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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

#41

Post by smoorman1024 »

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 you submit a buy order for 10 shares of GOOG through a conventional retail website like ScottTrade or ETrade your order is going to be sent to an HFT firm that buys flow from from these retail websites.

If it's a limit order the HFT firm is going to immediately decide whether it wants to take the other side of your order (i.e. immediately give you an out that leaves you whole with 10 shares of GOOG at $1134) or whether they don't want the order in which case they might send it directly to a lit venue like NYSE where your order will rest in the open market.

If they take it, from there the firm is going to try to liquidate the position in the market now that they are short 10 shares of GOOG. It is up to their discretion on when they want to even out their portfolio. The idea is that sophisticated traders are able to better time and aggregate retail orders than the retail customer themselves and here is where they make money albeit with a little risk.

For one simple example since you only wanted 10 shares of GOOG typically you would pay a penalty for executing an odd lot (an odd lot is an order that is not an even multiple of 100). If the firm can collect 10 buy orders of 10 then they can avoid the odd lot penalty.

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

#42

Post by runako »

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 you make a limit order at e.g. $1134, it's entirely possible that the best price is below $1134. For instance, if you enter that order right now, you should expect the order to execute at closer to $1130 (assuming a small order size). Your limit price is therefore a worst case.

Lewis is saying that in the absence of HFT front-running, you'd get the best available price at the time, say $1129.82. However, he alleges, HFT traders can front-run you and you'll instead pay e.g. $1129.92, meaning you overpaid for the stock. Note that this happens even though what you paid and the best theoretical price are both below your limit. So you're getting robbed, even though it's not apparent to you.

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

#43

Post by foobarqux »

adambratt wrote: post #39
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…

> 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.

They cannot do that. They can't fill you at a worse price than NBBO.

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

#45

Post by [deleted] »

unreal37 wrote: post #6
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.

No, its like saying Walmart watches as you put the item in your shopping cart, and raises the price before you can get to the cashier.

[deleted]

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

#46

Post by minimax »

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? 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?

If there is a resting sell order below the limit price of your buy order, nobody will see your buy order. The cross will happen as soon as your order hits the matching engine. You and your counterparty will get trade confirmations via your order entry port, and market data subscribers will see a trade report (10 shares crossed at $XX.YY) and the size of the resting sell order will change.

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

#48

Post by sambe »

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…

Which tax is it adding? You enter a limit order at a price, and you get filled at that price: that is true with or without HFT. With HFT, the spread is tighter, so either crossing or stepping inside makes your trade more efficient.

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

#49

Post by fauigerzigerk »

adambratt wrote: post #39
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…

>HFTs and other trading firms actually buy up the order flow from brokerages.

That's interesting. This sounds like blatent front-running though. I wouldn't have thought this to be legal.

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

#50

Post by josephlord »

harryh wrote: post #33
josho wrote: post #20

Earlier quoted context omitted.

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.

HFT implies computers but computers do not imply HFT. You could automate the trading platform and give everyone equal access without it becoming a hardware arms race.
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