The SEC has acknowledged the problems caused by High Frequency Trading and may change some of the rules in order to reduce the 'front-running' done by HFTraders and increase market fairness.
U.S regulators may relax rules that require the fastest possible execution of securities trades, potentially helping upstart trading venue IEX Group's plans to become a full-fledged stock exchange.
IEX has put in place a "speed bump" delaying incoming orders by 350 millionths of a second, or a thousandth of the time it takes to blink on its trading venue, letting it update prices faster than the fastest market participants can calculate them, so that high-frequency trading firms cannot use their speed advantage to front-run others.
The strategy has proved popular with investors, who have made IEX the 7th most used alternative trading system in the U.S. for the week of July 7, according to data from the Financial Industry Regulatory Authority. However, instituting any sort of trading delay clashes with current market rules for exchanges, which is eventually what IEX has said it wants to be.
In a June 5 speech, SEC Chair Mary Jo White questioned whether the pursuit of speed in the markets has gone beyond the point of benefiting investors and whether current rules are getting in the way of trading venues designing systems to level the playing field.
"A key question is whether trading venues have sufficient opportunity and flexibility to innovate successfully with initiatives that seek to deemphasize speed as a key to trading success in order to further serve the interests of investors," White said. "If not, we must reconsider the SEC rules and market practices that stand in the way."
It is generally understood that HFT is "legalized front-running" however, technically HFT is not front-running since they're not acting on privileged information and not violating their clients' trust, but it is still a predatory behavior. The SEC has launched an investigation due to the unfair advantage from having faster access to richer information, and the ability to act on that information faster than anyone else. The mission of the SEC is to "protect investors; maintain fair, orderly, and efficient markets; facilitate capital formation".
(Score: 2) by VLM on Wednesday August 06 2014, @11:52AM
"It is generally understood that HFT is "legalized front-running""
No, only the "I must hate what I don't understand" crowd says that. And the commies, because anything that sounds bad about something capitalist must be true.
You'll rarely find a stronger serious critic of the crooks on wall street. As a group, they are a net negative to humanity as a species. However. Using what borders between comedy and libel WRT HFT strongly discredits my position that they're influence buying self serving crooks who belong in prison or up against a wall.
Its very much like the vaccines-cause-autism, the wifi-causes-cancer, and the astrology-is-real nutcases. What a lovely story that sounds so believable and explains so much and doesn't require any scientific or domain knowledge to "understand" at least for vanishingly small values of "understand", too bad its all bullshit. Just like "HFT is devil worship just like DnD" even though I have no idea what HFT is other than it causes cooties and I have no idea the reaction mechanism of why its bad other than other ignorant people say it all the time so it must be true, just like the earth is flat as any well educated gentleman knows.
Now that I've brutally savaged the argument, I don't entirely disagree with the rule change. There are always engineering tradeoffs and "execute trades as fast as possible" has a tradeoff cost with basically wasted money and energy. The world really isn't any better off in any meaningful sense if I can trade WEC stock in nanoseconds instead of milliseconds or frankly at least in my case, days. And the capability to do an infinite volume of trading in nanoseconds has a real cost to the world in energy and money to build all that useless crap and the human capital where those guys could be doing something productive with their time, but they aren't.
Scientist: Now oddly enough it seems Cholera can be traced coincidentally to certain water pumps in London and merely closing those wells results in a delta in infection rates of ...
Village idiot: Yeah and those pumps were used by witches casting hexs on people using those pumps and we need to burn some old women that I don't like alive, trust me I ran my astrology chart on this AND dealt tarot cards and the government has a conspiracy to not tell us, the witches hate our freeeee dumb and I was at a meeting of "Occupy Trafalgar Square" with my hippie friends last night and a visiting numerologist gave a lecture about the whole conspiracy and ..
Scientist: Shut the F up village idiot you're making "the real cause" look bad. Are you an astroturf plant to make us look bad? Now like I was saying, the delta in infection rates was about negative ninety nine percent, leading to the theory that Cholera is caused by infectious substances in the water, next we applied that disease model to the Paris water supply and using that specific theory it successfully resulted in a decline of ...
(Score: 1) by wantkitteh on Wednesday August 06 2014, @12:36PM
I can see how HFT could be applied to be a form of legalised front-running, but why bother? - if you've got a speed advantage like that, you don't need the "insider" knowledge of what other trades you're processing at the time, that's the whole damn point.
I wonder if people are calling it front-running because they don't know what the term means in this context? Hell. I had to look it up myself. I guess people have heard the tales of HFT'ers paying for "special" feeds from the exchanges and think that's front-running, when actually it's past-posting, but of course they don't know that term either...
Still, it does all boil down to:
Chimp: "Monkey think HFT bad and unfair!"
