60 Minutes lead story on Michael Lewis - Flash Boys

[writser]

@Jschembs: regarding point 3: I think mom & pop are actually getting screwed by your mutual fund: 1) The one or two pennies the fund hypothetically loses when buying MSFT are nothing compared to the annual management fee and 2) If these pennies are actually starting to get significant the fund should trade less & invest instead.

 

@Otsog: the whole point of an exchange is that your order information is visible. The aggegrate of all those orders forms a market. There have always been people who react to order information faster than others (steamboat vs. sailboat, telegraph vs. pigeon, phone vs. computer). These people make money and that is perfectly legal, as long as the order information is public. The problem with all HFT media attention is that it insinuates that HFT firms use private order information. That's not true, they're just faster. The scaremongering about 'flash orders' is completely irrelevant, it is a specific order type for a select number of exchanges that you have to choose to use. Somehow a competitive edge based on speed has been perfectly fine for a centuries but if HFT firms are doing it it is 'frontrunning'. But even Lewis had to admit that what HFT firms are doing is completely legal. I agree with critics that there probably is a better market model and that the HFT speedrace is not very beneficial to society but actually the current market model works much better for most investors than 50 years ago due to:

 

1) More transparency. Back in the days a guy on the floor could be friends with a broker and he would give you a headsup if a big order was coming. And if a smart kid with a pocket calculator was giving better prices you'd kick hiss ass outside the building after trading hours. Or you spat in his ear on the trading floor. Or you made a deal for $3.33, wrote a ticket for $8.88 and hoped backoffice wouldn't spot the difference. Now everything is automatized, logged, retraceable and happens according to rules designed by the exchange. Less chances for fraud.

 

2) More liquidity. Computers don't panic, can calculate faster and don't need toilet breaks. They're simply much better at providing liquidity than humans and that's why they have surpassed them. In the middle of another 2008-style crisis I'd prefer to deal with an unemotial computer rather than a coked-out idiot on a trading floor. The former will always give better prices than the floor trader. That's why HFT firms account for so much of the traded volume: they give the sharpest prices (surprisingly!).

 

Anyway, I'm done with this topic. It's painful to see all these people blaming technology that has been hugely beneficial to them in the past decades and want to get in the time machine back to the good old times when you were ripped off ten times harder and didn't even notice.

[writser]

Private thieves are a drop in the bucket compared to the theft on a colossal scale that taxation represents, but I don't think it is clear that HFT is theft.  I know that when I place a limit order and it is executed at the price I was comfortable with, I don't really care if someone made a penny per share or less on the transaction.  I got what I wanted.

 

What if it was an illiquid stock and your order would only be partially filled because some HF trader snaps up the shares you intended to buy? Then you'd either pay the higher price or wait. To larger institutions nearly every stock is illiquid within a certain time frame. To them, HFT this feels like a transaction tax. There are good reasons why "traditional" front running is prohibited.

 

Orders are atomic operations. A HFT firm cannot snap up shares halfway your order. What they can do is snap up shares after your order is partially filled. Everybody can do that. Everybody could do that 200 years ago. To counter that you can use limit orders, 'click through the book'  to fill your order completely, trade smaller chunks or whatever. Exchanges have always worked like that.

[ni-co]

Private thieves are a drop in the bucket compared to the theft on a colossal scale that taxation represents, but I don't think it is clear that HFT is theft.  I know that when I place a limit order and it is executed at the price I was comfortable with, I don't really care if someone made a penny per share or less on the transaction.  I got what I wanted.

 

What if it was an illiquid stock and your order would only be partially filled because some HF trader snaps up the shares you intended to buy? Then you'd either pay the higher price or wait. To larger institutions nearly every stock is illiquid within a certain time frame. To them, HFT this feels like a transaction tax. There are good reasons why "traditional" front running is prohibited.

 

Orders are atomic operations. A HFT firm cannot snap up shares halfway your order. What they can do is snap up shares after your order is partially filled. Everybody can do that. Everybody could do that 200 years ago. To counter that you can use limit orders, 'click through the book'  to fill your order completely, trade smaller chunks or whatever. Exchanges have always worked like that.

