writser

How large do you make these option positions? And do you look at them in terms of notional exposure or net costs?

spot on. Exactly. I wanted to post a reply but this would pretty much be it. One thing to add: while going to university most students have a vague plan about their future. But really 90% of them end up doing something completely different. You have no clue, so pick the most interesting study, work hard and enjoy it. Don't let financial incentives decide whether you do finance or accounting. On average both will be fine and present a similar set of opportunities. (might be different if you have to choose between dentist and classical languages) I would never suggest the first part. It's not all about the end result.

Anybody familiar with ABC funds (Irwin A. Michael)? I don't know them but I've been following their website for a couple of years as a source of ideas: http://www.valueinvestigator.com/en/valuefavourites/ . They maintain a sort of blog about their biggest positions online and also have an archive with updates about past holdings. For all major holdings of the past decade you can see what they thought when they bought it, what happened in the meantime and why they decided to sell. As far as I know, such transparancy is quite unique and I like it. No clue about the performance of their funds though :) .

The best review I read so far. Even more terrible poker analogies for you Otsog :). Cheers.

A couple of days ago I finally started reading 'Energy Transitions' from Vaclav Smil and this guy has a very interesting view of the world indeed. Recommended. I can also highly recommend watching some of his youtube videos (as mentioned above). Bill Gates indeed seems a voracious reader. He keeps recommending books to us mere mortals :). An update after a couple of months: Ten books recommended for the TED crowd: http://www.gatesnotes.com/About-Bill-Gates/10-Books-Recommended-to-TED Best books he read in 2013: http://www.gatesnotes.com/About-Bill-Gates/Best-Books-2013 His bookshelf: http://www.gatesnotes.com/Books There is quite some overlap with books appreciated on this forum: he recommends Charlie's Almanack, The Checklist Manifesto, The Box, The Black Swan and Tapdancing to work, among others. I'm not especially interested in reading books about some topics he likes (diseases, education) but I think it's occasionally good to broaden your horizon so I'm probably going to order a few random books he recommended that are not related to finance. Any suggestions? The Tobacco atlas sounds interesting for some reason. His blog itself is also recommended. He's doing some interesting stuff, for example promoting research to design better condoms (11 contenders). According to Gates on Reddit "a sensitive topic". If only he could convice Buffett to start a blog too.

I started to reply but frankly what's the point. You already made up your mind and your arguments come in on a page-by-page basis while reading the book. You admit that you are ignorant about the subject but somehow you are sure that the abuse is 'staggering' and that we ideally should shut down the NYSE and NASDAQ (after rolling out excess fiber cable everywhere). That's not a rational way to approach the subject. I agree with you there are some problems that should be solved but let's put this into perspective. Assume you are a value investor with a $1m portfolio. Annual turnover is 50%. You buy everything directly from the offer, sell everything directly on the bid and all your trades are routed to an exchange where you get scalped for a penny. Let's assume the average stock is worth $20. Annual costs? $1.000.000 * 50% / $20 = 25k stocks traded, yearly costs: $250. Drag on performance: 0.03% per annum. That's pretty much the worst case scenario. Switch to a decent broker or enter limit orders behind the market and you avoid all these costs. I really don't see what all the fuss is about. I personally couldn't care less, I'm happy with the excess liquidity and give them a penny every once in a while. Certainly not worthy to write yet another book about. I'm also a lousy writer in comparison to Lewis! His description of Greg Lippmann was awesome. I will definitely read Flash Boys too.

Not to mention that the record was only about 'trading results', ignoring the depreciation of enormous investments in hard- and software and ignoring the financing of their heavily leveraged balance sheet.

Haha, true. The topic title was good though!

On a tangent: why would Goldman oppose High Frequency Trading? link . We want our floor trading back!

The problem you describe arises from a conflict of interest between you and your broker and has nothing to do with HFT. The way you phrase it makes it sound as if HFT firms pay a monthly fee to brokers to gain access to order data. That is not true (at least that would be illegal) - brokers choose to trade on specific exchanges because they interpret reg-NMS literally and not how it was designed to be used. But any decent broker (IB, for example) lets you choose on which exchange to trade and passes through (at least partially) rebate fees and commissions, sidestepping the whole problem. Check this out: http://image.bayimg.com/f9de38255ac7a9dd774facdf2b480d01f2696e70.jpg (Also, you could just use limit orders and be a little bit patient!) So yeah, you have to do some research and yeah, people will get screwed. But is this a problem caused by HFT? No. Nobody is forcing you to trade with HFT firms on specific exchanges. Also, why are you first suggesting we need " fibre optic spools 30 nano seconds long" in every exchange? I hope you see now that that wouldn't solve any problem. I get the impression you are talking first and doing research later. That said, I agree with you that reg-NMS compliant order routers are not doing what they were designed to do and that should be fixed. It's your brokers problem though - he is routing your orders. Cheers :) .

Curious: have you told your friend what you did?

I don't like the Asian guy. Always smiling because he knows he represents the moral highground to the general public. Meanwhile trying to promote his own exchange as an alternative. After having worked as a trader for a couple of years and selling HFT software to his clients. Ultimate hypocrite. Believe it or not, I actually symphatize for Michael Lewis. At least he is trying to raise some valid concerns. However, he has always been a bit too populistic for my tastes. He uses some funny buzzwords and simplified examples to make his point and that makes people think they understand a wildly complex subject, sprint to their computers and yell 'frontrunning!' 'we need longer cables!' 'HFT makes me sick!' without understanding at all how stock markets actually work. Or are supposed to work. As happens in this thread. That is detrimental to an (otherwise interesting) discussion.

