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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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  • Not a surprise (Score:5, Insightful)

    by cHiphead (17854) on Wednesday April 30, 2014 @08:17AM (#46877211)

    Looks like she's bought and paid for.

    It's insanity, we are watching real life crazy people.

  • by Andover Chick (1859494) on Wednesday April 30, 2014 @08:18AM (#46877219)
    Of course the markets are rigged. It has always been that way all the way back to the 1920s. Most often the regulators where former insiders themselves, in which case they were complicit in the buddy-buddy world of Wall Street. This woman, however, just seems to be an imbecile. [I'm a 30 year veteran of Wall St and have worked on the trading floors in most of the major firms.]
  • bullshit (Score:5, Insightful)

    by O('_')O_Bush (1162487) on Wednesday April 30, 2014 @08:24AM (#46877265)
    Yea, somehow banks are using HFT to magically pull money out of thin air, definitely not at the expense of traders, because traders are being so well served.

    That definitely makes sense and doesn't sound like complete bullshit at all.
  • Of course not (Score:4, Insightful)

    by beamin (23709) on Wednesday April 30, 2014 @08:27AM (#46877289)

    Nothing to see here, people. Move along. And could you put that Social Security Trust Fund money here before you go?

  • Front running (Score:5, Insightful)

    by countach (534280) on Wednesday April 30, 2014 @08:32AM (#46877317)

    Either people are being front run, or they are not being front run. Can't the SEC grow a pair and actually say definitively whether people are being front run or not? I don't think the concept of front running is an obscure concept that is up for debate. Come on SEC, investigate and pass judgement. Don't give us these weasel words.

  • by Anonymous Coward on Wednesday April 30, 2014 @08:34AM (#46877335)

    Officer I was not speeding. Yea, that's what they all say. So, what did you expect the SEC Chairperson to say. Anything but "the markets are not rigged" would gave caused a panic. Congress took away her option to say nothing. Of course the markets are rigged in favor of the HS traders. Why else would you do HS trading but to gain an 'unfair' advantage? Let's have a regulation that requires investors to keep what they buy for 30 days before they can sell. No penalties for early sale. You just can't sell it for 30 days.

  • Net Neutrality (Score:5, Insightful)

    by nickmalthus (972450) on Wednesday April 30, 2014 @08:36AM (#46877359)
    HFT is another sound argument for Network Neutrality. Fair open markets can not exist on top of a network where superior bandwidth and latency decide market winners instead of legitimate market forces.
  • Not rocket science (Score:5, Insightful)

    by Anonymous Coward on Wednesday April 30, 2014 @08:41AM (#46877383)

    So, if the market's not rigged and HFT is a feature, what's wrong with introducing random delays of tens of milliseconds into their data streams? Robustness testing, don't ya know. Since there's no way to guarantee flawless links you need to stress the system to locate problems.

    The likely outcome would be that the markets would continue to perform as expected while a number of HFT firms would go belly up. Who would miss them?

  • by Anonymous Coward on Wednesday April 30, 2014 @08:41AM (#46877395)

    There's also no way SEC can make the claim, since until CAT ( ) shows up, there's really no data to verify whether markets are rigged or not in the way described in the Flash Boys book. A more sensible answer would have been ``we lack the means to verify claims of a rigged markets, but indications point towards minimal or no impact to the retail investor'' (at least that would have been the optimistic truth). Flat out saying that markets are not rigged is just a lie, since they can't even do a study they're claiming to have done.

  • So...Why then (Score:5, Insightful)

    by Grey Geezer (2699315) on Wednesday April 30, 2014 @08:52AM (#46877497)

    are trading houses spending hundreds of millions of dollars on high speed, fiber optic, trunk lines, in an effort to cut milliseconds from their transaction times? Give me a break puddin cake!

  • by cHiphead (17854) on Wednesday April 30, 2014 @08:58AM (#46877551)

    You don't understand the issue or you are making money from the technique and have fully disconnected yourself from the ethical implications of HFT scamming.

    I'll use plain english terms to describe it since I'm not in that industry and never remember the fancy facade of names used to obfuscate investing practices and technical points from non-industry people.

    You can check the bid/ask prices, the type of HFT process that screws you happens entirely AFTER you press the buy button, they see your buy at one data exchange location and literally outrun your network packets to remaining exchange points to buy up what you just clicked 'buy' on. You end up with a portion of what your lowest bid was, but suddenly the other locations that have the product to fill the order are all priced higher from the HFT gamer. This requires special high speed access and high speed API access to the data exchange points.

    It's rigging the system. It's a great hack if you are making money for yourself but it's more than just unethical, it utterly destroys any usefulness of financial investment markets, and also leads to caustic disruption of real world economic data.


  • by Charliemopps (1157495) on Wednesday April 30, 2014 @09:09AM (#46877643)

    This is the fundamental problem with federal regulation. If the government controls how you can make money, those with money will seek to control the government. I'm not suggesting a solution, I don't have one. But understanding that "more regulation" will likely do just as much harm as it does good is important to this debate.

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

    by FriendlyLurker (50431) on Wednesday April 30, 2014 @09:15AM (#46877681)

    All part of the circus to convince the gullible American people that Congress represents *them*, and not just the oligarchy.

    A circus that we the people have no say in whatsoever []. Akin to serfdom of old, only with some modern conveniences.

    "Researchers from Princeton University and Northwestern University have concluded, after extensive analysis of 1,779 policy issues [], that the U.S. is in fact an oligarchy [] and not a democracy []. What this means is that, although 'Americans do enjoy many features central to democratic governance,' 'majorities of the American public actually have little influence over the policies our government adopts.' Their study [] (PDF), to be published in Perspectives on Politics, found that 'When the preferences of economic elites and the stands of organized interest groups are controlled for, the preferences of the average American appear to have only a minuscule, near-zero, statistically non-significant impact upon public policy.'"

