writser Posted March 31, 2014 Share Posted March 31, 2014 You think the problem is solved by banning co-locating? Anyway, I just wanted to highlight the opposing view but my ego compels to get back in the mudfight everybody is posting something new. Not very productive. :) I'll try and discuss stocks again. Link to comment Share on other sites More sharing options...
Otsog Posted March 31, 2014 Share Posted March 31, 2014 Have a fibre optic spool 30 nano seconds long that has to be run in the exchanges before an order is received. (Or whatever time is necessary). Link to comment Share on other sites More sharing options...
writser Posted March 31, 2014 Share Posted March 31, 2014 Have a fibre optic spool 30 nano seconds long that has to be run in the exchanges before an order is received. (Or whatever time is necessary). That already happens in some exchanges, for example NYSE (link) :). Doesn't really change the game, HFT firms will still be faster than you because they have specially designed hardware, proprietary trading software, faster switches, pay extra for exclusive data from Reuters and buy faster lines between Chicago / NY / Tokyo / Europe. Co-location is just one aspect, equalize that and firms will compete on other grounds. If you want to stop the speedrace the only way to do so is to change the market model. What you propose is not a solution, you're just giving everybody 30 nanoseconds delay. Doesn't change anything. Link to comment Share on other sites More sharing options...
Liberty Posted March 31, 2014 Share Posted March 31, 2014 Add a randomized delay of between 1 and 10 seconds to everybody's trades ;) Link to comment Share on other sites More sharing options...
writser Posted March 31, 2014 Share Posted March 31, 2014 Add a randomized delay of between 1 and 10 seconds to everybody's trades ;) Yes, something like that is a possible solution. There is a flipside though. Let's make your suggestion more extreme: suppose an order will be merged with the order book after a random delay of 1 to 2 days. Nobody would want to provide liquidity anymore. Why would you risk giving prices for 2 days during the collapse of Lehman? What would happen to your Berkshire orders if Buffett dies? Or even simpler, would you want orders in the market around quarterly figures? Non-farm payrolls? With such a market system liquidity would dry up and price discovery would be far more inefficient. And if you allow people to cancel their orders the whole speed game will start again, only this time it is about who can cancel their orders the fastest. Really, I think it's not a trivial problem. Link to comment Share on other sites More sharing options...
Otsog Posted March 31, 2014 Share Posted March 31, 2014 If the trade information is being obtained from the exchanges and all the exchanges have an appropriate delay then the skimming would be impossible. Link to comment Share on other sites More sharing options...
rkbabang Posted March 31, 2014 Share Posted March 31, 2014 Add a randomized delay of between 1 and 10 seconds to everybody's trades ;) To make things even more fair when you want to invest in stocks, you should place your trade and a random number generator determines which stock you get. It is no more fair that some people should profit from using public information more intelligently than others when determining which stocks to buy than it is that some people are able to evaluate information and execute trades more quickly than others. Some people have some weird expectation that life should be fair and everyone equal. This is the result of that type of thinking: http://www.tnellen.com/cybereng/harrison.html Link to comment Share on other sites More sharing options...
writser Posted March 31, 2014 Share Posted March 31, 2014 If the trade information is being obtained from the exchanges and all the exchanges have an appropriate delay then the skimming would be impossible. No. You don't solve anything. It's like saying Formula 1 would be fair if everybody starts 10 minutes later. You ignore inter-exchange arbitrage, hardware speed, software efficiency and important information from other sources (Reuters news, SEC-filings, currency feeds, interest rate decisions, etc.). Also you ignore my previous point: an exchange like NYSE already has equal-length cables for colocated servers. The playing field is completely level as long as you have the capital to compete. Link to comment Share on other sites More sharing options...
