Ever wonder exactly how the high frequency algorithmic, Fed fueled Wall Street machine really works?

Joe Saluzzi, an expert on high frequency trading (HFT) algorithms and author of “Broken Markets”, joined Peak Prosperity in a new 50 minute video last week where they explained exactly how the system is rigged by talking about how the Fed is driving the market and how algorithmic trading has turned the markets into a casino where the institutions always win. 

Banks Posting Record Numbers Despite The Recession

The video starts by discussing how banks posted record numbers this month despite the economy’s downturn. 

“Over 50 million Americans have lost their jobs as a result of the economic carnage inflicted by the Covid-19 pandemic. And yet the big banks are not only unscathed, but positively swimming in profits,” the video describes.

“We live in a system run by the banks, for the benefit of the banks. We, the public, are simply grist for its mill. After all the US Federal Reserve, which wields immense global power and influence as the controller of the world’s reserve currency, is owned by its private member banks. Should we really be surprised how the banks always seem to come out on top?”

“This looks just like 2009. Wall Street paying itself huge bonuses while the rest of the world is stuck in recession,” the host says.

He also asks Saluzzi about how it is possible that banks like JP Morgan and Citadel will post “zero days” of trading losses in a quarter. Saluzzi responds: “Think of it as a casino. It basically is. There are guys that used to bet on sports and now they’ve moved on to the stock market. This is a different game. The house always wins.”

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The Market Is Now Officially A Casino

“Joe’s key takeaway is to realize that the markets, and the financial institutions operating them, are casinos. They have engineered the system to slant the odds in their favor. If you invest your hard-earned capital without clearly understanding the risks in play, then you’re the sucker at the poker table,” the video explains.

Saluzzi talks about how institutions are extremely good risk managers and not only manage their downside risks in trades, but will also not let trades move too far to the upside. He says institutions would rather make small amounts of money on large amounts of trades than let their winners ride. He describes this as the casino’s game and encourages retail investors to avoid this strategy.

“As long as at the end of the day me – the casino – makes money more than loses money, that’s what I want,” he says. “Overtrading is probably the biggest mistake you’ll ever make. Don’t overdo it. It’s supposed to be about investing.”

“HFT dominates and most people don’t talk about it anymore,” he says. “It’s just become the fabric of the market now. Everybody is making money off the way the system is built. No one wants to change it.”

Never Use Market Orders

Saluzzi also tells retail investors to never use market orders and cites big market moves (and flash crashes) on lack of liquidity due to the role that algorithmic trading plays in the market. He used Bill Ackman’s appearance on CNBC a couple months ago as an example of how broken the markets have become. “The gap down was enormous” Saluzzi says. The reason was because the normal limit orders “were never there”. “There’s no obligation for a market maker to provide liquidity anymore,” he says.

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“If there’s no limit orders and no specialist, who’s there to provide liquidity? No one,” Saluzzi says. If you put in a market order on a day like that “you’re going to get crushed”. 

“That’s why we had $30 stocks trading for a penny on the day of the flash crash. There was just no bids,” he explains. “Never ever ever place a market order. Make sure you put a limit in that box. It’ll give you some safety,” Saluzzi says. 

While talking about all the new trading apps, Saluzzi says “they may not charge you for the trade, they make money off the spread.”

Algos Are One Step Ahead and There’s Nothing Regulators Can Do

Algos can “sense when the order book is about to change”, Saluzzi says. They then built their own book based off of seeing market quotes faster than the average person. When Saluzzi is asked about whether or not algos can be used to manipulate the market, he reveals that regulators don’t have visibility on how one market can be used to move another – including the S&P futures market and the S&P cash market.

“You can post bids on one exchange – say BATS – and then you’re on another exchange, or a dark pool, looking to sell. It makes it more difficult for one exchange to see you’re a spoofer.”

Regulators have been building a way to observe exchanges for spoofing for 10 years, but Saluzzi says they still don’t have visibility.

“Suppose you’re a really sophisticated trader and you wanna manipulate the S&P 500 – the actual index. And you go into the e-mini market and start spoofing with some futures to see if you can get the cash market to go. They don’t have a tool to see that.”

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Regulators “will not see cross market manipulation – which is a problem” Saluzzi concludes. 

Unless, perhaps, you’re the trading desk at the NY Fed. 

You can watch the whole video here:


Via Zerohedge