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

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."

day trader loses to second traders

[alen]

how exactly is this rigged for the longer term investor?

hedge funds have always been about finding some unknown niche with tiny profit potential and making it up on volume with borrowed money

Forbit all HFT

[photonic]

HFT should be banned, there is nothing these robo-traders contribute to society except for profit for themselves. The argument that they provide for liquidity of the market, or whatever, would not change if everyone would be trading at second scale instead of microsecond scale. My proposal (as someone how knows nothing about stock markets): make it a level playing field and only allow trading at say exact 30 second intervals or so, which should be synced world-wide. In this way, the big firms would only have an advantage over the small guy when new information becomes available in the last half second before the deadline, instead of on every instance of new information. After everyone has placed their orders for the current round, the stock market then takes a few seconds to update all stock prizes, after which everyone has 'infinite time' to compute his action for the next round.

Re:Forbit all HFT

[NoNonAlphaCharsHere]

Better yet, how about a tiny tiny tax on each trade? We bitch and moan about deficit this and tax-the-rich that, how about we tax the fuckers who are causing the problem for the behavior that's causing the problem? If financial markets weren't such a short-term crapshoot, and we really DID care about "long-term" capital gains, we wouldn't have the boom-and-bust economy we've been living in.

duh.

[Anonymous Coward]

The stock market long ago ceased being about owning pieces companies with companies paying out dividends. It's the same bet that prices are going up that it was in 1929, the HFT's have just figured out how to micro-jack the prices. There is a simple simple fix. Stocks are made non-fungible and you must own for 24 hours before you can trade. This puts pricing back onto a time scale over which the actual productivity or fickle fortunes of a company can change. The economic production of a real company doesn't change on the millisecond time scale.

I've worked in financial firms for my entire life.

[HerculesMO]

In IT, of course...

And one thing I've learned is that financial firms generally speaking, don't beat the market. If you look at the S&P 500 as a baseline index for the health of the economy (and it might not be perfect, but it's a good measure), 80% of firms CANNOT beat the S&P in the same timeframe. If the S&P loses, those private firms lose too.

And even if they did... maybe 1-2% over? Which you won't get, because that's what they charge in FEES to manage their funds.

So basically HFT exists, because people still have the idea that investing with Morgan Stanley or somebody is a great idea, and so MS have a huge amount of equity to derive ridiculous profits on for who else -- themselves. Add to that the fees they charge to manage the funds they offer, and the marginal rates of return that investors get well... you know how it goes.

Hopefully my job interviews pending will pan out and I'll get out of finance for good; but sadly the money is what has kept me there, especially with the student loans... yet another benefit from our wonderful financial industry.

Pretty damn good article

[m.dillon]

Best article on HFT that I've ever read. Explains in fine detail how institutional players get fleeced by high frequency traders. Took a while to read the whole thing, but well worth the time.

One thing to note to all of us retail investors, though... our tiny orders aren't really getting fleeced, and with spreads on most stocks of only $0.01 our trading overheads are miniscule compared to 20 years ago. Standard brokerage fees trump (by several orders of magnitude) HFT losses for people like us.

-Matt

Tax every trade

[Squidlips]

That will slow down the trading and encourage long-term investment....