Economist: "Technically, it's not at all unfair, but it is the latest symptom caused by the stock market's increasing distance from it's originally intended purpose as a source of capitalisation, pushed by increasing greedy short-term profit-hunting bastar - ",
Chimp: "Too long, monkey no listen, HFT bad and unfair!"
(Score: 3, Insightful) by Anonymous Coward on Wednesday August 06 2014, @01:06PM
Nothing is unfair, I just don't have the financial backing to compete in the fair market.
(Score: 5, Interesting) by VLM on Wednesday August 06 2014, @01:50PM
"I just don't have the financial backing to compete in the fair market."
Ah now thanks for bringing that up AC. That is the most insightful AC post I've read in a long time. This is turning out to be a pretty interesting article...
That post is important because the financial markets supposedly exist to raise capital for capital intensive businesses. Not dot com idiocy or ultra short term sub second speculative gambling. All that capital tied up and regulation and infrastructure and people "exist" so GM can sell shares (or bonds) to raise the dough to build a really expensive factory, or a railroad can raise dough to lay track, or refineries blah blah.
None of that has anything to do with a scam the HFT crowd does where they "borrow" the financial market as a venue, kind of like the Greatful Dead borrowing a baseball stadium, to do zero sum gambling speculation where pretty much the guy who spends the most wins the most from his competitors and society as a whole gains absolutely nothing.
HFT does accidentally and incidentally provide a little bit of liquidity which isn't really necessary anyway. Just to head that off at the pass. Its not like getting rid of HFT means you'll never be able to trade IBM again or some joke like that LOL.
If you blew away the financial long term market, that would suck the next time you need capital to build/upgrade a refinery or dig an oil well. You need a financial market for a capitalist system, or even a crypto-capitalist system like ours. If you blew away the HFT market, that would suck because, uh, well I guess it wouldn't suck at all and would only be a net gain to humanity as a species.
There's a subtle difference between being useless and being evil. For example, in your guts, your appendix is useless, but a cancer tumor is evil. Maybe one arguable interpretation is W was useless, Cheney was evil. Whatever. The point is that a distinction between the two does exist.
(Score: 3, Informative) by Anonymous Coward on Wednesday August 06 2014, @01:23PM
Because it turns out that the most profitable form of HFT, and the form that comprises the largest proportion of orders, is when the HFTer sees an order on one exchange that is too large to complete on that exchange, then goes and raises the price on several follow-through exchanges, before the original exchange has time to forward its own order. The original exchange acts as a leak of confidential information, which can only be acted on because HFT are faster than the inter-exchange communication itself.
It's not legally front running, but its practically indistinguishable from the perspective of the follow-through exchanges: HFTers are trading on the secondary exchanges before the secondary exchanges learn of the order upon which the HFTers are trading.
(Score: 3, Insightful) by HiThere on Wednesday August 06 2014, @07:06PM
Comment on your dialog:
The thing is, the Chimp may not have the language, but that doesn't mean he's wrong. The Economist is (plausibly) technically correct, but that doesn't make the Chimp wrong. It's just that when the Chimp says something, you don't understand what he means, because his language isn't correct.
I will admit that the Chimp also doesn't understand the Economist, but that doesn't make either of them wrong. And the Chimp has his handle on the basic point, while the Economist looses it in his addiction to detailed precision.
Javascript is what you use to allow unknown third parties to run software you have no idea about on your computer.
(Score: 2) by wantkitteh on Thursday August 07 2014, @08:47AM
Hey, look! I got running commentary! ;)
(Score: 4, Insightful) by Kilo110 on Wednesday August 06 2014, @01:06PM
So you wrote a lot about your disdain for the statement "It is generally understood that HFT is "legalized front-running""
But now can you explain how that statement is not accurate?
I've read the book Flash Boys, and while it's clearly catered towards those with only a little bit of financial markets knowledge, it did lay out many compelling arguments.
(Score: 1, Insightful) by Anonymous Coward on Wednesday August 06 2014, @01:58PM
> So you wrote a lot about your disdain
Indeed, 100% invective equals 0% content.
He's complaining that people don't understand HFT, but he doesn't even demonstrate an understanding much less add to the understanding of anyone reading his rant. Pot calling th kettle black.
(Score: 3, Insightful) by digitalaudiorock on Wednesday August 06 2014, @04:43PM
I was going to ask the same thing. Simply lumping all of us that tend to view it that way into the categories of vaccines-cause-autism, wifi-causes-cancer, astrology-is-real nutcases, and "Village Idiot" somehow just isn't a very compelling argument. Killer good insult though...
(Score: 5, Informative) by Anonymous Coward on Wednesday August 06 2014, @01:10PM
"HFT" is "front running" in exactly the same sense as "raising the question" is "begging the question." Both "front running" and "begging the question" have extremely specific legal or technical definitions, but the words that make up the jargon encompass a much larger domain for people not versed in the jargon.
