High-Speed Traders Rip Investors Off, Michael Lewis Says • Hacker News Board

Re: High-Speed Traders Rip Investors Off, Michael Lewis Says

#21

Post by kasey_junk » Mon, Mar 31, 2014, 2:20 PM UTC

unreal37 wrote: post #12

kasey_junk wrote: post #8

Earlier quoted context omitted.

The idea that an HFT can see you attempt to buy stock before it goes to the market is not true and would be against the law if it happened.

It seems like it isn't against the law. The thing is, there are multiple markets not just one. So when you place an order to buy 100 shares of IBM, that order gets sent to many places to try to find the best offer to fill you. If a HFT can see you submit that order to 1 market, and then beat you to the other 4 markets and buy up all the shares before you, that's frontrunning. That would be illegal if your broker did…

There are lots of things you are glossing over that complicate this picture quite a bit (like the fact that your broker is almost certainly executing on an HFT platform), but the biggest issue here is that no one can see your order until you place it on the first market.

Once that order hits the market it is public signalling data that should impact the prices on every other market. That some traders are more efficient at responding to that public signalling data than others is not an issue and in fact is a large part of why the markets are as efficient as they are.

Re: High-Speed Traders Rip Investors Off, Michael Lewis Says

#22

Post by kasey_junk » Mon, Mar 31, 2014, 2:22 PM UTC

keithwarren wrote: post #16

I don't like taxes in general but wouldn't a small tax per share (pennies even) pretty much end HFT?

Chris Stucchio has a couple of good blog posts explaining why this common reaction would not have the impact most people think it would.

http://www.chrisstucchio.com/blog/2012/hft_apology.html

Re: High-Speed Traders Rip Investors Off, Michael Lewis Says

#23

Post by kasey_junk » Mon, Mar 31, 2014, 2:23 PM UTC

icebraining wrote: post #18

michaelt wrote: post #13

Earlier quoted context omitted.

Katsuyama realized that his orders traveled along fiber optic lines and hit the closest exchange first, where high frequency traders would get a glimpse, and then use their speed advantage to beat him to the other 12 U.S. public exchanges and 45 private trading venues. HFT algorithms could then buy the shares Katsuyama wanted, and then sell them to him at a slightly higher price. [1] I don't know if this is illegal o…

Could one bleed the HFTs by putting out orders in one exchange, waiting for them to buy up the shares elsewhere, and then cancelling the order? Or just waiting for the HFTs to re-sell them at the previous/lower price and buying them afterwards?

Sure. That said in most regulatory environments putting orders into a market that you have no intention of trading is illegal. Enforcement and it's impact of profitability on this sort of predatory trading is an issue.

Re: High-Speed Traders Rip Investors Off, Michael Lewis Says

#24

Post by joezydeco » Mon, Mar 31, 2014, 2:23 PM UTC

kasey_junk wrote: post #8

unreal37 wrote: post #4

The argument in favor of HFT is that it both increases liquidity of markets and reduces the spread - both favorable to most investors. But they can actually see you attempting to buy stock, step in front of you, buy it before you, and then try to resell it to you for a higher price? That's bad behavior and reduces confidence in the free market. There needs to be regulation around things like that.

The idea that an HFT can see you attempt to buy stock before it goes to the market is not true and would be against the law if it happened.

Just had drinks over the weekend with a friend that works IT for a major exchange in the midwest. He was telling me how they set up the network interconnect cables from their trading systems to the co-located brokers. They are measured to be identical to the millimeter to satisfy all the high-speed brokers that want to sit next to the exchange and avoid any argument about who can get in quicker.

Re: High-Speed Traders Rip Investors Off, Michael Lewis Says

#25

Post by Zweihander » Mon, Mar 31, 2014, 2:24 PM UTC

keithwarren wrote: post #16

I don't like taxes in general but wouldn't a small tax per share (pennies even) pretty much end HFT?

Yup - http://en.wikipedia.org/wiki/Tobin_tax You can make it very small to cut out almost all of these problems and it wouldn't be noticeable to any non-HF traders. It's not gotten very far in the US and is only partially supported in the EU (though I think there's something amiss with the EU proposal).

Re: High-Speed Traders Rip Investors Off, Michael Lewis Says

#26

Post by kasey_junk » Mon, Mar 31, 2014, 2:26 PM UTC

josho wrote: post #20

unreal37 wrote: post #4

The argument in favor of HFT is that it both increases liquidity of markets and reduces the spread - both favorable to most investors. But they can actually see you attempting to buy stock, step in front of you, buy it before you, and then try to resell it to you for a higher price? That's bad behavior and reduces confidence in the free market. There needs to be regulation around things like that.

