60 Minutes lead story on Michael Lewis - Flash Boys

[Guest longinvestor]

Good article in WSJ

 

Vinod

 

High-Frequency Hyperbole

Beware of critics who are 'talking their book' about trading that lowers costs.

By

Clifford S. Asness And Michael Mendelson

 

A few nights ago, CBS's "60 Minutes" provided a forum for author Michael Lewis to announce that Wall Street is "rigged" and for the sponsors of a new trading venue called IEX to promise to unrig it. The focus of the TV segment was high-frequency trading, or HFT, an innovation now over 20 years old.

 

The stock market isn't rigged and IEX hasn't yet generated a lot of interest. In our profession, what we saw on "60 Minutes" is called "talking your book"—in Mr. Lewis's case, literally.

 

The onslaught against high-frequency trading seems to have started about five years ago when a blogger made a wildly exaggerated claim about one firm's HFT profits. Nowadays after any notable market event, and again last Sunday for no reason other than a book launch, the world gets bombarded with arcane details and hyperbolic assertions about HFT strategies. If you find the discussion overwhelming, we have some good news: The debate can be understood without knowing how equity orders are routed, matched or canceled.

 

Few professionals completely understand the details of market microstructure. Rather, when someone has a strong opinion about the subject, it's likely to be what they want you to believe, not what they know.

 

Our firm, AQR Capital Management, is an institutional investor, primarily managing long-term investment strategies. We do not engage in high-frequency trading strategies. Here is where our interest lies: What is good for us is lower trading costs because it translates into better investment performance and happier clients, which makes our business slightly more valuable.

 

How do we feel about high-frequency trading? We think it helps us. It seems to have reduced our costs and may enable us to manage more investment dollars. We can't be 100% sure. Maybe something other than HFT is responsible for the reduction in costs we've seen since HFT has risen to prominence, like maybe even our own efforts to improve. But we devote a lot of effort to understanding our trading costs, and our opinion, derived through quantitative and qualitative analysis, is that on the whole high-frequency traders have lowered costs.

 

...

 

How HFT has changed the allocation of the pie between various market professionals is hard to say. But there has been one unambiguous winner, the retail investors who trade for themselves. Their small orders are a perfect match for today's narrow bid-offer spread, small average-trade-size market. For the first time in history, Main Street might have it rigged against Wall Street.

 

Mr. Asness is managing and founding principal of AQR Capital Management, where Mr. Mendelson is a principal and portfolio manager. Aaron Brown, chief risk officer at the firm, also contributed to this op-ed.

 

Not to single you out Vinod, but this WSJ piece was posted, sliced and diced on this discussion forum, just a few pages back. I suppose this is likely to happen with long threads, there is not enough time or patience to read what has already been posted.

[rkbabang]

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.

 

Well there are numbers out there, for example, "[in 2012], according to estimates from Rosenblatt Securities, the entire speed-trading industry made about $1 billion, down from its peak of around $5 billion in 2009."

 

I dunno in my book $1 billion a year is enough that it warrants attention to see if it's actually legal or not.  My own opinion is that it is probably a lot higher, and the firms involved in this have figured out ways to make even more money from this strategy that is not disclosed, but that is just conjecture.

 

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?

 

Well my point is that if you are a typical retail investor and buy $50k of a stock and lose $500 of that (0.1%) to the HFT's then you probably won't know or care very much.  If you don't trade much then this is just rounding error for you.  This I think is why it has gone on so long, it's an annoyance but not a deal breaker for anyone.

 

No retail investor loses $500 on a $50K trade to HF traders.  If you used a limit order you lost nothing, if you used a market order to make a $50K trade you didn't care what price you got as long as it was in the ballpark of the current bid/ask, so again, you lost nothing.  The tiny spreads we see today (at least with large caps) allow you to make market orders and still get around the current price.  I still don't do it though, because there is no reason to. If I want to be sure my trade goes through I place a limit a few cents above the current ask if I'm buying or a few cents below the current bid if I'm selling.  And many times I get a price better than my limit.  Now try placing a market order on a micro-cap stock where there is no HF Trading.

 

[merkhet]

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.

 

It is usually a good idea to come off as condescending when trying to explain something. It creates the right tone and environment for explanation and learning.