Otsog Posted March 31, 2014 Share Posted March 31, 2014 If by the time my order becomes visible it is already in the spool-queue at every other exchange how do I get front-runned? Link to comment Share on other sites More sharing options...
rkbabang Posted March 31, 2014 Share Posted March 31, 2014 If the trade information is being obtained from the exchanges and all the exchanges have an appropriate delay then the skimming would be impossible. No. You don't solve anything. It's like saying Formula 1 would be fair if everybody starts 10 minutes later. You ignore inter-exchange arbitrage, hardware speed, software efficiency and important information from other sources (Reuters news, SEC-filings, currency feeds, interest rate decisions, etc.). Also you ignore my previous point: an exchange like NYSE already has equal-length cables for colocated servers. The playing field is completely level as long as you have the capital to compete. Maybe everyone everywhere in the world should be required to use the same computer and the same software and some bureaucrat can be tasked with deciding when everyone can upgrade, but upgrading can only be done when everyone on Earth can afford to. #progress! Link to comment Share on other sites More sharing options...
Liberty Posted March 31, 2014 Share Posted March 31, 2014 First, my comment was meant mostly as a joke. I'm not convinced that HFT is a net bad compared to the system that we had before. I'm all for them keeping spreads low and providing liquidity, but there's a law of diminishing returns that is reached at some point and what might have been good at first could stop adding value past a certain point. Everything looks crazy if you push it to the logical limit. What if there was a police officer following everybody around all day and night? See, the idea of having a police force is crazy! Sure putting delays of days or having randomly selected stocks would be hugely problematic. But putting a small random delay (it could be between 0.1 and 1 seconds, whatever works) would probably kill a lot of strategies that aren't adding much value and keep a fair amount of market makers around. The stock market is a system created by humans, all the rules were created by us, so changing those rules to try to improve how capital markets work isn't some crime against nature. It all depends on what the end goal is; is it to built a really cool casino or to build a system that allows the fractional ownership of businesses and the allocation of capital to those businesses. If it's a casino we want, I'm sure we could do a lot better than what we have now. Link to comment Share on other sites More sharing options...
rkbabang Posted March 31, 2014 Share Posted March 31, 2014 First, my comment was meant mostly as a joke. I'm not convinced that HFT is a net bad compared to the system that we had before. I'm all for them keeping spreads low and providing liquidity, but there's a law of diminishing returns that is reached at some point and what might have been good at first could stop adding value past a certain point. Everything looks crazy if you push it to the logical limit. What if there was a police officer following everybody around all day and night? See, the idea of having a police force is crazy! Sure putting delays of days or having randomly selected stocks would be hugely problematic. But putting a small random delay (it could be between 0.1 and 1 seconds, whatever works) would probably kill a lot of strategies that aren't adding much value and keep a fair amount of market makers around. The stock market is a system created by humans, all the rules were created by us, so changing those rules to try to improve how capital markets work isn't some crime against nature. It all depends on what the end goal is; is it to built a really cool casino or to build a system that allows the fractional ownership of businesses and the allocation of capital to those businesses. If it's a casino we want, I'm sure we could do a lot better than what we have now. But what is the problem that is being solved? If there really is front running or some crime being committed I agree with you, but if it is just an arms race to have the fastest equipment, shortest fiber (closest real estate), and best algorithms, then what exactly is the problem? The threshold for taking action against someone who is making money shouldn't be "does it add value?", but "does it cause harm?" and "who is the victim?". The answer to both those questions is "no" and "no one". "Does it add value?" Maybe. Maybe not. Who really cares? What is the reason this bothers people so much? Re-read Harrison Bergeron at my link above, this whole thread reads like that story to me. Link to comment Share on other sites More sharing options...
writser Posted March 31, 2014 Share Posted March 31, 2014 @Liberty: you propose an interesting solution. I've thought about that as well but I'm not sure whether a small delay would help. HFT firms would on average still be faster, right? Your suggestion would change the game, I don't know in what ways exactly, but over billions of trades faster systems will probably still have the same relative edge. Probably you have to add some stochastic models to your software. Might actually make it more interesting :). If by the time my order becomes visible it is already in the spool-queue at every other exchange how do I get front-runned? The assumption being that you currently get front-runned every single time. Please explain to me where that happens exactly in the process if you enter an order on NYSE ARCA. This is the exchange rulebook: link, sections 61 and 70-74 are relevant. I'm being a smartass now but your assumption is just incorrect, probably based on a misunderstanding of flash orders, a practice that has been discontinued by most exchanges a long time ago (link) exactly because of the reasons mentioned by Lewis c.s. Link to comment Share on other sites More sharing options...
