Under the headline, "The Wolf Hunters of Wall Street", The New York Times Magazine is running this review of a new book. It tells a long story that ends in the creation of IEX (Investors Exchange), a new stock exchange with the intent of bypassing the unfair advantages that co-located high-speed traders currently have. After a few weeks of operation near the end of 2013, their volume was larger than AMEX(!!)
Here's a quote from near the end of the book review:
IEX had made its point: That to function properly, a financial market didn't need to be rigged in someone's favor. It didn't need payment for order flow and co-location and all sorts of unfair advantages possessed by a small handful of traders. All it needed was for investors to take responsibility for understanding it, and then to seize its controls.
"The backbone of the market," Brad Katsuyama (President & Chief Executive Officer, IEX) says, "is investors coming together to trade." While the article is long, I enjoyed the story. I have no connection to this company, but here's their website.
(Score: 2, Informative) by Hawkwind on Wednesday April 02 2014, @02:34AM
(Score: 3, Insightful) by Anonymous Couuard on Wednesday April 02 2014, @06:04AM
Thanks for the link to the audio clip. I enjoyed listening to it. I liked the comment about the company digging a dedicated tunnel from Chicago to New Jersey to get a 12.5 msec link to beat the fastest link by Verizon, which was 17 msec. Then the HFT bozos use it for the few extra milliseconds to rig the the price on other exchanges to jack up the price by a few cents and cash in. What an absolute racket. They add NO value. Complete parasites.
(Score: 1) by len_harms on Wednesday April 02 2014, @01:55PM
I read the article too. It was an interesting idea using different speeds on their link so the bids appeared to show up at all the exchanges at the same time. That way you minimize who can front run you. It does not however get rid of front running. As more exchanges give the people who are doing it the ability to front run even more.
It is an exchange setup to lure in people who just want to buy hold sell. For the HFT guys they will just use it as another tool to skim .0002 cents out of people.
If you use the exchange exclusively you will not get as screwed. If you go outside of the balanced ones there is a possibility of being front run.
It was also interesting that 2-5ms is enough to get front run.
(Score: 1) by Hawkwind on Wednesday April 02 2014, @10:38PM
I think your referring to the Thor Ring initially set up to deal with the problem (the current best answer from big investors trying to end this being IEX). The tunnel from Chicago was a different beast where the builder of the tunnel "blackmailed" traders to have to switch to his faster connection or become obsolete. A fun note of this is the guy was approached about doubling his price by one of the groups! The thinking being a higher price for access to his connection would reduce competition.
On the IEX point, my understanding is Goldman Sachs just recently announced they'll be sending their business that way. It'll take the biggest investors hounding these middle men to get something closer to an open market.
(Score: 4, Interesting) by internetguy on Wednesday April 02 2014, @03:10AM
IEX is a FINRA registered "alternative trading system" (ATS) and is regulated by the SEC. While IEX appears to have it's heart in the right place, IEX is not a National Exchange. IEX is still operating in the same market place as high frequency traders (HFT), millisecond transactions, dark pools, and automatic trade algorithms. I believe these problems are perpetuated by FINRA. We need another Financial Regulatory Organization who has regulations we can TRUST. I propose that we need to create another regulatory organization to oppose FINRA and create some competition and trust into the exchanges.
Sig: I must be new here.
(Score: 3, Funny) by edIII on Wednesday April 02 2014, @03:23AM
My kingdom for mod points...
Technically, lunchtime is at any moment. It's just a wave function.
(Score: 2) by c0lo on Wednesday April 02 2014, @04:50AM
Not interested. A cheap republic on the other hand... if you have one, I might throw in some mod points for that.
(grin)
https://www.youtube.com/watch?v=aoFiw2jMy-0 https://soylentnews.org/~MichaelDavidCrawford
(Score: 1) by khallow on Wednesday April 02 2014, @02:01PM
While I approve of creating rival financial regulatory organizations, this would remain a problem because there really is only one space. Even the "national exchanges" are in this space even if they are subject to different regulation and rules. Nor would there be any advantage to attempting to segregate these markets, participants, and activities/algorithms. Especially since it doesn't deal with the government regional monopolies on regulation. There's no competitor to the SEC in the US.