[rkbabang]

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.

 

It is usually a good idea to come off as condescending when trying to explain something. It creates the right tone and environment for explanation and learning.

 

So you are saying sarcasm is more effective? :)

 

But yes, you are correct (or at least the opposite of what you wrote being what you meant is correct) , I should have left all of that out of my post.

[APG12]

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.

 

It is usually a good idea to come off as condescending when trying to explain something. It creates the right tone and environment for explanation and learning.

 

So you are saying sarcasm is more effective? :)

 

But yes, you are correct (or at least the opposite of what you wrote being what you meant is correct) , I should have left all of that out of my post.

 

I've found sarcasm is best for giving advice. nyuck nyuck nyuck  ;D

 

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.'

 

Well woopedy do. There's all sorts of fees and transaction expenses I don't like or don't think are efficient. So what?

[dcollon]

Charles Schwab's view on HFT:

 

http://pressroom.aboutschwab.com/press-release/corporate-and-financial-news/schwab-statement-high-frequency-trading

[merkhet]

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.

 

It is usually a good idea to come off as condescending when trying to explain something. It creates the right tone and environment for explanation and learning.

 

So you are saying sarcasm is more effective? :)

 

But yes, you are correct (or at least the opposite of what you wrote being what you meant is correct) , I should have left all of that out of my post.

 

Exactly. Sarcasm >> {everything else} :)

[APG12]

Charles Schwab's view on HFT:

 

http://pressroom.aboutschwab.com/press-release/corporate-and-financial-news/schwab-statement-high-frequency-trading

 

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.

[Otsog]

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:

 

http://pressroom.aboutschwab.com/press-release/corporate-and-financial-news/schwab-statement-high-frequency-trading

 

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. 

 

 

[APG12]

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.

 

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.

 

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. 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.

[tiddman]

No retail investor loses $500 on a $50K trade to HF traders.  If you used a limit order you lost nothing, if you used a market order to make a $50K trade you didn't care what price you got as long as it was in the ballpark of the current bid/ask, so again, you lost nothing.

 

You said earlier that nobody knows how much the HFT'ers are making, yet here you refute that they're making $500 on this trade...

 

Say you place a limit order to buy something at $17 and it's currently available in the market at $16.95, and instead of getting filled at $16.95, someone else buys it at $16.95 and sells it to you at $17.  Would that bother you?  How about $16.99?  Maybe it wouldn't and you're just willing to give away a few basis points on every trade to someone?

 

If so, would you be willing to pay $500 per trade instead of $10?

 

Maybe the assumption that people disagree on is whether or not a quoted price should be available to everyone at the same time equally, like if a stock is for sale for $20, a fair market suggests that any investor of any size can get that price.  How about if certain traders can get it at $20, large institutional investors can get it at $20.02, smaller institutions at $20.04, and retail investors at $20.10.  Would that be fair?

[writser]

But the even deeper reason this book made me angry is because Lewis has given new firepower to the self-righteous idiot Luddites who like to kill flies with sledgehammers. I was more disgusted and frightened by the comments attached to various articles on the HFT issue than anything else. All these people who probably don’t know the first thing about trading saying “Oh yeah, it’s obvious HFT is a blatant scam, it’s obvious the American capitalist system is a blatant rip-off,” on and on. The only thing that is “obvious” is that the average commentator is an opinionated fool who feels far too strongly about far too many things he doesn’t know the first thing about, and Lewis played right into that like the worst huckster.

 

[..]

 

America has a real problem with excitable idiots and demagogue politicians happy to exploit that excitement, with very bad things the net result. (Government shutdown and near debt default anyone?) And by creating a hyperbolic issue where one should not exist, Lewis has given ammunition to those hyper “fixers” and muddied the waters of what could have been a more logical and fair debate.

 

In a more reasonable world, Lewis could have taken another year or two before rolling out this book. In addition to interviewing his “hero,” Katsuyama, he could have interviewed a bunch of floor traders and market makers. He could have investigated the long history of liquidity provision, balancing out its pluses and minuses. He could have examined the transition from floor trader to black box as a form of 21st century change. He could have compared the profit spreads of HFT firms to the old i-bank divisions. He could have concluded that yes, HFT has some “wild west” about it, and there is some unsavory stuff going on, but we need to recognize that a core value function is being provided here, and that the industry needs to be cleaned up and polished, not written off as “rigged!”

