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Navinder Sarao has lost his appeal and is set to be extradited to the USA, where he faces charges with a possible maximum sentence of 380 years. He is accused of causing the "flash crash" in 2010, when the Dow Jones index dropped by 1000 points. He ran his trading from his bedroom in his parents' house and it is claimed that he made more than £30M (approximately $40M) in 5 years. His parents had no idea what he was doing, nor the scale of his income. He is accused of placing trades that he never intended to fill, so, to this naive person, it's hard to distinguish what he did from that of the large high-speed trading firms.
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Accused British "Flash Crash" Trader to be Extradited to the US
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If the thunder don't get you, then the lightning will.
(Score: 0) by Anonymous Coward on Sunday October 16 2016, @06:40PM
You claim that HFT is what brings enough liquidity to the market to enable you to trade.
No. HFT increases liquidity. That is a good thing for everyone!
This is obviously untrue, because trading worked just fine before HFT existed.
No. HFT definitely increases liquidity. Before HFT, bid/ask spreads were wider and there were more market inefficiencies.
Any normal investor, or even any serious investment fund, does not need liquidity on a millisecond scale.
I am not sure that you understand the concept of liquidity in the markets -- it's not about time, it's about price.
Liquidity is not a problem
Tell that to the mom/pop investor who loses $600 in slippage exiting a trade, because the bid/ask spread and open interest on their obscure, low volume stock is wide enough to drive a truck through.
and HFT is not a solution.
HFT is certainly not a problem, and it definitely helps liquidity.
The argument against HFT is deceptively simple: it makes money. Since HFT doesn't create money out of nothing, the money it makes is coming at the expense of other traders.
I don't think that you really understand what you are talking about, and a lot of legislators and regulators have similar ignorance, which is a huge danger to the free and open markets.
The only other traders who are affected negatively by HFT are the other HFT traders who are competing in the same game. Non-HFT traders have other longer-term strategies which are unaffected by single-tic HFT trades.
Specifically, it comes from influencing prices (with bids retracted before they can be executed) and then reacting before anyone else can.
Which greatly increases liquidity while having zero affect on mom's & pop's thirty-year nest egg -- you are talking about a single-tic change in price.
Furhtermore, HFT additionally makes money from arbitrage, which eliminates market inefficiencies -- while also increasing liquidity!
It makes money from front-running. Likely there are other techniques as well.
There are all kinds of ways that huge, non-HFT traders (non-HFT) manipulate the markets as well. Such big traders influence prices a few tics, and that is part of normal trading, and it is opportunity for those who are aware of what is happening. Such activity usually doesn't last more than a few minutes, and it almost never affects who you call "normal" investors.
In the case of both HFT and huge non-HFT trades, such activity usually occurs in futures that have large notional values -- mom & pop aren't investing here.
In all cases, this money is coming from other people's trades, by making the spread just that little bit larger.
NO! We are talking one or two tics (or simple arbitrage) in a split second -- the only other parties who are largely affected are other HFT traders.
IN ALL CASES, THE BID/ASK SPREAD GETS SMALLER!
We are not only talking your trades as a private person, but also trades made by any funds that you may own, by any retirement funds that you might benefit from, etc.. HFT is making money, but adding no value whatsoever.
No. We are talking about a one or two tic change in price for a split second. Nobody's retirement fund is affected, and liquidity is increased -- this helps mom & pop get out of their trade at maximum value.
Now, maybe my proposed cure is too extreme. Either part would do: Either you prohibit retracting orders (or, at least, more than some very small proportion of your orders) - thus preventing the influence on price. Or you prohibit the fast trading itself, requiring positions to be held for a minimum amount of time. Probably either of those would be sufficient.
As another poster has stated, your suggestions would not fix the problem behind what caused the "flash crash" in question, and such arbitrary measures would only be detrimental to free and open trading.
Huge non-HFT institutional traders influence stock and derivative prices all day, every day, way more than single-tic HFT outfits, but nobody is up in arms about such large-scale price manipulation. This large-scale, non-HFT influence is perfectly normal and accepted investing, and it can actually be short-term opportunities for others who are savvy.
Always, more trading is better for the markets!