 

No. You're missing my point here. They can snap up your shares before you get a single share. They know that your order will come and buy right before you. And not everybody can do that. That's why it pays for them to have the fastest wires to the exchanges. This adds up to quite a lot of money and is exactly the reason why your broker isn't allowed to do that.

[TwoCitiesCapital]

For those who are complaining against HFT for fear your orders won't be filled, I have bad news for you...that's the market. It's not illegal for someone to pay more than you to buy or receive less than you to sell resulting in your unfilled order.

 

The problem with HFT, as I see it, is the following:

 

1) Data firms, like Reuters, have previously did subscriptions to HFT firms to receive releases seconds beefier the public allowing them to immediately trade upon market moving information prior to its public release and

2) many of these companies are just glorified momentum traders that provide a false sense of market depth/liquidity that disappears in bad times. If you think stock A trades so many shares a day and is this large and liquid enough to build a large position in, you may be surprised and negatively affected when 60% of that volume disappears and volatility spikes during a bear market.

3) I'm pretty sure the banks have found even more lucrative ways to disadvantage clients and each other that are beyond my understanding. There's no other way they'd be paying the fees they're willing to pay for access to these HFT lines

[rkbabang]

Private thieves are a drop in the bucket compared to the theft on a colossal scale that taxation represents, but I don't think it is clear that HFT is theft.  I know that when I place a limit order and it is executed at the price I was comfortable with, I don't really care if someone made a penny per share or less on the transaction.  I got what I wanted.

 

What if it was an illiquid stock and your order would only be partially filled because some HF trader snaps up the shares you intended to buy? Then you'd either pay the higher price or wait. To larger institutions nearly every stock is illiquid within a certain time frame. To them, HFT this feels like a transaction tax. There are good reasons why "traditional" front running is prohibited.

 

Orders are atomic operations. A HFT firm cannot snap up shares halfway your order. What they can do is snap up shares after your order is partially filled. Everybody can do that. Everybody could do that 200 years ago. To counter that you can use limit orders, 'click through the book'  to fill your order completely, trade smaller chunks or whatever. Exchanges have always worked like that.

 

Exactly.  If I have a computer program to scan "item wanted" ads as well as "item for sale" ads on Craigslist and it finds someone selling an item for $10 and someone looking for the same item willing to pay $15.  If my program automatically emails them both offering to buy/sell before they find out about each other, I have done nothing illegal.  Everyone got what they wanted and I made a profit.

 

[Ross812]

How is this any different than 30-40 years ago when the majority of investors would make a trade based off of yesterday's newspaper quote. The investor would see a price - 34 1/4 and call their broker in the morning to by 1000 shares at 34 1/4. Unless you were at the exchange you had no way of knowing if shares were changing hands at 33 3/4; your order was filled at 34 1/4. The broker could pocket the $500 and you were none the wiser.

 

I am in the camp that if success comes down to execution to the nearest penny and having a news feed plugged directly into the horses mouth, you are doing something wrong. I have put in many limit orders in based off of IB 15 minute delayed quotes or yahoo. Seven years ago I wouldn't make a trade unless I had 2nd tier quotes and checked the macd.

[writser]

No. You're missing my point here. They can snap up your shares before you get a single share. They know that your order will come and buy right before you. And not everybody can do that. That's why it pays for them to have the fastest wires to the exchanges. This adds up to quite a lot of money and is exactly the reason why your broker isn't allowed to do that.

 

And you arrived at that conclusion based on what? This is the popular fear mongering story but is simply not true - if it was HFT firms would be violating the law and even Lewis conceded that they were not. They simply see faster that an order 'has arrived' in the order book. What you assume (the HFT firms can peek at your orders and quickly buy shares before you can) is blatantly incorrect and ignorant but people have repeated it so often that it became a prime argument against automated trading.