 

The book should have been longer anyway. Not because “long” is intrinsically better, but because it feels rushed in a sloppy way. This was not a true effort to explore an interesting and important story (the rise of HFT) from multiple angles, as past Lewis books have been. This was more a flat-out bromance between an author looking for his next big hit and a Canadian entrepreneur who had all the quirky hallmarks of “hero” that Lewis picked up like a bloodhound on the scent. And he manages to insult real investors and traders in the process by calling us “dumb tourists” to boot. So lame.

 

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

[Otsog]

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?

 

[ni-co]

The best about this whole discussion is that we have a very nice control experiment to see whether Lewis is right: There is not a single reason why IEX should succeed if the EFT practices it seeks to hinder were a net benefit to the market. If IEX succeeds in a big way (or other exchanges change their model to resemble IEX more closely) then Lewis will have been right.

[Otsog]

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

 

Definitely the funniest I have read so far.  A lot of words for not a single challenge on the facts. 

[Otsog]

Interactive Brokers to offer direct routing to 'Flash Boys' dark pool IEX

 

http://www.cnbc.com/id/101552626

 

Under the service, which is expected to be available in 5 to 10 days, customers will be able to allow Interactive Broker's "smart router" decide for them which exchange on which to execute an order, or specify that they only want the trade to happen on IEX.

[rkbabang]

The best about this whole discussion is that we have a very nice control experiment to see whether Lewis is right: There is not a single reason why IEX should succeed if the EFT practices it seeks to hinder were a net benefit to the market. If IEX succeeds in a big way (or other exchanges change their model to resemble IEX more closely) then Lewis will have been right.

 

+1 Bingo!

[APG12]

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?

 

Yes, please let me clarify. I'm not referring to a specific document but rather to what a market is by its very nature. A fundamental characteristic of a market is that participants interact voluntarily. What makes a characteristic 'fundamental' is that it is a necessary condition and gives rise to the other characteristics of a market (for example, volatility, price discovery, etc). That is, without voluntary interaction a "market" would be nothing like what we call a market. It wouldn't be a market at all. This is what I mean by fundamental. It's intrinsic to the concept. Try imagining a market where interactions are not voluntary. Would it have any of the characteristics which are common to all markets? I would say definitely not. In a market place people enter into agreements because they are expecting to gain from the transaction. This is a very important characteristic of a market because it implies that the interactions are win-win. If the transaction is not, you don't engage in it. A forced transaction, on the other hand, may very well be lose-win or lose-lose. All of these reasons are why voluntary interaction is fundamental to the concept of a market place. I could go on if you think it'd make it clearer but I think I've made my point.

 

There are market places where some actions are voluntary and some are forced (ie regulated). These are not market places in the fullest sense of the word but because they retain some voluntary aspects they largely function like a market. The extent to which interactions are not voluntary is the extent to which you remove the fundamental factor that makes a market place a market and the extent to which your interaction should not truly be considered a market. Does that statement make more sense in light of my explanation about what it means for something to be fundamental? What you see is the more distortion the government brings to the market by injecting force the more the market breaks down and ceases acting like a market. Banking, housing, education, student loans, health care...

 

Now, look at perfect competition. Perfect competition is a construct used to explain certain interactions in a market place. It is not fundamental in the sense that it is not intrinsic to the concept of a market nor the source of what it means to be a market.

 

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.

 

Well, I think it's silly because it does not accurately describe reality and is therefore a bizarre choice for an ideal. But now do you see why your question about antiquated principles is an invalid question? Voluntary interaction as the fundamental component of a market can never be antiquated. It is what it means to be a market. It is a fact and not at risk of becoming antiquated.

 

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.

 

Haha, no worries!

 

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?