  • by delt0r (999393) on Wednesday April 30, 2014 @09:48AM (#46878007)

    The only problem with that argument is it ignores the liquidity and spread reduction produced just by having HFT in the market.

    God i am sick of this BS being trotted out every time someone wants to defend HFT. Liquidity as a useful metric is *never* measured in milliseconds. It could be easily argued that measuring less than a minute is simply not understanding what liquidity even is.

  • by KiloByte (825081) on Wednesday April 30, 2014 @10:20AM (#46878461)

    The stock exchange is a zero-sum game, at least in the short term. Contrary to popular views, no profits of the company being sold, nor even dividents granted to shareholders, inject any money into stock exchange -- they change only the perceived valuation of shares, and the only new money comes from the Ponzi effect.

    And in a zero-sum game, if someone is skimming, everyone else loses.

  • Re:Not a surprise (Score:2, Insightful)

    by squizzar (1031726) on Wednesday April 30, 2014 @10:20AM (#46878477)

    And your 401k is managed by people so naive as to allow that? They don't themselves adopt similar technologies and strategies to mitigate that? I'd move my investments if I were you.

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

    by timeOday (582209) on Wednesday April 30, 2014 @12:11PM (#46880173)
    High-frequency traders are spending untold millions of dollars to lay new fiber and pay analysts to develop competing algorithms that are totally divorced from anything of value. I don't want my savings dumped into perfecting this stupid game, I want it fixed.
  • Re: Not a surprise (Score:4, Insightful)

    by vakuona (788200) on Wednesday April 30, 2014 @01:53PM (#46881763)

    This isn't predicting the markets. This is gaming them. If I know that a big pension fund want to buy Apple stock, having gleaned this information from unfulfilled orders on some exchanges, I can go out and quickly buy some Apple stock, and then almost immediately sell it to the fund. Why should we allow HFTers to have information before the rest of us. They should wait in line like everyone else. Why can't orders be queued so that the last to place and order is the last to have it filled. And why can't we impose a delay (even a random one) to ensure that one cannot jump ahead of the queue by going to other markets to find the same shares when they find out that someone else is looking for shares.

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

    by Kevin Stevens (227724) < minus distro> on Wednesday April 30, 2014 @03:56PM (#46883247)

    Are you just some fatass in a chair bitching? Or do you have a real solid, informed complaint about HFT?

    I ask this, as I worked in the algo trading industry for ten years on both the prop (HFT) side and the agency side, where I built tools to counteract HFT players. I recently left as the money dried up, while the hours didn't, and to be quite honest I just lost a lot of interest in the business.

    There are problems with HFT activity, but I believe that overall, they have benefitted the retail investor. Since the rise of HFT and electronic markets, spreads have collapsed to be an insignificant cost of trading. HFT guys ate the lunch of market makers who used to have cushy little businesses and traders getting mid 6 to 7 figure bonuses. My first job involved automating those guys out of a job. Those guys used to legitimately front-run orders, anyone talking about HFT front running is either redefining the term, or doesn't know what they are talking about.

    Guys with a speed advantage have always used that advantage to make money in the stock market. Whether it be guys with faster horses in the pre-railroad/telegraph era (supposedly the rothschilds made their fortune this way, buying up english bonds as they had news that a war had ended first), telephones ripping off bucket shops in the 1900's, SOES bandits in the 1980s, and now HFT today, this has always existed. All those guys who actually used to sit on the floor of the NYSE- why do you think they were there?- So they could trade on the news first (one quote from the book Market Wizards: "First its the floor traders, the next day its the dentists, then after that comes Joe Schmoe.")

    The games that HFT guys are playing is generally sniping a penny here and there. As a retail investor who is buying and holding, their game has nothing to do with yours, and they have eaten the lunches of the market makers and brokers who used to rip you off.

    Are there problems with HFT? Yeah- mainly that exchanges are developing order types exclusively for their use. The fact that they are acting like market makers by providing liquidity and squeezing the legit market makers, but once things start looking weird, pull out immediately (though after the flash crash, many of these guys started becoming legit market makers).

    Net/net though, these guys are good for retail traders. If you disagree, come up with a good, specific, informed reason on how they are hurting you and your orders in the market. If you look at some of the major detractors of HFT like Joe Saluzzi, they are almost always from smaller niche firms who can not afford technology to adequately compete in an electronic world, and are getting squeezed out by the bulge bracket guys.

    The HFT business is drying up as it is though. The arms race has put enough players on equal footing that the low hanging fruit is gone. The major banks have invested enough in their infra that they can't just be picked off by these guys anymore. This is good for the industry in my opinion, maybe the focus can go back to trading smarter, not just saving off ten microseconds on the slice time.

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

    by Kevin Stevens (227724) < minus distro> on Wednesday April 30, 2014 @04:05PM (#46883345)

    You completely misunderstood Flash Boys when you read it. Diverting an order into a dark pool is meant to HIDE information from HFT guys. You don't know where the order came from, or who your counterparty is. You can't view the order book, its much more hidden (hence the name "dark" pool, as opposed to the "lit" exchanges). The only way to see if there is any activity in a given name is to actually send an order in and hope it gets executed.

    What do you mean that this gives HFT guys more information that others don't have? They can try pinging dark pools and try to make guesses about the size that is actually there, but this not really information that others don't have. Around 2008-2009, it was becoming known that some participants were trying to sniff out size in dark pools, and most pools put in mechanisms to prevent this.

    Dark pools exist as a way for brokers to make themselves money by keeping the exchange fees.

    Source: I have built dark pools and routers that route flow into them.

Forty two.