SEC Chair On HFT: 'The Markets Are Not Rigged' 303
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.'"
Not a surprise (Score:5, Insightful)
Looks like she's bought and paid for.
It's insanity, we are watching real life crazy people.
Re:Not a surprise (Score:5, Interesting)
The cute part is that she thinks she can get away with it. She's not screwing over your average American household, she's screwing over investors who have money and power.
Re:Not a surprise (Score:5, Informative)
She's screwing YOUR retirement/pension plans. These are the folks who are getting fleeced by HFT.
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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)
Re:Not a surprise (Score:5, Insightful)
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.
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HFT overcharges are fleecing the market to the tune of $50 million per day. Many billions per year. Adding no value, and tacking on % charges to each transaction. It's visible to those who trade, they can't fix it and the SEC won't touch it - justifies it, as this piece shows. That's how it's worse: we know it's going on and we're blessing it.
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Yes. Market makers had to make a market and not pretend to do so or lie about how much they were making a market.
| Is you pension fund suffering because of increased liquidity and reduced spreads?
Yes, because the liquidity is illusionary in institutional amounts as are the spreads.
| Do you seriously think a major player in the market like a pension fund doesn't use these algorithms themselves?
No matter what algorithm you use if your opponent front
Re: Not a surprise (Score:4, Insightful)
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.
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Not just her, but also the members of the House Financial Services Committee who she's testifying before. They're putting on a nice dog-and-pony show of looking like they give a shit. But at the end of the day--they're going to do nothing, go home, and collect nice fat campaign contributions from the very crooks that the SEC is supposed to be stopping (and fat high-paying jobs from them when they leave Congress too).
All part of the circus to convince the gullible American people that Congress represents *th
Re:Not a surprise (Score:5, Insightful)
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 [slashdot.org]. 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 [commondreams.org], that the U.S. is in fact an oligarchy [wikipedia.org] and not a democracy [wikipedia.org]. 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 [princeton.edu] (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.'"
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Looks like she's bought and paid for.
It's insanity, we are watching real life crazy people.
Huh? She's bought and paid-for; how insane is that? Evil, perhaps; sociopathic, certainly...
No, the ones who tend to be insane are those watching the real-life evil people.
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Absolutely.
I'm not even an expert but knowing they can look at your market order 20 milliseconds before your order executes and buy the equity and sell it to you at a profit is clearly frontrunning you for profit.
However- simply buying and selling fast isn't front running. That's a different kind of manipulation which may be legal.
But being able to see your orders and execute their orders faster. And being able to see your limit orders and executing false orders (and cancelling them before they execute) t
Re:Not a surprise (Score:5, Insightful)
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, Informative)
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.
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> Is it illegal to run to the next stalls, buying all the oranges and then offering them back to the slow moving guy?
In financial markets, that is expressly illegal. That activity actually has its own set of laws because it is such an unfair, pernicious, and profitable activity.
The issue with HFT is that the wording of the laws make it legal for a _computer_ to do it, as long as there isn't a human telling the computer what to do _for each individual operation_. It is legal to have a computer program for
Re:Not a surprise (Score:5, Informative)
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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HFT works on every transaction and has zero risk for them. Tens of billions of dollars per year siphoned out of pension funds. OK with you? Not OK with me since it's know, can be fixed, but isn't.
Either she's a fool or complicit (Score:5, Insightful)
Re:Either she's a fool or complicit (Score:5, Insightful)
There's also no way SEC can make the claim, since until CAT ( http://catnmsplan.com/ ) 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.
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And it's not illegal. Although the whole system is tainted by the appearance of impropriety, it could be legislated out of existence with the stroke of a pen.
Give me control of a nation's money supply, and I care not who makes its laws.. Rothschild
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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.
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HFT has passed the tipping point (Score:5, Informative)
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The whole point of HFT is to jump in and buy a stock when someone else is trying to buy it and resell it to them at a slightly higher price. Without HFT, that someone else would still buy the stock.
HFT has never intentionally provided liquidity to the market. Buying something that has no other buyers is exactly the opposite of what they're trying to do.
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end the day flat. that's funny. sounds like the Pope has more saints to canonize...
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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
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Indeed. In this article [businessinsider.com] (talking about the same interview), there was this interesting quote:
Some Congressmen had a looser grasp on the specifics of the issue, but had no problem making their discomfort known.