(Score: 3, Insightful) by bradley13 on Sunday October 16 2016, @07:02PM
Ok, let me see if I understand your position:
1. HFT increases liquidity by decreasing spreads.
2. HFT does not make money at the expense of "normal" trading, but only at the expense of other HFT traders, presumably
Have I understood your position correctly? If so, then I challenge you to explain these two points in any sort of clear way. There are articles out there that agree with you [forbes.com], but they seem to omit any explanation of just *how* HFT performs such miracles. Meanwhile, there are also articles that disagree with your premises [economist.com] - generally, these seem to include more information on the mechanisms.
I find point 2 above particular difficult to accept. HFT as a whole makes bags of money, else it would not exist. Hence, the money is not only being made by one HFT company at the expense of another. Since HFT traders aren't printing money, and since spreads are, in fact, smaller today than previously...the only place that money can come from is non-HFT traders.
Rather than telling me yet again that I am wrong, explain why you are right. Explain *how* HFT trading makes money without taking it from non-HFT trades. See the second link above for examples that you must counter.
Everyone is somebody else's weirdo.
(Score: 1, Interesting) by Anonymous Coward on Sunday October 16 2016, @08:32PM
In response to your two numbered points:
1. HFT increases liquidity by increasing volume and open interest and by reducing bid/ask spreads.
2. HFT is not a detriment to non-HFT traders, because such trading usually involves split-second arbitrage and split-second one (maybe two) tic moves. HFT is an advantage to markets because it increases liquidity.
Thank you for linking the articles, but 99% of such pieces are useless information, as 99% of folks in the financial media (and in the financial world) are stuck with a legacy financial mindset, and they don't understand the reality of the situation.
At any rate, I can't get past the Forbes cut to see that article.
The Economist piece has a shaky premise, and it actually states, "HFT now accounts for as much as half of all stockmarket trading in America; its rise has coincided with a marked narrowing of the bid-ask spread." I am not sure about that figure, but, if it is so, that much HFT trading is a gigantic increase liquidity, which is an incredible boon to all traders. The Economist article also seems to indicate that HFT trading is mainly a detriment to the market makers, who are almost always using HFT algorithms themselves. Again, except for the benefit of added liquidity, HFT trading only affects those who are competing in the HFT game.
There is no "miracle" to an increase in trading boosting liquidity -- it is a fundamental fact of all markets, just as basic as the law of supply and demand. Little trading means little interest (low liquidity). High volume of trading means lots of interest (high liquidity). It's that simple.
In regards to your statement that HFT "makes bags of money," it seems that the profits of the HFT outfits are actually in decline. This reduction in HFT profits is almost certainly due to the fact that there are a lot more players in that game now.
You made a statement about the origin of HFT profits "...the only place that money can come from is non-HFT traders." First of all, a lot of HFT trading is simple arbitrage.
Secondly, of course, some of the non-arbitrage HFT money comes from non-HFT traders, as they might be entering a market order at the split-second of the HFT bid/ask. However, don't assume that that single tic of income for the HFT firm means that the non-HFT party on the other side of the trade automatically loses. The non-HFT party is probably in trade for a longer time frame, so that single tic is inconsequential. In addition, most (smart) retail traders use limit orders to get the price they desire.
In addition, there has to be a large number buyers or sellers on the other side of the trade for a single HFT trade to make a little profit, and if there is a large block of bids or offers, that usually comes from an institutional trader, who may or may not be HFT. If such a large trader is non-HFT, then they are influencing by the price that they decide on, and, also, that single tic probably isn't a huge deal if they are in the trade for a longer time frame. If the large trader on the other end is also HFT, then they are competing in the HFT game, and that's that.
There is no need to place arbitray limits/restrictions on traders -- a free and open market is beneficial to all.
(Score: 0) by Anonymous Coward on Monday October 17 2016, @03:44AM
But there are restrictions on trade, as show by the arrest. Only certain people are allowed to do the things HFT's do.
Only people with lots and lots of money can set up HFT, so again not free and open but restricted to the few. HFTers see extra information that no one else gets to see, so again not free and open.
It matters very little if the spreads have narrowed if the HFTers can push the price up or down due to insider knowledge. That price movement will be much greater than any decrease in spread. See the flash crash from the article for an extreme example. But you surely must know price patterns have changed due to HFT's.
