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SEC Chair On HFT: 'The Markets Are Not Rigged' 303

Posted by Soulskill
from the everyone's-equal-once-they-invest-a-billion-dollars dept.
Hugh Pickens DOT Com writes "Reuters reports that U.S. Securities and Exchange Commission Chair Mary Jo White told a U.S. House of Representatives panel that she flatly rejected claims that retail investors are being fleeced by high-frequency traders who can use their speed to jump ahead with buy and sell orders that fetch better prices. 'The markets are not rigged,' says White. 'The U.S. markets are the strongest and most reliable in the world.' White's comments to the House Financial Services Committee mark the first time she has directly responded to allegations in Michael Lewis' new book Flash Boys: A Wall Street Revolt. The book alleges that high-speed traders are engaged in a form of front-running, in which the firms are able to quickly identify an investor's desire to buy a stock, rush to buy it first and then sell it back at a higher price. The SEC has been reviewing equity market structure issues, particularly following the May 6, 2010 flash crash incident when the Dow Jones Industrial Average sharply plunged before quickly rebounding. Although staff at SEC are considering whether to launch some pilot studies to test different regulatory proposals, there are no immediate plans to issue rules to crack down on high-speed trading or trading in unlit markets. 'I want to be very clear that the market metrics suggest that the retail investor is very well-served by the current market structure.'"
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SEC Chair On HFT: 'The Markets Are Not Rigged'

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  • by Anonymous Coward on Wednesday April 30, 2014 @08:21AM (#46877245)
    I highly recommend reading Flash Boys [amazon.com] , mentioned in the Slashdot summary here. While advocates of HFT have always claimed that it provides liquidity, and it did fulfill that role usefully for a long time, we've passed a point where the gains of liquidity are overcome by the overall detriment to the economy: transactions that would have occurred anyway are penalized with what is essentially an extra tax because they came a few seconds later, and people with arcane and specialized equipment jumped the gun.
  • Re:Fucking Casuals. (Score:3, Informative)

    by Anonymous Coward on Wednesday April 30, 2014 @08:43AM (#46877413)

    the book actually talks about large investors getting screwed. Not the casual wanna be day traders, but hedge fund managers who have to take massive losses on those couple of pennies as they are buying many shares at a time.

  • Re:Fucking Casuals. (Score:5, Informative)

    by JeffSh (71237) <[gro.0m0m] [ta] [todhsalsffej]> on Wednesday April 30, 2014 @08:44AM (#46877425)

    Even if you check the bid/ask price, without HFT there's a conceivable chance for your buy order to be filled for less than your limit, but with HFT the cheaper stock is exhausted and your order filled at the buy price.

    Sounds silly, but pennies matter to these people due to volume and that's what's occurring.

  • Re:Fucking Casuals. (Score:5, Informative)

    by laird (2705) <lairdp@gma[ ]com ['il.' in gap]> on Wednesday April 30, 2014 @08:48AM (#46877461) Journal

    Perhaps you don't understand "front running".

    The actual buy/sell price of a transaction isn't the number either part put in, but is a dynamic number based on the market, within the constraints of the buy/sell orders. So if you say "buy at up to 8" for a stock selling at 7, you'll end up paying somewhere below 8 depending on available sell orders.

    What is happening is that a company has tapped into the front-line routers to the trading systems with extremely high performance systems that can see and execute and deliver an incoming buy/sell order faster than the real buy/sell orders so they execute first, and injecting their own order AHEAD of your order. This requires their hardware being tapped into the network, and having extremely high performance systems and networking, so it's an option only open to an extremely small number of companies. So if the stock is selling at 7, you say you'll buy at 8, and the third part injects an order to buy at 8 that executes before your buy order, to you end up buying at 8 instead of at 7. The actual differences are smaller, of course, but the volume is infinite, so it generates plenty of cash. Because it requires specialized gear running inside the exchange's network, it's an option only available to a very small number of well-connected companies (one that's been reported), and the collusion of the exchange to arrange for the trader to have better access to the exchange's data feeds than the exchange itself. Other than being highly profitable, I can't see how this can possibly be legal, since it's a clear corruption of the exchange giving one party an unfair advantage.

    The is different from high frequency trading, which is programmed trading of rapid transactions, which can be done from anywhere - that doesn't require special network access, etc., just huge piles of cash and an algorithm.

  • by Vitriol+Angst (458300) on Wednesday April 30, 2014 @09:09AM (#46877633)

    U.S. Securities and Exchange Commission Chair Mary Jo White told a U.S. House of Representatives panel that she flatly rejected claims that retail investors are being fleeced by high-frequency traders

    I'd make a bet with anyone that someone is going to be "shocked and surprised" one day that there was rigging going on just like Allan Greenspan. And just like Allan Greenspan, a certain SEC Chair is going to be miraculously a very wealthy bitch when she retires from a government oversight job.

    Of course, I feel compelled to let you know that the betting process is rigged in my favor.

  • Re:Not a surprise (Score:5, Informative)

    by Anonymous Coward on Wednesday April 30, 2014 @09:10AM (#46877651)

    She's screwing YOUR retirement/pension plans. These are the folks who are getting fleeced by HFT.

  • Re:Fucking Casuals. (Score:5, Informative)

    by jbmartin6 (1232050) on Wednesday April 30, 2014 @09:29AM (#46877807)

    What is happening is that a company has tapped into the front-line routers to the trading systems with extremely high performance systems that can see and execute and deliver an incoming buy/sell order faster than the real buy/sell orders so they execute first, and injecting their own order AHEAD of your order

    Completely false. This does indeed describe front running, which is illegal. There is no mechanism provided by any exchange which would allow any market maker to observe orders entering the exchange and then enter an order ahead of them. When an order enter the exchange, it is matched with offers that already exist in the system and that is the first time any market participant has an opportunity to react directly to it. What the book talks about is order placed across multiple exchanges, where one party would observe heavy activity in one exchange and *guess* that it is likely to be quickly repeated on other exchanges and try to get to the *other* exchange before the original party.

