Do You Think the Market Is Rigged?

Eddie Braverman's picture
Rank: The Pro | 21,212

I just started reading Flash Boys: A Wall Street Revolt and I'm not the least bit surprised that I love it so far. Michael Lewis is out promoting the book, naturally, and he caused something of a shitstorm on CNBC yesterday by claiming that the market is rigged due in large part to high frequency trading. I've included a shortened version of the video below, but I wanted to get your take on the subject. I happen to agree that the market is rigged, but then I believe that it always has been and that's no reason to stay out of it. It seems I'm not the only one who feels that way, but again, I'm curious about what you think. Check out the video and let me know in the comments. I have a feeling this could be one of our more productive discussions.

Mod Note (Andy): Best of Eddie, this was originally posted on 4/2/14. To see all of our top content from the past, click here.

Mod Note (Andy): See more discussion on this topic here.

Comments (85)

Apr 2, 2014

I don't think the market is "rigged", however, I do believe that some banks have an advantage. (And that isn't a bad thing.) By design the market is a business like all the others and the best float to the top.

Pull back from Wall Street and compare it to the retail industry:

Wal-Mart is the biggest, baddest company in retail. Should the small retailer claim that the retail system is rigged simply because Wal-Mart receives (and by receives I mean is able to demand and receive) preferential discounts from vendors due to their size and distribution?

Since we are talking about HFT ask it this way: If Wal-Mart and a small retailer both pick up the phone and call a vendor...which call will be picked up first? Does that mean things are rigged? NO! It means that you have to go about your business in a different way than Wal-Mart.

HFT is ONE strategy. It is a great strategy, but that doesn't mean it is the right strategy for all. And it certainly doesn't mean that everyone needs to avoid the market.

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Best Response
Apr 2, 2014

I don't disagree with you. But if your intent is to get the broader population to understand the merits of a free market and to appreciate that HFTs aren't really a bunch of crooks, I don't think comparing them to Wal-Mart is the path to getting there.

I definitely agree with your argument though.

The reason this is causing such a stir is because the Wall Street as a Unscrupulous Crook archetype is such a popular one among the masses that are spoon fed by the media, who themselves are a key component of the market which they shit on for ratings.

The RBC guy is a complete joke. Yes, he's very impressive in his career but what really happened in his case is that he discovered something that no one else had yet noticed and is trying to get rich(ER) off of it (which strikes me as a very blatant analogy of a high frequency trader). His position in the 60 minutes segment was that "this just isn't right" and "these are pensions that are getting front run" etc. This guy himself would push for technological advantages to maximize his trading edge, when some finds a sharper ax then him its cheating. Its pretty tough to take a guy seriously when he tries to take such a moral high ground and altruistic stand and he's spent his life making millions of dollars as a trader... old habits die hard and what motivates him is money and winning.

In reality, if you can even the playing field by spending an incremental $10 million to lease space on the fastest fiber pipe, if you're at scale, then that's a no brainer. These institutions are spending billions of dollars a year on their IT infrastructure to support their market making activities, $10 million is a rounding error. If the argument is that this is taking advantage of the little guy, there is no little guy anymore. This isn't the 1940's, retail investing is dead. Anyone who is still there is a long-term investor to invests in a portfolio more out of habit or being old school or a dummy who doesn't really belong there and is going to get his ass kicked and leave anyway (because the market participants that do this for a living are much smarter than him).

This concept of taking advantage of the little guy is pure bullshit. The HFTs themselves are running institutional money. So if you're taking zero-sum alpha from Bridgewater and giving it to Renaissance (prob not the best example)... who fuckin cares. The Renn guys are rocket scientists and are eating your lunch because they're smarter than you.

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Apr 2, 2014

I used Wal-Mart specifically because they are the "HFT" whipping boys of the retail space. Your average 401k/IRA worker bee investor doesn't care about HFT, nor do most of them care about Wal-Mart. They want to make their contributions, buy their low price crap, and retire somewhere warm.

The narrative surrounding HFT and Wal-Mart are essentially the same: They are horrible players in the market that take advantage of the Mythical Little-Guy. When in reality each are playing within the rules of the market. I completely agree with you that the media pushes a populist narrative, especially when the subject matter is difficult.

Apr 2, 2014

Retail investors with a long time horizon can do absolutely fine. You just don't play against the HFTs. If you're a value guy with an average hold period of 5-20 years, the day to day vicissitudes of the market are meaningless. I'm not a fan of HFT, I suspect, although can't prove, that it increases volatility and that the liquidity associated with it will flee whenever you truly need it.