 

Yes, fraud in a strictly legal sense. If you have a case for how you were defrauded you go to the government and say, hey, I had an agreement with this guy to do such and such and he did something else which I had not agreed to. I gave him money and he tricked me. Take front running. It's clear why front running is fraud. You pay your broker to do a certain job- he does something else to which you had not agreed costing you money. Now who is being defrauded w/ HFT? If you had agreed to purchase a security at a price and someone else came and raised that price without your knowledge thereby stealing from you- that would be fraud. However, when the price goes up from HFT, you know the new price before you pay. There is simply no fraud going on that I know of. The interactions are voluntary. When you see that HFT has raised your price, you still have the choice not to buy. You might not like the new price- but so what? It's not your stock and whoever owns it can offer it for whatever price they want. Don't like it? Don't buy it.

 

Would I describe the practices as deceptive? I presume that you think the deception arises from seeing a bid in the market for a certain price but only being able to buy it at a higher price. I don't think it's deception because the price you see is really the price that it's being offered for. It might cost you personally a few pennies more to buy it but that really is the price it's offered at. It's too bad you don't have the technology to take advantage of the displayed price but calling it deceptive is a little silly. People should just be aware that they don't have the fastest trading platforms on earth and therefore should expect to pay a bit more.

 

I hope that clarified my position and I'm sure you'll disagree about... well probably everything.  :P

[Otsog]

Yes, please let me clarify. I'm not referring to a specific document but rather to what a market is by its very nature. A fundamental characteristic of a market is that participants interact voluntarily. What makes a characteristic 'fundamental' is that it is a necessary condition and gives rise to the other characteristics of a market (for example, volatility, price discovery, etc). That is, without voluntary interaction a "market" would be nothing like what we call a market. It wouldn't be a market at all. This is what I mean by fundamental. It's intrinsic to the concept. Try imagining a market where interactions are not voluntary. Would it have any of the characteristics which are common to all markets? I would say definitely not. In a market place people enter into agreements because they are expecting to gain from the transaction. This is a very important characteristic of a market because it implies that the interactions are win-win. If the transaction is not, you don't engage in it. A forced transaction, on the other hand, may very well be lose-win or lose-lose. All of these reasons are why voluntary interaction is fundamental to the concept of a market place. I could go on if you think it'd make it clearer but I think I've made my point.

 

Oh, market properties.  Markets are simply one person selling to two, or two people selling to one.  Markets do not require voluntary participation.  In almost all cases voluntary participation is required for optimum efficiency so it usually an ideal trait.  Equitable information is also almost always required for optimum efficiency so it is usually an ideal trait.

 

The American healthcare market is a perfect current example of a non-voluntary market.  When it was voluntary is was the least efficient developed healthcare system in the world.  It will be interesting to see the effects of mandatory participation. 

 

There are market places where some actions are voluntary and some are forced (ie regulated). These are not market places in the fullest sense of the word but because they retain some voluntary aspects they largely function like a market. The extent to which interactions are not voluntary is the extent to which you remove the fundamental factor that makes a market place a market and the extent to which your interaction should not truly be considered a market. Does that statement make more sense in light of my explanation about what it means for something to be fundamental? What you see is the more distortion the government brings to the market by injecting force the more the market breaks down and ceases acting like a market. Banking, housing, education, student loans, health care...

 

Putting aside whether we agree or not on voluntary participation being a property of a market that still doesn't prove anything about optimal efficiency.  If we never agree on definitions that's fine, but this thread is really about optimal efficiency of markets.  I don't find regulation = force = distortion = market break down convincing at all.  It happens for sure, but so does this:  lack of regulation -> mis-aligned incentives -> predatory participants -> distortion -> market break down. 

 

Absolute on either end (laissez-faire or regulatory) is usually disastrous with the optimal utility coming somewhere in between.  If our ideal for a market is fixed by definition instead of transitory to seek optimal utility then of course we will start making erroneous generalizations like government = bad without exception, or humans = rational actors.

 

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?

 

Yes, fraud in a strictly legal sense. If you have a case for how you were defrauded you go to the government and say, hey, I had an agreement with this guy to do such and such and he did something else which I had not agreed to. I gave him money and he tricked me. Take front running. It's clear why front running is fraud. You pay your broker to do a certain job- he does something else to which you had not agreed costing you money. Now who is being defrauded w/ HFT? If you had agreed to purchase a security at a price and someone else came and raised that price without your knowledge thereby stealing from you- that would be fraud. However, when the price goes up from HFT, you know the new price before you pay. There is simply no fraud going on that I know of. The interactions are voluntary. When you see that HFT has raised your price, you still have the choice not to buy. You might not like the new price- but so what? It's not your stock and whoever owns it can offer it for whatever price they want. Don't like it? Don't buy it.

