Otsog
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Posts posted by Otsog
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Another complete mis-characterization. I think by markets you mean free markets.
Heh? I'm talking about founding principles. The extent to which a market is controlled is the extent to which it's not a market. A market is a place where buyers and sellers can choose to exchange good/services. Sure there are mixtures of freedom and coercion that are still called markets. But again, I was talking about the founding principle of what it means for an exchange to be considered a market. I really don't think that's a mis-characterization. Forcing two people to take part in an economic transaction is not a market.
What basis do you have for the statement "the extent to which a market is controlled is the extent to which it's not a market"?
Can you list the "founding principles for an exchange to be considered a market"? My thoughts on this obviously differ greatly from yours, but it almost sounds like you are referring to a specific document/economic law?
How are people being forced into economic transactions?
A free market founding principle is perfect competition. Perfect competition requires buyers and sellers have equal access to information.No! I don't think it is at all. Perfect competition is a (silly?) notion that developed as our understanding of markets developed. It's certainly not a founding principle and I don't think you'll find it discussed anywhere in early economic literature.
Fair enough. What is the point of founding principles then in relation to this discussion? Perfect competition has been a central economic theory for hundreds of years in the study of efficient markets, of which equitable information access is an integral part. How is perfect competition a silly notion? Our understanding of everything develops, a cornerstone of value investing is changing your opinion as the facts change, not relying on founding principles without considering they may be antiquated.
The last gasp of the HFT defense is "well, it's not that bad lol!", which isn't a defense, it is a reason to not give a shit and extract oneself from the conversation.Yikes, I didn't mean to offend anyone. Anyways, maybe that's the defense for some HFT defenders but it's certainly not mine.
Sorry, I have no idea why I included that last paragraph in that post. It was on my mind from before, but that certainly shouldn't have been directed at you! Seriously sorry, my bad.
My defense is: these interactions are voluntary and not fraudulent therefore you have no right to tell people what they can and can't do with their own time and their own money. Just as we do not outlaw overdraft fees even though I don't like them. In the end, you will never pay more for a security than you agree to pay. I'm sorry you don't like that someone has figured out how to make a tiny amount per transaction on your purchase. But that doesn't change anything.
Do you mean fraud in a strictly legal sense?
Would you call the discussed market practices of HFT firms duplicitous or deceptive?
Would you call the discussed market practices of the Exchanges/Brokers duplicitous or deceptive?
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Anyways, a lot of folks seem to forget the fundamental fact that you never pay more for a security than you agree to pay. Many of the arguments against HFT amount to: 'I want to pay less than the price at which people interacting on a voluntary basis (ie. without force and fraud) are willing to offer me stock.'
Sorry, but that is a complete mis-characterization of the arguments. They literally are trying to interact at the EXACT price voluntary participants are offering.
Charles Schwab's view on HFT:
HAH!
"High-frequency trading isn’t providing more efficient, liquid markets; it is a technological arms race designed to pick the pockets of legitimate market participants. That flies in the face of our markets’ founding principles."
OK, equating HFT with theft is downright dishonest. No one is having money stolen from them. The founding principles of our market (of ANY market) is that people are able to interact voluntarily and that we have objective laws. Not a system where if enough people yell loud enough the government outlaws certain practices.
Another complete mis-characterization. I think by markets you mean free markets. A free market founding principle is perfect competition. Perfect competition requires buyers and sellers have equal access to information. It has been exhaustively explained in thorough detail the past 4 days how the HFT market is leveraging asymmetric information.
The last gasp of the HFT defense is "well, it's not that bad lol!", which isn't a defense, it is a reason to not give a shit and extract oneself from the conversation.
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hugheslittle.com
These guys are great. Their letters are short but sweet.
They prefer larger market caps, concentrated portfolios and stay pretty fully invested.
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The drag on the market is combined HFT/Exchange/Broker cronyism, not just HFT.
How do we know it's 0.1%?
Should we adjust for risk, that is virtually non-existent?
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Well I guess the reason that it's debatable is that your typical investor is not affected much by this.
How do we know this to be true? It's not like there is a marginal cost of labour with a running computer program. What's stopping them from attacking every single spread and every single order they can get information on? Why is TD Ameritrade's order flow the most profitable?
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So technically hes right. It is rigged right? BUT it is only rigged like a tiny percentage. So in the case of calling Einhorn a fish, he is wrong. Since einhorn makes like 20% a year or something, and only loses very tiny percentages over this.