Instead, I think the diversification of markets into dark pools is one of the better financial innovations out there. I'm sure it'll bite us every so often, but dark pools are still a decent workaround for a few of the regulations imposed by the SEC and restrictions imposed by the national exchanges (such as time of day or week restrictions on trading stock or restrictions on computer trading at the very times when that trading is most needed - such as during market crashes).
(Score: 2, Insightful) by Anonymous Coward on Wednesday April 02 2014, @03:59AM
p.s. and some of those flamefests get really boring esp if they are the same ones every time similar stories get posted.
(Score: 2) by tathra on Wednesday April 02 2014, @04:54AM
i'd much rather have good, interesting stories even if there isnt much to discuss about them than shallow (and likely biased and/or agenda-driven) stories that are neither interesting nor informative but generate a lot of comments. we just dont have the userbase to be able to get lots of comments on every story due to how diverse they are, and we'll probably never get that userbase without quality, thought-provoking stories.
(Score: 1) by No.Limit on Wednesday April 02 2014, @05:23AM
This submission was certainly much more interesting than many others with more comments. At least for me.
(Score: 2) by carguy on Wednesday April 02 2014, @01:54PM
From submitter -- thanks for the compliments. However, the lack of comments brings to mind the phrase, "it was a critical success", which is usually used for books and shows that flop financially....
(Score: 2) by TheLink on Wednesday April 02 2014, @02:38PM
(Score: 2) by Hairyfeet on Wednesday April 02 2014, @03:17PM
Well I'm afraid if you want a lot of comments on an article like this it really needs to be in a financial publication because frankly one has to have some really in depth knowledge of the subject to see why this is important or why HFT is a problem.
Take myself as an example, i didn't post because there really isn't anything to add other than HFT gives the top 86 individuals that now control over 70% of the wealth on this planet a way to siphon even more riches, but anybody who knows anything about HFT already knows that it allows the top 1% an easy way to grow their wealth as 1.- You need a LOT of money to even get into the game, and 2.- because you already know what the price is and are trading on the milliseconds it takes for the price to hit the screen? you can't lose. Those that know nothing about HFT will either not believe you or think its something political, so you are either wasting your time or preaching to the choir...what is the point in that?
Lets face it, most of the guys that came over here at day 1 are old school tech heads NOT day traders, so its doubtful many will have the level of expertise to speak about this in any kind of depth.
ACs are never seen so don't bother. Always ready to show SJWs for the racists they are.
(Score: 1) by NeoNormal on Wednesday April 02 2014, @03:24PM
Excellent post! That is the way I feel about quite a few topics. I know enough to understand the thrust of the discussion, but not enough to advance it... so I read and moderate.
And, to be clear, I still enjoy reading these topics as I feel they advance my knowledge.
(Score: 1) by No.Limit on Wednesday April 02 2014, @06:54PM
Same here. Only reason why I didn't moderate and commented instead was because I didn't have mod points just then.
It's often really interesting to read posts of people who are simply much better informed.
(Score: 2) by Phoenix666 on Wednesday April 02 2014, @05:22PM
There is the question of fairness, which has already been mentioned. Front-running a trade you know is going to happen is an unfair advantage. It is the purest and most insidious form of insider trading. There is the question of legality, which has been covered. Front-running a trade is illegal. Insider trading is illegal. Both happen all the time and even when the rare, rare person or firm is caught for it, the penalties are either waived or are so paltry that the cost-benefit ratio of the behavior is so wildly inadequate that it guarantees recidivism. There is the question of harm, which many have touched on. Who does it really harm if somebody steals a few pennies off your final price? It mostly affects big traders, so who cares if they get stuck for a few extra millions? They can spare it, can't they? Can the average person even understand or care about the basic math you have to be able to do to really appreciate the scale of what this means?
If those are the only things you are looking at, then, yeah, so what?
