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'Flash Boys' IEX stock exchange opens for business

latimes.com

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Re: 'Flash Boys' IEX stock exchange opens for business

#51

Post by harryh »

hm8 wrote: post #48
harryh wrote: post #40

Earlier quoted context omitted.

Your intuition about financial markets does not match reality. In financial markets no one knows that you want to buy a gallon of milk (or a share of stock) until your bid has already been submitted. No matter how fast their Ferrari, there is no way for them to get in line ahead of you at the store.

Well, there is in a matter of speaking. To take the analogy further, imagine not buying a gallon of milk but 100,000 1 gallon can of milk. The guy with the Ferrari wouldn't be able to get in front of you at the next door target but they'll loot the most convenient Walgreens, Safeway, Walmart, and Amazon Prime. Of course, the analogy no longer holds for numerous reasons (100000 gallons of milk, driving around, buying…

If you want to by 100,000 gallons of milk you don't have a god given right to do so at the currently posted prices in every grocery store in town. Those grocers are well within their rights to raise prices as soon as they figure out what you're doing.

Re: 'Flash Boys' IEX stock exchange opens for business

#52

Post by naveen99 »

physguy1123 wrote: post #31
modoc wrote: post #24

Earlier quoted context omitted.

As a mostly lay person, for me it's vilified because my understanding of it is that HFT has a significant advantage over my own personal trading, and that through this advantage HFTs are able to make "more" profits than would be possible without HFT. My brain tells me that some of these profits are likely at my own trades' expense, and that while markets and economies rise and fall, my own profits are negatively impa…

Short story: HFT is generally considered good for retail traders because spreads tend to be lower. You trade both more cheaply and more quickly. However, it's generally not good for large institutions (which are more than just 'big evil hedge funds') because markets react very quickly to movements caused by this big firms. If they decide that something is priced wrong, they won't be able to make many trades taking ad…

I see HFT as good for everyone.

Market has a hard time reacting to option spreads when the long option is executed prematurely. I don't see why big players can't use them.

Also the market can't react too predictably. Because then the big player could just yank the market around and profit.

Some of this is limited by regulations on large holders / insiders.

Re: 'Flash Boys' IEX stock exchange opens for business

#53

Post by hm8 »

harryh wrote: post #51
hm8 wrote: post #48

Earlier quoted context omitted.

Well, there is in a matter of speaking. To take the analogy further, imagine not buying a gallon of milk but 100,000 1 gallon can of milk. The guy with the Ferrari wouldn't be able to get in front of you at the next door target but they'll loot the most convenient Walgreens, Safeway, Walmart, and Amazon Prime. Of course, the analogy no longer holds for numerous reasons (100000 gallons of milk, driving around, buying…

If you want to by 100,000 gallons of milk you don't have a god given right to do so at the currently posted prices in every grocery store in town. Those grocers are well within their rights to raise prices as soon as they figure out what you're doing.

The grocers' price is irrelevant to the discussion here.

The guy with the Ferrari would still outrun you and offer you a new price, with a margin just enough for them to be profitable, yet not substantially large as to talk you out of the deal altogether.

Re: 'Flash Boys' IEX stock exchange opens for business

#54

Post by pthreads »

esaym wrote: post #13

On the same topic, I've actually set aside a down payment for a house, but I probably won't be buying for another year or so. I'm wondering what is a good way to invest this money since leaving it in the bank at less than 1% interest really isn't doing much.

My recommendation is to put it in something like the Vanguard REIT ETF. So if real estate is up by the time you are ready to buy your house your investment will likely be up proportionally. In the event you get a negative return it is very likely your down payment might be lower as well.

Alternatively if you want to lower your risk (which also lowers your expected reward) you may invest half in REIT ETFs and the other half in an uncorrelated sector. Think of what sector goes up when real estate goes down.

DISCLAIMERS of course: This is not professional advice. Invest at your own risk.

Re: 'Flash Boys' IEX stock exchange opens for business

#55

Post by tptacek »

lbotos wrote: post #16
tuna-piano wrote: post #12

Earlier quoted context omitted.

This is the thing when I see wall street, and specifically high frequency trading vilified. Income inequality, the plight of the middle class, etc has almost nothing to do with that kind of financial maneuvering. Getting rid of high speed trading won't affect the average person really at all - but yet it's constantly vilified.

I think it's vilified because for some reason people think that the HFTraders are "stealing" from them in the form of tax avoidance and their exorbitant incomes.

HFT firms make something like an order of magnitude less than their prey, the major investment banks.

Re: 'Flash Boys' IEX stock exchange opens for business

#56

Post by infinite8s »

modoc wrote: post #34
harryh wrote: post #26

Earlier quoted context omitted.