It really seems the case here that nobody is truly hurt here. Only so little that it is barely noticable. But people have a feeling it is unfair, and easy money is made by rich people, so they are pissed.
Nobody knows how much is being skimmed. A lot of people in this thread have thrown around random calculations but they are all completely useless. They are all numbers based on nothing cherry-picked out of thin air and steeped in confirmation bias. Nobody knows how effective the strategies are. Because it was highlighted in the 60 Minutes piece this thread has primarily been about the scalping/front-running/skimming/whatever you want to call it. As ItsAValueTrap has pointed out there are many other dubious strategies.
I think inverting it and looking at the money being poured into it is a valuable exercise, although still not conveying the total depth.
- Why are exchanges deriving 50+% of their revenue (billions) from HFT firms?
- Why is a fibre line from Chicago to NY that shaved 1.5 milliseconds and cost $300 million worth billions?
- How much more has been spent on infrastructure that otherwise wouldn't have been, hundreds of millions? Billions?
- How many millions (billions?) have been spent on order flow?
- Are programmers with $20+ million annual salaries actually creating $20+ million of value? (along with the externality of mis-allocation of some obviously brilliant STEM minds)
If I was making billions a year on top of the above costs I would love to have the people I was ripping off not care.
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I'd just like to add a few points to the discussion. If you are the type that likes to react emotionally and not think too far past your first instincts on any issue (most people it seems), than please ignore what comes next, because it will only frustrate you, or you won't get it.
In general, every complex evolved system has inner workings which are hard to understand, and at first can appear useless or even harmful (i.e. tonsils/appendix don't do anything, take them out). It is also true that any sufficiently complex system will acquire opportunistic parasites. Some of these are harmful (tapeworm), some harmless (most of the bacteria on your skin), some beneficial and can even become essential as the organism and the parasite co-evolve (the micro-organisms in your gut). For the most part what doesn't kill a system will make it stronger, so most harmful parasites should be left alone so that the system can fight them off and improve itself, or evolve defenses against it. A careful balance has to be struck between fighting the harmful things and not hurting the beneficial, while not hampering the evolution of the system itself. The problem with government regulations is that they cement in place procedures/technology and other parts of the system which can stop the evolutionary process. It is the nuclear option, which if used at all, should only be used against the most severe and deadly threats to the system. Anything we are talking about in this thread will seem so antiquated in 15 or 20 years as technology and the exchanges evolve that it will be funny to go back and read it. You don't want to make permanent changes to an evolving system because of short term "problems" unless they are gigantic and causing massive harm. HFT isn't even clearly a problem at all. It is a minor nuisance to frequent traders at worse and beneficial market making at best. It isn't worth scheduling surgery, IMHO.
I think we are all able to recognize disruptive technologies will likely have exploitable niches that were unanticipated before hand despite being an overall positive change. Nobody is advocating for throwing the baby out with the bath water, I'm on the sidelines cheerleading computerized trading along with everyone else. That straw man is really taking up a lot posts and obfuscating the issue at hand. A lot of people (both here and in the press) very clearly disagree with you that ceratin HFT practices are a "minor nuisance to frequent traders at worst" and have presented very rational non-emotional arguments about market inefficiencies. Absurd analogies, downplaying unknown costs and claiming unproven benefits as a defense is terribly unconvincing.
Example of an absurd analogy:
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.
This is not even close to what is being talked about. Corrected version:
Craiglist now posts substitute items together on a non-geographical page. You can search for basketballs and it will show you $10 for a basketball. There are 10 basketballs available at that price at various locations, CL:Los Angeles, CL:New York, CL:Miami. You don't think it matters where the basketball comes from because they are substitute products with the same shipping costs and delivery time.
From San Diego you send an order to buy 10 basketballs. Your order arrives at CL: Los Angeles first and you get the 3 basketballs offered at CL: Los Angeles. Your order travels to CL: Miami but the 4 basketballs that were offered there have been sold and relisted for sale at $10.01, your order travels to CL: New York but the 3 basketballs that were offered there have been sold and relisted for sale at $10.01.
The reason this happens is someone has rented server space inside all the CL locations, they have secured the fastest routes between CL locations, using information solely provided by your order they can plant themselves as a middleman.
We obviously disagree whether that is good, bad or neutral for the market, I just want to point out your analogy has nothing to do with the issues being discussed in this thread.
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I knew nothing about this at the onset absolutely! I'm learning as I go and am definitely very ignorant on a lot of the machinations at play here.
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.