The real importance of this story is the externalities, which are vast, deep, huge. First, you have the unearned wealth skimming off the top to further enrich an elite group of complete sociopaths. If all they did with that money was to buy another lambo or another house in the Caymans, so what. But they don't. They totally corrupt our democracy to the point where laws are passed that depriving most of us of liveable wages, medical care, housing, food, the ability to get our roads fixed, or to do something about the massive carbon bloom in our atmosphere. That is an existential threat to the very lives of the vast majority of us in the world. Second, you have the critical loss of confidence in the financial system, which has taken many body blows in the last 20 years. The little people who always get the shortest end of the stick lost that confidence a very long time ago, but when the other large players in the game lose that confidence too then the whole raison-d-etre descends into chaos. Consider that. The Snowden revelations have destroyed the credibility of the entire federal government, with the result that elements of the federal government are starting to turn on each other (see DiFi's attack on the CIA) and the NSA is turning on its own workers (presumably to stop future leakers). Now here with the financial system you have the pension funds, which are the really, really big money in the system, turning on the traders and the banks. Throw in the good times going on around the world like Russia and China and the Arab Spring. Throw in climate change and we have four very large trends converging on a very, very large systemic shift that's right around the corner.
Me, I'm teaching my 5- and 3-yr olds how to forage for food, hunt, fish, and flint-knap because after this collapse they could well be the skills they'll need to survive.
Washington DC delenda est.
(Score: 1) by No.Limit on Wednesday April 02 2014, @06:56PM
I think this is one of the main problems with corporations or governments abusing laws.
I think you can go as far as saying that it's an insult to a rational mind not to commit these crimes, because the risk and profit clearly tell you that it's absolutely worth it.
(Score: 1) by khallow on Wednesday April 02 2014, @01:52PM
What happened here is that someone adapted to HFT in just two years of observing the original problem and in four years came up with a market exchange that was resistant to the games played by HFT (and was amply rewarded for that latter effort within a year of the creation of that market). Such things reduce the advantage and profitability of HFT tactics and strategies to some degree, but they don't eliminate it.
IMHO, this article shows several things. First, that HFT is not as bad as claimed. The harm inflicted here was only on large traders. It was roughly 0.1% of the amount of the trade, and only until the trader adapted to the new HFT tactic. And a simple modest time delay of 350 microseconds eliminated most of that HFT advantage. It also showed that adaptation was swift as I discussed above. Finally, the article showed the development of interesting new technologies, and counter-HFT tactics and strategies which no one would have developed in the absence of pressure from HFT traders.
This shows part of why I think HFT should not only be allowed, but encouraged. It opens up new ideas and technologies.
(Score: 1) by WanderCat on Wednesday April 02 2014, @04:50PM
I am not sure what "new ideas and technologies" you're referring to.
HFT is the next generation of technical trading, in which buy/sell decisions are made based on statistical analysis of price and volume trends. This is utterly apart from fundamental investing, in which buy/sell decisions are based on the basic value proposition of the organizations whose equities are being traded.
Being able to attract capital on an improved/improving value proposition is a welcome driver of economic improvement. Technical trading is a (n increasingly effective) method of gaming the system to make profits on the side. The problem is that this, in most cases, leads to markets which are less stable and less prone to promote real growth.
The current practitioners of HFT are akin to poker players who, on arriving at the casino, agree to pay the casino owners a cut of their winnings in exchange for being able to see other players hands before the end of the hand. The faster your ability to survey market activity, the more players hands you get to see before deciding how to bet.
All in all, an unhealthy development.
But, the emergence of new exchanges that prune out elements who do not contribute to value in the long term is a sign of hope. (And, exactly what one would expect in a properly functioning market.)
(Score: 1) by khallow on Wednesday April 02 2014, @05:22PM
The problem is that this, in most cases, leads to markets which are less stable and less prone to promote real growth.
There is no such problem. Seriously, the best evidence for this case are some small flash crashes and all the near clueless internet commentary on how bad HFT is.
The current practitioners of HFT are akin to poker players who, on arriving at the casino, agree to pay the casino owners a cut of their winnings in exchange for being able to see other players hands before the end of the hand. The faster your ability to survey market activity, the more players hands you get to see before deciding how to bet.
They don't have the ability to see orders or trades before they hit the market, unless they happen to be the broker managing those orders or trades. That conflict of interest is a different problem than HFT and it's been around long before HFT.
(Score: 0) by Anonymous Coward on Wednesday April 02 2014, @05:44PM
HFT distorts real value by interjecting yourself as a middle man by creating false scarcity.