Apr 2, 2014

Rigged, no. Advantages to big players, without a doubt.

Apr 2, 2014

Just like the rest of the world.

Maybe someone should tell Michael Lewis how publishing is rigged because of distribution relationships at WW Norton and Simon and Schuster.

Apr 2, 2014

man this was an awesome argument. I was watching it live yesterday. That ceo from BATS looked like a total tool. He got owned so badly

Apr 2, 2014

We should try to get Michael Lewis to do an AMA. That would be amazing.

Buy fear, sell cheer

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Apr 2, 2014

In a slightly unrelated note, did anyone see that the FBI was starting a probe into HFT the same day Michael Lewis comes out with this book?

...

Apr 2, 2014

Is the market rigged? Yes/no it is rigged in the sense that some parties have a much higher chance of coming out ahead be it from research/technology/information or what ever. No, in the sense that even these advantages are no promise of a win. Like Eddie said it has always been rigged its just now that computers are scalping fractions of a penny as opposed to a pit trader scalping quarters.

Follow the shit your fellow monkeys say @shitWSOsays

Life is hard, it's even harder when you're stupid - John Wayne

Apr 2, 2014

Virtu delayed it's IPO till April 20th (I believe?). This book and associated press is causing quite the shit storm.

Apr 2, 2014

I could say a lot about the accuracy or at times the lack of accuracy in reporting
anyway Businessweek had a article that talks about what Michael Lewis gets wrong about HFT

http://www.businessweek.com/articles/2014-04-01/wh...

'The critical investment factor is determining the intrinsic value of a business and paying a fair or bargain price." W.B."
we venture the motto, Margin of Safety." Ben Graham

Apr 2, 2014

I find this article by Steven Sears at Barrons very funny and quite ironic. It looks like someone bougt puts on the nasdaq right before Michael Lewis' 60 Minutes interveiw about HFT. Think a HFT computer bought the puts???

http://online.barrons.com/article/SB50001424053111...

Buy fear, sell cheer

Apr 2, 2014

As far as I can tell, IEX is just another dark pool. More market fragmentation = more problems. The issues described in the book are caused more by the fact that there are over a dozen exchanges + Reg NMS, not HFT.

Apr 2, 2014

The BATS guy did a terrible job of hiding his butt hurt.

Apr 2, 2014

Why is there such a defensive hostile reaction to Michael Lewis around Wall Street and around the financial news channels where he is been on promotional tour.

as a skeptic that makes me always wanna look at the problem even closer, the push back he gotten was all over the place from the market have always been rigged so why point out the obvious, and this one was my favorite on Bloomberg "So you are going around defending guys like Einhorn" as if being David Einhorn is a negative thing.

'The critical investment factor is determining the intrinsic value of a business and paying a fair or bargain price." W.B."
we venture the motto, Margin of Safety." Ben Graham

Apr 2, 2014

If CNBC says "little guy" one more time, I'm gonna go fuckin bananas.

God forbid a HFT intercepts Sue Herera's 11 share buy order on GE.

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Apr 2, 2014

Can someone please point out the flaws in my thinking, I'm admittedly not smart enough...

People keep talking about 401K accounts, retirement funds, pension funds, etc. Many of these, as others have mentioned, are managed by HFT players or by their competitors. Being a zero-sum game, some will win what the others lose, in addition to the fact that the HFT system narrows bid-ask spreads significantly which ultimately leaves both sides better off than the (old school) game without that system in place. No?

If the players who do not participate in the high frequency trading are the ones acting butt hurt and publicly feeling for the people invested in the *losing* accounts, why are they making the decision to be the underdog? Rather than losing the money to the opposing "team," sack up and buy the equipment necessary to even the playing field. Why are you racing in the Indy 500 with a fucking Prius for Christ sake. No?

People keep talking about the retail investors. If we are talking about the guy with a few dribbles of piss on his pant leg, sipping coffee and "trading" on his intel core duo laptop at Starbucks on his lunch break, odds are he isn't playing with enough money for a few of his trades being front run to actually matter and cause him serious harm/losses. If he is trading a significant amount of money on his own, it is likely for entertainment, meaning he should not be trying to "win" while he is betting his money on that fucking Prius out on the track. The ESPN Ocho/Business Insider readers surely are not of much concern. No?

Help me, I'm confused...

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Apr 2, 2014

Yeah, I don't think you're missing anything.

