Two weeks ago, without knowing the details of the most recent market-rigging and frontrunning scandal involving “alternative” market veteran ITG’s dark pool POSIT, which issued a vague 8-K it would settle with the SEC for “irregularities”, we explained what we thought had happened:
ITG had an in house prop trading group, or “pilot”, which operated for nearly two years, whose only signal was client order flow, which it would frontrun, and make millions in profits. In other words, once again precisely what we have claimed since 2009. But oh yes, not everyone is guilty of such manipulation. Only Liquidnet… and Pipeline… and ITG… and countless other ATS and HFT firms for whom clients are better known as either “easy money” or muppets.
And yes, we get the “trading experiment” narrative: calling it “criminal market manipulation and order frontrunning scheme” just does not sound like something the Modern Markets Initiative would spend millions of dollars to get Congressmen to agree on.
It turns out we were spot on, the only thing we missed was the name of this market manipulation exercise. Now, thanks to the SEC, we know: “Project Omega” (or as it was also correctly dubbed here the “criminal frontrunning scheme“) is how ITG dubbed its secretive prop-trading desk whose only purpose was to frontrun clients.
Here are the details for all you suckers who still read the HFT apologists and believe the bullshit that all these algos do is provide liquidity, when in reality all the really do is frontrun your orders, assuring them of 6 years of trading without a single day’s loss (or in the case of Virtu, one trading day loss). From the SEC:
Between approximately April 2010 and July 2011, ITG violated the federal securities laws and regulations in multiple ways as a result of its operation of an undisclosed proprietary trading desk known within ITG as “Project Omega” (“Project Omega” or “Omega”). During the period of April to December 2010, Project Omega accessed live feeds of ITG customer and POSIT subscriber order and execution information and traded algorithmically based on that information in POSIT and in other market centers. In connection with one of its trading strategies, Project Omega identified and traded with sell-side subscribers in POSIT and ensured that those subscribers’ orders were configured in POSIT to trade “aggressively,” or in a manner that benefitted Omega by enabling it to earn the full “bid-ask spread” when taking the other side of their orders.
Project Omega, which operated as part of AlterNet, traded a total of approximately 1.3 billion shares, including approximately 262 million shares with subscribers in POSIT. ITG’s proprietary trading gross revenues resulting from Project Omega totaled approximately $2,081,304.
A quick point here: since ITG was quick to settle at a cost of $20 million, one can be absolutely certain that the true damages to clients, aka Project Omega revenues, were orders of magnitude higher, however since it wasn’t the SEC’s intention to disclose just how criminal HFTs are in general but just to put a black eye on ITG’s dark pool (as Goldman flexes its muscles and prepares for world algo domination by taking down its competition one by one), and since it is difficult to capture all the “externalities” and dollar benefit from rigging, the SEC was happy to only point out the absolutely bare minimum of damages which were probably the explicit documented loss by those traders who brough this case to the SEC’s attention in the first place. Everyone else will have to wait in line for the class action lawsuits to begin when laying out their damages.