1. I said I am ignorant about a lot of the machinations at play here and am learning about the subject. If the requirement for honest discourse here is a thorough understanding you wouldn't be qualified either.
2. I have not made up my mind. I am waiting for a logical counter argument. Your only argument is that "it's not that bad". You sound like the Wizard of Oz 'Pay no attention to the man behind the curtain!"
3. I didn't say the abuse is staggering. I said the prima facie nature of the abuse is staggering. I find the inability to complete a transaction on a publicly offered good staggering. Your counter to that has only been non-applicable analogies about exchange arbitrage and that this has been happening on public exchanges forever. I think it has been plainly and logically argued many times in this thread that what is happening now bears almost no resemblance to arbitrage.
4. If I am too stupid and biased to continue discourse with would you address ni-co's latest post?
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How can it be that a discussion thread that stretches into the 100's of posts not have Level (3) mentioned, ha.That sounds interesting, could you contribute your thoughts in further detail?
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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
When I say they are paying for an informational advantage I am including everything: fibre optic infrastructure, buying order flow, bait orders, flash orders. None of which add anything of value to the market at all. In the book IEX explains how they hired puzzle masters who had previously won the Microsoft College Puzzle competition specifically to figure out the tricks HFT firms were using to extract cheap information from the markets. If I recall correctly they claimed to have discovered ~50 different strategies.
That picture isn't loading for me, not sure if it's my internet.
(Also, you could just use limit orders and be a little bit patient!)
That's a pretty good example of the problem, why do I have to be patient to complete publicly offered orders? Because someone spent millions of dollars to co-locate? These guys aren't arbitraging between exchanges offering different prices on a good, they are literally inhibiting the ability to purchase a good at a publicly offered price. Investors are making purchase decisions based on fundamental analysis, news headlines, tea leaves etc. and HFT firms are making purchase decisions based solely on intercepting investors decisions. Your argument that it is speculation is weak as ni-co articulated very well above. They have found a way to game the system to skew the odds heavily in their favour.
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.
Michael Lewis and Co. said it was a combination of HFT, Exchanges and Brokers/Banks. HFT is getting more of the heat because they are the driver. They are the head of the snake. They are the ones calling up NASDAQ, Direct Edge, NYSE, BATS and using their trading volume as a threat to get what they want. I don't particularly care what happens to those exchanges, ideally they would go down as well.
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.
That's exactly one of the strategies IEX is using. That along with providing high speed access to the other exchanges offers investors the ability to actually act on publicly offered goods. I initially mused it would have to be in all exchanges, but you only have to send order to IEX and as they are slowing down the HFT's they will check the other public exchanges for you. I imagine they would do that using a Thor like application to ensure they are not getting scalped.
I get the impression you are talking first and doing research later.
I knew nothing about this at the onset absolutely! I'm learning as I go and am definitely very ignorant on a lot of the machinations at play here.
I am trying not to overstep or slip into hyperbole, but the prima facie nature of the abuse here is staggering. There is comforting social proof in the public comments of Munger, Einhorn, Loeb, Ackman etc. The deeper you go down the rabbit hole, the uglier it gets.
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.
It's the investors problem! The HFT/Exchange/Broker cronyism is profiting from this. The whole point of what Michael Lewis/IEX is doing is to squash the problem so the investor isn't encumbered.
However the HFT/Exchange/Broker's want to point fingers at each other I couldn't care less.
Cheers :)
You too!
Have you started (or plan to start?) the book yet?
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1. The stock market is too fragmented.
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.
It is the stock market fragmentation combined with the exploitation of Reg NMS that is causing the issue. Reg NMS creates a loophole that allows the scalping. Saying the problem is being exacerbated by IEX is blatantly false.
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.
This has a lot to do with HFT. No one in this thread has decried the amazing advantages computerized trading has brought. HFT is simply a new tool we can apply thanks to new technology. A lot of it is good, part of it simply parasitic. But for HFT, the Reg NMS loophole would not be happening. Period.
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:
It's not speculation when you never lose. They are paying for an asymmetric informational advantage.
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The issue of FRAGMENTATION OF EXCHANGES is an issue I think should be discussed by the SEC. The nature and special treatment or market makers should also be clarified and justified. But the issues raised in the Lewis piece about HFT being bad seem strange. There are many areas where "HFT" generally probably should be banned (quote jamming / infrastructure attacks, if there really is front running (I don't know), etc) - but unless I missed it, they weren't discussed (and may not be right to capture under the heading "HFT", I don't know).