Take Massachusetts' *Stephen Lynch for instance.
"Virtual financial said in 5 years they had one day of trading losses," Lynch said incredulously, "...there seems to be a definite advantage for a firm that can operate for 5 years without any trading losses."
He meant Virtu, the high-frequency trading firm that has delayed its IPO indefinitely because of the fallout from Lewis' book.
I'm sure there is a statistician out there who could tell us the odds of running 5 years of trading with only one day of losses, in a system which was not rigged.
SEC Chair Mary Jo White is full of shit, and quite the opposite of reassuring us all that the markets are indeed not rigged, it just verifies that the SEC is complicit in this whole system.
bullshit (Score:5, Insightful)
That definitely makes sense and doesn't sound like complete bullshit at all.
Of course not (Score:4, Insightful)
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)
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.
Re:Front running (Score:5, Interesting)
don't think the concept of front running is an obscure concept that is up for debate.
Front running 30 years ago was a simple concept. These days concept is really blurring. From wikipedia
"Front running is the illegal practice of a stockbroker executing orders on a security for its own account while taking advantage of advance knowledge of pending orders from its customers"
Please note - 'its' customers. HFT are often 'front running' somebody else customers. They don't know the orders up-front - they observe market and block/execute on other markets fractionally faster.
I'm not saying it is morally valid - just challenging the statement that 'front running' is a clear concept.
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I see no reason whatsoever why the concept of front-running should be restricted to a broker and their client. It doesn't make it different just because some other person is front-running.
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There is a huge difference. In case of broker you give him some information in trust and he has a legal obligation to not misuse this information against you. In case of HFT, people are observing you and using their observations against you.
It is like a doctor or lawyer confidentiality. There is a huge difference between people doing some things based on fact that you have visited doctor (even if it is abortion clinic) and doctor himself publishing/using your private medical details for his own benefits. In
High Frequency Theft ... (Score:5, Interesting)
I'm largely of the opinion that HFT is a chance for the banks and trading houses to skim off the top of the stock market, at the expense of the 'normal' investors, and using information and access we couldn't possibly have.
I don't believe at all that the "retail investor is very well-served by the current market structure". In fact, I believe the retail investor gets fleeced by these trading programs.
And since there are several well known examples, including the one in the summary, in which these trading programs themselves distort the market and significantly changes the valuations of the stocks.
HFT is the large trading houses using the money of investors (their own and everyone else in the market) like a Vegas casino slot machine.
Basically, HFT is vigorish [wikipedia.org].
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I don't believe at all that the "retail investor is very well-served by the current market structure". In fact, I believe the retail investor gets fleeced by these trading programs.
My interpretation on the first reading of that quote was "dear retail investor, you should be happy you're getting what we've decided to allow you, and now shut up", or in Darth Vader terms "We are altering the deal, pray we don't alter it any further".
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Basically, HFT is vigorish [wikipedia.org].
But if that's the case, wouldn't we still be better off letting those entities take their cut, and avoiding the waste of building these HFT systems?
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What, exactly, entitles them to a cut? I would say nothing entitles them to a cut.
You're suggesting we just fork over a fraction of all trades to spare the large banks and trading houses the expense of building the HFT systems to rip us off?
Hell no.
I have a better solution, and it doesn't involve keeping HFT or the trading houses getting a guaranteed cut.
If the
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What, exactly, entitles them to a cut? I would say nothing entitles them to a cut.
I'm not saying they should get a cut. I'm suggesting (though I don't really know, so I'm phrasing it as a question) that the HFT is even worse than simply "skimming off the top" because they're also spending a lot of money to develop software and run datacenters to do nothing productive aside from "skimming off the top".
Tax based on holding period (Score:5, Interesting)
Simply tax profits on all equities held for less than 5 minutes at 100%. Problem solved.
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Simply tax profits on all equities held for less than 5 minutes at 100%. Problem solved.
No problem is "simply solved" within our tax system. GE would still find a way to get around rules like this.
When megacorps by the rule-making system, they will never lose.
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I think this is a sound idea.
I'm not sure the 100% idea would ever happen, but I know the notion of varying capital gains taxes based on the duration they have been held has been discussed a lot as means to discourage risky, short-term bet-making, market churn and encourage investment.