 

You said your defense of HFT is that it is voluntary and not fraudulent.  Your interpretation of fraud is in strictly a legal sense.  If the government changes the laws or we later find out law breaking was happening, does your opinion change? 

 

 

Would I describe the practices as deceptive? I presume that you think the deception arises from seeing a bid in the market for a certain price but only being able to buy it at a higher price. I don't think it's deception because the price you see is really the price that it's being offered for. It might cost you personally a few pennies more to buy it but that really is the price it's offered at. It's too bad you don't have the technology to take advantage of the displayed price but calling it deceptive is a little silly. People should just be aware that they don't have the fastest trading platforms on earth and therefore should expect to pay a bit more.

 

Pre-FB I think that the public knowledge of HFT was infinitesimal, people weren't aware and it was deceptive. I think it's been shown that even people you would expect to know with decades of experience (Ackman, Einhorn, Loeb etc.) didn't know before Brad told them (they suspected, but didn't know).  You haven't done this, but others have insinuated everyone should have known and if you didn't know you were stupid or a retard.  The market people were seeing wasn't the real market and they didn't know it.

 

I think FB and the associated media coverage has done an excellent job of presenting the case for public consumption.  Only now do people know the market is not the market, the market is not a level playing field, the market is dysfunctional. 

 

In both cases we have a dysfunctional market.  I love the free market (operating efficiently :)) ) so if Brad can solve this dysfunction through his exchange or the public pressure from the book causes the big guys on Wall Street to institute investor protection it's a lot better than the impotent SEC getting involved.

 

I hope that clarified my position and I'm sure you'll disagree about... well probably everything.  :P

 

Yes, that was helpful, thanks!  :)

[yadayada]

honestly i think that all that time spent typing those posts and reading this thread would have been better spent looking for investments ;)

[fareastwarriors]

http://www.bloomberg.com/news/2014-04-03/vanguard-says-minority-of-high-speed-traders-may-abuse.html

 

 

Vanguard Says Minority of High-Speed Traders May Abuse

[APG12]

Oh, market properties.  Markets are simply one person selling to two, or two people selling to one.  Markets do not require voluntary participation.

 

Hmmm. Well I would argue that this is just not true. If the government forces me to sell my car to you for $20k no more no less, that would not be a market. Markets are not just one person selling to another. It's two people coming to an agreement to transact.

 

The American healthcare market is a perfect current example of a non-voluntary market.  When it was voluntary is was the least efficient developed healthcare system in the world.  It will be interesting to see the effects of mandatory participation.

 

Yes, I would agree that the American healthcare system is not a fully voluntary system in a lot of ways. I don't think it was before the individual mandate either (pre-OCare 50% of spending was from the government, insurance regulation, etc). But my point about markets as voluntary was not that certain markets can't function with some elements of freedom and some of coercion. Pretty much every market these days has some coercive element to it. What I was trying to say is that there must be some element of freedom or you wouldn't even call it a market because it wouldn't be a market in any sense of the term. With that being said it doesn't make sense to point at a mixed economy and say, look this functions with some freedom and some coercion. It's only thanks to the element of freedom that it functions at all.

 

Putting aside whether we agree or not on voluntary participation being a property of a market that still doesn't prove anything about optimal efficiency.  If we never agree on definitions that's fine, but this thread is really about optimal efficiency of markets.

 

Yes I agree with you here too and consequently it makes sense why you're arguing above that the mixed healthcare system we had was inefficient.

 

You said your defense of HFT is that it is voluntary and not fraudulent.  Your interpretation of fraud is in strictly a legal sense.  If the government changes the laws or we later find out law breaking was happening, does your opinion change?

 

Yes, I'm using the word fraud in a legal sense. No, I would say my opinion is not dependent upon the law because I think fraud has an objective definition. Even if what Bernie Madoff was doing was considered legal it was still fraud because he was lying to his investors.