  • by Anonymous Coward on Wednesday April 30, 2014 @10:11AM (#46878333)

    Perhaps GrumpySteen understands what HFT is, and you don't understand what market making is. Market making involves having open limit orders to buy and sell at all times; the market maker can choose the price, but they're meant to be there continuously and available to whoever wants to trade (at that price). They "provide liquidity" by providing a place where other people can execute a trade, at all times.

    HFT orders are instantaneous, and don't provide liquidity as such. HFTs execute against a particular order, for instance buying someone's specific "sell at $1" order, *only at the moment when the HFT knows there is another buyer who will pay $1.01 that the HFT can sell to*. In this case the "sell at $1" is the one providing liquidity, the HFT takes that liquidity because it got into the queue ahead of the "buy at $1.01" order, and then the "buy at $1.01" accidentally provides liquidity to the HFT when it meant to take liquidity from "sell at $1".

    The problem is that the HFT can see the "sell at $1", can also see the "buy at $1.01", and can get into the queue to buy at $1 *ahead* of the person trying to buy at $1.01 even though they are reacting to their order.

  • Terminology (Score:4, Informative)

    by rla3rd (596810) on Wednesday April 30, 2014 @10:16AM (#46878401)
    I used to work as a trader for a major wall street firm. Slight correction in the terminology. If you are bidding the stock you are a buyer, If you are offering the stock you are a seller, regardless if the price you want to buy/sell at is on the bid or ask. If the bid/ask is $1.00/$1.01 and you offer $1.01, you are offering to sell at $1.01, and become part of the offered volume at $1.01. I know, I know, I sound like a bit of a prick pointing out the nuances. But you'd be in for a world of trouble in a pit or on a phone order offering a ton of stock if you were a buyer.
  • Re:Fucking Casuals. (Score:5, Informative)

    by meta-monkey (321000) on Wednesday April 30, 2014 @10:18AM (#46878443) Journal

    No, the OP was right. They see the buy order placed at one data exchange and before it can get to the other exchanges, the HFTers microwave beam the information to servers located next door to the NYSE and outrun your buy, buy over your bid and then sell the shares back to you. It's straight up scalping, and the only difference between this and front running is front running requires the scalper to be your own broker. The HFTers just found another way to see your buy order before it executes.

  • Naive (Score:4, Informative)

    by sjbe (173966) on Wednesday April 30, 2014 @10:19AM (#46878455)

    There is no mechanism provided by any exchange which would allow any market maker to observe orders entering the exchange and then enter an order ahead of them.

    Doesn't have to be provided by the exchange. What they do is place small (100 share) on lots of stocks and when someone buys a small amount, the HFT algorithms can interpret intent to buy and buy up that stock ahead of the rest of the order. Some exchanges even pay firms to make markets which is nuts until you realize what they really are doing. Additionally a lot of orders are not filled on open exchanges but in dark pools [wikipedia.org]. Stock exchanges permit HFT firms to co-locate in the exchanges. There is NO plausible reason to do that unless some form of front running is occurring. There is NO reason for HFT firms to lay their own fiber or microwave connections unless it provides them some huge informational advantage.

    Seriously, read Flash Boys [wikipedia.org]. It's an interesting read and worth your time. Even if it gets parts of the story wrong, there is enough credible evidence in there which can be backed up to paint a pretty damning picture of how you are getting screwed. Maybe not big time screwed but definitely screwed.

  • Re:Not a surprise (Score:5, Informative)

    by squizzar (1031726) on Wednesday April 30, 2014 @10:33AM (#46878673)

    Nope. The 'scam' in the flash boys (from the interviews - as per usual Slashdot expectations I haven't read the book) is that someone places a very large stock order for X at the current ask price that is routed to multiple markets. Let's call them A, B and C. From your trader the delays to those markets are 10ms, 100ms and 200ms respectively (which are ridiculously high numbers for this game). Your HFT trader has collocated servers at markets A,B,C, and minimal-latency links between their servers. So when the order arrives on market A and fills, they think 'Hmm, someone is looking for a shedload of X. They then place instructions to buy on the other markets, followed by orders to sell at a slightly increased price. They have 90ms (- the time for exchange A to match, fill, post market data etc., and the time for orders to be placed on other exchanges). It's like some slow moving person walking from stall to stall in a (physical) market buying all the oranges, and announcing loudly that they are doing so. Is it illegal to run to the next stalls, buying all the oranges and then offering them back to the slow moving guy?

    All the information is public. The market data feeds are available to anyone. You pay for more up to date market data (which includes details of fills, not orders placed) - you don't pay for the 20-minute delayed stuff on google/yahoo, but you do if you want it faster. You pay for collocation. You pay for those low-latency connections. You used to pay for a trading desk on the stock exchange floor, guys in coloured blazers who could calculate and make decisions faster. The system has never been 'fair', but HFT doesn't necessarily make it worse.

  • Re:Not a surprise (Score:5, Informative)

    by S.O.B. (136083) on Wednesday April 30, 2014 @11:00AM (#46879145)

    That's why the HFTs installed their own dedicated fiber-optic lines between key exchanges that were "straighter" than the public network to shave a few milliseconds off the roundtrip time at the cost of $100's of millions. Why do you think they did that? So they could improve their WoW latency?

    That was only one of the techniques they used to manipulate the market. NY Times has a nice article about the book [nytimes.com] that brought this to peoples' attention.

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