So, "front running" technically means someone taking information you've secretly given them and trading on that information before they fulfill their contract to execute your trade. It is technically a criminal accusation. That definition is limited to interactions between you and your broker. However, the words "front" and "running" include just about any circumstance where someone runs in front of your transaction. Meaning, it includes those circumstances where an HFT observes the public information that you have placed an order on Exchange #1 and places that same order on Exchange #2, while your own broker is still getting around to submitting your order to Exchange #2. It's legal because the information on Exchange #1 is public, but it still feels like the same kind of cheating - where someone has information about something you've committed to do, but beats you to the execution desk.
Imagine if, back in the days when there was still floor trading, I put someone with a microphone next to you, recorded your orders as you called them out, and played them through a speaker next to the market maker's ear. My "orders" would always beat yours, because the speed of light is faster than the speed of sound, and I wouldn't be using any proprietary information. It'd still be cheating, and I would still want to use the phrase "front running" to describe it.
(Score: 5, Informative) by tathra on Wednesday August 06 2014, @02:03PM
excellent explanation. "generally understood" doesn't mean its correct, just that its how most people understand (or fail to understand) a concept; it wasn't a statement about HFT, more a statement about how people see HFT. i included a link to a question on forbes explaining why its not frontrunning because the first article uses the term while talking about HFT, and i expected it to come up in comments.
part of the SEC's mission is to "maintain fair markets" and their investigation has determined that HFT is unfair because the information they receive is far more detailed than what's available to the public and they can act on that data faster than anyone else, allowing them to insert themselves into transactions as middle-men by buying stock that somebody's already trying to buy before other markets even receive their order and selling it to them at a higher price. it would be like me going to the store and taking products out of people's hands while they walk up to the cashier, buying them, and then selling them to the people who were going to buy them at higher prices.
(Score: 3, Interesting) by jackb_guppy on Wednesday August 06 2014, @04:26PM
Is not explanation point to "insider trading"?
If you make buy order because you "knew" another was going to buy, so you can sell it to them at a higher price. How is that not insider trading?
Personally, I think a simple method is you cannot sell a stock until 24hrs as passed. That more of investment then gaming the system to be in-front of line every time.
(Score: 3, Informative) by tathra on Wednesday August 06 2014, @05:08PM
insider trading would be if i bought or sold stock based on private information being leaked from inside companies. so if somebody who worked at microsoft told you that they were going to file bankruptcy tomorrow or next week and i sold all my M$ stock before it crashed, or if somebody told you that Sony was about to release some new, world-changing product so you buy a bunch of Sony stock before its release just so you can sell it after the stock prices rise when it gets released. "insider trading" relies on insider information; what lots of people in congress do, buying and selling stocks based on the laws they pass, which raise and lower stock prices, before they pass them is also a type of insider trading.
what HFTraders do isn't really insider trading; an AC above [soylentnews.org] described pretty well what they're doing. i understand how it could be seen as insider trading though since they do have access to information that the public doesnt and by the time that information would reach the public it would be outdated and worthless anyway.
(Score: 1, Informative) by Anonymous Coward on Wednesday August 06 2014, @01:14PM
I'm an idiot and as such found Mark Cuban's guide to HFT very useful.
http://blogmaverick.com/2014/04/03/the-idiots-guide-to-high-frequency-trading/ [blogmaverick.com]
(Score: 3, Interesting) by VLM on Wednesday August 06 2014, @01:38PM
That's a pretty good article, AC. If I wrote something twenty times longer that what I actually wrote, I'd hope it would be as well written as the linked article.
I really like his phrase "Latency Arbitrage" which summarizes the situation about a billion times more accurately than making criminal accusations of front running which rely mostly on the accuser not knowing anything about the situation or the criminal act.
What I don't like about his article, and its not much, is he comically uses phrases like "jumps ahead" as if the starship enterprise uses its transporters or warp drive or some other idiocy to beat other traders. Reality is a lot simpler and some wise people choose to colocate in New York to trade the New York market. On the other hand I live about 13 milliseconds away from New York. That doesn't mean they "jump me" or some BS phrase like that, it just means they're closer and they'll always be about 13 milliseconds ahead of me. Of course another way to look at it is the guys in NYC trying to trade in Chicago are always going to be 13 milliseconds behind the reality if I trade in the Chicago markets, and again, it doesn't mean I "jump in front of them" or some such BS.
Maybe rephrased, if we decide to race on foot, and we knowingly and mutually agree to do a 100 meter dash and you do a K and we all agree knowingly and accept the terms and you intentionally decided to run ten times as far, then we race, then I win, that doesn't mean some sour grapes about I "jumped in front of you" or whatever idiocy.