Liberty Posted March 31, 2014 Share Posted March 31, 2014 But what is the problem that is being solved? If there really is front running or some crime being committed I agree with you, but if it is just an arms race to have the fastest equipment, shortest fiber (closest real estate), and best algorithms, than what exactly is the problem? The threshold for taking action against someone who is making money shouldn't be "does it add value?", but "does it cause harm?" and "who is the victim?". The answer to both those questions is "no" and "no one". "Does it add value?" Maybe. Maybe not. Who really cares. What is the reason this bothers people so much? Re-read Harrison Bergeron at my link above, this whole thread reads like that story to me. That's why I said I'm not convinced that HFT does net harm. If they only make money that past less-efficient market makers would've made otherwise, that's fine with me. I don't care about those victims because they are just victims of a better system, and that's progress. I'm no HFT expert, but if there are HFT strategies that aren't in that category and that make a lot of money in a zero sum way without providing benefits to anyone (front running, whatever), I don't think there's anything wrong with changing things to block them, just like insider trading is banned. Otherwise they just add friction to the system, acting as a kind of fee on the markets (not that it affects me much personally, but it's still a problem if it's the case). But if all they do is try to react to news faster than others, that's fine with me too... Link to comment Share on other sites More sharing options...
Otsog Posted March 31, 2014 Share Posted March 31, 2014 If by the time my order becomes visible it is already in the spool-queue at every other exchange how do I get front-runned? The assumption being that you currently get front-runned every single time. Please explain to me where that happens exactly in the process if you enter an order on NYSE ARCA. This is the exchange rulebook: link, sections 61 and 70-74 are relevant. I'm being a smartass now but your assumption is just incorrect, probably based on a misunderstanding of flash orders, a practice that has been discontinued by most exchanges a long time ago (link) exactly because of the reasons mentioned by Lewis c.s. No, the assumption is that it happens at all. If it doesn't happen, it makes no difference. The 60 Minutes article and the NYtimes piece earlier linked explained pretty clearly how people were getting front-runned at the NYSE. Link to comment Share on other sites More sharing options...
Rabbitisrich Posted March 31, 2014 Share Posted March 31, 2014 No, the assumption is that it happens at all. If it doesn't happen, it makes no difference. The 60 Minutes article and the NYtimes piece earlier linked explained pretty clearly how people were getting front-runned at the NYSE. I didn't think that Lewis' arguments made a ton of sense. In the 60 minutes interview, one of his descriptions of front-running included a scenario where you place an order, an HFT sweeps the bid, then you buy at a higher price from the HFT. What? Isn't that another way of describing your actual bid being exposed? From an investor's point of view, the danger of front-running is that someone diminishes the value of your more-efficient-than-market thesis. If Michael Burry explains his need for bespoke CDS, and the institutions step ahead of him to purchase their own CDS, then the institutions just occupied his place in line. But if an HFT bids a fraction ahead of you, then flips the share to another market participant who bids a fraction ahead of them, then that is nothing more than matching the share to the highest bidder. There may be a front-running aspect to HFT, but so far Lewis seems to be conflating liquidity services with front-running (I haven't read the book.) Link to comment Share on other sites More sharing options...
randomep Posted March 31, 2014 Share Posted March 31, 2014 While we are on exchanges, I have a slightly off topic questions. The volume that we see quoted on the exchanges for a security... does that include all these ECN trades or is it just those that are traded on the exchange? I admit I only try to understand certain securities but not the mechanisms of trading..... Link to comment Share on other sites More sharing options...
