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Adaptation From Flash Boys Offers Inside Look at High-Frequency Trading 246

Posted by samzenpus
from the rigged-game dept.
Lasrick (2629253) writes "This NYT adaptation from the book provides an in-depth and infuriating look at how the stock market is rigged. Brad Katsuyama of the Royal Bank of Canada couldn't understand why stock he was trying to buy would suddenly vanish: 'Before RBC acquired this supposed state-of-the-art electronic-trading firm, Katsuyama's computers worked as he expected them to. Suddenly they didn't. It used to be that when his trading screens showed 10,000 shares of Intel offered at $22 a share, it meant that he could buy 10,000 shares of Intel for $22 a share. He had only to push a button. By the spring of 2007, however, when he pushed the button to complete a trade, the offers would vanish.' The ensuing investigation by Katsuyama led him to design a program that actually slowed down the trades. But Katsuyama's investigation revealed so much about how the system is rigged."
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Adaptation From Flash Boys Offers Inside Look at High-Frequency Trading

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  • ACM issue on HFT (Score:5, Informative)

    by peter303 (12292) on Monday March 31, 2014 @02:22PM (#46623681)
    Last August the ACM had a whole issue [acm.org] on detailed technical aspects of all parts of trading. I dont recall talk a part on front-trading. But how to shave off yet another few microseconds. Fascinating.
  • by Soulskill (1459) Works for Slashdot on Monday March 31, 2014 @02:34PM (#46623787) Homepage

    You can opt out of the beta by hitting the Slashdot Classic link in the footer. Or click this: http://slashdot.org/?nobeta=1 [slashdot.org]

  • Re:Limit order? (Score:4, Informative)

    by gurps_npc (621217) on Monday March 31, 2014 @03:28PM (#46624251) Homepage
    Did you read the article? It doesn't sound like you did?

    Because nothing you said focused on the problems the article discussed.

    One of them was the ability for people to see your trade and then cancel their own order, all before your trade was executed. All made possible because the HFTers were located fiber-optic-distance closer to the exchange servers

    Limit orders work fine for small investors, but don't work on high trade situations - you end up ensuring that you get the worst possible price. That is, you only get executed after the price has moved in the wrong direction.

  • by m.dillon (147925) on Monday March 31, 2014 @03:30PM (#46624271) Homepage

    No, you didn't read the article carefully enough (or at all). The order did in fact vanish. The HFT has bids or asks up on all the exchanges. When they see a large order fill on one exchange they front-run the order on all the others (which involves canceling the order on the other exchanges and then taking some other action) before the originators order reaches the other exchanges.

    The other point here is that many of these exchanges offer special order types designed to allow HFTs to take advantage of normal investors. For example, orders which either match instantly or auto-cancel if instant execution cannot occur. And many other types beyond the standard market, limit, and split-the-difference orders.

    So, yes, the potentially matching orders went poof.

    -Matt

  • by Minwee (522556) <dcr@neverwhen.org> on Monday March 31, 2014 @03:51PM (#46624513) Homepage

    if someone put a Lamborghini on craigslist for $1, and someone else bought it before you, your order didn't vanish... it simply can't be placed. the offer is no longer valid.

    And that's also nothing at all like HFT.

    It's more like one person has offered a Lamborghini on craigslist for $300,000, another has offered one on autotrader for $310,000 and a third is on eBay for $325,000. You try to buy all three of them for you client, a legally bind racing enthusiast for whom this is a one week supply. The ads have been up for three days already so you send an offer to each of the sellers confident that you can get all three. A response comes back from eBay and you buy that car for $325,000, but someone else who just happened to be watching eBay at the moment you bought it quickly buys the other two cars in the time between your initial buy and the time that your offers arrive at craigslist and autotrader.

    While you are wondering what just happened two new Lamborghinis show up on eBay for $325,000 each. You sigh, buy them, and try to think of a nice way to explain to your client that $935,000 in cars just turned into $975,000 in less than a tenth of a second.

    The exploit used by high frequency traders isn't the fact that they are able to buy cars before you can, it's that they can spot your orders going into the market and front run on them before they can execute.

  • by Charliemopps (1157495) on Monday March 31, 2014 @04:20PM (#46624899)

    What you describe is illegal, if you have any evidence of this feel free to forward it to the SEC. Once an order hits the exchange it is on equal footing in regards to being matched with any offers. Some aspects of HFT work by anticipating demand and hitting the exchange before others, this has always been the case since markets were invented.

    You didn't read the article did you? This is exactly what they are doing.

  • by jbmartin6 (1232050) on Monday March 31, 2014 @05:01PM (#46625371)
    I read the article, and I believe you have misunderstood it. When an order enters an exchange, it will be matched with any offers that are already in the system. There is no opportunity to see that order, then run ahead of it to buy shares *on that exchange* and then use them to fill that order. If you offer to buy X at $100, and there are existing offers to sell X at $100, you will be matched with them based on whatever matching rules the exchange uses. There is no legal opportunity for someone to "beat" you to those sell offers and then turn around and try to sell the shares to you at a higher price before your order has a chance to be filled. What the article talks about is working across many different exchanges, which is a different story. i.e. seeing activity on one exchange and anticipating the same activity in a different exchange before you get to it.
  • by Anonymous Coward on Monday March 31, 2014 @06:43PM (#46626307)

    That was NOT the problem discussed in the article.

    The problem here was that the investment was going through a batch of exchanges, and if the first exchange that the request reached couldn't fulfill the order, the HFT would see that request and then run it against the other exchanges before the original investor's request made it to the exchange that WAS offering the stock at his price -- much like the Big Bad Wolf made it to Grandma's house before Little Red Riding Hood could get there. The HFT would get the deal and the original investor was left with a "This stock was already purchased. Too slow."

    Their original fix was to throttle some of their requests so it would make it out to all exchanges at the same time (within a millisecond).

    It had nothing to do with day traders vs. long-term investors, it had more to do with swiping things out of someone else's shopping cart when you see they were getting a good deal.

  • by geoskd (321194) on Monday March 31, 2014 @10:40PM (#46627645)

    Any competent institutional broker has a wide variety of ways to defend its customers against that, all you need is a little time for their algorithms to work. If you don't have time, well, you pay the price just like any motivated seller.

    The problem with dark pools, is that the customers need to be defended from their own broker. These trades happen so fast, and there is so much raw data out there that verifying that the price you got for your stocks was optimal is prohibitively time consuming, so no one double checks that their broker actually got the best price. The high frequency trading takes a very small amount from each trade (0.1% is the amount I saw in the article). Its small enought that it gets lost in thebackground noise of the market, but it is really no difference between this and stealing a penny every time someone withdraws money from an account. Stealing is stealing no matter how you dress it up, or pretend its for the good of "The Market".

  • by Charliemopps (1157495) on Monday March 31, 2014 @11:32PM (#46627855)

    No, they setup their own exchange so they could see your order come through, then they beat your order to the next exchange and buy it out from under you. Forcing you to re-order, from them, at a higher rate. It's flat out illegal and they're doing it anyway.

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