I just watched the interview twice. I heard two tangible complaints: 1. The stock market is too fragmented. 2. Brokers are selling customer order information to HFT firms. He also tries to make a third point but I didn't understand it: something about a terribly complex system enabling scalping. And it was a valid point because (drumroll): it was raised by Goldman Sachs! Yeah, if they voice a concern about unfair markets I'm sure we should implement it directly. Neutral bystander :o . I'm not sure point 1 is a problem. Alternative exchanges popped up for a reason (mostly being cheaper). Some competition is good. Actually the heroes of the story exacerbated the problem by creating yet _another_ exchange. Point 2 sounds bad. I don't know how this happens in practice. Again Lewis is a bit too fuzzy for my taste. Maybe the book is more clear. I'm no expert on retail brokerage. I do know that brokers are allowed to match orders internally and some other stuff but I don't know the specifics. My main problem here is that this has nothing to do with High Frequency Trading. Sounds more like getting screwed by your broker. Even Michael Lewis is saying: "This has nothing to do with speed. Technology has brought huge benefits" or something. So yeah, we should fix that and fix all other possible problems but after that there will still be a guy with a faster computer that tries to buy shares on other exchanges in case you try to buy a shitload everywhere (i.e. your example). It's not frontrunning: it's speculation. And I think that is the best market model we currently have. I saw a nice twitter post from Kiddynamite that pretty much sums up my feelings: Now watching the HFT debate. Sounds like this topic indeed! 2v1, Otsog and Ni-Co vs Writser :). Cheers.

How do you explain what? It is completely logical, if your orders end up at exchanges within a shorter timespan it is harder to react to their respective executions. What do you think is at work here, magic? So now RBC is selling a trading system that can send orders to multiple exchanges in a shorter timespan. They're using their computers and proprietary software to be less exploitable by other market participants. Just like the HFT firms ..

I'll try to explain where your example goes wrong. The moment you buy 10k shares on the first exchange, nobody, except for you, knows that you sent more buy order to other exchanges. That is private information until your orders actually hit the other exchanges. You make an implicit assumption that HFT firms know that you try to buy 30k shares in total. They don't. That would be frontrunning, that would be illegal and if they had that information and acted upon it they should be shut down. But because you have to buy more shares in this example, the HFT firms look like geniuses. If all you had to do was buy 10k shares they look like idiots, buying 20k shares @ $20 while nobody is interested in them. They don't know beforehand what scenario will unfold. The only information they have is that somebody bought the entire offer on a single exchange. However, the alternative outcome in which the HFT firm is left with 20k shares on his book is never brought up in the 60 minutes show. Your example is a subset of possible outcomes in which the HFT firms gets lucky. What HFT firms are doing in your example is speculating based on public information: 10k shares traded at exchange 1 (public information) so I buy 20k shares at exchanges 2 and 3 (speculation). In your example the HFT firm will probably make money because you use a predictable, blantantly obvious strategy to buy the maximum number of shares in the shortest possible timeframe. But it is not a guaranteed way of making money and it has NOTHING to do with frontrunning. They're just trying to predict what you have to do and are preying on your psychological fears (the shareprice is running away from me!) and hope that you instantly buy shares from them. Now you may think that that is despicable but people have been speculating, trying to predict and trying to scalp in stock markets for centuries. I say: nothing wrong with that. The more participants the merrier. The problem is that you look at a whole series of transactions in hindsight and pick the easiest explanation to support one specific outcome (Looks like they know about my orders! They must be frontrunning me! Evil computers!), instead of the hard explanation that explains all possible outcomes (They use sophisticated hard- and software to predict what I am trying to do. They were actually right this time. If that happens constantly maybe I should adapt my strategy).

No! HFT did not introduce the middleman. He has been forever: the market maker. Or day trader. Or arbitrageur. Order books have never been sacred bibles where only long-term investors can enter orders. There are and always have been people trying to read the tape. People who think: "well if I can buy at this price I probably sell it over there", "that's a big sell order, let me adjust my quotation slightly lower" or "the market trends up, let me buy something". You make it sound as if HFT is suddenly a new class of assholes. They are not. Only the tools they use are different. Inter-exchange arbitrage is nothing new. These firms just took all the profits the old assholes made because they are far more efficient at their job. They also make transparent how much the middle men are actually making and that is why you suddenly hate them. That doesn't make sense. If the buyers and sellers were already there the trade would, by definition, already have been executed. If the price changes either the buyer or the seller makes a profit. And if the trade happens at a lower price and a HFT firm is the buyer then nobody was willing to pay more - or the trade would've been executed at a better price in the first place! What you struggle to describe is called market making. If you add liquidity to the system (i.e. put a bid behind behind the best bid and have a coffee) then market makers make zero money. If you substract liquidity from the system (buy from the offer) them yes, market makers will make money in the long run. It has been like that for centuries. If you don't like that: don't buy from the offer! @Otsog: it's not an analogy, it's a completely identical situation. You can have an opinion about it but markets have been functioning like that for centuries. I understand your sentiment, I even somewhat agree with it but you have to understand that your arguments are not specifically targetting HFT trading. You just want to forbid arbitrage and allow exchange access only for long-term investors. That's a very nice notion of how an ideal capital market should look like but guess what: we have have FREE markets. Things don't work that way.

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.

@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.

@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 :). 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. 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.

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.

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.

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.

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.

@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.