In Regulation: Don’t Throw the Baby Out With the Bathwater, Progress CTO John Bates illustrates the principle of advocating a position based on a natural conflict-of-interest and then wrapping “the package” in rhetorical phrases.

First of all, the US economy (read individual investors) would be much better off if financial services firms (or anyone) were not permitted to use computers next to stock exchanges to seek split second “get rich quick” opportunities that the normal, traditional investor does not have.    The only “economy” that benefits are entities that participate in this type of activity and the technology firms selling the hardware and software to make “all the madness” possible.

Many technology companies make a living selling software that facilitates high frequency trading.  This is the same type of trading that continues to destabilize stock markets and injure investors.    But, investing in equities should mean investing in the companies, not electronic signals.  Unfortunately, high frequency trading is not investing, it is a type of electronic game where the winners are the companies with better technology and the losers are individual investors, retirees, mom-and-pop businesses, and everyone else.

The stock market was created for the purpose of public ownership in businesses, not to be a tit-for-tat game of “who has the best technology to exploit signals”.  What we are seeing in high frequency trading is an abomination of the principles of investment.  The poster’s closing statement on the topic is revealing:

“[we need]…. new approaches to markets surveillance across fragmented markets and real-time pre-trade risk management.

Which simply translates to,

“We want to sell you more software.”

Let’s their be no mistake about it, companies working in the high frequency trading domain do not care about the economy, individual investors, or the principles of stock ownership. They care about making as much money as they can. They care about profit.

This is precisely the reason that I voluntarily stepped down from my active leadership role in CEP. CEP was originally based on the need to protect networks and computers. This is exactly what DARPA funded and academics like David Luckham were funded to research. Unfortunately in the marketplace, the term CEP was hijacked by software firms selling to financial services and has become a distasteful abomination of a once promising industry.


  1. I agree 100%. High frequency trading in black trading pools only benefits the corporations participating in it. The rest of the world gets screwed.

  2. Hello,

    Lot’s of misinformation and knee jerk reactions are out there regarding HFT. Unfortunately, this is another one of them. Your posts are usually a bit inflammatory; that’s why I like reading your blog. But you usually provide at least a shred or two of evidence to support your thesis.

    I’d really like to see some examples of how HFT is damaging individual investors – I’m personally not aware of any and I’ve spent the last 20+ years in the field – even before CEP became a popular buzz word. If you’ve got some examples, I’d love to see them.

    We went though this same controversy back in 1987 and many people blamed that crash on portfolio insurance and automated trading then – but they were wrong then, as they are now in blaming the recent flash crash on HFT. When there are no buyers, prices plunge. When there are no buyers, HFT stops – HFT firms aren’t usually sending market orders blindly in a falling market. It’s just stupid to do so.

    The recent flash crash has to do more with market structure and too much global debt – NYSE halted (temporarily, I know they don’t like that term) for what’s referred to as a LRP, or liquidity replenishment point. The goal of an LRP is to put a symbol into auction mode when a bunch of orders come in on one side, resulting in an imbalance. When those symbols were halted, orders for those symbols went to other exchanges. Where there was no liquidity and those orders ended up crossing at what are referred to as stub quotes. Stub quotes are required by some crossing engines to open the symbol for trading. No one is putting real bids in at a penny. When those orders crossed at a penny, the index calculations picked up the crosses and the ‘market’ plunged when the index re-priced. If those sell orders that went off at a penny had been limit orders, this probably wouldn’t have happened. This may be an example of SOR – Stupid Order Routing.

    When NYSE re-opened those symbols, trading resumed and, magically, at the prices they were at before the LRP was activated. So that worked for NYSE. What didn’t work was other exchanges not honoring NYSE’s action. Knowing the rules is important; sending orders to off-primary exchanges can incur additional risk. We saw that during the flash crash.

    So, this would have happened with or without HFT; with or without CEP; and with or without the vendors that sell all the hardware and software to make HFT possible. In fact, it could have happened with even 1 large sell order in an affected symbol. And HFT doesn’t usually involved large orders.

    In fact, in this day of lessened or no return for those who use to act as intermediaries in the market (specialists or market makers), it could be argued that those engaging in HFT are actually helping the individual trader (or investor) by providing more liquidity.

    It’s easy to blame HFT for the machinations we see in the market today – it’s harder to blame your neighbor for taking on more debt than they can afford to buy more and more goods than they can afford. And, as we saw during the flash crash, consumerism and greed is no longer an American only obsession.

    Some day, you’ve got to pay.

  3. Hi Tim — I respect your views as always and understand where you’re coming from. My view on this is that HFT is not driving the market — fundamentals will still do that. So people still invest in companies driven by good economics. HFT makes the market more efficient. And yes it does accentuate movements.

    The point I was trying to make is that you can protect investors from some of the rapid movements that HFT can accentuate by having electronic safeguards — like real-time pre-trade risk and real-time market surveillance.

    Sure I want to sell people more software – but there’s a bit more to it. If I didn’t work for Progress I’d still feel the same way as I do.


  4. Hi Tim,

    pitty to read that you became so bitter about CEP. I remember a question you put on LinkedIn some years ago about use case for CEP outside Capital Market. At Progress I had the luxury of pursuing those cases. We had some contacts and indeed there was not much outside the capital market. Since then we made some progress (pun intended).

