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High-Speed Traders Rip Investors Off, Michael Lewis Says

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

#31

Post by harryh »

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.

No, they cannot actually see you attempting to buy stock and step in front of you. That's not true.

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

#32

Post by icebraining »

kasey_junk wrote: post #23
icebraining wrote: post #18

Earlier quoted context omitted.

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.

Yeah, but what about my second suggestion, which would be to just buy from one market and then buying the rest in other markets after the HFTs had re-sold the shares?

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

#33

Post by harryh »

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…

HFT decreases the bid ask spread by replacing expensive human traders with relatively cheap computers. It's automation.

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

#34

Post by badman_ting »

I work for a financial services company and I still don't invest in stocks. Not that high-freq trading is specifically the problem (maybe it is, maybe it isn't, I dunno) -- retail investing just seems like a sucker's game, though admittedly that leaves me a little stumped as to how a schmuck like me is supposed to grow his money.

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

#35

Post by fauigerzigerk »

Can someone help me understand this beyond analogies please?

If I submit a buy order for 10 shares of GOOG with a limit of $1134 that order is going to show up in the data stream of HFTs only after it has become a valid open order on the exchange, right?

If at that time there is a sufficient volume of open sell orders at or below my limit, does my order go through or is there a way for an HFT to overtake my order?

The only way I can see how an HFT could possibly overtake my order is by offering to buy at a higher price than me before my order goes through, hoping that he could sell the shares to me later on for an even higher price.

But that's a pretty risky bet for the HFT assuming he needs to be out of the market before the market closes. It seems to me that the most likely victims are other HFTs because they are the ones who will quickly raise their limits when they see the price go up.

A low frequency trader like myself can just sit there and wait until the price comes down again or just walk away. Is there something I misunderstand?

[Edit]:

So, summing up the replies I got here, the only problem seems to be that my broker is allowed to send my order to HFTs before it goes live on the exchange. Wouldn't it be incredibly simple to ban this practice? If it's that simple to solve, why all the fuss about HFT?

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

#36

Post by kasey_junk »

icebraining wrote: post #32
kasey_junk wrote: post #23

Earlier quoted context omitted.

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.

Yeah, but what about my second suggestion, which would be to just buy from one market and then buying the rest in other markets after the HFTs had re-sold the shares?

I can assure you that there are most certainly HFT systems out there trying to identify other HFT systems that need to dump positions.

Trade execution/optimization is actually where most of the differentiation is in current HFT systems as the speed race has become so efficient.

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

#37

Post by harryh »

badman_ting wrote: post #34

I work for a financial services company and I still don't invest in stocks. Not that high-freq trading is specifically the problem (maybe it is, maybe it isn't, I dunno) -- retail investing just seems like a sucker's game, though admittedly that leaves me a little stumped as to how a schmuck like me is supposed to grow his money.

Historically the stock market has returned about 10% a year. You should be investing in stocks if you're investing over the long term.

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

#38

Post by kasey_junk »

fauigerzigerk wrote: post #35

Can someone help me understand this beyond analogies please? If I submit a buy order for 10 shares of GOOG with a limit of $1134 that order is going to show up in the data stream of HFTs only after it has become a valid open order on the exchange, right? If at that time there is a sufficient volume of open sell orders at or below my limit, does my order go through or is there a way for an HFT to overtake my order? Th…

"If I submit a buy order for 10 shares of GOOG with a limit of $1134 that order is going to show up in the data stream of HFTs only after it has become a valid open order on the exchange, right?"

Correct.

"If at that time there is a sufficient volume of open sell orders at or below my limit, does my order go through or is there a way for an HFT to overtake my order?"

You will get filled with at worse, your limit price.

"The only way I can see how an HFT could possibly overtake my order is by offering to buy at a higher price than me before my order goes through, hoping that he could sell the shares to me later on for an even higher price."

Correct.

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

#39

Post by adambratt »

fauigerzigerk wrote: post #35

Can someone help me understand this beyond analogies please? If I submit a buy order for 10 shares of GOOG with a limit of $1134 that order is going to show up in the data stream of HFTs only after it has become a valid open order on the exchange, right? If at that time there is a sufficient volume of open sell orders at or below my limit, does my order go through or is there a way for an HFT to overtake my order? Th…

> If I submit a buy order for 10 shares of GOOG with a limit of $1134 that order is going to show up in the data stream of HFTs only after it has become a valid open order on the exchange, right?

False.

HFTs and other trading firms actually buy up the order flow from brokerages. In fact, retail investors making trades in their brokerage accounts are actually referred to as "dumb flow". Having access to the order flow and controlling the routing of it can allow them to jump in front of your trade.

For example, they could see that your limit order of $1134 came in when the lowest ask price was $1133.90. They could buy that for $1133.90 and sell it back to you at $1134 for a 10 cent profit.

It's not too much different than in the old days when the market makers would delay buy/sells calls to their pits to their own advantage in order to scrape a small profit on the spread.

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

#40

Post by foobarqux »

fauigerzigerk wrote: post #35

Can someone help me understand this beyond analogies please? If I submit a buy order for 10 shares of GOOG with a limit of $1134 that order is going to show up in the data stream of HFTs only after it has become a valid open order on the exchange, right? If at that time there is a sufficient volume of open sell orders at or below my limit, does my order go through or is there a way for an HFT to overtake my order? Th…

> If I submit a buy order for 10 shares of GOOG with a limit of $1134 that order is going to show up in the data stream of HFTs only after it has become a valid open order on the exchange, right?

No. Your broker might send order flow to HFT firms for payment. They have to fill you at the national best offer if they want to take the trade.

The other thing that can happen is that if your order is not marketable at the current exchange you are trading at but is marketable at another exchange then the first exchange can sometimes "flash" the order to selected participants to see if they want to fill the order so you can avoid forwarding the order to another exchange.

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