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US Securities and Exchange Commission Chair Mary Jo White told a US 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" 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."
(Score: 1) by infodragon on Wednesday April 30 2014, @01:40PM
Explain how this works exactly! Nobody has ever been able to explain how HFT "sees" your order and gets in front of it on an exchange. Read carefully, on AN exchange, not across the 80 or so securities exchanges.
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(Score: 1) by RandomSchmoe on Wednesday April 30 2014, @02:04PM
HFT servers are sitting physically at the exchanges and have immediate access to exchange data that is not available at the same time to anyone outside the exchange. HFT servers can see orders before retailer systems. I've read that in some rare cases they have access to orders sent in before they are actually placed on the exchange.
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(Score: 1) by infodragon on Wednesday April 30 2014, @02:08PM
The latter is illegal if intentional and I know of a couple of cases it was a technical issue that was resolved very quickly. HFT can see market data before retail because they are co-located, light can only go so fast. How can HFT see YOUR order and get in front of it? This is a critical point in the debate that nobody has answered however it is constantly propagated.
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(Score: 1) by cyxs on Wednesday April 30 2014, @04:49PM
If you use a broker that broker routes the orders to a processing house and that processing house sees your order before placing it. That is how they see your order. Also they can then place your order via a slower connection to the market and give the order details to someone else and they have a faster connection to the market. 300ms vs 100ms makes all the difference in this case as they have bought the stock you were going to buy in the extra 200ms that your order takes to get to the market.
Another thing about multiple markets is that big traders have bought the old microwave radio relays between NY/NJ and Chicago to make it so they can place orders faster to those markets because those relays are a fraction of a second faster then via cabling.
(Score: 2, Insightful) by infodragon on Wednesday April 30 2014, @04:53PM
The former is illegal. If someone is caught there are heavy penalties. Please point to an example of this happening on a regular basis.
And with microwave towers, how do they SEE your order FIRST and then beat you to it?
I keep seeing a lot of theory but nobody actually presents evidence or concrete examples. Been waiting for quite some time now (about 7 years) It's like a urban legend that just won't die.
Don't settle for shampoo, demand real poo!
(Score: 1) by cyxs on Wednesday April 30 2014, @05:02PM
The order placed quicker isn't the broker that is doing the placing but they are selling the market flow data to another party which has a faster access to the market via radio towers or other methods.
Also the use of radio towers is used to jump in front of you on the other exchange if someone sees that someone is buying a stock via the liquidity of that stock going down or that more market orders are being placed via the market flow data. Why do big trading houses spend lots of money buying market flow data from brokers if its not to see where everyone else is doing?
(Score: 1) by infodragon on Wednesday April 30 2014, @05:07PM
Illegal for a party to send your order differently then their own or another party, in which the order is triggered based on another order (in this case your order).
Again hypothetical situation without concrete example or technical detail and reference to broker/ECN practices.
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(Score: 1) by cyxs on Wednesday April 30 2014, @05:23PM
They don't place the other order they sell the market data to another party that is right next to them server wise so nearly no delay. That other party then places their own order via the market and if they have a quicker backend to get to the market then the broker its not violating any laws because the broker isn't trading your or another orders differently they are selling the market data.
(Score: 1) by infodragon on Wednesday April 30 2014, @05:29PM
I've asked again and again but nobody will provide concrete examples of this being done. When making a statement such as this in which an industry, company, group or individual is demonized it should be backed up with examples/fact.
I.E. completely unlawful behavior of Enron, manipulation of credit ratings by the industry that helped propagate the MBS fisaco, Goldman Sachs/Bank of America/... selling MBS garbage rated AAA. There is corruption in the industry for sure, with concrete examples. So far none have been provided to demonstrate YOUR order being front run by HFT.
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(Score: 1) by cyxs on Wednesday April 30 2014, @05:53PM
This could be shown to be true if you had lots of money and time. I recently read about the IEX where they delay the market orders 300ms or something like that and alot of investors are happy with that because it delays or makes HFT harder.
Also another thing that your saying is if order is placed on an exchange that HFT can't jump in front of it. Yes this is true but a standard person can't place orders directly on exchanges. They have to place an order via a broker. That is where dark pools and HFT come into play. A broker sells the market flow data which is all the orders they are processing to 3rd parties and those are the ones that use HFT to jack up the price.
(Score: 1) by infodragon on Wednesday April 30 2014, @05:56PM
A broker has a fiduciary responsibility to get you the best price possible. If they do not do this either by matching against their dark pool or sending your order down one pipe and their order down another they have failed in that responsibility and is illegal.
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(Score: 2) by VLM on Wednesday April 30 2014, @02:46PM
The former doesn't matter to retail investors. Retail order hits, is executed, HFT finds out before anyone else finds out, and ... crickets? The order is already executed, so theres not much to do about it...
They're only entering one order not a hundred, hundredth size orders over a period of time.
Furthermore an investor buys when value is higher than price, so as long as they enter a properly formatted limit order at a price lower than their idea of the value, then even if they were front run on a future order that doesn't exist, which is impossible for a single order executed in the past, they'd still be "OK" just not quite as profitable.