The most obvious, and yet unanswered question is where does all the profit come from. If it's just redistributing the money among HFTers all the losing ones go broke and then what? They keep on going until there is only one left? More and more keep joining into the game bringing in new money? Seems quite a stupid thing to do, survivership bias and all. Only the best of the best still remain, yet newbies are arrogant enough to think they can compete? Seems the only explanation people claim. Apart from the obvious that HFTers are just leeches on the system.
(Score: 0) by Anonymous Coward on Monday October 17 2016, @05:08AM
I agree that HFT should be open to anyone, but if one doesn't have a lot of capital (or even if one has a lot of capital), there certainly are much better ways than HFT.
I don't want to keep repeating myself, but the HFTers can only move the price up or down one tic, so the liquidity benefit to the market hugely outweighs such a miniscule move. Most HFT is arbitrage anyway, so it is not really moving the price. Non-HFT Institutional investors move the prices to a greater degree, but such moves are usually only several tics and don't last more than a few minutes. Neither type of "price influencing" is large enough nor long-lasting enough to affect mom & pop, buy-and-hold investors -- those folks don't lose and only benefit from the increased liquidity.
The HFT profit mostly comes from arbitrage and other HFT investors, and it is usually a profit from large orders moving a single tic -- not huge, earth-shattering moves.
HFTers are not "leeches on the system" -- they are legitimate traders just working within shorter terms and smaller moves, who benefit the markets with higher liquidity and who have no detriment to any other traders (except perhaps to other HFT traders -- but that's the trading game).
(Score: 0) by Anonymous Coward on Monday October 17 2016, @05:47AM
HFTers can only move the price up or down one tic
Except when they produce a flash crash and the entire Dow drops by a thousand points...
Just ignore all the "long term" (ie few seconds) price fluctuations and changes.
(Score: 0) by Anonymous Coward on Monday October 17 2016, @07:03AM
That's probably not exactly what happened and it was a fluke that likely won't happen again -- none of the HFT traders wanted it.
Furthermore, it was a "flash" crash, so it came right back up, and mom & pop's retirement account didn't suffer.
(Score: 0) by Anonymous Coward on Monday October 17 2016, @07:13AM
Isn't all the extra liquidity supposed to stop that kind of thing though and not cause it.
That was also only one extreme example but how much do other individual stocks get manipulated by obviously smaller but still meaningful amounts?
Are you also claiming that the only people who bought or sold during that time were other HFTers, or did regular people suffer material losses as well?
Increased volatility isn't beneficial to anyone but traders. It's clear prices are pushed up or down at the whims of the few. Explain again why that is some kind of benefit.
(Score: 0) by Anonymous Coward on Monday October 17 2016, @08:26AM
Isn't all the extra liquidity supposed to stop that kind of thing though and not cause it.
No one knows exactly what causes "that kind of thing." Liquidity probably has little to do with the cause of such a fluke.
IThat was also only one extreme example but how much do other individual stocks get manipulated by obviously smaller but still meaningful amounts?
Such small changes in price are only meaningful to those who trade in huge blocks very quickly -- HFT traders.
Are you also claiming that the only people who bought or sold during that time were other HFTers, or did regular people suffer material losses as well?
Large volume trading and liquidity often halt during a crash. Any one who made a trade during the flash crash was taking a huge risk. However, it was a "flash" crash, and the market rebounded quickly, so there was no adverse affect for the typical buy-and-hold traders.
Increased volatility isn't beneficial to anyone but traders. It's clear prices are pushed up or down at the whims of the few. Explain again why that is some kind of benefit.
Increased volatility is beneficial to those who sell volatility (and that technique is probably the most successful in investing). Again (I am getting tired of repeating myself), the moves that result from HFT are minute -- one, mabye two tics. Non-HFT institutional investors can move prices several tics, but such influence usually only lasts for a few minutes. Long term mom & pop investors are making random plays and are not affected by extremely short term HFT and institutional order book plays.
Look, there is no way that anyone can predict stock price movement past those few tics and those few minutes. Trading the market directionally for more than a days time span is a completely random game, and HFT traders have no effect on such pursuits, except to increase liquidity.
(Score: 0) by Anonymous Coward on Monday October 17 2016, @01:12PM
So the very time liquidity is needed the most HFTers run for the hills.
You are basing your claim that the prices that move around just magically due to HFTing go back to normal and the prices other people buy and sell at are unafected as soon as a mere mortal tries to buy or sell? How is that even mathematically possible.