[ni-co]

No. You're missing my point here. They can snap up your shares before you get a single share. They know that your order will come and buy right before you. And not everybody can do that. That's why it pays for them to have the fastest wires to the exchanges. This adds up to quite a lot of money and is exactly the reason why your broker isn't allowed to do that.

 

And you arrived at that conclusion based on what? This is the popular fear mongering story but is simply not true - if it was HFT firms would be violating the law and even Lewis conceded that they were not. They simply see faster that an order 'has arrived' in the order book. What you assume (the HFT firms can peek at your orders and quickly buy shares before you can) is blatantly incorrect and ignorant but people have repeated it so often that it became a prime argument against automated trading.

 

Have you even watched this 60 Minutes video this thread is about?

 

http://www.cbsnews.com/news/michael-lewis-explains-his-new-book-flash-boys/

[SharperDingaan]

It is legalized front-running, it exists only because of methodology differences, & it is very simple for an exchange to shut down. Simply use the computer to track & break down every trade, irrespective of size, into the base round-lot; & have all the round-lots hit the electronic floor simultaneously. My 2500 share transaction trades as 25, 100 share round-lots, & I pay $X per successful fill. 25 x $X is either less than, or equal to what I pay today, or I go to somebody else.

 

Joe Sixpack is, in fact, getting screwed; through the shares his PP or mutual fund owns on his behalf. But unlike Joe, those FIs have a fiduciary duty to Joe to oppose the practice, failing which they could be sued. The end result is that the exchange either stops the practice or they take their deal-flow elsewhere, subject to regulatory approval, strangling the exchange.

 

Regulatory approval because as compensation, most FIs would short the exchange ahead of their demands; before making them public. Capital markets solution, to a capital markets problem, but it has to be allowed to occur.

 

SD

 

 

 

[writser]

Yes. To be fair I have also worked at a HFT firm for a couple of years (scapegoat!). I quit my job a while ago but I might be biased. Mainly it pisses me off how people that are mostly clueless about financial markets have such a strong opinion about something they know nothing about. At least I know a little bit about the subject, as does Kiddynamite (and he is far better at explaining things, I encourage everybody to read his articles on HFT).

 

If you look at the 60 minutes show it's featuring:

 

- a guy that promotes a book about how HFT is bad.

- a guy that designed a new exchange with as main selling point: no high frequency trading.

- an investor in said exchange.

 

and is aired on a commercial channel; a story about how computers steal our money is far more attractive for advertisers than a story about 'how things got better on the stock market the last decades'. Now the show raises a couple of valid concerns but also grossly overstates the issue and gives no opposing view. If you watch this for an hour and think you have a fair and balanced view of how electronic markets work and how HFT is destroying our capital markets: think again.

[Otsog]

Yes, technology has made things a lot better.  Friction costs have gone down.  Nobody is advocating for a return to 'the good old days'. 

 

But, we can have the lower friction costs and squash out this useless leeching entirely, what is the issue?

 

 

[ni-co]

Yes. To be fair I have also worked at a HFT firm for a couple of years (scapegoat!). I quit my job a while ago but I might still be biased. But mainly it pisses me off how people that are mostly clueless about financial markets have such a strong opinion about something they know nothing about. At least I know a little bit about the subject, as does Kiddynamite (and he is far better at explaining things, I encourage everybody to read his articles on HFT).

 

If you look at the 60 minutes show it's featuring:

 

- a guy that wrote a book about how HFT is bad

- a guy that designed a new exchange with as main selling point: no high frequency trading.

- an investor in said exchange

 

and is aired on a commercial channel; a story about how computers steal our money is far more attractive for advertisers than a story about 'how things got better on the stock market the last decades'. If you watch this for an hour and think you have a fair and balanced view of how electronic markets work: think again.