If I open a hedge fund and run my trades through an E*Trade account, can I cry foul because RBC has a line directly into the exchange and can get their orders filled faster than mine?

This is an incredibly technologically driven business and you either invest in your systems or you get your ass kicked, end of story. The reason some of these fuckers are so sore is because (a) they're playing to the public rhetoric against wall st in order to enrich themselves / advance their own prominence and (b) because they got their asses kicked for a meaningful amount without even knowing what was happening to them, and they think they're so fucking smart that if someone else is bitch slapping them around it can only be through impropriety.

Apr 2, 2014

Thanks for the reply. So, I guess my takeaway would be this...

Forget the guy trading pennies and nickels at Starbucks. If every fund/manager that actually matters or is impacted by competing against HFT *had* a HFT system (basically, the technology) then this would be a non-issue. That being said, the only barrier to entry or relevant variable stopping these funds/managers from getting this technology is money, making the real issue at hand the fact that the market structure has changed and some players are no longer fit to be playing in the game.

It seems to me that this could be solved in time, as funds/managers with the capital to play will pay up and improve their technology, and the ones without it will exit the market. But what about the 401K's, retirement accounts, pension funds, etc? Like any other industry where your player leaves the game, they will have to forgo some switching costs and allocate their resources to one of the remaining players in the game.

At this point, all funds/managers that matter will now be playing by the same "rules" and the problem at hand is solved. Again, would love to hear other people's thoughts on this line of thinking...

Apr 2, 2014

I do not think that the term "rigged" is appropriate for this situation, but I understand using it is easier(lazier) than explaining the intricacies of market structure. I do believe that HFT needs to be reigned in and shining light on it for the public to view is the first step in this process.

Over the past half dozen years or so HFT has been in an arms race. The fastest traders with the best algorithms prevail. Now, I don't wish to get tied up in discussing the markets current state of a virtuous circle, but these program trades do very well in our current environment. When they do not do well is when the markets decline precipitously. The number of flash-crashes as a result of the disappearance of liquidity throws a wrench in the "liquidity provider" argument. They don't provide liquidity when it is needed most, only when it suits them.

The idea that they do no harm is also ludicrous. Under the current structure these companies basically print money(so long as their algorithms don't go haywire) and ever BSD is trying to get into the space or if already in create faster programs with multiple "levels." It is current providing most of the juice in the markets today and a huge amount of the volume. This should be concerning to most who are not following their own self interest. Ask yourself: Where does all this money come from? If you follow it all the way back then you know who is getting screwed.

A few ideas that I have heard and thought about, maybe not all but some could be used:

1. All orders must remain "up" for 1-3 seconds(debate the actual time, but anything over a second should suffice)
2. Penalty for large number of "ghost" orders( I don't have a specific number in mind as I do not have the metrics to calculate)
3. Initiate a very small transaction fee for order placement
4. Require margin for every order placed
5. ??Other thoughts Monkeys??

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Apr 2, 2014

I would argue that while I disagree with the broad headline that has been used, "The markets are rigged", I would also suggest that there has been a problem generated by certain activities of HFT. I certainly believe, however, that high frequency trading in aggregate is beneficial in the current marketplace mostly because of the apparent liquidity and spread-narrowing it offers. Anyone who is a proponent of complete HFT bans has a truly arcane view of the marketplace and a misunderstanding of the pace necessary to maintain an efficient market in the age of the computer. After all, any and all trading done today, even from an individual's E*TRADE account, would be considered high speed compared to the exchanges of the early 1990's and prior.

However, that is not to say that there does not appear to be the presence of predatory high-frequency trading tactics in the market. Based on Michael Lewis' and his proponents' opinions, high-frequency traders are able to capitalize on the ultra-fast execution of trades based on incoming traditional, institutional orders, essentially front-running these large orders to skim a small profit. While there was once a time when Wall Street was extorted and ruled by insider trading (see Joe Kennedy's and JP Morgan's Wall Street), it appears that the insider profit is based on the ability to take advantage of the execution of incoming orders.