(Score: 3, Informative) by tynin on Wednesday April 30 2014, @04:08PM
Party A puts stocks for sale. It specifies initial and minimum selling price.
Party B wants to buy stock that A sells. It puts a buy offer for stock, with initial and maximum buying price.
Party A and B find each other, and if sale and buy order sums match, trade happens.
What low latency trader C does is abuse the fact that he has a supercomputer with extremely low latency on the trading floor, rather then a system connected from outside. C sees that both A and B are interested seconds before A and B find each other, first tests how low A will sell by buying 1 piece of stock at a time for lower and lower until the sale no longer happens. Then C places an offer for amount of stock that B wants to buy at lowest possible price that A will sell for. At the same time, C goes through similar process with B, only selling stocks little by little to find maximum buying price.
Then C simply sells all the stock it bought from A to B and pockets the difference. All this is possible because of latency before searches for trade made by A and B find each other that C doesn't suffer from.
(Score: 1) by infodragon on Wednesday April 30 2014, @04:30PM
Hypothetically This scenario is only true for illiquid products. Which in that case what liquidity is there is due to HFT and typically retail does not participate in this. Secondly your scenario assumes there are only three participants, there are many more than that. Thirdly please describe what types of orders are used to achieve this. I'm not going to do the work for you! You have presented a scenario with hypothetical situation with no technical explanation. So far in the years I have been discussing this nobody has been able to present to me how this scenario can happen using technical precision of what ACTUALLY happens.
Also describe the process of a party able to dictate market behavior by buying lower and lower at will. No amount of super computing and sub-light speeds can achieve this.
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(Score: 2) by tynin on Wednesday April 30 2014, @06:43PM
Fair enough, I suppose I'd like to see a fully technical explanation as well. It took me a while to even understand it to the point I gave you, which of course is couched in its simpleness.
(Score: 0) by infodragon on Wednesday April 30 2014, @07:18PM
It's incredibly complex and that is where I believe the rigging is. Over regulation has allowed so much complexity that nobody can account for the unintended consequences. However none of this really impacts the retail investor. It's all institutional money which indirectly impacts individuals as pension funds and mutual funds are institutional.
Listen carefully to what is said about retail investors, NEVER is the individual mentioned. Beware smoke and mirrors for it is easy to be duped!
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(Score: 1) by infodragon on Wednesday April 30 2014, @07:20PM
Replying to myself here, 401k is another institutional vehicle that I forgot to mention that impacts many individuals.
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(Score: 2) by sjames on Thursday May 01 2014, @06:44AM
I hear the liquidity excuse often enough, but I don't think it takes much imagination to conclude that if A is selling and B is buying and that there is any hope for a profit acting as a middleman, they will over the next several minutes find the middle ground where a trade happens. Sure, it may take minutes rather than seconds, but so what? Given the free choice, I'm fairly sure A and B would prefer to take a few minutes in exchange for the better deal each potentially gets.
Nobody is going to fire up a supercomputer to give you a simulation involving thousands or millions of traders. You need to at least meet the example half way. You'll likely find most examples involve the minimalist 3 party scenario.
(Score: 2, Funny) by infodragon on Thursday May 01 2014, @10:33AM
Sigh... imagination has been the beginning of many great ideas that proved terrible, many wonderful sounding theories that ended up debunked.
I have run scenarios with clusters and have participated, and continue to participate, in research to protect against predatory HFT crap. The first step is to ask a lot of critical questions, challenge assumptions and that is where imagination comes into play. Once you have those you build tests in an attempt to disprove the hypotheseesesseseses (plural of hypothesis) that have been created. It is incredibly complex, requiring tremendous time and resources which the general population does not have (this includes most geeks)
Most geeks have above average intelligence, extrapolate conclusions and are quite often right and implement concrete results based on the extrapolation. This is a wonderful process in most cases but when requiring real results out of research extrapolation is not enough, at minimum you must interpolate the results from real data. Because they are quite often right, or easily modify extrapolated conclusions to become right we arrogantly believe all problems are like this and thus in extremely complicated problems the war drums are beat about scenarios such as this and the masses present an ignorant and foolish argument.
I have answers, I'm not arrogant to believe they are the right answers, to the questions I have been asking. In 7 years I have been refining those answers and asking everybody who challenges them to provide proof, tests, examples that I can come back and test against my conclusions. Nobody has, in 7 years NOBODY has been able to respond intelligently and effectively to these questions that has not been involved in the actual research. So to sooth our wounded pride, fight against terrible injustice the masses (of geeks) proudly proclaim the evils of HFT (there are some) but are fundamentally wrong in assumptions and facts. The real issue is the overly complex regulation allowing for over 100 types of orders for securities that can NEVER account or deal with the unintended consequences.
So please, consider your assumptions and research, at the very minimum google, to discover real examples. I haven't found any there were not illegal.
If it's legal then your beef should not be with those participating but those that make the rules, i.e. your representatives. Otherwise all energies spent are in vein. But that would require real action on the part of the participants, truly being informed and active at the polls. Sadly this will never happen.
