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60 Minutes lead story on Michael Lewis - Flash Boys


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http://www.bloomberg.com/news/2014-03-30/high-frequency-traders-ripping-off-investors-michael-lewis-says.html

 

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"It's legalized front-running. I think it is basically evil and I don't think it should have ever been allowed 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?"

Charles Munger on high-frequency trading

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We're you guys aware of the scope of the front running?  I have read numerous times before about the hft firms buying real estate as close as possible to the exchanges, but I thought that was so their algorithms could beat other algorithms for arbitrage opportunities, not to front run submitted orders.

 

 

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This was awesome. Just ordered the book. How this is legal is beyond me.

 

because my understanding is SEC do not have any optical engineers on staff. they don't understand the problem.  that's not a knock. the SEC is always going to be a step behind the "clever". the world changes faster than the regulators do.

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I'm trying to figure out if this affects me.

 

I make trades infrequently. But when I do, I look at market prices and set a limit order. If the limit expires at the end of the day, I'll try again the next day.

 

I figure this affects you more if you trade frequently, want your shares quickly, and don't stick to limit prices.

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I'm trying to figure out if this affects me.

 

I make trades infrequently. But when I do, I look at market prices and set a limit order. If the limit expires at the end of the day, I'll try again the next day.

 

I figure this affects you more if you trade frequently, want your shares quickly, and don't stick to limit prices.

 

This is how I look at it as well.  I'm not a day trader trying to make a penny here and there per trade.  I guess the only way it could effect you is if you set a buy limit to say $4 and because of the high frequency trading picking up all the $4 sell orders, maybe there was only a few of them that day,  your order never gets filled.  Of course you will never know this happened, you will just see that your order wasn't filled even though the stock dipped to $4 for a few seconds that day.    If I intend to hold a stock for a year or 20, It doesn't effect me all that much if I pay a penny more and sell for a penny less.

 

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Contrary opinion: I think this is just a blatant case of fear-mongering and promotion of his new book. A bit disappointing frankly (though probably a good read). HFT is mostly profiting from 'old-school' brokers, banks and other middle men. The fact that a couple of firms are making so much money now is only making transparent how much investors got ripped off in the past. But instead of being angry at the friendly broker that used to call us (Saluzzi) and now is pissed he lost his job to more efficient competitors it is probably easier to blame a bunch of techies with computers doing stuff we don't know anything about if we lose money in the markets. One always needs a scapegoat ...

 

I'm not saying the current speed race is benefiting society and probably the market model of exchanges could be improved. But the stuff about front-running poor investors is just nonsense.

 

Kiddynamite wrote an article about HFT that's still relevant: http://kiddynamitesworld.com/we-fear-what-we-dont-understand/.

 

Update: I see he just wrote a new article. Mandatory reading material if you want a more balanced view of current markets: http://kiddynamitesworld.com/still-want-talk-high-frequency-trading/

 

I think it’s incredibly dangerous to lead retail investors to believe that they will ever be on a “level” playing field.  In reality, we should be telling them that there will always be someone smarter in the market.  There will always be someone faster than you in the market,  there will always be someone who gets the information before you get it.  There will always be someone who reacts before you can react.  But the great thing about current market structure is that those discrepancies have been reduced from tens of minutes to milliseconds:  the playing field is more level than it has ever been, and more importantly: those who want/need faster access can get it!  That was most certainly not the case in previous market structure – there was a closed monopoly system (NYSE specialists).  The current market structure has democratized the role that specialists filled formerly.  Despite all the HFT hysteria, I think that democratization is a phenomenal thing.

 

I was once one of these big traders.  Now I am a little guy – and I know damn well that the current market structure doesn’t disadvantage me – on the contrary: the little guy like me is the winner.  My old job would be a lot harder now due to competition from high frequency traders and others – would you shed a tear for me?  Maybe I should  have titled this post “Don’t Cry For Me, Goldman Sachs…”  Do you feel bad for the guys at Goldman Sachs, JP Morgan, Barclays, etc – who have to adapt their execution methods in the face of new competition?    If you want to argue that the big sell side broker dealers who have to adapt to current market structure are the victims, then fine: do that – but don’t hold up “the little guy” as your pariah when you’re really fighting for The Big Guy.

 

My goal, dear readers, is for you to question the motivation of those who are railing against high frequency trading.    They often do so in the name of “standing up for the little guy,” while in reality I think they are doing exactly the opposite: standing up for the big guy who is losing out to competition in “his” market.

 

 

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the reality is that it doesn't effect most of us one iota. if you put in a limit order you know exactly how much you pay. let's put it this way. there was a thread recently where everybody said how much they made last year. it was a lot. hft didn't keep people here from having results that were "satisfactory".