I don't understand how HFT increases liquidity, this Q/A[1] is a start at an answer. My conclusion is that yes HFT probably does increase liquidity at the expense of adding a tax on many of the transactions. Except this tax does nothing else to help the markets except to further feed the beast (profits) of companies running HFT. So the real question to ask is: does a marginal increase in liquidity outweigh the financ…

It's not just increased liquidity, it's also a decrease in the bid/ask spread, which is the actual cost of purchasing. HFT drives those much lower, decreasing the cost for most participants.

Re: High-Speed Traders Rip Investors Off, Michael Lewis Says

#27

Post by reverend_gonzo » Mon, Mar 31, 2014, 2:28 PM UTC

er35826 wrote: post #9

dsjoerg wrote: post #5

It's like saying Wal-Mart rips off its customers, because they use computers and their market power to buy stuff cheaply, and then they turn right around and sell it to their customers for more, making a profit 100% of the time.

The problem is not the HFT firms buying stock cheaply and reselling it for a profit. As the article points out the problem is investors placing a buy order, and the HFT firms seeing this buy order and snapping up the remaining stocks before the original buy order is fully completed. This has the negative side effect of essentially making it impossible to buy for the listed price, even when there are supposedly enough…

HFT firms don't see the buy order before its get to the market. They see that a bunch of quantity was bought so they raise their prices on the other markets. Because the purchaser had bad order routing, he moved the market and the hft firms were able to raise prices for what they believe the new market price to be.

Say you decide you want to buy up a bunch of property that's all on one street, and the market price for each property is listed at $100,000. Once word gets out that you made the first purchase for $100k, the prices on those other properties are going to go up, because if there's a buy at $100k, they might as well start negotiating at $110k, but they have no idea if there's a buyer who wants just one property, or all of them.

Now, only the buyer know how much he wants to buy. If he was smart, he'd go to each seller and execute at the exact same time so when word gets out of a purchase and prices go up, he's already purchased everything he wanted, the uptick in market prices actually benefits him.

It's the same thing with trading. If the guy is buying a couple thousand shares scattered across a dozen exchanges, he absolutely needs to make sure they get posted to the exchange at the same time, or he needs to break them up in small orders over a period of time so he doesn't affect the market with his purchases.

Re: High-Speed Traders Rip Investors Off, Michael Lewis Says

#28

Post by kasey_junk » Mon, Mar 31, 2014, 2:29 PM UTC

joezydeco wrote: post #24

kasey_junk wrote: post #8

Earlier quoted context omitted.

The idea that an HFT can see you attempt to buy stock before it goes to the market is not true and would be against the law if it happened.

Just had drinks over the weekend with a friend that works IT for a major exchange in the midwest. He was telling me how they set up the network interconnect cables from their trading systems to the co-located brokers. They are measured to be identical to the millimeter to satisfy all the high-speed brokers that want to sit next to the exchange and avoid any argument about who can get in quicker.

Yes and providing identical service levels to all co-located participants is a major profit center for exchanges now. Before that change in the market there was a whole class of consultant that would claim they could find specific racks in colo data centers that would give you latency edge.

But this latency is not about seeing other peoples orders before they enter the market, it is about reacting to market data quickly as it is disseminated to everyone.

Re: High-Speed Traders Rip Investors Off, Michael Lewis Says

#29

Post by andylei » Mon, Mar 31, 2014, 2:29 PM UTC

001sky wrote: post #17

kasey_junk wrote: post #15

Earlier quoted context omitted.

What is being described in this article is latency arbitrage and is not illegal. You will notice it specifically mentions that his order was changing the price on other exchanges, not on the exchange he submitted his order to. He was taking advantage of multiple exchanges in order to hide his order flow, because as a natural consequence of market laws large orders move prices. He is just upset that other folks were b…

What is being described in this article is [regulatory] arbitrage and is not illegal FTFY

no, its not regulatory arbitrage. its latency arbitrage.

Re: High-Speed Traders Rip Investors Off, Michael Lewis Says

#30

Post by icebraining » Mon, Mar 31, 2014, 2:31 PM UTC

keithwarren wrote: post #16

I don't like taxes in general but wouldn't a small tax per share (pennies even) pretty much end HFT?

But why should we care? The thing I don't understand about the whole debate is, even if the HFTs are milking investors, so what? We're not talking about powerless individuals versus giant companies that we might need to protect, why not just let the investors deal with it by pressuring the exchanges into banning HFTs, or making new exchanges where HFTs aren't allowed? Is it just moral outrage because the HFTs are perceived to profit from "doing nothing"? Frankly, I'm at a loss why do so many people feel bad for the "poor" investors.