 

Absolute on either end (laissez-faire or regulatory) is usually disastrous with the optimal utility coming somewhere in between.  If our ideal for a market is fixed by definition instead of transitory to seek optimal utility then of course we will start making erroneous generalizations like government = bad without exception, or humans = rational actors.

 

I think this is really where the breakdown is. I've always been interested in why people disagree about things, in general. We're two honest people looking at the same issue and discussing it with each other yet come to completely different conclusions. And worse, we're pretty much unable to convince each other of our positions. When this happens it seems to me that it's almost always because there is a disagreement about a more fundamental issue.

 

In this case I think it's a moral issue. When two people agree to a voluntary transaction, I have a moral problem with forcing them to act against their will. Who is to decide how a person lives their life? Who should be making these choices? Essentially, who does your life belong to? I would argue, as the declaration of independence states, that your life belongs to you.

 

I think you can see that coming at this from my perspective any arguments about efficiency are really not going to be very impactful. Or to you, concerned with efficiency as you are, are not going to have a much harder time buying this argument: "regulation = force = distortion = market break down" I have a certain moral view that confirms that theory and you don't. I do believe it's true apart from the moral aspect but nonetheless it's a lot easier to convince me of its truth than it is to convince you.

 

I think FB and the associated media coverage has done an excellent job of presenting the case for public consumption.

 

Mehhhhhhh. I don't know. The whole 'the market is rigged' and David Einhorn as a 'dumb tourist' in a casino were a bit much. I think FB probably presents are one-sided view (although I've yet to read it).

 

Only now do people know the market is not the market, the market is not a level playing field, the market is dysfunctional.

 

I'd argue that there is no such thing as a level playing field in the sense that you're using the term but I think that's another debate. I'm afraid that unless our moral assumptions are in agreement we stand a fat chance of ever agreeing on whether HFT should be allowed. With that being said, thanks for an engaging discussion!  :)

 

honestly i think that all that time spent typing those posts and reading this thread would have been better spent looking for investments ;)

 

;D I'd say you're right. Although the wisest folks are probably the ones that never bothered to post in this thread. I need to remind myself more often: "Better to remain silent and be thought a fool than to speak and to remove all doubt."

[Otsog]

In this case I think it's a moral issue. When two people agree to a voluntary transaction, I have a moral problem with forcing them to act against their will. Who is to decide how a person lives their life? Who should be making these choices? Essentially, who does your life belong to? I would argue, as the declaration of independence states, that your life belongs to you.

 

I think you really nailed it here.  I have a moral problem with duplicitous practices for the purposes of predation.  I don't see any restrictions on freedom here, you can do whatever you want.  If society thinks you are a cheater they may change the rules of the game or ostracize you. They are not inhibiting your freedom, merely exercising theirs.  Anyone can go start their own exchange and write their own rules.

 

honestly i think that all that time spent typing those posts and reading this thread would have been better spent looking for investments ;)

 

;D I'd say you're right. Although the wisest folks are probably the ones that never bothered to post in this thread. I need to remind myself more often: "Better to remain silent and be thought a fool than to speak and to remove all doubt."

 

There's not much to do in the Arctic, and this is a lot more interesting than CFA studying  :D

 

Agreed, I think that is an apt quote for me.  I will work on that patience thing Warren and Charlie are always yammering on about.

[Grenville]

This is hilarious. It's in regard to the interview with Brad Katsuyama from Tuesday.

 

BATS Forced to Correct Statements by President O’Brien on How Its Exchanges Work

http://blogs.wsj.com/moneybeat/2014/04/03/bats-forced-to-correct-statements-by-president-obrien-on-how-its-exchanges-work/

 

BATS Global Markets Inc., under pressure from the New York Attorney General’s office, corrected statements made by a senior executive during a televised interview this week about how its exchanges work.

 

BATS President William O’Brien, during a CNBC interview Tuesday, said BATS’s Direct Edge exchanges use high-speed data feeds to price stock trades. Thursday, the exchange operator said two of its exchanges, EDGA and EGX, use a slower feed, known as the Securities Information Processor, to price trades.

[jberkshire01]

I didn't go through this whole thread, so I apologize if this Munger clip from CNBC a year ago has already been posted, but as always, Charlie is to the point: http://www.valueinvestingworld.com/2014/04/berkshires-munger-high-frequency.html