So what did you expect the SEC Chair to say? (Score:2, Insightful)
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
Net Neutrality (Score:5, Insightful)
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Does net neutrality fix the problem, though? Even with net neutrality, there's still the possibility of someone buying more bandwidth or lower latency. Though I'd agree that getting rid of net neutrality would open the doors for further abuse, but I'd think you'd need some additional measure to solve the problem.
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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.
While I can see a few parallels, HFT is really an entirely different beast. This isn't about deliberate throttling of traffic. This is more about companies building private microwave relays and such to try to shave a few miles off of runs like Chicago-NYC to get a few nanoseconds less latency in communications, or implementing their algorithms in ASICs. I've even heard people talking about digging deep cables since it is shorter to go through the earth than on top of it.
Nobody would do this sort of thing
Not rocket science (Score:5, Insightful)
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?
Umm, what's the difference between (Score:2)
Ummmm, aside from it sounds like something different, not much.
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Transparency. If you are a broker and say to the client "You can buy from market for 101, but if you try, I'll charge you extra 2 each time" it is adding spread (or broker fee actually). If you are a broker and say "You can buy from market for 101 and I'll do my best to do that" and then you are doing side deals buying all the orders between 101 and 103, then selling them to your client for 103 realizing immediate profits and pretending "somebody else bought cheap ones" - then it is front running.
Of course,
Skimming is a better word than rigged (Score:2)
Rigged implies pricing is completely controlled by these HFTs which is not true. It is a skimming
basically these hfts are making pennies per trade but doing so in billions of trades.
Of course not... (Score:2)
Film at 11.
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How does it compare to human trading? (Score:2)
So...Why then (Score:5, Insightful)
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!
So how fast does real world value change? (Score:5, Interesting)
When put this way, the only events that qualify are explosions and lightning. Even an earthquake takes seconds to minutes to "change value". Tornadoes take minutes and hurricanes take hours or days.
HFT is totally removed from real world phenomena. It is a completely fictional construct. Is it any surprise that it is used to fleece the suckers? It has no legitimate purpose because it is not a real world measure of anything.
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If you accept that the market system is a way of determining the value of securities...
Is that what it is, though? I was under the impression that it was largely a casino dedicated to gambling on economic matters instead of card games or horse races. To that extent, it's not shocking when some rules are arbitrary, based on nothing in the "real world", and it's not surprising that everyone is looking for a way to cheat.
Similar to (Score:2)
The market is not rigged (Score:2)
Guess who is going to retire well; (Score:5, Informative)
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.
Half SEC are employed by HFT firms (Score:2)
They are guaranteed jobs in HFT firms after they retire from SEC:
"High-frequency trader Getco hires key SEC staffer"
http://www.reuters.com/article... [reuters.com]
HFT as 'insider trading'. (Score:4, Interesting)
The whole concept of 'insider trading' is that you're using knowledge that wasn't yet available to others.
If someone told you, 'hey, we're going to sell in 5 minutes at $100/share', and you went and bought it all up so they had to buy it at a slightly higher price ... wouldn't that be trading on information before it became public knowledge?
Now, it might not be 'insider', as you're not within the company whose stock is being sold ... and they're legally allowed to release the information ... but there are so many other laws regarding stock sales (eg, 'tender offers', where a company plans to buy back shares at a higher price, and they have to leave it open for a given amount of time), that I'd be willing to argue that it *should* be illegal, even if only to improve 'investor confidence'.
(ie, why would you trade in the stock market when you're getting scammed every time you do?)
Yes, they are rigged, asshole! (Score:3)
Tax fast trading (Score:3)
A 10% tax on selling stocks held less than a month (or whatever numbers you think appropriate) would quickly put a stop to all sorts of shenanigans, while not harming, and in fact benefiting real investors. After all, the whole point of stocks is to allow investors to invest in a company, not some sort of gambling scheme.
Awww...Mary Jo White is so *cute* (Score:2)
Thinking anyone believes her.... Sure, hun. Santa Clause is coming. The Easter Bunny is real. There's going to be oil *forever, and the markets aren't rigged.
What a joke (Score:2)
Then again when the regulators have been gutted,bought off, and have former (and soon to be again) Wall Street insiders running them, what do you expect?
The industry is practically self regulated now, an oxymoron of course, which is to say: they aren't regulated.
Free markets will solve all -- except of course when our extreme greed causes the excrement to hit the fan and then it is time for the taxpayer to pony up. Bonuses!
She's blind (Score:2)
I'm sure she thinks that America has the best health care delivery system in the world, too.