 

Fair enough, a few years ago it even might not have worked this way. I'm fully aware of what I'm watching. However, while being a great self promoter Michael Lewis is also a very sharp guy who does tons of research before he writes a book. I read several of his books and while he certainly takes some creative liberties the gists of his stories have been very reasonable so far. Secondly, it's not only Michael Lewis who says that HFT can be a form of legalized front running but also people who know the markets much better than me, e.g. Charlie Munger (http://blogs.barrons.com/stockstowatchtoday/2013/05/03/charlie-munger-hft-is-legalized-front-running/) and other investors. Thirdly, at least in cases where larger orders are split up between several exchanges the way they explain it to work makes very much sense to me.

 

I'm not advocating to return to "the good old days" but to me this seems to be a fairly new but solvable problem.

[APG12]

Yes, technology has made things a lot better.  Friction costs have gone down.  Nobody is advocating for a return to 'the good old days'. 

 

But, we can have the lower friction costs and squash out this useless leeching entirely, what is the issue?

 

I think the issue is one of rights. Is anyone being defrauded? I haven't seen anyone discuss this but it's more than just a tangential question, in my opinion.

[rkbabang]

Yes, technology has made things a lot better.  Friction costs have gone down.  Nobody is advocating for a return to 'the good old days'. 

 

But, we can have the lower friction costs and squash out this useless leeching entirely, what is the issue?

 

I think the issue is one of rights. Is anyone being defrauded? I haven't seen anyone discuss this but it's more than just a tangential question, in my opinion.

 

I think the issue is that someone is using a fast computer to make money and people don't like that.  Therefore it must be stopped. The thinking goes "If stopping it is possible and it doesn't hurt me then why not ban it?"

 

 

[writser]

@Otsog, ni-co: I agree with you both that the situation could be better but actually we're doing quite fine. Also (warning: controversial statement) HFT firms do provide a service: liquidity. Most HFT firms made a shitload of money in 2008. Not because they were evil frontrunners but because other entitites were forced sellers and HFT firms & value investors were the only liquidity providers. Contrary to popular believe these firms absorb volatility and do not exacerbate it.

 

Finally: if you think about it more deeply; is HFT the problem or is it the symptom? If everybody would invest like Berkowitz and Buffett what would happen to HFT trading? If you want to help retail investors that's the real problem you have to tackle.

[ni-co]

@Otsog, ni-co: I agree with you both that the situation could be better but actually we're doing quite fine. Also (warning: controversial statement) HFT firms do provide a service: liquidity. Most HFT firms made a shitload of money in 2008. Not because they were evil frontrunners but because other entitites were forced sellers and HFT firms & value investors were the only liquidity providers. Contrary to popular believe these firms absorb volatility and do not exacerbate it.

 

I don't doubt that. I didn't want to say that HFT is "evil". What bothers me is not computerized trading or having faster access to new information, what bothers me is that the very fact that I am placing an order (or rather a larger institutional investor) is the "news" that some of these HF traders can trade on even before I get my order filled.

 

Finally: if you think about it more deeply; is HFT the problem or is it the symptom? If everybody would invest like Berkowitz and Buffett what would happen to HFT trading? If you want to help retail investors that's the real problem you have to tackle.

 

I understand what you mean and to me personally it doesn't matter that much because I'm trying to invest for the longer term like Berkowitz and Buffett. But if it's true that orders of larger institutional investors can be legally front-run (be it with faster connections between exchanges or with algorithms or a combination of both), Berkowitz and Buffett are paying the bills of these traders – not of every high frequency trader, but of those using this strategy. It might not matter to Buffett or Berkowitz in the grand scale of things but that doesn't make it right.

[rkbabang]

@Otsog, ni-co: I agree with you both that the situation could be better but actually we're doing quite fine. Also (warning: controversial statement) HFT firms do provide a service: liquidity. Most HFT firms made a shitload of money in 2008. Not because they were evil frontrunners but because other entitites were forced sellers and HFT firms & value investors were the only liquidity providers. Contrary to popular believe these firms absorb volatility and do not exacerbate it.

 

I don't doubt that. I didn't want to say that HFT is "evil". What bothers me is not computerized trading or having faster access to new information, what bothers me is that the very fact that I am placing an order (or rather a larger institutional investor) is the "news" that some of these HF traders can trade on even before I get my order filled.

