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Guest 50centdollars

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.

 

You would think that the president of an exchange would know how his exchange works? What a donkey.

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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.

 

You would think that the president of an exchange would know how his exchange works? What a donkey.

 

You don't think he knows?

 

When there is a small coterie of people making billions of dollars from something which has zero risk, I like to invert the old saying:  "Never ascribe to stupidity that which is adequately explained by malice."

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When there is a small coterie of people making billions of dollars from something which has zero risk

 

These guys take risk.  It's not like the good old days of market making where market makers and brokers didn't take any risk.

 

And it's a problem that they take risk because we could see something worse than the flash crash.

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  • 11 months later...

I work at a trading firm(though not the high frequency kind and recently had someone from IEX come and try to pitch us the exchange). That, and some of our own testing, I think I can explain how some "HFT"s make money.

 

Lets say a stock has a spread of .25. Bid at 10.00 and Offer at 10.25.

You want to buy the stock so you bid for 500 shares on Nasdaq at 10.01. To your surprise, the second you put in a bid for 500 shares at 10.01, a bid on bats, arca, and edgex also show up at your price, sometimes they even go higher than your price at 10.02.

 

Situation A. A few seconds after, A sell order comes in for 2000 shares market. The order at 10.02 gets filled, then you get your fill at 1.01, and the price goes even lower because not all of the 2000 shares were to get filled. That large sell order moves the market. In this case the HFT comes out ahead because he bought at 10.02, sold to you at 10.01 but knows that the true market price is lower because of the large order.

 

Situation B. A few seconds later, A sell order comes in for 200 shares. The limit to buy at 10.02 gets filled and you at 10.01 don't get filled. The limit order at 10.02 also gets some rebates from the exchange for "providing liquidity". The HFT is coming out ahead because he is getting a rebate for adding liquidity, and doesn't fear being on the wrong side of the trade because there are no more sell orders.

 

The HFT's say that by being there, they are tightening spreads and providing liquidity, but forget to mention that they have an edge and provide liquidity when it's convenient. 

 

I was told that an old strategy was when a large bid would come into the market, to bid .01 above that and sell to it if prices start to move in the wrong direction. HFT's do this, but because of their speed, they do it to every buyer and seller.

 

Related strategy.

a stock is trading 119.99 by 120.00. There are 25 lots on each exchange of bats, arca, edgex, and nyse. You are a willing buyer of 100 lots and put in a market order to buy 100 lots. There are no other buyers at that exact moment so you should be able to get all of your liquidity. but you only get 25 of your 100 lots and the rest of the 75 are gone. Basically after you buy your 25 lots, every HFT can see that you need to buy 75 more and go to it and take it away. They then go ahead and sell it back to you, for a penny or more.

 

Basically imagine you need to buy 100 apples and there are 4 markets each selling 25 apples. You buy 25 at the first market, but there is an HFT on a helicopter watching you and when you head to the other markets, he has already gotten there and bought all the apples and willing to sell to you for a penny or two more. The speed which this all happens is imperceptible to the human eye. All of this happens under 1/3 of a second.

 

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Legalised front running. Good explanation.

 

BeerBaron

 

The problem is it's worse then that.  The customer is now HFT.  The SEC has a subscription feed where a HFT can buy access to SEC filings 1-2 seconds early.  In computer time that's an eternity.  A server can parse a filing in well under a second as well as make a buy or sell decision based on that.  When I saw the program I believe the SEC was charging $50k a month for this.  The SEC is selling their regulatory data to HFT, it's not only legal it's endorsed by the regulatory body!

 

Exchanges make their money selling their data and feeds to HFT firms.  Brokerage firms sell customer order flow to HFT firms.  HFT is so profitable (how could it not be??) that they are a ready buyer for any and all forms of data and suddenly the companies we trust with our trades and execution and regulation are happy to sell out.