What? Lets say I say I am going to buy at 10 and you can front run me and buy everything at 9.99. Now I can not buy at 10. But you put your sell up for 10.01 and I have to buy because my customer demands it. You have artificially distorted the market price. When the original buyer and seller would have been happy at 10.
They don't have the ability to see orders or trades before they hit the market
Yes they do. Because you submit to 10 exchanges at once. I can watch all 10 and see when they go up and in a few ms make a decision to do the above. You do not even know it happened. Because you are too far away.
That is why this 'hack' they did works to an extent. They are timing their buy/sell to show up on all 10 exchanges at the same time. Instead of being staggered out. All of the exchanges have the same information at the same time so you can not see my buy show up on one exchange and then gobble it up on all the other exchanges before I get there.
That is but one aspect of what HFT is about. It is why all these guys want to be on the fastest network. A 5-10ms is enough for me to get ahead of you in line at another exchange...
(Score: 1) by khallow on Wednesday April 02 2014, @08:25PM
Ok, how is real value being distorted? In your example, you were willing to buy everything at 10.01, and everyone else was willing to sell at 9.99. Everyone got what they wanted including the HFT trader.
Except that the whole story was about them noticing that it happened. And when they actually came up with a program that traded at the same time on all the exchanges rather than submitted at the same time, the HFT advantage went away. "ms" also refers to milliseconds not microseconds. Googling around, I gather "ums" would be acceptable as an abbreviation for microseconds.
This whole HFT strategy works because a big trader is doing something predictable on the time scales that HFT works at. It's knowledge that gets used by the markets.
And it's only a problem because you're only presenting it from the viewpoint of the other parties to the trade. Everything works just fine from the HFT trader's point of view.
(Score: 1) by monster on Wednesday April 02 2014, @04:56PM
A parasite, even if it doesn't a lot of harm, is still a liability. Put another way: If a thug robbed your house but only got a few dollars, would you feel the need to encourage robberies because it opens up new ideas and strategies in home security?
Would you like to experiment with HFT? Fine, start a new experimental exchange. Doing it in normal exchanges is akin to develop software directly against production servers.
(Score: 1) by khallow on Wednesday April 02 2014, @09:44PM
A parasite, even if it doesn't a lot of harm, is still a liability.
Only to those who don't develop protection against the parasite.
If a thug robbed your house but only got a few dollars, would you feel the need to encourage robberies because it opens up new ideas and strategies in home security?
Home security is pretty well tested. HFT works so well because there are a lot of big traders who aren't trading securely. If that same situation existed in homes where a thug could steal a few dollars from thousands of homes simultaneously but otherwise there would be no incentive to develop secure homes, I would have to say yes, we need the robberies in order to develop the security. I would apply the same logic to most modern malware as well. It helps protect us against the more dangerous stuff out there.
The parasites will exist anyway. But in this scenario, the parties susceptible to those parasites will develop defenses.
And that's based on the assumption that HFT is just parasitism. When you take into account the benefits such as liquidity and new technology/math R&D it adds, this accusation doesn't make sense.
(Score: 1) by monster on Thursday April 03 2014, @06:35AM
So, the old "they were looking for it!" argument.
(Score: 1) by khallow on Thursday April 03 2014, @02:03PM
So, the old "they were looking for it!" argument.
You decide whether it's important to you or not that your pension fund is "looking for it".
(Score: 2) by etherscythe on Wednesday April 02 2014, @07:15PM
While there may be some interesting results from the game theory playing out, I don't agree that HFT should be "encouraged" on the open market. Most of the value I am seeing is mainly from an academic viewpoint, and provides no practical benefit whatsoever. You're saying that enough value is generated that it is OK to constantly nickle-and-dime everybody's retirement plans to give a few already-rich traders additional incentive to participate, because HFT is naturally at odds with the profit of average, low-volume traders. I completely disagree that it's justified, in fact quite the opposite.
The people we should be looking to benefit are the senior citizens on fixed incomes and with high medical bills, and the average workers with retirement plans who will eventually become those senior citizens.
It might be good to encourage people to hold onto individual stocks for a decent period of time as well, so that they can perhaps emotionally invest in the company and maybe give it a little bit of direct moral guidance and conscience. I don't see any other way for corporations to become worthy of the "personhood" they have been granted.