 

But do these HF traders have access to anything that you couldn't have access to as well if you were to make the same investment they have in equipment and algorithm development?  In other words, is this really insider dealing or front running, or is this all just envy of people who have made massive investments in equipment and software development and are profiting from those investments?

 

[Otsog]

Yes, technology has made things a lot better.  Friction costs have gone down.  Nobody is advocating for a return to 'the good old days'. 

 

But, we can have the lower friction costs and squash out this useless leeching entirely, what is the issue?

 

I think the issue is one of rights. Is anyone being defrauded? I haven't seen anyone discuss this but it's more than just a tangential question, in my opinion.

 

I don't think it's fraud from a legal perspective.  I said earlier it was duplicitous which is essentially the same thing without the legal connotation. 

 

If I place a buy order at the exact ask I believe I deserve (not a legal right) to have that order executed unless someone beats me to it.  If someone beats me to it because they placed it before me, they were a computer or they were closer to the exchange that is perfectly fine.  If they beat me to it because they saw my order on the NYSE and then beat me to the Nasdaq I would absolutely feel that I had been wronged. 

 

@Otsog, ni-co: I agree with you both that the situation could be better but actually we're doing quite fine. Also (warning: controversial statement) HFT firms do provide a service: liquidity. Most HFT firms made a shitload of money in 2008. Not because they were evil frontrunners but because other entitites were forced sellers and HFT firms & value investors were the only liquidity providers. Contrary to popular believe these firms absorb volatility and do not exacerbate it.

 

Finally: if you think about it more deeply; is HFT the problem or is it the symptom? If everybody would invest like Berkowitz and Buffett what would happen to HFT trading? If you want to help retail investors that's the real problem you have to tackle.

 

I love the fact that markets have been moving more electronic.  The chaos of the human trading floors is entertaining for movies, but it is so damn antiquated. 

 

I should have (and 60 minutes should have) done a better job of differentiating HFT practices and acknowledging the positive aspects.

 

But, I think this is still a major issue.  Based on the insidious Wall Street culture and our inability to ever know the pervasiveness of this market manipulation it is a detriment to the integrity of capital markets.  The government could stamp out the skimming immediately and effectively without causing any harm to the rest of the HFT practices.

 

 

[randomep]

IMH, this is a lot to do about almost nothing.  Compared to the extent retail investors are getting screwed by the IRS and their state taxing agencies whenever they make a profit this isn't even in the same ballpark. ballpark? Not even on the same planet.

 

If you feel that way then you can make that argument about any situation.  Bernie Madoff, Enron etc.

 

I think the original poster is right. Though front running is making tons for a select few they are making a tiny bit off the masses. The victms are probably a huge active mutual fund say. Well most active mutual funds are useless and they charge you say 1.5%. Say your gains are hampered by 0.1%, it is still an order of magnitude less than your fees for useless management.

 

Madoff ruined lives and caused people to commit suicide. Enron did the same.

 

I think we should put things in perspective. I think a single person like Jim Cramer does as much aggregate financial damage to personal wealth as one of those front runners.....

 

 

[tiddman]

An analogy would be that you go to make an infrequent, significant purchase such as a lawnmower, and instead of costing $200 it costs $202.  This 1% difference doesn't really mean anything to you and so you could say you don't care, after all if you had bought the mower a week earlier or later or a different model or brand you might have paid $2 more or more anyway.

 

But someone is out there collecting 1% of the price of every lawnmower sold in the country and is becoming very wealthy, they claim that they are making it easier to buy lawnmowers but really they're just skimming some money off of every purchase.  So while this doesn't impact you economically it isn't fair that someone earns a lot of money for doing nothing of any value.  Whether or not this breach of "fairness" bothers you might depend on your perspective.

 

"Front running" is illegal for brokers and advisors, but the kind of front running done by the high-frequency traders is not technically illegal but is certainly the same type of offense and arguably should be just as illegal.