Re:Retail doesn't even have SEC Protection (Score:4, Interesting)
She has a point – a weak one but still a point. I have read the book and it seems to me that the system is not gammed for small retail orders – those are harder to front run. And even if the HFT trades scalp a penny or three per share that is still better than the $.125 spread 20 years ago. Not saying that the system can’t be improved – Flash Boys did change my mind on that – but let’s realize the magnitude and who it affects.
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those same people fought the move to decimals tooth and nail. it would destroy liquidity, blah, blah, blah...
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...as evidenced by the retail investors' yachts...
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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.
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But they're those long term investors everyone wants in the market right? They're expecting to make more than those few pennies on the stocks aren't they?
This fantasy long term investor looks at things they could invest in, determines the potential return and risk of losses and picks stocks to invest in. So when placing the orders to buy these investments they set a price at which they thing it's worth buying - e.g. where their calculated risk/return ratio favours that investment over something else. If
Re:Fucking Casuals. (Score:5, Informative)
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, Interesting)
Someone did a study on this and proved it. I think the study showed that if the bid/ask is $1.00/$1.01 and you offer $1.01, all of a sudden the bid ask goes to $1.01/$1.02.
I've seen this myself. Just watching the stock price go up a penny every time I put an order in. The study showed that HFT can step in before my order is filled and get the transaction that I wanted.
This is what these "smart" people get paid for. It's total BS and not "American"
Terminology (Score:4, Informative)
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So, the probelm can be avoided with sufficient competence. Now, is there any reason that you would intentionally not avoid the HFTers? And if not, why should they be permitted to continue gaming the system?
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The “within a few seconds of each other” shows that you have not really paid attention here. The problem is that if you are trying to place a single composite order on multiple markets. Unless you time your partial orders to arrive at their respective markets within 10 milliseconds or so, you will find that someone has magicallly swooped in to the markets that got your orders 20 miliseconds later than the others and bought what you were trying to buy and is now offering them for marginally more.
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It's called front running and it's both unfair and illegal. It's just that in this case, being illegal doesn't mean it will be stopped or those doing it punished.
Re:Fucking Casuals. (Score:5, Informative)
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.
Re:Fucking Casuals. (Score:5, Informative)
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.
Re: (Score:2)
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.
You assume that. You have no way of knowing it for sure. There have been explicit allegations about back-channel signaling via agreed-upon patterns of rapidly canceled orders being used to alter the sequence in which orders are processed.
Re:Fucking Casuals. (Score:5, Informative)
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)
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.
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This is much simpler. HF traders are making money. That money comes out of the pockets of people who aren't doing HFT, and don't have access to the needed resources even if they wanted to. The simple solution is to put a 1 second delay on all orders.
Re:Fucking Casuals. (Score:5, Insightful)
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:Fucking Casuals. (Score:5, Insightful)
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.
Cheers.
Re:Fucking Casuals. (Score:5, Insightful)
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.
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How would taxing help? The regular investors would still getting screwed, the profits just now being split by the HFTs and the government.
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In the old days? Yes - and it would take much longer to correct. I remember the time when George H. W. Bush (senior) was shot. That rumor tanked the FX markets for 4 hours. Markets go down a little faster today, but they recover much much faster.
By the way, when France taxed the HFT, spreads and volatility increased. The issue is not the speed of the system but that the system can be gammed. Fix the root cause, not the symptoms.
Re: (Score:2)
If companies opt for a low cost solution (non-colo, 100 mb line or lower) then it is truly their choice.
Here's a thought experiment: Everyone except the HFT firms takes their business to another exchange where high frequenct trading is not allowed. This would leave the high frequency traders on their own network to trade among themselves. Would this be a viable situation fo them?
I didn't think so. HFT is only viable if 'slower' traders exist to be exploited.
Re: (Score:3)
The difference is HFT steals from the big boys. And remember what we found out from the financial bailouts. Steal from poor people? Pensioners and little old ladies? No penalties. You get bailouts even. Steal from rich people, ala Bernie Madoff? Prison.
Remember, if you're going to steal, steal from poor people. Nobody gives a shit about them.
Re: (Score:2)
If HFT doesn't yield an advantage
It does. For the HF Traders. At everyone else's expense.
Its the goose principle: The art of HFT consists in so plucking the goose as to obtain the largest amount of feathers with the least possible amount of hissing.
We are the goose.