Overall, I am not suggesting that high-frequency trading is purely "bad", and the headlines following this book have been somewhat overblown and certainly meant to continue this "corrupt" view of Wall Street by the public. While I have little to no knowledge of HFT algorithms, I can say that I am a proponent of the liquidity that they add to the marketplace, and such firms and traders certainly have the prerogative to utilize mathematical programming and statistical correlation to forecast short term pricing opportunities just as the greatest value investors in history have been able to use fundamental analysis to identify undervalued assets. However, this ability HFT appear to have developed to skim profit off of traditional orders, is at the least "unfair", which I will be the first to say is a very subjective term, and at worst could lead to the degradation of an efficient and free market. If a traditional investor wants to place a buy order for shares at $1.00, but due to HFT skimming will only be able to execute most of if not all of the order at $1.05, eventually the trader will wise up to know that he should place the order at $1.05 to fulfill the total shares of the original order. However, high frequency traders will once again begin to skim off of the order, and now the trader can only fill his order at $1.10, and so begins a vicious cycle of traditional traders trying to completely fill orders against predatory traders trying to skim profit off the top, and no longer to prices accurately reflect traditional market demands. Rather, they are hinged on the implied premium that must be paid due to this HFT activity.

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Apr 2, 2014

I admittedly don't know too much about HFT so I'll keep this brief. I just think that the whole "if you can't beat them, join them" argument kind of sucks. Point blank- something either adds value or it doesn't. I just don't see where value is added by front running someone's orders. How does that even add liquidity? If the HFT bought it ahead of you purely to sell it to you- it served zero purpose. That means someone was buying and someone was selling (the TRUE liquidity), if the HFT wasn't there what would have changed besides a lower execution price? All it did was add phony trading volume. I just don't buy the capitalistic/ "shut up and get a faster connection" card. If it doesn't add value, I see zero reason to let it ride. Making money to connect buyers and sellers is one thing, but making money by just forcibly inserting yourself between the two is another. Just my USD$.02.

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Apr 2, 2014

This form of rhetoric ("rigged") is nothing but incendiary moralizing. What could possibly be the meaning of "rigged" in this context? I invite anyone who agrees with the phrase "the markets are rigged" to offer a concrete definition of the word "rigged".

What's ironic about all of this ruckus is the constant complaints about "advantages to big players", which, of course, is precisely what HFT market makers aim to unwind! This conflagration sourced its spark from argumentative institutional investors who are now upset that when they begin laying out orders the market moves more rapidly than it had before, costing them pennies of cost-basis that they would otherwise have been able to skim off of slower-to-react human traders. Because HFT market makers can rapidly integrate information, their margins are more consistent, which in turn allows them to charge narrower spreads on order flow than their human broker-dealer counterparts.

Isn't it interesting that in this putatively "rigged" market, the spreads charged by market makers have been consistently declining? Where are all of the "outsized profits" from such "rigging"? If the tragedy alluded to herein is merely that HFT dealers are building market share at the expense of traditional dealers, color me uninspired, especially when that transition entails cheaper transaction costs. And to the extent there are "outsized profits", why don't the harmed institutional investors merely purchase the equity of HFT market makers and have their "unfair costs" returned back to them through dividends?

There are no easy answers gleaned from such silly pandering. If you outlaw co-located HFT machines, they will simply move across the street. If you move to batch auctions every second, HFT firms will bleed market share back to traditional broker-dealers, institutional investors will grab back their reduced cost-basis (at the expense of other traders), and spreads will widen to compensate for the increased opacity in the markets.

HFT dealers are eating away at spreads and doling out the benefits to the broader market; that is, it represents progress. This politicizing nonsense is merely an example of one man (or group) claiming the power to decide whose profits are to be arbitrarily protected.

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Apr 6, 2014

Once again, agreed 100%. Well put.

"When you stop striving for perfection, you might as well be dead."

Apr 2, 2014

On another note, the biggest realization I've had through all this controversy is that the genius of Michael Lewis is not is writing but rather his uncanny ability to zero in the optimal subject matter, frame of perspective and marketing campaign for very lucrative book.

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Apr 2, 2014

I think even Lewis himself would agree that the word "rigged" was used somewhat sensationalistically for publicity (and it obviously worked). In reality, the only "person" truly rigging the market is the fed (next book idea?).

Apr 2, 2014

These algos aren't only preying on equities. They're all over the FX market (due to the sheer size), and in exchange-traded futures as well. At my prior job, while we would actively trade the EURIBOR and Eurodollar contracts, our head traders would always tell us to watch out for the fake size being displayed on either side of the order book. These things are uber liquid, depending not only on how close the month is to expiry, but even moreso due to kinks in the yield curve and where market participants except the next hike to be.
For example today the ED Dec '15 contract had the most volume on it (surprise surprise...bet on first rate hike), Anyway if we wanted to join the bid or offer, we would typically put a sizeable order on a stack that's about 10,000 lots deep on each px level. Now, when a human puts an order, it can be assumed we are the LAST ones to get filled, and thus would get "flipped" on, the second the 10,000 disappears and you're too slow to cancel (either way it's your software that does it..) the order. But, many a time on a less-liquid contract, if I wanted to join the bid with a few hundred in queue ahead of me, the second I joined that bid, it would literally instantly decrease to only MY size as the size showing on the bid, and then get filled on while the bid flips down one px level lower and then im looking at an immediate 1 tick loss on however many contracts. Fun fun fun!!