I don't think trading $ for winners of foot races, at great capital and labor expense, is overall a societal good or even something useful to aspire to, so I think rules that encourage it are pretty stupid. That doesn't mean that a winner who plays fairly by mutually previously agreed upon rules is a "cheater" or a "crook" apparently solely because they won and/or some losers have sour grapes and/or some clueless are always trollin'. They might very well be crooks and most of the wall streeters are crooks, but this small aspect of their activities is one of the few legit times they really aren't crooks.
Maybe the most accurate analogy about the crying is it would be very much like east coasters accusing mid westerners of cheating because they get to watch prime time TV shows an hour before they do because the coastie episode of Survivor is on at 8 and the mid westerner episode is on at 7. It really is about that dumb of an argument when you research the whole situation. Or even better, west coasters crying because east coasters get high tide first, every time. They must be cheating crooks jumping in front, LOL.
(Score: 5, Insightful) by Anonymous Coward on Wednesday August 06 2014, @01:55PM
Not to put to fine of a point on it you are arguing over semantics. People understand in that context what 'front running' means. It is like trying to argue that a hacker is not a bad person. Well to the general public it is. Communication is not about picking nits and twisting the words. It is about communicating meaning.
In this case the meaning is you have people basically skimming the arbitrage and being a net burden on the system. They are not creating liquidity. They are actually slowing down transactions. By getting by cutting in line because they are taking advantage of the system which is not instantaneous, but a state machine.
The only reason it is not illegal is because its not legally 'front running'. Which is legally defined as having insider information. The effect however is the same with the same goal. To skim the arbitrage.
To put it more bluntly let me aim you at this comic.
http://pvponline.com/comic/2014/07/31/cons-and-pros [pvponline.com]
Woe unto us the middle men who will not make their millions for doing nothing...
(Score: 4, Insightful) by cafebabe on Wednesday August 06 2014, @04:09PM
There are a four interlinked arguments and people agree and disagree about different consequences:-
The consequences include:-
I don't understand the argument that High Frequency Trading is acceptable because it is a continuation of the trend in which trading was done by telegraph. The common man couldn't afford to trade by telegraph and the common man remains unable to trade on a level playing field. The professional advantage becomes ludicrous when fiber follows the great circle from New York to Chicago [forbes.com]. It is a US$300 million, speculative, for-profit venture where there was no shortage of bandwidth. It doesn't help anyone on a human scale and any value or liquidity gained is at the expense of the whole market. This isn't for the betterment of mankind or for the efficient distribution of goods and services.
Next, I don't understand the necessity of dark pools. Market efficiency depends the distribution of information. Much of the trading occurs over TCP. Therefore, there are no technical barriers to open exchanges widely and it should be in the interest of bankers to do so. It should be affordable and cost effective for someone in a favela to trade with a smartphone. (While you may think my priorities are skewed, the homes in the world with access to the Internet exceeds the homes with running water.) If you want trust and transparency, dark pools shouldn't exist and they look awfully like collusion even if they are run by independent legal entities.
Given that anyone should be able to join a market and trade meaningfully, the truth of the matter is that anyone connecting with an FPGA over InfiniBand is using six year old technology [fpgadeveloper.com]. In the same way that cryptocurrencies have gone CPU -> GPU -> FPGA - > custom silicon, market trading has followed a similar progression. That includes a custom chip able to execute trades in 740ns [wsj.com] and a Cisco router for the financial market with a 190ns latency mode [cisco.com].
Regarding real or perceived conflict of interest, I think re-instatement of the Glass-Steagall Act [wikipedia.org] would be too weak. At a minimum, there should be:-
I'm sure that bankers would holler at such proposals, say I'm crazy or say I don't understand. Perhaps they're correct but the current state of affairs is one of secrecy and ambiguity. And the loss of trust devalues the market and reduces liquidity.
1702845791×2
(Score: 3, Insightful) by naubol on Thursday August 07 2014, @01:46AM
Ok, I'll bite.
You start with a bushel load of ad hominems and a highly characterized story. Do you expect to be persuasive? In fact, everything but the fifth paragraph of your message could be dropped and it would actually improve the whole message.
In the fifth paragraph, I get the strong impression that you don't know what front-running is. Maybe I was just emotionally invested in the premise that someone doesn't have a problem with front-running or doesn't think HFT is front-running, but you don't seem to deliver. I am disappointed.
Actually, I agree with the basic perspective of the other paragraphs, people are often wrong. You got so far in understanding how far people are naive and without understanding and you failed to grok that this means you shouldn't be so certain.
(Score: 0) by Anonymous Coward on Wednesday August 06 2014, @03:01PM
I can't tell which side of this he's on, or what his point is, but it's clear he's pretty pissed off.