now, if i get the right opportunity, i am open for that
Thanks again

smisachu 01-22-2011 12:20 AM

Quote:

Originally Posted by hope4gc (Post 2260906)
smisachu,
Thanks for that Info, here is my requirement
I am on H1B and plan to have my own company as a trader to trade stocks.
I will be the owner and wish to draw profits, may not have employee in my company for now(please advice, if i need to)
I need inputs to know what type of company should that be (LLC, S Corporation.. e.t.c.)?
Is it advisable to have a GC holder/citizen as partner?
What form of income should i withdraw(salary/profits/dividends/Interest..) How is the income considered when i file my taxes?
I am not aware of anyone who can sponsor my H1 as a trader atleast for now, if i get the right opportunity, i am open for that
Thanks again

1. If you want to trade stocks only, with your own capital ,then set up a LLC or C corp. If you trade other people’s capital then maybe become a RIA.
2. If you form a llc you become a employee of your own company (say managing director, CIO etc) and sponsor your own H1.
3. You can have a fixed salary and a draw, which is what a typical trader gets. Draw is a percentage of the profits you generate by trading.
4. You don’t need a gc/Citizen as a partner.
5. The company/fund makes money by trading securities and the earnings are retained by the company, you draw salary and bonus.
6. You file taxes as a regular employee would.
7. You might be able to get H1 from a day trading firm, a day trading firm is not a market maker. They trade company capital and typically you have to post some risk capital based on which they will provide you leverage and provide you with equipment etc. You don’t get a salary, just a draw.

But let me ask you something; I am not aware of your expertise in the markets so forgive me if I sound patronizing.
1. Do you have a seven figure capital pool? You will need at least 1MM if you want to make a living trading.
2. Are you aware of the equipment and ECN and direct access software needed assuming you are technical trader.
3. Do you have a prime broker who is going to provide you leverage and settlement? If you have not decided consider Interactive Brokers.
4. What kind of risk management software will you be using?

If you are in the NY/Nj area I suggest try day trading at a firm posting risk capital (typically 10K) then decide if you want to do this full time. It will also help sharpen your skills. If you want I can recommend a few. They will not sponsor H1 though, you will have to have some consultant do that for you.

hope4gc 01-22-2011 01:41 PM

Smisachu,
One more question for now
Do i need to apparoach an immigration lawyer and a CPA for setting up a company?
I have PMed you with some questions you have asked
Thanks

floridasun 01-22-2011 03:45 PM

Quote:

Originally Posted by smisachu (Post 578958)
There are many good strategies but I have no idea on sophistication of each individual. For example right now you can sell credit default swaps on Goldman sachs medium senior secured notes and hedge it with delta units of binary in-the-money call options on the VIX. This will give you synthetic exposure to the notes with steady cash flow and the binaries are cheap. If goldman defaults the VIX will sky rocket giving you a handsome payout better than what you will have to pay on the senior secured notes because of high recovery rate if all the default climbs up to the senior tranche. Actually this would be equal to the end of the world in today’s market.

Or better yet just buy SPX and sit, the market is doing all the work for you.

The US natural gas market is in contango (I swear this is not jargon:o, there is no other term). So buy long dated/leap calls at the money now. In 2 years you will be so deep in the money you wont know what to do. But average retail investor cannot hedge this as he cannot trade spot.

So I guess my point is there are sophisticated ways to make money for which the average retail investor has no access to. If there is a simple way then it has already been exploited under the no-arbitrage clause of free markets.

If you have 2-5 year horizon. Go long the market and sit on it would be my best advice. If people want to meet and share ideas I am open to it. I live in NJ so NY/NJ is fine spot to meet.

good thread. I do little bit of trading myself from a personal brokerage account and made some pocket change (few hundreds by trading commodity ETFs) recently. in layman terms, can u explain wht do u mean by ' US natural gas market is in contango' .

smisachu 01-23-2011 10:57 PM

Quote:

Originally Posted by floridasun (Post 2263699)
good thread. I do little bit of trading myself from a personal brokerage account and made some pocket change (few hundreds by trading commodity ETFs) recently. in layman terms, can u explain wht do u mean by ' US natural gas market is in contango' .