Rabbitisrich Posted March 31, 2014 Share Posted March 31, 2014 This is the part that makes no sense: Steve Kroft: What do you mean front run? Michael Lewis: Means they're able to identify your desire to, to buy shares in Microsoft and buy 'em in front of you and sell 'em back to you at a higher price. It all happens in infinitesimally small periods of time. There's speed advantage that the faster traders have is milliseconds, some of it is fractions of milliseconds. But it''s enough for them to identify what you're gonna do and do it before you do it at your expense. Notice that the above argument has little to do with investing. Lewis is describing how the "investor" can no longer clip the marginal value of mismatches between what people would pay and what they actually pay. So, in the pre-HFT days, did the generous market makers of lore pass along such bid-ask spreads to the buyer or to the seller? Link to comment Share on other sites More sharing options...
Otsog Posted March 31, 2014 Share Posted March 31, 2014 He had to dumb it down because of the intended audience, but he isn't talking about that. He is saying they identify your order from the first exchange it gets to and then they beat you to all the other exchanges and place the exact order you were about to. Why did the market in any given stock dry up only when he was trying to trade in it? To make his point, he asked the developers to stand behind him and watch while he traded. “I’d say: ‘Watch closely. I am about to buy 100,000 shares of AMD. I am willing to pay $15 a share. There are currently 100,000 shares of AMD being offered at $15 a share — 10,000 on BATS, 35,000 on the New York Stock Exchange, 30,000 on Nasdaq and 25,000 on Direct Edge.’ You could see it all on the screens. We’d all sit there and stare at the screen, and I’d have my finger over the Enter button. I’d count out loud to five. . . . “ ‘One. . . . “ ‘Two. . . . See, nothing’s happened. “ ‘Three. . . . Offers are still there at 15. . . . “ ‘Four. . . . Still no movement. . . . “ ‘Five.’ Then I’d hit the Enter button, and — boom! — all hell would break loose. The offerings would all disappear, and the stock would pop higher.” At which point he turned to the developers behind him and said: “You see, I’m the event. I am the news.” To Katsuyama the maps explained, among other things, why the market on BATS had proved so accurate. The reason they were always able to buy or sell 100 percent of the shares listed on BATS was that BATS was always the first stock market to receive their orders. News of their buying and selling hadn’t had time to spread throughout the marketplace. Inside BATS, high-frequency-trading firms were waiting for news that they could use to trade on the other exchanges. BATS, unsurprisingly, had been created by high-frequency traders. Link to comment Share on other sites More sharing options...
morningstar Posted March 31, 2014 Share Posted March 31, 2014 He had to dumb it down because of the intended audience, but he isn't talking about that. He is saying they identify your order from the first exchange it gets to and then they beat you to all the other exchanges and place the exact order you were about to. The problem is this is a bad definition of front running. What we are talking about here is using widely available information, finding a market where that information is not currently reflected, and acting on that information. Because the information is widely available (not necessarily free, but also not particularly exclusive) basically anyone with some capital to put up can do this. The fault here, if any, would seem to lie with the BROKER (the one with duty of best execution), not the HFT. In Katsuyama's story, his firm has selected vendors so slow that in the time it takes his order to reach the NYSE (a market where he knows he wants to act), somebody else is completing a loop that involves another entire exchange and getting ahead of him. In Lewis's own piece he comes up with a solution to this that seems to basically solve his problem. The prior belief they seem to be using is that their order to buy $1.5 million of stock should somehow not be news - that is, that the market shouldn't respond and they should be able to fully execute at whatever pace they like. But unfortunately activity in a stock IS news... as soon as Katsuyama's activity is visible to the first player in the market, it will begin reacting. Link to comment Share on other sites More sharing options...