The market information asymmetry and obliqueness is being driven by the HFT firms. Lewis may have taken artistic liberties with the delivery, but he is factual about the mechanical operations, I have absolutely no qualms with his vilification of HFT. They are parasitic entities that are lowering the efficiency of public markets.
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I think all the analogies in the thread so far have been beyond terrible so I might as well try one too, but only poker players will get it.
The specific HFT practice that the 60 minutes and NYT pieces cover is akin to playing Rush Poker and landing in the button every single hand. And they are paying FTP for that right.
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Otsog, the quotes supplied in the Michael Lewis piece are even more confusing. They look at one side of a transaction, the trader who enters an order that doesn't get filled, and somehow end up at "front-running". What happened to the order? Is the HFT now taking your place as the investor? Or, more likely, is the HFT flipping the stock to an investor who is willing to pay more? In the latter case, that is just price discovery! What the people in the article are complaining about is the allocation of the fee for matching buyers and sellers. The bid ask spread is not a right. It is just the information provided given the existing order flow.
The HFT is taking your place as the investor.
http://www.nytimes.com/2014/04/06/magazine/flash-boys-michael-lewis.html?hp&_r=0
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Unless you actually take into consideration the purpose of a public market.
That is a God awful analogy. I'm looking forward to these bastards getting crushed.
I think it is very stupid to allow a system to evolve where half the trading is a bunch of short-term people trying to get information one-millionth of a nano-second ahead of somebody else. It’s legalized front-running; I think it’s basically evil and it should never have been able to reach the size that it did…why should all of us pay a little group of people to engage in legalized front-running of our orders? -
Ya what a retard, expecting to be able to pay the publicly asked price for something ::)
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He had to dumb it down because of the intended audience, but he isn't talking about that.
He is saying they identify your order from the first exchange it gets to and then they beat you to all the other exchanges and place the exact order you were about to.
Why did the market in any given stock dry up only when he was trying to trade in it? To make his point, he asked the developers to stand behind him and watch while he traded. “I’d say: ‘Watch closely. I am about to buy 100,000 shares of AMD. I am willing to pay $15 a share. There are currently 100,000 shares of AMD being offered at $15 a share — 10,000 on BATS, 35,000 on the New York Stock Exchange, 30,000 on Nasdaq and 25,000 on Direct Edge.’ You could see it all on the screens. We’d all sit there and stare at the screen, and I’d have my finger over the Enter button. I’d count out loud to five. . . .“ ‘One. . . .
“ ‘Two. . . . See, nothing’s happened.
“ ‘Three. . . . Offers are still there at 15. . . .
“ ‘Four. . . . Still no movement. . . .
“ ‘Five.’ Then I’d hit the Enter button, and — boom! — all hell would break loose. The offerings would all disappear, and the stock would pop higher.”
At which point he turned to the developers behind him and said: “You see, I’m the event. I am the news.”
To Katsuyama the maps explained, among other things, why the market on BATS had proved so accurate. The reason they were always able to buy or sell 100 percent of the shares listed on BATS was that BATS was always the first stock market to receive their orders. News of their buying and selling hadn’t had time to spread throughout the marketplace. Inside BATS, high-frequency-trading firms were waiting for news that they could use to trade on the other exchanges. BATS, unsurprisingly, had been created by high-frequency traders. -
If by the time my order becomes visible it is already in the spool-queue at every other exchange how do I get front-runned?
The assumption being that you currently get front-runned every single time. Please explain to me where that happens exactly in the process if you enter an order on NYSE ARCA. This is the exchange rulebook: link, sections 61 and 70-74 are relevant. I'm being a smartass now but your assumption is just incorrect, probably based on a misunderstanding of flash orders, a practice that has been discontinued by most exchanges a long time ago (link) exactly because of the reasons mentioned by Lewis c.s.
No, the assumption is that it happens at all. If it doesn't happen, it makes no difference. The 60 Minutes article and the NYtimes piece earlier linked explained pretty clearly how people were getting front-runned at the NYSE.
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If by the time my order becomes visible it is already in the spool-queue at every other exchange how do I get front-runned?
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If the trade information is being obtained from the exchanges and all the exchanges have an appropriate delay then the skimming would be impossible.
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Have a fibre optic spool 30 nano seconds long that has to be run in the exchanges before an order is received. (Or whatever time is necessary).
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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.
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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.
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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?
60 Minutes lead story on Michael Lewis - Flash Boys
in General Discussion
Posted
Definitely the funniest I have read so far. A lot of words for not a single challenge on the facts.