First of all note that the original post was alomst year and a half old so dont go by the ideas there now :D

In commodity markets you trade futures and spot. Spot means immidate delivery of the under lying commodity. In futures you pay today for delivery at a future date. So typically the price of the future will be the price of spot + the storage charge (simple calculation to give you an idea considering no premiums). As the day of delivery approaches the price will pull to spot price. For example if west texas intermediate (WTI) crude is $92 spot price the 3 month future will be $100. (92+8 for storage). Considering that the spot price does not change at all, in three months time the price of the oil you will now be purchasing will be $92, but you paid $100 for it. This is backwardation. This is usually how markets are most of the time.

Now if in 3 months the price of WTI is trading at $110, you will own oil you paid $100 for and now can turn around and sell for $110. This is contango.

When you buy a commodity ETF, they dont take actual delivery of the product, they roll their contarcts. So they will hold a 3 month contarct and when the third month approaches they sell the contarct and get another 3 month contaract. If market is in backwardation then they will always be buying high and selling low. If market is in contango they will make money but as soon as it switches back to backwardation they will ride down the slide and loose all the money they made. So I dont think ETF's are agood way of making money in commodities passively. You can actively manage the ETF portfolio and make money using options and hedges and leveraged ETF's. But buy and hold, I suggest go and invest with a CTA who will be trading rule based to negate the effects of contango and backwardation.

Hope this is simple enough:)

smisachu 01-23-2011 10:58 PM

Quote:

Originally Posted by hope4gc (Post 2263366)
Smisachu,
One more question for now
Do i need to apparoach an immigration lawyer and a CPA for setting up a company?
I have PMed you with some questions you have asked
Thanks

I dont think so. I PM'ed back.

krishmunn 01-24-2011 09:29 AM

I have read in several forum that one cannot form own company and sponsor H1 through that. The logic is sponsoring H1 is work and you cannot work without H1.
I think it is acceptable logic. Otherwise many would have sponsored H1 for self.

Check with some attorney.

smisachu 01-25-2011 11:19 PM

Quote:

Originally Posted by krishmunn (Post 2270647)
I have read in several forum that one cannot form own company and sponsor H1 through that. The logic is sponsoring H1 is work and you cannot work without H1.
I think it is acceptable logic. Otherwise many would have sponsored H1 for self.

Check with some attorney.

I started my company when on H1 but I did not sponsor myself or anyone. I also did not withdraw earnings from the company since it was not my main income. I only started withdrawing earnings from the company after I got my GC and I can claim on taxes. But it is a good idea to ask an attorney.

floridasun 01-27-2011 12:30 PM

Quote:

Originally Posted by smisachu (Post 2268873)
First of all note that the original post was alomst year and a half old so dont go by the ideas there now :D

In commodity markets you trade futures and spot. Spot means immidate delivery of the under lying commodity. In futures you pay today for delivery at a future date. So typically the price of the future will be the price of spot + the storage charge (simple calculation to give you an idea considering no premiums). As the day of delivery approaches the price will pull to spot price. For example if west texas intermediate (WTI) crude is $92 spot price the 3 month future will be $100. (92+8 for storage). Considering that the spot price does not change at all, in three months time the price of the oil you will now be purchasing will be $92, but you paid $100 for it. This is backwardation. This is usually how markets are most of the time.

Now if in 3 months the price of WTI is trading at $110, you will own oil you paid $100 for and now can turn around and sell for $110. This is contango.

When you buy a commodity ETF, they dont take actual delivery of the product, they roll their contarcts. So they will hold a 3 month contarct and when the third month approaches they sell the contarct and get another 3 month contaract. If market is in backwardation then they will always be buying high and selling low. If market is in contango they will make money but as soon as it switches back to backwardation they will ride down the slide and loose all the money they made. So I dont think ETF's are agood way of making money in commodities passively. You can actively manage the ETF portfolio and make money using options and hedges and leveraged ETF's. But buy and hold, I suggest go and invest with a CTA who will be trading rule based to negate the effects of contango and backwardation.

Hope this is simple enough:)

Thanks smisachu. that was informative. FYI right now I am double shorting crude oil - with everyone calling higher crude oil prices in future, I may be in for a loss here... but willing to hold till I get break even :-)


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