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(Score: 2) by TK on Thursday May 01 2014, @05:48PM
After a few insightful mods, I had to mod this comment of yours as funny.
Don't worry, at least one person learned something from your comments, and is thankful that SN can have comments of this caliber. I guess I'll stick around.
Also, /s/vein/vain
The fleas have smaller fleas, upon their backs to bite them, and those fleas have lesser fleas, and so ad infinitum
(Score: 1) by infodragon on Thursday May 01 2014, @06:00PM
Thanks for the comment, at least my effort wasn't in VAIN! I used to be the worlds worst speller, with a lot of work now I am just terrible!
I intended to play devils advocate and ask for answers to the implied questions of the comments. I was not holding my breath but am waiting one day for someone, out side my circle of research, to have an intelligent and informed answer to these questions. In the mean time I will continue to ask the uncomfortable questions and occasionally get down modded as did one of my comments in this thread.
Don't settle for shampoo, demand real poo!
(Score: 1) by infodragon on Friday May 02 2014, @10:43AM
Sorry about posting again, I couldn't find a way to privately message you.
You might be intreested in these two papers, I posted them to another commenter below.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id =2034858 [ssrn.com]m ents/webasset/con_035928.pdf [nyu.edu]
http://www.stern.nyu.edu/cons/groups/content/docu
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(Score: 2) by sjames on Friday May 02 2014, @09:11AM
It is worth noting that a few exchanges are being set up which take various measures to make HFT fail. They seem quite popular. Australia seems to be looking at measures [computerworld.com.au] meant to curb or outright kill HFT. Meanwhile, the market operated quite well for decades without it.
Looking at things from a black box, we have groups that do not hold stock for more than an instant somehow coming out ahead in spite of rather large expenses involved. That money isn't just materializing, it comes from somewhere, does it not? Odds are, that somewhere would just as soon keep that cash themselves.
Meanwhile, no advocate of HFT has ever managed to explain why the trades wouldn't happen within a reasonable timeframe without HFT or why faster is necessarily better for society and the market as a whole.
It's also worth considering the way HF traders spam the market with insincere offers.
I certainly do not subscribe to the idea that legal==right. Because of that, I reserve the right to have a beef with someone even if they are acting within the law.
(Score: 1) by infodragon on Friday May 02 2014, @10:12AM
There is the spirit of the law and the letter of the law. If I hear you right you are speaking in regards to the spirit of the law. I have a beef with those in violation of the spirit of the law as well, however I do my utmost to devote any energy into those creating the law rather than those in violation of the spirit of the law. The utter stupidity of many of the finance laws is incalculable. It irks me to no end that the law is created without the consultation of true experts rather than those who have the expertise of lining their pockets with the manipulations of legal systems (lobbyists)
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(Score: 2) by sjames on Friday May 02 2014, @05:41PM
Yes, I speak of the spirit of the law. I believe we are in agreement on this point. Finance needs to be regulated, but those regulations need to be sensible. They are not sensible today.
(Score: 1) by infodragon on Friday May 02 2014, @05:53PM
That is an understatement! The more complexity the more unintended consequences. Introduce simplicity then it is easier to enforce the law, meaning current resources for prosecution become much more effective.
Don't settle for shampoo, demand real poo!
(Score: 2) by sjames on Friday May 02 2014, @07:23PM
I believe the complexity is deliberate and driven by the large players. They WANT complex regulations that small players and newcomers can't afford to figure out how to comply with that at the same time present loopholes than an established player with a large legal department can play in.
(Score: 1) by infodragon on Friday May 02 2014, @10:24AM
I just remembered this paper
http://papers.ssrn.com/sol3/papers.cfm?abstract_id =2034858 [ssrn.com]
Some basic research into detecting and avoiding issues such as the flash crashm ents/webasset/con_035928.pdf [nyu.edu]
http://www.stern.nyu.edu/cons/groups/content/docu
An excerpt
THE GREAT DIVIDE
Legend holds that Nathan Mayer Rothschild used racing pigeons to front run his
competitors and trade on the news of Napoleon’s defeat at Waterloo a full day ahead of His
Majesty’s official messengers (Gray and Aspey [2004]). Whether this story is true or not, it is unquestionable that there have always been faster traders. Leinweber [2009] relates many
instances in which technological breakthroughs have been used to most investors’ disadvantage.
The telegraph gave an enormous edge to some investors over others in the 1850s, perhaps to a
greater extent than the advantages enjoyed today by high frequency traders. The same could be said of telephone traders in the 1875s, radio traders in the 1915s, screen traders in 1986, to cite only a few known examples. Since there have always been faster traders … what is new this time around? If there is something truly novel about high frequency trading (HFT), it cannot be only speed.
I did not want to provide information in the beginning of the discussion because I wanted to provoke discussion, I was, as expected, disappointed...
Enjoy!
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(Score: 2) by sjames on Thursday May 08 2014, @09:35AM
Sorry fopr the late reply.
One significant difference is the use of false offers and various tricks to keep the queues stuffed. The possability to completely crash the market faster than any human overseer can even blink is new. It's become more about metagaming the market to make it leak money.