You are probably getting tired of repeating yourself because you aren't saying anything usefull and just shilling. Just repeating trust me liquidity will solve all your problems, and that the $Billions HFTers 'earn' don't come from anywhere but magic.
You keep claiming the same nonsense. If a fund sells and another fund buys, what benefit is there that a HFTer skimms a bit of money from both? Their days long portfolio change happens a couple microseconds quicker and at a worse price. No benefit to anyone but the leeching HFTers.
Facts are, HFTers are privileged above any other traders. They have lower fees, special access, and extra information that regular traders don't ever get to see etc. The complete opposite to a free and fair market (,to anyone who isn't financially benefiting from said shenanigans that is).
(Score: 0) by Anonymous Coward on Monday October 17 2016, @06:32PM
So the very time liquidity is needed the most HFTers run for the hills.
Huh? What are you talking about?
You are basing your claim that the prices that move around just magically due to HFTing go back to normal and the prices other people buy and sell at are unafected as soon as a mere mortal tries to buy or sell? How is that even mathematically possible.
Look, prices move. They go up, they go down, sometimes a lot, sometimes a little. That is the nature of the markets. The way prices move now is just like this the way prices moved before HFT trading existed. The only difference is one of those single tics of movement might occasionally be due to HFT (or it might not). Here's the important part -- that single tic of movement that may or may not be due to HFT makes absolutely no difference to the buy-and-hold trader -- THE BUY-AND-HOLD TRADER DOESN'T LOSE WHEN THE HFT TRADER WINS ONE TIC!
This concept is very simple. It is analogous to tuning in a low power radio station against a higher power station at a higher frequency. The powerful higher frequency station my cause an occasional tiny static pop, but you will have no problem getting your lower frequency station.
Regarding the flash crash, it is doubtful that this single HFT trader caused it. Even the SEC has changed where it placed the blame. However, occasional large down moves have always been part of the nature of the markets. Such moves aren't new since HFT appeared. If a trader is not prepared to contend with such possibilities, then perhaps that trader should not be in the game. And I will remind you once again that the flash crash in question was followed by an immediate rebound.
You are probably getting tired of repeating yourself because you aren't saying anything usefull and just shilling. Just repeating trust me liquidity will solve all your problems, and that the $Billions HFTers 'earn' don't come from anywhere but magic. You keep claiming the same nonsense. If a fund sells and another fund buys, what benefit is there that a HFTer skimms a bit of money from both? Their days long portfolio change happens a couple microseconds quicker and at a worse price. No benefit to anyone but the leeching HFTers.
I don't think that you really understand the situation nor how markets work, nor even why people make certain trades. I can't give you an investing course in this thread, but it all basically comes back to the explanation above about how the market moves and how, hence, buy-and-hold traders are unaffected by HFT trading (except for the benefit of added liquidity).
Facts are, HFTers are privileged above any other traders. They have lower fees, special access, and extra information that regular traders don't ever get to see etc. The complete opposite to a free and fair market (,to anyone who isn't financially benefiting from said shenanigans that is).
Don't be naive.
HFT traders have to contend with higher fees. It is tough to use HFT (especially with all of the current competition) if you can't buy at the bid and sell at the offer. The primary tradeoff of having such a privilege is extreme cost of entry/fees.
On the other hand the tradeoff for being a retail investor (without the high entry fees) is that you cannot buy at the bid and sell at the offer. Here's the thing, when there is a lot of liquidity, it is great to be a retail investor -- no exorbitant market maker fees, while you might pay only a penny for the bid/ask spread! By the way, liquidity is also good for the market maker, even though the spreads are tighter, because they get more occurrences.
Furthermore, with the advanced retail platforms that are currently available, market makers don't have any extra information over retail investors. In fact, many such big traders use retail platforms for their indicators and order book ladders.
(Score: 0) by Anonymous Coward on Tuesday October 18 2016, @05:30AM
It's common knowledge (even wikipedia mentions) that the liquidity HFTers claim to supply, is the first to dry up if there is any 'unexpected event'. ie they disappear when liquidity is needed most, like in flash crashes.
There are many documented examples of patterns when looking at the trading data of HFTers. To not know this is also ignorant in the extreme. To pretend that HFTers don't change the price by more than one tick is completely disingenuous. The way prices move now is clearly not the same as the way prices moved before.