At first i was surprised to read a lot of posters here acting as apologists for HFTs, then again, when your career depends on it (do we really have that many quants here??), it's not surprising at all. I guess CNBC has edumacated you well.

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Apr 2, 2014

Welcome to the free market. Maybe its time you clowns get better systems.

Apr 2, 2014
zeropower:

These algos aren't only preying on equities. They're all over the FX market (due to the sheer size), and in exchange-traded futures as well. At my prior job, while we would actively trade the EURIBOR and Eurodollar contracts, our head traders would always tell us to watch out for the fake size being displayed on either side of the order book. These things are uber liquid, depending not only on how close the month is to expiry, but even moreso due to kinks in the yield curve and where market participants except the next hike to be.

For example today the ED Dec '15 contract had the most volume on it (surprise surprise...bet on first rate hike), Anyway if we wanted to join the bid or offer, we would typically put a sizeable order on a stack that's about 10,000 lots deep on each px level. Now, when a human puts an order, it can be assumed we are the LAST ones to get filled, and thus would get "flipped" on, the second the 10,000 disappears and you're too slow to cancel (either way it's your software that does it..) the order. But, many a time on a less-liquid contract, if I wanted to join the bid with a few hundred in queue ahead of me, the second I joined that bid, it would literally instantly decrease to only MY size as the size showing on the bid, and then get filled on while the bid flips down one px level lower and then im looking at an immediate 1 tick loss on however many contracts. Fun fun fun!!

At first i was surprised to read a lot of posters here acting as apologists for HFTs, then again, when your career depends on it (do we really have that many quants here??), it's not surprising at all. I guess CNBC has edumacated you well.

May I take this opportunity to reiterate the fact that this case's plaintiffs are in most cases the most sophisticated institutional human investors and traders in the business. These are the 'little guys' for whose plight we are supposed to feel sympathy in their battle to regain competitive advantages from today's freshest Wall Street public enemy: HFT. If only we just legislated away these evil computers, they would get their profits back without having to adapt to competitive practices! Is that too much to ask?

Apr 2, 2014
zeropower:

For example today the ED Dec '15 contract had the most volume on it (surprise surprise...bet on first rate hike), Anyway if we wanted to join the bid or offer, we would typically put a sizeable order on a stack that's about 10,000 lots deep on each px level. Now, when a human puts an order, it can be assumed we are the LAST ones to get filled, and thus would get "flipped" on, the second the 10,000 disappears and you're too slow to cancel (either way it's your software that does it..) the order. But, many a time on a less-liquid contract, if I wanted to join the bid with a few hundred in queue ahead of me, the second I joined that bid, it would literally instantly decrease to only MY size as the size showing on the bid, and then get filled on while the bid flips down one px level lower and then im looking at an immediate 1 tick loss on however many contracts. Fun fun fun!!

Not to be that guy...but you realize that the Eurodollar futures market trades pro rata (not time-price priority) right? That's why people post big size when the level is holding strong, because you can get filled even if you entered your order last, as long as you are big enough.

Apr 2, 2014

I have never worked on a trading floor and have a hard time understanding bid-ask, hell I don't even work in finance anymore; but can someone explain me how high frequency trading is any different than tapping somebody's phone line to front-run somebody's trade?

Forgetting any moralistic argument (although they could potentially have some merit) for a moment, how is this legal?

This is a genuine question btw - trying to understand.

Apr 2, 2014

To specify your question, I assume you are asking what is the distinction between this described "HFT" front running and traditional broker front-running as you suggested. I certainly have very limited knowledge of HFT and the development of the infrastructure associate with the strategy, but I would imagine the distinction that proponents of High Frequency Traders (and regulators, at least at this time) make is that traditional front running utilizes non-public information or information not known to the members of an exchange as a whole. That is front-running orders before they are placed on the exchange. It appears HFT's can use proprietary speed to front-run orders that have already been linked to an exchange and placing orders on other exchanges before the original order hits that exchange. At least this is my very generic understanding of the process going on.