[valueorama]

just an FYI, the new exchange is owned by

=============

Who owns IEX?

 

IEX is owned by a collection of mutual funds and hedge funds including Greenlight Capital, Capital Group, Brandes Investment Partners, Senator Investment Group, Scoggin Capital Management, Belfer Management, Pershing Square, and Third Point Partners, as well as family offices and individual investors, including IEX employees.

 

=============

 

Looks like some people here look upto some of these folks who have invested. I want to know who is behind the "Senator Investment Group" ?

 

Interesting that no Investment bank is in it. To those who say there is no issue with current system, think again.

 

Ofcourse, Lewis is using hyperbole to promote his book.

[Otsog]

I think the original poster is right. Though front running is making tons for a select few they are making a tiny bit off the masses. The victms are probably a huge active mutual fund say. Well most active mutual funds are useless and they charge you say 1.5%. Say your gains are hampered by 0.1%, it is still an order of magnitude less than your fees for useless management.

 

Madoff ruined lives and caused people to commit suicide. Enron did the same.

 

I think we should put things in perspective. I think a single person like Jim Cramer does as much aggregate financial damage to personal wealth as one of those front runners.....

 

I don't understand the lethargy to right a wrong because someone else is doing something worse.  Especially when this one is a one-foot hurdle. 

 

Educating the public on the con that is mutual fund fees is a very high hurdle .  It is actually being addressed as well, ETF's are far more popular and growing.  Mutual fund fees have been dropping significantly.  This will continue to take a long time. 

 

Stamping out the skimming practices of HFT is an absurdly fast and cheap way to make the markets more efficient and fair.

[writser]

I don't see how this is a one feet hurdle. If you want markets to be speed-indifferent you have come up with a new market model, make everybody adapt it and rewrite all current trading software in every financial institution around the world, for starters.

[randomep]

An analogy would be that you go to make an infrequent, significant purchase such as a lawnmower, and instead of costing $200 it costs $202.  This 1% difference doesn't really mean anything to you and so you could say you don't care, after all if you had bought the mower a week earlier or later or a different model or brand you might have paid $2 more or more anyway.

 

But someone is out there collecting 1% of the price of every lawnmower sold in the country and is becoming very wealthy, they claim that they are making it easier to buy lawnmowers but really they're just skimming some money off of every purchase.  So while this doesn't impact you economically it isn't fair that someone earns a lot of money for doing nothing of any value.  Whether or not this breach of "fairness" bothers you might depend on your perspective.

 

"Front running" is illegal for brokers and advisors, but the kind of front running done by the high-frequency traders is not technically illegal but is certainly the same type of offense and arguably should be just as illegal.

 

 

We all understand the mechanics of being ripped off here. The issue is how much. In your example you are talking about a 1% fee. That is a shock.

 

The way I see it is this: I am a long term investor. Most reasonable investors have turnover of around 25-20% which means we trade every 5yrs. Your 1% which is huge, works out to a fee of 0.2% per year. Still very little compared to a mutual fund fee.

 

But the 1% is a huge stretch still. I look at my trades, a large cap security simple does usually move 1% in a day. Let along in a blick of an eye. I just bought ERUS (a several hundred million ETF), it quoted at 17.75 or some such, and I got it at that price on a market buy, give or take a few pennies. If you are talking about me being taxed 1% it means I / would have to pay 17.93, I mean I would notice if I am paying that much difference. So my point it is just a fraction of a percent, if at all. It is probably happening to big block orders..... so one more reason to avoid hedge funds, mutual funds, pension funds..... and 95% of us buy our own securities.....

 

 

[valueorama]

I don't see how this is a one feet hurdle. If you want markets to be speed-indifferent you have come up with a new market model, make everybody adapt it and rewrite all current trading software in every financial institution around the world, for starters.

 

It has nothing to do with software, it has everything to do with Physics(speed of light) and how long your information needs to travel before it hits the exchange. Not everybody can live near an exchange.