 

HFT to me IS the narrative that Wall Street is screwing average Americans.  When I hear Avg Joe or Avg Jane talk about how Wall Street is ripping the guts out of the middle class they aren't talking about high mutual fund fees or boiler room operations.  They're talking about the perceived unfairness and edge Wall Street has given itself.  This is what people are fuming about.  Wall Street is one step ahead and even if they do mess something up they have so much power and clout that their sins are forgiven and all mistakes erased.

 

I was talking to a wealthy individual recently who works in markets and is VERY concerned about this.  He said the gap (real or perceived) between the rich and poor is a problem.  I guess this had troubled him so much he studied these gaps in history and how big they needed to be before commoners revolted.  According to this guys estimation we're beyond the average gap size that's led to revolts in the past.  I don't know what that means.  I can sense the hostility when talking to non-finance types.

 

This is a random story, but I'm well on my way down the rabbit hole so I might as well continue.  I was skiing in Utah recently.  I chat with others on the lift, I chat with anyone who has ears..forgive me.  Anyways I was talking to a girl who raised money for non-profits.  She asked what I do.  I discussed a little of my tech company that provides tools to better utilize bank data.  I am not a bank, I don't fund banks etc.  She flipped from being a nice and well adjusted woman to ranting about how I was helping banks screw over Americans and I should be ashamed of myself.  This is not an uncommon attitude.  Maybe an hour or two earlier in the day I rode the lift with a Cxx of JEF.  The guy tried to hide that he worked in finance.  He had told me he lives in West Chester and works in Manhattan, I said "you work in finance?" he dodged the question etc.  I said it's what I do as well and boom..suddenly the guy opens up and we had a great conversation.  He wasn't out there advertising his title, just the mere mention of finance in NYC elicits the reaction of that girl over and over.  I don't blame the guy.

 

I don't know how this ends, but I don't see how it gets fixed.

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Oddball,

 

The funny thing is that if people have to hate, they should hate tech people instead of hating finance people. But they don't - apart from SF Google bus incident, I guess.

 

Anyway, I'm too lazy to write about this, it's more of a conversation over beer rather than message board writing piece.  8)

 

Edit: in short: I disagree with your arguments and your conclusions. Technology is a bigger cause of inequality than finance. They are intertwined though. There is also USA politics... well I should not start on that. ;)

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Related strategy.

a stock is trading 119.99 by 120.00. There are 25 lots on each exchange of bats, arca, edgex, and nyse. You are a willing buyer of 100 lots and put in a market order to buy 100 lots. There are no other buyers at that exact moment so you should be able to get all of your liquidity. but you only get 25 of your 100 lots and the rest of the 75 are gone. Basically after you buy your 25 lots, every HFT can see that you need to buy 75 more and go to it and take it away. They then go ahead and sell it back to you, for a penny or more.

 

Basically imagine you need to buy 100 apples and there are 4 markets each selling 25 apples. You buy 25 at the first market, but there is an HFT on a helicopter watching you and when you head to the other markets, he has already gotten there and bought all the apples and willing to sell to you for a penny or two more. The speed which this all happens is imperceptible to the human eye. All of this happens under 1/3 of a second.

 

I don't think they actually "see" the order.  I suspect that they use a special order type that automagically cancels if the whole order would fill.  So one strategy is:

 

Sit there on the bid and the ask all day flipping shares by buying at the bid and selling at the ask.  Market makers have an advantage because they can front run you via price improvement.  Suppose the bid/ask is

$100.00 / $100.01

They place their bid at $100.0001 and their ask at $100.0099.  So they cut ahead by a fraction of a penny (or a subpenny).

 

They might only want to do this for a small number of shares.

 

If somebody comes in with a buy order for 500,000 shares, suddenly their order is pre-emptively cancelled and doesn't get filled.  They do this because somebody trying to buy that many shares has a good chance of moving the market.

 

-------------------

 

The bottom line is that retail brokers, institutional brokers, and the exchanges are selling out their clients to market makers and other financial parasites (HFTs, intermediaries, etc.).  That's the simplest way of looking at the problem.

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I can sense the hostility when talking to non-finance types.