That isn't to say I don't think some level of regulation should be put into place about this HFT process. I am all for more traditional and purely quantitative based HFT algorithm's. However, even if we consider this order flow to be public-information, if only a small number of players (HFT) can act on it, shouldn't the capitalization on that information be at least somewhat regulated? Just my USD$0.02.

Apr 2, 2014

When you're eaves dropping you're spying on someone unbeknownst to them. In HFT the buyer is making the rounds to outposts and explicitly telling everyone what he wants. You're just getting to the next outpost on a faster horse than him and buying what he wants and selling it to him by the time he gets there.

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Apr 2, 2014

This whole thing is a joke. Don't retail investors know what a limit order is? If you don't want someone to front run your trades...well, that's a simple solution right there.

Yellow journalism at its finest, but we sure do love "picking on the little guy" stories, so I'm not surprised people are running with it, and that CNBC is basking in it for as long as they can. Michael Lewis is a tool among tools - the Dr. Seuss of Wall Street - but at least that's a pretty widely accepted view on the street already. I give him tons of credit for the way he tells his stories though, and his ability to bring everything down to a 3rd grade reading comprehension level. He's the National Enquirer on steroids.

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Apr 3, 2014
BlackHat:

Michael Lewis is a tool among tools - the Dr. Seuss of Wall Street -

.....ouch

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Apr 3, 2014
Marcus_Halberstram:

In terms of 401k, pensions etc... (a) these guys largely outsource their investing to hedge funds anyway

Did you just say or imply that 401k plans normally use hedge funds for their investments? Just want to make sure I am reading straight.

Apr 3, 2014

So I did, sue me. My point was that most "little guy" money is run institutionally, which isn't really a little guy and has no excuse to be using sub-optimal technology. The "little guys" that are getting boxed out of the market (supposedly because of the prohibitively expensive technology that HFTs are using) have $3 trillion under management... so its tough to feel sympathy for their unwillingness to spend to keep up or just pure ignorance.

On another note, I'd be interested to know what % of daily flow is "little guy" 401k money.

Apr 3, 2014

Funny to see this argument about liquidity coming again and again when discussing HFT.
Every decent trader knows that liquidity is one (if not the one) major risk when entering a trade. And liquidity disappear when you need it the most, HFT or not.

Apr 3, 2014
TheSquale:

Funny to see this argument about liquidity coming again and again when discussing HFT.

Every decent trader knows that liquidity is one (if not the one) major risk when entering a trade. And liquidity disappear when you need it the most, HFT or not.

All right, what's your point? The markets in which HFT firms are most prevalent are not coincidentally the most liquid. Moreover, those markets have become significantly more liquid as a result of HFT activity. Falling short of your utopia, indeed, liquidity risk will never disappear, but HFT firms have permitted us to move further in that direction. No sane individual would ever contend that liquidity risk has been eliminated by the existence of HFT, so it is unclear at whom you direct your laughter.

Apr 3, 2014

What are the most liquid markets?

Apr 4, 2014

It's essentially speed arbitrage. A inefficiency existed in the markets and some participants used that inefficiency to make money. When the a solution to the exploitation was discovered someone created a solution to make money themselves.

Apr 4, 2014

Everyone needs to realize that this shit has been happening since traders had pocket calculators. Albeit in different forms, the original HFT were guys who rigged up computer systems to read the market flow and then feed a program into a robot that punched a keypad to execute trades. Technology has always been an advantage in the trading game just like it has been an advantage in any business. The only people that complain are the old foogies who are disadvantaged because they don't know that you can buy floor/rack space in ISP/Exchange data centers that are have latency of essentially 0, hire programmers to write code, and traders to feed in human market overview data. But then again they all wish we went back to a day where they could stand on their desks with a bottle of whiskey yelling out trades to runners. So never mind their bitching, not saying that I wouldn't welcome those days with open arms.

Follow the shit your fellow monkeys say @shitWSOsays

Life is hard, it's even harder when you're stupid - John Wayne

Apr 4, 2014

Just LOL. I like NorthSider's posts. I learned three new words today.

Apr 5, 2014

Not sure if this has been mentioned, but I find it kind of funny how journalists have been talking down HFTs for YEARS yet it takes a Michael Lewis book for anyone to give a shit.