"Fake News: anything reported outside of my own personally chosen echo chamber"
(Score: 1) by khallow on Wednesday April 02 2014, @09:59PM
Most of the value I am seeing is mainly from an academic viewpoint, and provides no practical benefit whatsoever.
To you. It's not all about you.
You're saying that enough value is generated that it is OK to constantly nickle-and-dime everybody's retirement plans to give a few already-rich traders additional incentive to participate, because HFT is naturally at odds with the profit of average, low-volume traders.
Here's an example. Low volume traders are almost invisible to HFT. A few nickels and dimes over years are nothing especially considering the reduction in bid spread as a result of HFT and similar trading. As to your retirement plans, look at who has your money. That entity is far more capable of taking your money than the HFT traders are.
I don't see any other way for corporations to become worthy of the "personhood" they have been granted.
So your financial ignorance stretches to the realm of corporate personhood? Bad ideas accumulate, I guess. Corporate personhood is another area which I think works well as is.
The problem here is that people with lots of wealth had advantages. It's not corporations or HFT that give them this power, but wealth. My take is that even if laws are passed which shut down corporations and HFT, it will be done in a way that furthers the power of people with wealth (especially given that I don't think corporations or HFT actually does that much for wealthy people).
(Score: 2) by etherscythe on Wednesday April 02 2014, @11:21PM
Feel free to enlighten me. No, seriously, I don't have a burning need to be "right"; if you have credible sources I will give credit where it's due.
From where I sit, HFT algo wars lead to things like market bubbles, which are unhealthy and lead to collapses that destroy retirement plans and such (to say nothing of bugs causing flash crashes and the cascading effects therefrom). I've seen markets collapse and investments go down in flames. I have yet to see a HFT algo used to cure cancer, or really any positive benefit at all for anyone who doesn't have the money to drop for high-end hardware and connections. Maybe it's there, but it's certainly not to be found in your reply. Show me and I'll change my tune.
But then, if you're not seeing how corporate campaign donations and lobbying that result from that personhood are skewing the political landscape with disproportionate effects for those who are not in the 1%, we probably have irreconcilable differences of perspective, at which point there is nothing more to discuss. Given your tone, I wouldn't be surprised.
"Fake News: anything reported outside of my own personally chosen echo chamber"
(Score: 1) by khallow on Thursday April 03 2014, @02:37AM
HFT algo wars lead to things like market bubbles and lead to collapses that destroy retirement plans and such (to say nothing of bugs causing flash crashes and the cascading effects therefrom).
Why would it? You need incorrect valuation for a bubble to occur and it can be worsened by easy credit from some sort like central banks or high levels of leverage. That has nothing to do with speed of trade.
I have yet to see a HFT algo used to cure cancer, or really any positive benefit at all for anyone who doesn't have the money to drop for high-end hardware and connections.
Pension funds don't do that either.
But then, if you're not seeing how corporate campaign donations and lobbying that result from that personhood are skewing the political landscape with disproportionate effects for those who are not in the 1%, we probably have irreconcilable differences of perspective, at which point there is nothing more to discuss.
I guess it's time to move on then.
(Score: 1) by SplawnDarts on Wednesday April 02 2014, @06:09PM
A lot of HFT activity is because of the extreme LACK of profit in market making in stocks these days. Back before decimalization and electronic markets, the spreads on many stocks were 1/8 of a dollar or higher. Which made it very worthwhile to make a market - any vaguely balanced order flow was profitable. Any idiot could make money as the market maker. Now those spreads are now frequently $0.01 on decimal electronic markets. Not so worth it any more.
The beneficiary of that market change was of course the investor - saving $0.05 or so average per side per share on every transaction. That's a HUGE deal. The market makers were the corresponding losers, and as a result started looking for other ways to make money. All these order queue and rebate games that are now being played (buying order flow via dark pools etc.) are basically just carving up that last $0.01 of gap into ever smaller pieces and trying to get a chunk for yourself. It's not exactly a fair game, but it's very non-harmful to the customers compared to the old game.
There are some HFT practices however, like order flooding, which are clear garbage and need to end.