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I disagree with Lewis when he says retail investors are getting screwed. I just think he is trying to sell his new book to retail investors by saying that. It's good PR. Like others have said on this board, how am I getting screwed by say buying 100 shares of BMO @ $54.30? I think it effects people like the RBC trader who are buying millions of dollars of a stock in a single trade. He is getting screwed in my opinion. I still don't understand how this is legal?

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In my opinion, you are being "screwed". You put your limit order in to buy 1000 shares at 10. Those 10 bids add to 100,000 shares to buy at 10, lets say. The hft bids 10.001 so that when a seller sells stock you don't get filled. Maybe you decide to pay 10.01 and you buy your stock at 10.009 from the hft firm that payed 10.001. you think your benefiting from a better price but your not. Or you stay at 10 and never buy your stock. The public would benefit from trades crossing at 10 or 10.01.

 

Imo stocks should trade in no smaller increments than a penny. And the fragmentation of markets has led to a situation where time order means nothing, and maybe it never did to a certain extent but it means nothing now.

 

I don't claim to understand hft - I'm not that smart. But I have no doubt that whatever profits hft firms are making is just sucked out of your pocket with no benefit to you whatsoever.

 

Munger is right, it's high tech frontrunning.

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Contrary opinion: I think this is just a blatant case of fear-mongering and promotion of his new book. A bit disappointing frankly (though probably a good read). HFT is mostly profiting from 'old-school' brokers, banks and other middle men. The fact that a couple of firms are making so much money now is only making transparent how much investors got ripped off in the past. But instead of being angry at the friendly broker that used to call us (Saluzzi) and now is pissed he lost his job to more efficient competitors it is probably easier to blame a bunch of techies with computers doing stuff we don't know anything about if we lose money in the markets. One always needs a scapegoat ...

 

I'm not saying the current speed race is benefiting society and probably the market model of exchanges could be improved. But the stuff about front-running poor investors is just nonsense.

 

I agree there is a better than good chance Lewis will present his case in a way that oversells the dangers, but, how is the front-running nonsense?  Firms/algorithms are making trades solely off your own order information (if you're an institutional investor).  That will be a detriment to every single pension plan and endowment in the world.  Even if it was just the IBanks that were getting screwed I would be pissed, to me this is a blatant (but easily solvable) degradation of the integrity of the capital markets.   

 

The efficiency of the markets in the past has absolutely nothing to do with this.  Just because we were getting screwed harder before means we should be grateful and accept duplicitous behaviour today? 

 

 

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

 

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

 

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

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

 

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

 

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

 

 

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Doesn't affect me one bit. I make a few trades a year between 5-10. I place a buy order with  a limit price set a few cents above ask. I place a sell with a limit price set a few cents below bid. I fell that missing the opportunity to do the buy/sell is a lot worse that losing a few cents on shares that I will hold for years.

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Here are my thoughts in three bullets:

 

1. In general, HFT is bullshit and shouldn't be allowed. It's legalized front running.

2. Particular to retail investors (investing their own money) and folks like us, HFT isn't really relevant. No HFT firm is sniffing around illiquid micro caps.

3. Just like in the movie Office Space, institutions are getting screwed via HFT penny shaving. More importantly, however, I think is that mom & pop investors in mutual funds end up screwed via the performance shortfall they experience that is attributable to the front running by HFTs in front of institutions*.

 

*Non-mutual fund institutions (bank prop desks, other professional traders) are also getting screwed, but my view is this is more of a zero sum game than what's being done to the mutual fund investors. Still front running IMO, but not as egregious given the other side of the trades in this case are aware of who they're playing against.

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Kind of mildly interesting (or maybe not...) facet of this.  There is a Canadian company set to start construction in May on a fibre optic cable that will connect Tokyo and London by going through the Canadian Arctic (http://arcticfibre.com/). Our internet speeds up here are shit, 1.5Mbps costs me $84.00/month with a 10Gb data cap, and we would be able to tap into the Arctic Fibre feed. If there are any regulatory changes that make this project uneconomical, Michael Lewis might be screwing me out of faster internet in 2016  >:(

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I have known of a lot of relatively shady envelope-pushing practices in HFT, but always "shrugged" and thought it is better than the alternative of trading 50 years ago without reg FD and via phone. 

 

My first reaction was similar to some of those here: it affects me a minimal amount because I trade infrequently and I use limit orders, and my size is relatively small.  I think for those that use limit orders, the effect is in a lower likelihood of a fill on your order.  Also, even if the cost of this amounts to almost nothing, almost nothing is still something, and a small something multiplied by the size of the US Market is a lot. 

 

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

 

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

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