People make trades for variety of reasons. Some of those reasons are due to price or volume data that is fake due to HFTers. Momentum and other trading strategies that are also disrupted by HFTers manipulations.
Are you seriously claiming HFTers pay the same or higher fees for the trades they execute. Thats funny. Paying a higher cost to set up your special privledged connection, is quite different to having cheaper trades than any one else. Especially as is often the case of being paid by the exchange (getting a rebate) to make those trades.
The exchanges aren't charities, the money they pay to HFTers comes at least in part from the fees that everyone else pays to trade.
How could you possibly think that HFTers don't have extra information over and above everyone else? If my computer is places closer to the exchange I get the information sooner than you do. HFTers pay to see data that the average person will never be in a position to see.
It's clear you haven't even tried to look objectively at any of this but have been told HFT good, now go convince every one else.
The Billions of dollars of profits they make even after taking into account the hundreds of Millions they pay to set up their infrastructure and buy their special access, must come from somewhere. It does, it comes from everyone else.
(Score: 0) by Anonymous Coward on Tuesday October 18 2016, @06:38AM
Dude, liquidity disappears all together in a crash, period. HFT traders have nothing to do with this phenomenon. Disappearance of liquidity happened in all crashes before HFT trading existed -- it is simply an integral part/symptom of a crash.
There are many other fundamental reasons why folks make trades which you have not mentioned, usually in derivatives, which is actually a much bigger market than stocks. I am not here to school you on these strategies.
HFT traders usually want market making privileges for which they (and everyone else) have to pay hefty fees. Furthermore, they try to get a fast, close-proximity-to-the-exchange connection, which also adds a lot to their costs. I can't help it if you are ignorant of these facts.
Are you claiming that the exchanges pay HFT traders with fees from retail traders? Really?
HFT traders don't have any unique information, but they do have unique algorithms and strategies.
I don't have time to school you.
(Score: 0) by Anonymous Coward on Tuesday October 18 2016, @09:59AM
You are a completely delusional fool.
(Score: 0) by Anonymous Coward on Monday October 17 2016, @03:49AM
HFT makes money by inserting itself between actual buyers and sellers.
That is, folks who have or want to have a stock.
To HFT, having a stock is like having a hot potato.
They are not interested in buying something unless they are pretty sure they have a buyer.
If there were no actual buyers and sellers, there would be no market making interest from HFT.
So to say they make the market more liquid ignores the fact that they only do this when it is not needed.
To say that they lower the apparent spread may be true, but I suspect that they do not lower the spread between actual buyers and sellers.
They like the spread, that is where they make their money.
(Score: 0) by Anonymous Coward on Monday October 17 2016, @05:27AM
HFT makes money by inserting itself between actual buyers and sellers. That is, folks who have or want to have a stock.
No. HFT traders are actual traders -- they just work within a shorter time span and within tiny moves.
HFT traders don't affect the mom and pop, buy-and-hold stock investors, except to increase liquidity, making it easier for mom & pop to exit their trade with more value.
Also, most HFT is arbitrage, so it really doesn't change pricing as much as it eliminates market inefficiencies while increasing liquidity.
To HFT, having a stock is like having a hot potato. They are not interested in buying something unless they are pretty sure they have a buyer. If there were no actual buyers and sellers, there would be no market making interest from HFT. So to say they make the market more liquid ignores the fact that they only do this when it is not needed.
Of course, HFT traders want liquidity just like everyone else. Like most others, they can't operate effectively if there is no interest in a product.
However, HFT (like all trading) definitely increases liquidity, and more liquidity is always helpful, even in the markets chosen by HFT traders.
To say that they lower the apparent spread may be true,
Yes. That is obvious. And "lowering" the spread means more liquidity and easier trades for all.
but I suspect that they do not lower the spread between actual buyers and sellers. They like the spread, that is where they make their money.
Huh? If the spread is narrowed, that helps everyone get more value out of the trades -- even for the market makers and arbitrageurs.
I am not sure if most folks making assertions here are familiar with the actual realities of the markets.
(Score: 2) by bradley13 on Monday October 17 2016, @05:57AM
Good discussion, thank you.
Everyone is somebody else's weirdo.