Rather than seeing HFTs as competing against you, a more accurate model is to see various firms competing against each other to service your needs at the lowest possible cost. These firms used to be staffed with expensive and slow humans, but by automating they are able to deliver a service to you at a much lower cost than was previously possible. The story of automation in the financial markets is similar to the sto…

How does that really help me if I'm buying/selling a specific stock (vs. being in a larger fund, etc...)? My, again very lay, understanding is that the HFT is likely to push my buy price up slightly and make money in the middle of me a non-HFT seller, and push down the price slightly on the sale side, again making money as a very fast middleman. I may have that completely wrong though.

What you are missing is that in the old days, your buy/sell order was probably handled by a human market maker instead of an HFT's algo, who would push up/down the price much more than 'slightly', hence making you pay more in trading costs. The biggest opponents of HFTs are the major financial institutions who used to provide those market making roles.

Re: 'Flash Boys' IEX stock exchange opens for business

#57

Post by harryh »

hm8 wrote: post #53
harryh wrote: post #51

Earlier quoted context omitted.

If you want to by 100,000 gallons of milk you don't have a god given right to do so at the currently posted prices in every grocery store in town. Those grocers are well within their rights to raise prices as soon as they figure out what you're doing.

The grocers' price is irrelevant to the discussion here. The guy with the Ferrari would still outrun you and offer you a new price, with a margin just enough for them to be profitable, yet not substantially large as to talk you out of the deal altogether.

Once the grocers raise their prices, there's no margin left for the Ferrari owner to capture.

Re: 'Flash Boys' IEX stock exchange opens for business

#58

Post by harryh »

pthreads wrote: post #54
esaym wrote: post #13

On the same topic, I've actually set aside a down payment for a house, but I probably won't be buying for another year or so. I'm wondering what is a good way to invest this money since leaving it in the bank at less than 1% interest really isn't doing much.

My recommendation is to put it in something like the Vanguard REIT ETF. So if real estate is up by the time you are ready to buy your house your investment will likely be up proportionally. In the event you get a negative return it is very likely your down payment might be lower as well. Alternatively if you want to lower your risk (which also lowers your expected reward) you may invest half in REIT ETFs and the othe…

This is an interesting idea!

It might even be better to think about an investment vehicle more closely correlated with housing costs. The main Vanguard REIT is mostly commercial property I believe which could be somewhat uncorrelated with residential property.

Re: 'Flash Boys' IEX stock exchange opens for business

#59

Post by harryh »

ddinh wrote: post #7

In terms of reducing the ability of speedy traders to gain an advantage in a continuous time market, how does IEX's fixed time delay compare to discretizing the timesteps, so all the trades within some finite interval [t, t+e] are treated as if they came at the same time? This talk presents compares discretization to standard continuous-time bidding, but doesn't go into a lot of detail about how it compares to IEX-st…

"Pro-rata to break ties" <--- A pretty big issue that he quickly glosses over.

Re: 'Flash Boys' IEX stock exchange opens for business

#60

Post by mjfl »

imcqueen wrote: post #37
tuna-piano wrote: post #12

Earlier quoted context omitted.

This is the thing when I see wall street, and specifically high frequency trading vilified. Income inequality, the plight of the middle class, etc has almost nothing to do with that kind of financial maneuvering. Getting rid of high speed trading won't affect the average person really at all - but yet it's constantly vilified.

You're probably correct here. The part people find a little unsavory is not that it's somehow eroding the middle class. It's the idea that HFT can act as an unnecessary intermediary, essentially taxing a transaction that otherwise didn't need to be disrupted and at scale the amount extracted becomes material. Imagine your neighbor owned a Ferrari and you told him one day you were going to buy a gallon of milk at the…

That analogy is tempting but inaccurate. Pretty popular with the Mike Lewis "the market is RIGGED against the LITTLE GUY and we're all MAD AS HELL" crowd, but in the end it's hyperbole. IEX is not for the little guy. IEX is for the really big guy. Institutional investors. They are tired of having the market run away from them on large orders.

A closer analogy would be that the neighbor is the owner of the local supermarket and you have recently announced that you were going to buy all the milk in the region. You go to one local supermarket (not his) first and buy out the entire stock of milk. On your way to the next one (his), he raises the price of milk to $4.20, knowing that your increase in demand is going to drive up the price everywhere and he doesn't want to be the idiot that sold you milk at $4.00/gal and will have to resupply at $4.20, losing 20 cents per gallon on that sale. When you get there your realize that the price of milk has gone up, and you yell and scream and stomp your feet, but you buy the milk anyways, because you have high demand for milk. The supermarket owner is not a jerk for responding to the increased demand for milk, but many people see it that way.

So maybe your a really rich guy who can afford a lot of milk, and so you lobby the government to restrict the ability of supermarket owners to talk to each other, maybe they have to wait a day or something. The supermarket owners are just going to respond by increasing the price of milk on average, because there are random milk thirsty people coming through every once in a while buying up all the milk, increasing the price, and they need to increase the milk premium so they can afford to resupply. They need to compensate for that risk. For that reason everybody loses out. Less people are going to buy milk due to increased prices, so that's bad for the store owner, and milk buyers are going to have to pay a higher price.

Same thing is going to happen at IEX. There is simply going to be a wider bid/ask spread.

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