    We made CEP work at BGN, Boekhandels Groep Nederland in the Netherlands where it is making item based identification possible through RFID markers on every book. It improves customer satisfaction (they can tell exactly where which book is in the shop) and it reduces the stealing of books. We made CEP work at Royal Dirkzwager, who is using it to give better and detailed information about ship movements, help optimize ship operations, reduces risks of collisions and reduces fuel consumptions. H3G an Italian operation manages revenu assurance making sure that every phone call is handled correctly. A bank in Europe is using it now for Debit and Credit card fraud detection reducing response time to things like skimming from 1 hour to inflight transaction. Match2Blue is using it for improving the functioning of their Social Networking software.

    So blaming one industry for misusing it and then condeming the technology seems to me that you are trying to reason like a quaker. Denying the advancements made and trying to get back to the life how it used to be,

    Next to that, I am working for four years now in the CEP space. I have free access to all CEP licenses in the company and software made. I am able to run all kind of trading scenario’s. If it was all that simple to make some money with CEP in the cap market then by now I should be a millionair right? I wished it was all that simple… If I wanted I could link up some of the realtime streams available and try to make some money….but I dont ….why? Because I miss one essential ingredient…understanding.
    CEP is a lot but it is not artificial intelligence. It is triggering a response to a pattern set by a human. People tend to forget that when they start talking about something that looks from the outside as magic.

    In the end all CEP does is repeating what the trader would had done, but faster…nothing else. I can’t make money in the financial market with all technology in my laptop because I dont know where to look for. So in the end and that is also what I read in the comment of Collin it are the humans behind the system to blame and with or without the technology they would find a way.

    Hope you step back in your role as CEP advocate…I really like your posts.


  5. Hi Bart,

    Thanks for your post. I would like to point out you don’t need a “CEP engine” to do any of the things you have spoken about. The technology to do what you mention existed long before CEP became a marketing term. CEP does not really define any clear technical solution.

    My earlier work in CEP was based on seeing a potential for advancement of the state-of-the-art, a movement forwards, not backwards. There has been no advance of the state-of-the-art based on these “simple event processing” IDEs, in my view.

    In your post, when you call me a Quaker, you seem to be confusing “processing complex events” with the marketing hype of CEP vendors.

    There many, many people doing great things in event processing, and most of the technological advances are happening outside of the so called commercial CEP space. In fact, there are few “self described CEP companies” that have moved beyond simple query engines with a design-time / run-time GUI wrapper.

    Personally, I like the event processing that is going on at CERN’s LHC, where complex events are detected, but mostly not at run-time, since the events are so (truly and very) complex.

    There has been little progress in other areas, and the same software logic that was available 10 years ago, is easily used today for complex event processing. Of course, there has been cloud computing, distributed services, and more, but these advances are mostly unrelated to commercial CEP software.

    So, I don’t think I am bitter about “complex event processing”. I am unhappy that “complex event processing” and the term CEP was hijacked by a bunch of marketing people who have little actual experience in actually processing / detecting complex events, which if course is a different (but similar) discussion than the misuse of the term in financial services and algo trading.

    Yours, Tim

  6. From first hand experience building pre-trade compliance system and working with customers, many firms buy compliance software and then don’t run it. That’s no lie either. I was shocked to find out that was the norm and not the exception. The reality of pre-trade compliance is far from the rosy pictures technologists like to paint. Saying “pre-trade” compliance is a viable solution to moderating HFT is a flat out lie in my mind. A lot of business in the financial sector only buy pre-trade compliance because the government requires it, but they don’t actually like it or want it. Once you get down and dirty, you’ll see that many don’t run pre-trade compliance in favor of paying fines. This is the dirty little secret about pre-trade compliance.

    Even in the cases were a firm runs compliance, it’s generally on a nightly job, or only simple restriction rules like “a sell cannot exceed 500 million dollars.” Ask anyone with 10 yrs of experience implementing pre-trade compliance and you’ll see the reality is far from rosy.

    Whether HFT contributed to flash crash isn’t the main issue. The main issue is having a level playing field. If only hedge funds can afford HFT, then it’s not a level playing field. It should either be outlawed or available to everyone. Clearly black trading pools aren’t available to everyone!

  7. Hi Peter,

    Here is another manner of speaking what you just said… reworded by me:

    HFT is like information system hacking. HFT hackers basically use regulatory loopholes to “hack” trading systems by getting information before outsiders and taking action before the outsiders are aware of what has happened. It is basically a not-yet-illegal form of white collar crime against investors-at-large.

    For anyone to say that these not-yet-technically-illegal white collar criminals are going to install another system to monitor their hacking is nonsense. If they were going to be compliant, fair and ethical, they would not be hacking the system with HFT in the first place.

    I really get bored with the overused “foxes guarding the hen house” metaphor, but common sense tells us that if you go to foxes who are devising ways to “acquire” more eggs from the hen house; you then don’t say “hey foxes, install this system so you will get less eggs”.

    The foxes are looking for loopholes to get more eggs. If a fox installs a pre-steal-the-egg defensive system, then the foxes are only doing it to fool the hen house police.

    “Hey, we are not stealing eggs, we got an anti-egg-stealing system in place… !!”

    … as the foxes find another loophole to exploit. It is simply white collar crime which takes advantage of loopholes to defraud the markets.

    This should be obvious to anyone, even if they have never worked on trading systems.

    Yours, Tim

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