Apr 5, 2014

Typical WSO, sticking up for crmininal organizaitons such as HFT firms
these fuckers have been front running for the past 5 years and now that the fed is starting to taper QE, they're going to use HFT as a scape goat when the market crashes

lol..are the markets "rigged" ?? haha....is water wet? are women useful? is the sky blue?

dURR

alpha currency trader wanna-be

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Apr 6, 2014
watersign:

Typical WSO, sticking up for crmininal organizaitons such as HFT firms

these fuckers have been front running for the past 5 years and now that the fed is starting to taper QE, they're going to use HFT as a scape goat when the market crashes

lol..are the markets "rigged" ?? haha....is water wet? are women useful? is the sky blue?

dURR

Glad you were able to really cut through the bullshit and get to the heart of the issue using logic, personal experience, and convincing evidence, rather than something you'd stumble upon in the Yahoo Finance comments section

Apr 6, 2014

Based on the way the information is presented, how can you not think the markets are rigged??? People like to use Wal-mart as an argument of how HFT isn't technically "rigging" the game. This is why you're wrong.

Scenario 1: Wal-mart vs small retail shop. Both place an order for identical supplies at the same time... Wal-mart, due to its larger investment in infrastructure, closer relationships with suppliers, EOS, etc, receives the goods faster. Small retail shop obviously thinks this sucks, but that's capitalism and some bigger people have advantages than others.

Scenario 2: Wal-mart vs small retail shop. Small retail shop places an order of supplies for $500, Wal-mart does not. However, Wal-mart's investment in faster technology allows them to SEE the order that the small retail shop placed, leapfrog over the small shop, and buy the goods even though the small shop ordered them first. Wal-mart then sells the supplies to the small retail shop for $502.

I don't care whether or not you think scenario #2 is fair or not. The reality is 99% of Americans draw the line of "ethics" and "fairness" somewhere between scenario 1 and scenario 2, which is why Michael Lewis' book is getting so much traction. IMO People on Wall Street become so accustomed to advantages that their opinion on what's fair gets out of touch with the rest of the public. If someone orders something first, then they're entitled to receiving it the way they wanted it. HFTs are basically those douche bags that cut in line to get into the bar.

Apr 11, 2014
BlackHat:
watersign:

Typical WSO, sticking up for crmininal organizaitons such as HFT firms

these fuckers have been front running for the past 5 years and now that the fed is starting to taper QE, they're going to use HFT as a scape goat when the market crashes

lol..are the markets "rigged" ?? haha....is water wet? are women useful? is the sky blue?

dURR

Glad you were able to really cut through the bullshit and get to the heart of the issue using logic, personal experience, and convincing evidence, rather than something you'd stumble upon in the Yahoo Finance comments section

"When you stop striving for perfection, you might as well be dead."

Apr 6, 2014

Northsider is my word of the day source.

Apr 6, 2014

A couple things:

1. Out of this whole "controversy", what's blown my mind is the revelation that people actually use market orders.

2. Retail has already lost before they even step on the field - "public information" is a fallacy.

Apr 7, 2014

An excellent article on HFT that I came across today. @"WallStreetOasis.com", I think this most eloquently outlines my interpretation of this debate:

Informed order flow is toxic for market makers. They lose on average when trading against it. So they try to determine what order flow is informed, and what order flow isn't.

Informed order flow must hide in order to profit on its information. Informed order flow uses various strategies based on order types, order submission strategies, choice of trading venues, etc., to attempt to become indistinguishable from uninformed order flow. Uninformed order flow tries to devise in strategies to signal that it is indeed uninformed, but that encourages the informed traders to alter their strategies to mimic the uninformed.

To the extent that market makers-be they humans or machines-can get signals about the informativeness of order flow, and in particular about undisclosed flow that may be hitting the market soon, they can adjust their quotes accordingly and mitigate adverse selection problems. The ability to adjust quotes quickly in response to information about pending informed orders allows them to quote narrower markets. By pinging dark pools or engage in other strategies that allow them to make inferences about latent informed order flow, HFT can enhance liquidity.

Informed traders of course are furious at this. They hate being sniffed out and seeing prices change before their latent orders are executed. They excoriate "junk liquidity"-quotes that disappear before they can execute. Because the mitigation of adverse selection reduces the profits they generate from their information.

...

Pooling equilibria hurt the uninformed: separating equilibria help them. The opposite is true of informed traders. Market makers that can evaluate more accurately the informativeness of order flow induce more separation and less pooling.