 

This is a random story, but I'm well on my way down the rabbit hole so I might as well continue.  I was skiing in Utah recently.  I chat with others on the lift, I chat with anyone who has ears..forgive me.  Anyways I was talking to a girl who raised money for non-profits.  She asked what I do.  I discussed a little of my tech company that provides tools to better utilize bank data.  I am not a bank, I don't fund banks etc.  She flipped from being a nice and well adjusted woman to ranting about how I was helping banks screw over Americans and I should be ashamed of myself.  This is not an uncommon attitude.  Maybe an hour or two earlier in the day I rode the lift with a Cxx of JEF.  The guy tried to hide that he worked in finance.  He had told me he lives in West Chester and works in Manhattan, I said "you work in finance?" he dodged the question etc.  I said it's what I do as well and boom..suddenly the guy opens up and we had a great conversation.  He wasn't out there advertising his title, just the mere mention of finance in NYC elicits the reaction of that girl over and over.  I don't blame the guy.

 

I don't know how this ends, but I don't see how it gets fixed.

 

Financiers nakedly pursue their own self interest and the pursuit of self interest is widely regarded as immoral.

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I can sense the hostility when talking to non-finance types.

 

This is a random story, but I'm well on my way down the rabbit hole so I might as well continue.  I was skiing in Utah recently.  I chat with others on the lift, I chat with anyone who has ears..forgive me.  Anyways I was talking to a girl who raised money for non-profits.  She asked what I do.  I discussed a little of my tech company that provides tools to better utilize bank data.  I am not a bank, I don't fund banks etc.  She flipped from being a nice and well adjusted woman to ranting about how I was helping banks screw over Americans and I should be ashamed of myself.  This is not an uncommon attitude.  Maybe an hour or two earlier in the day I rode the lift with a Cxx of JEF.  The guy tried to hide that he worked in finance.  He had told me he lives in West Chester and works in Manhattan, I said "you work in finance?" he dodged the question etc.  I said it's what I do as well and boom..suddenly the guy opens up and we had a great conversation.  He wasn't out there advertising his title, just the mere mention of finance in NYC elicits the reaction of that girl over and over.  I don't blame the guy.

 

I don't know how this ends, but I don't see how it gets fixed.

 

Financiers nakedly pursue their own self interest and the pursuit of self interest is widely regarded as immoral.

 

It's worse when you are taking money from other investors who 1) are playing by the rules 2) don't know what's happening and 3) can't do much about it.

 

Having cheaters in a casino stealing from the house is one thing (and if the house found out, they used to break your legs, rather than sell you their deal flow and help you by creating new game rules that only you know about), but cheaters stealing from other players is another. The big institutional investors are in good part pension funds and such, it's not all hedgies getting skimmed.

 

The trick that the high speed scammers are playing is they're trying to conflate all HFT, and then say "but spreads are lower than at any time". That's BS. Electronic trading is good, eletronic market makers are good. But people who front-run orders (to which they have access, or via weird order types that aren't meant to be filled) between exchanges by buying what people are trying to buy before them and then reselling higher has zero utility. It's basically letting a bunch of mosquitos in your house. If you removed that yucky part of HFT but kept electronic trading and market makers, it would have zero negative impact and many positive ones.

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I suspect that they use a special order type that automagically cancels if the whole order would fill.

 

This seems so strange. Does it really exist and does it have a legitimate use?

 

It does exist, it doesn't have a legitimate use.

 

At one point in Flash Boys they find that some exchange had created something like 25 undocumented order types that most people don't have access to, or even know exist, but scammy HFTs uses them to sniff things out and bait orders.

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  • 2 weeks later...

How one trader made $2.4 million off a tweet

 

http://fortune.com/2015/04/01/2-4-million-off-a-tweet/

 

"Someone made a big bet on a company minutes before news came out about a possible acquisition. Was it insider trading or a well-programed computer that placed the bet? [...]"

 

This is not high frequency trading at all though.

 

And if the scoop was false, the trader would have lost the money they put in based on WSJ tweet... so it was risky.

 

TLM trade last year was much less risky IMHO and was available for a whole day...  8)

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