writser Posted April 1, 2014 Share Posted April 1, 2014 @Otsog: I agree that it looks unfair at first glance but: 1) Without the HFT traders the 'fake' liquidity wouldn't be there at all, i.e. the trader would just see empty orderbooks and would have to buy at a higher prices anyway to get an instant fill. 2) If you try to buy 100k shares this way you are an idiot. Split the order in chunks, TWAP, trade on dark pools, whatever. You pay HFT firms to provide you a service (liquidity). If you don't want that, just enter an iceberg order @ $14.99 and go to lunch. 3) If I understand it correctly, the crux of the problem is that the guy wants to trade on different stock exchanges simultaneously. Since when is that a right that we should take for granted? Answer: it has never been. Actually this trader is trying to game the market makers: they provide liquidity on every exchange and he is trying to profit from that by lifting all their offers at once. That's allowed but don't cry foul play if it doesn't work. Try calling Goldman, Morgan Stanley and Merril Lynch to price an exotic OTC derivative for $100m and buy from all three of them at the same time. Phone a couple of brokers for a bid in an obscure corporate bond and sell to them all three at once. I can assure you it is not appreciated - do it a couple of times and you're not trading with them anymore. But somehow this guy thinks it is his god-given right on electronic exchanges. 4) Most importantly: if this story is literally true the trader should sell 10k shares on BATS, drive the price lower and buy more on the other exchanges. Easy money :). Looks like just a retard pissing away money on the stock exchange and blaming the system. Pardon the language. Link to comment Share on other sites More sharing options...
Otsog Posted April 1, 2014 Share Posted April 1, 2014 Ya what a retard, expecting to be able to pay the publicly asked price for something ::) Link to comment Share on other sites More sharing options...
writser Posted April 1, 2014 Share Posted April 1, 2014 The example you brought up is 100% identical to a guy in 1910 reading stock quotes in the newspaper, placing a Standard Oil buy order in New York, sending a sailboat to Chicago to buy more and complaining that somebody else sold his Standard Oil stock in New York, sent a steamboat instead and bought back in Chicago before you could buy more. Somehow we never decided to ban steamboats. But replace the boats and newspapers with trading firms and computer screens and suddenly we call it 'legalized frontrunning'. It is a completely identical situation. Nothing changed. Instant communication is not possible. A NBBO will always suffer from some lag. People with more resources have an edge. Get over it. If you trade on a single exchange the market is completely, utterly fair. Trading on multiple venues is a privilege, not a right. Risk-free arbitrage between exchanges has never been possible, is certainly not something everybody is entitled to and if you can place 7 digit orders with a single mouseclick but you don't understand that then yes: you are a retard. Unless you're trying to market your new exchange. Link to comment Share on other sites More sharing options...
Otsog Posted April 1, 2014 Share Posted April 1, 2014 Unless you actually take into consideration the purpose of a public market. That is a God awful analogy. I'm looking forward to these bastards getting crushed. I think it is very stupid to allow a system to evolve where half the trading is a bunch of short-term people trying to get information one-millionth of a nano-second ahead of somebody else. It’s legalized front-running; I think it’s basically evil and it should never have been able to reach the size that it did…why should all of us pay a little group of people to engage in legalized front-running of our orders? Link to comment Share on other sites More sharing options...
Rabbitisrich Posted April 1, 2014 Share Posted April 1, 2014 Otsog, the quotes supplied in the Michael Lewis piece are even more confusing. They look at one side of a transaction, the trader who enters an order that doesn't get filled, and somehow end up at "front-running". What happened to the order? Is the HFT now taking your place as the investor? Or, more likely, is the HFT flipping the stock to an investor who is willing to pay more? In the latter case, that is just price discovery! What the people in the article are complaining about is the allocation of the fee for matching buyers and sellers. The bid ask spread is not a right. It is just the information provided given the existing order flow. Link to comment Share on other sites More sharing options...
Recommended Posts
Create an account or sign in to comment
You need to be a member in order to leave a comment
Create an account
Sign up for a new account in our community. It's easy!
Register a new accountSign in
Already have an account? Sign in here.
Sign In Now