Investment Banks Share the Same Trading Algo Code?
Collusion on Wall Street
ValueWalk's Raul Panganiban interviews Joseph Cioffi, Author of Credit Chronometer and Partner at Davis + Gilbert where he is Chair of the Insolvency, Creditor’s Rights & Financial Products Practice Group. In the interview, we discuss the findings of the 3rd Annual report. Q2 2021 hedge fund letters, conferences and more The following is a computer Read More
If Michael Lewis thought Wall Street was rigged with his reveal in Flash Boys he would be stunned to know that he barely scratched the surface of not only the corruption on the street, but the overt collusion behind the scenes at the Investment banks. We used to have notions of ‘proprietary programmed code’ but the Investment Banks learned that they could make their life a lot easier by working together instead of cross purposes. In a nutshell, collusion pays much better than trying to outcompete each other for market profits.
Preprogrammed Market Algos
Thus when you see moves in markets, most of these moves are preprogrammed well in advance, the code is shared amongst the Investment Banks and lucky Hedge Funds who provide good business to the Investment Banks in the form of solid fees and long standing relationships. This is part of the reason financial markets are so highly correlated between all the different and diverging asset classes. Most of the money is made by moving cash around the board from one asset class to another and then back again with financial markets effectively going nowhere. In short volatility for volatility’s sake all revolving around nicely constructed trading algorithms that all the major Investment Banks are privy to, and this ensures that they are always trading on the same side from a short term perspective.
You ever wonder why the major Investment Banks rarely have a losing trading day? It is unheard of them ever having a losing trading month, because they aren`t trading against anybody at all, and surely not against another investment bank. They are just putting cash behind the same trading algo that they all share in a collusive fashion to make their daily, weekly, monthly and quarterly FICC nut.
Adaptation to Brave New World
Now not all is lost for the rest of the market participants because when you have collusion on such a grand scale it actually makes trading a lot easier to decipher. There are two ways you can in essence piggyback on this shared code, one is to do it the old fashion way and write down every 5 minute bar for the market that you are watching and participating in for the desired trading timeframe. Let`s say the European open to the European Close where most of the action occurs, or let us say the US open until the US market close each day. Eventually you will notice the exact same recurring patterns in the market that you are trading in relation to the other markets, you will notice the same timestamp significance, and thus you will be discovering the programmed algorithmic code behind the market`s price action.
The other way to accomplish this task is with a computerized analysis program that analyzes the price action and spits out the patterns of the code. The high frequency trading firms don`t run the main show, but they are really good at exploiting and piggybacking on the coattails of the Investment Banks who are running the main show in the financial markets. Part of this means that anytime where there is a vacuum in financial markets they can come in and run parts of the show, usually during either very quiet periods like the holidays or very hectic periods like a full blown panic time in the market when the Investment Banks turn off their dominant trading algorithm.
Investment Banks – Conclusion
Therefore, the next time you wonder why a market you are participating in does something contrary to what a normal correlation would suggest it probably has something to do with another market incentivized and prioritized trading algo which was preprogrammed well in advance by the programmers at the large Investment Banks, and your favorite market is just being carried along for the ride.