Ultimately, then, the driver of this dynamic is the informed traders. They may well be the true predators, and the uninformed (or lesser informed) and the market makers are their prey. The prey attempt to take measures to protect themselves, and ironically are often condemned for it: informed traders' anger at market makers that anticipate their orders is no different that the anger of a cat that sees the mouse flee before it can pounce. The criticisms of both dark pools and HFT (and particularly HFT strategies that attempt to uncover information about trading interest and impending order flow) are prominent examples.

http://streetwiseprofessor.com/?p=8340

Apr 7, 2014

Personally I find NorthSider's comments (in addition to most other's on the thread) to be insightful and educational, provided you can muster the time and attention span. This is not a simple topic to debate and thus requires information to be conveyed in a clear and logical fashion. Something you rarely find watching a national news station (most of the segment was just people attempting to talk over each other anyway). That's why a site like WSO is more deserving of a truly curious or concerned mind's 30 minute devotion in the first place.

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Apr 9, 2014

I haven't read the book, just saw the 25 minute segment on CNBC. From my point of view, I think Michael Lewis is right. He is not against using computers for trading, or HFT at all. But he is against some of the strategies available to HFT firms. I suspect that the exchanges themselves are the real culprits in this scheme. The HFT firms pay them a lot of money, and in exchange, the exchanges give them an advantage over other investors. And by other investors I don't mean John Q from Florida, this includes even the likes of big institutions, pensions, hedge funds, etc. That should be illegal in my view. Front running orders should be illegal. You can not make a profit for knowing that I put an order to buy, and you arrive first at the exchange, move the price up a penny, and make a profit on my intent to buy. This is criminal.

Yes, it doesn't affect me as a small investor as paying a penny, or whatever it is will not be significant to my long term investment. But overall, they are making a lot of money out of this, and it is an unfair advantage. I agree with BlackHat that there will always be advantages (more time, more experts, more information, etc), but those advantages in theory can be replicated by someone in their garage. Yes, you get financial reports that cost a lot of money, from top analysts in each sector. But those analysts used public information to get to those conclusions. What I am saying is that the market should be fair to every player. As it is, those HFT have an unfair advantage and are making a lot of money. And I don't know if I agree that they provide liquidity to the market. At least, they don't provide any liquidity when they front-run an order, do they?

They way I understand liquidity is that you only provide liquidity by putting buy orders or sell orders. If HFT are seeing that you put a buy order, and the HFT gets to the exchange first, makes the buy, and then sells back to you at a higher price, then they didn't provide liquidity. They were just an intermediary between the real seller and the real buyer. This doesn't provide any useful thing to the market. Now, I don't know all the techniques used by HFTs, Some may provide something useful. Those techniques can stay, and they can make money off of the because the provide something in return. The techniques that only mooch out of the real participants, those need to go.

Now, how do you get rid of those unwanted techniques? That is the question. I don't think a transaction tax is the answer. Maybe what IEX is doing is the answer. Maybe the markets will vote by putting most orders on that exchange, and then, another exchange can be created to mimic IEX business plan. And IEX can grow as it gets more customers. That would be ideal, as the free market would take care of the problem. But not all the times the free market can make a change on its own. That's the reality, and some here don't see that. They think the free market is the answer to all the problems. I don't have the answer, this is a complex problem. And the people making the decisions might not have the best intentions. Too much money involved here. Hopefully they get it right.

P.S. I would like to invest on that IEX company, seems like a winner. I wonder, are they public yet?

Apr 11, 2014

Just to get to the essence of your argument...

You're aware of how buying a new Ferrari works, right? The demand is high, and the chairman Luca Montezemolo just announced that they will be limiting production going forward in order to drive demand. Now, dealers, even the biggest ones, only get so many allocations. And therefore, the price of a new model is highly elastic in response to the demand of the market. If you want a shot at something new coming out, you better be prepared to make an offer for far above MSRP, otherwise you're not even getting on the list. For example, the FF (which came out about 3 years ago) was not in high demand...prices started to drop almost immediately. However, the F12, which came out last year, is in extremely high demand. So much so that dealers are able to charge very high percentages over MSRP - sometimes as much as 20%. On a several hundred thousand dollar car, that's quite a big hit. Do you feel that this should be illegal? Should it be illegal for the dealers to profit off the clear surge in demand for a new model? To go even further, there are plenty of people who manage to make a few dollars by working their relationship with the dealer in order to pay, maybe, 5-7.5% over MSRP. Then, they turn around and sell it for 20% over MSRP to very willing people. Should this be illegal? Is this wrong? Should they not be able to take advantage of the market conditions in order to make money? I hope you don't say yes...

"When you stop striving for perfection, you might as well be dead."

Apr 17, 2014
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