A trading platform that outlaws what it sees as abusive practices • Hacker News Board

Re: A trading platform that outlaws what it sees as abusive practices

#21

Post by mrchicity » Fri, Jul 03, 2015, 5:28 PM UTC

res0nat0r wrote: post #6

blazespin wrote: post #4

Earlier quoted context omitted.

Well, you can disable front running with your own exchange which is what he is doing. And it seems to be working (he is getting liquidity, their average market share has tripled from .4% to 1.1%) This is much better than the government stepping in, so I am very glad he is doing it. We'll see if he can keep up the growth.

Front running is already illegal.

I guess in modern terms "front running" really just means getting arbed. If someone fast sees prices move in one market, they can buy at a relatively unfair price elsewhere, even sometimes outrunning the person who moved prices in the first place. That's not really a bad thing. It makes prices move together and spreads out liquidity across markets. It's also not risk-free money. Even a pure arb has legging risk.

A lot of dark pools have orders "pegged" to the mid-market of the best bid and offer. For example if a stock is $100.01 bid offered at $100.02, the order would float at $100.015 and adjust as the price moves. If the market moves rapidly, and a fast trader sees it go $100.02 bid offered at $100.03, sometimes they can trade with the pegged order at $100.015 before the system knows the price even moved. Make a half-penny, rinse, repeat a million times. At least that's the story.

IEX prevents some of this by computing their reference price in real-time that's used to determine where orders can execute and where pegged orders are priced, while delaying incoming orders by 350 microseconds so nobody can outrun their calculation of the best bid and offer to pick off stale orders. Mind you, this isn't even a real issue in markets today. There are a million ways to trade orders that are statistically mispriced before the market actually moves, so everyone will be taking them with these predictions with little left for the guys doing a pure arb. If you blindly peg your order to any benchmark, you are going to lose.

Also, there was already a market solution for this. Off-exchange markets have discretion on who they allow in and who can interact with one another. If you do nothing but arb slow orders in their pool, they'll either kick you out or restrict who you can trade with.

Re: A trading platform that outlaws what it sees as abusive practices

#22

Post by [deleted] » Fri, Jul 03, 2015, 5:28 PM UTC

res0nat0r wrote: post #6

blazespin wrote: post #4

Earlier quoted context omitted.

Well, you can disable front running with your own exchange which is what he is doing. And it seems to be working (he is getting liquidity, their average market share has tripled from .4% to 1.1%) This is much better than the government stepping in, so I am very glad he is doing it. We'll see if he can keep up the growth.

Front running is already illegal.

[deleted]

Re: A trading platform that outlaws what it sees as abusive practices

#23

Post by [deleted] » Fri, Jul 03, 2015, 5:29 PM UTC

JesperRavn wrote: post #17

res0nat0r wrote: post #8

Earlier quoted context omitted.

Front running is already illegal, so if any group is doing that they are already breaking the rules of the game, and should be punished/stopped if found out.

What some HFT traders are doing is economically equivalent to front-running, but is not legally front running since they are not front running the orders of their own clients. All of this is explained in the article, so if you disagree, it would make more sense to read it, find the parts you disagree with, and argue against them, rather than skim the article and then argue with our collective rehashing of the article…

[deleted]

Re: A trading platform that outlaws what it sees as abusive practices

#24

Post by vegabook » Fri, Jul 03, 2015, 5:31 PM UTC

dllthomas wrote: post #15

vegabook wrote: post #10

Earlier quoted context omitted.

The idea that HFT is front running any more than a human market maker is a fallacy. What HFT does, is to properly price the liquidity in the market. Previously, large institutional or more likely hedge fund orders would be priced very tightly, because it was in the market maker's interest to know the direction of the flow. By "winning" the trade he/she would have an information advantage on the subsequent likely move…

I don't follow what you say here - my understanding has it that spreads have grown tighter since computerizing things (and generally that a tighter spread is more efficient).

That's my point. For the vast majority of (smaller) flows HFT makes bid/offer tighter. TLDR on the above: HFT makes you pay a fair price for your liquidity requirement. If you're retail, your liquidity requirement is negligeable. If you're big your liquidity price is high. It's fairer.

In the old human system big funds' artificially high (cheap) liquidity is sponsored by the small player's artificially expensive liquidity and/or market move against him/her before he/she trades.

Re: A trading platform that outlaws what it sees as abusive practices

#25

Post by [deleted] » Fri, Jul 03, 2015, 5:31 PM UTC

dllthomas wrote: post #15

vegabook wrote: post #10

Earlier quoted context omitted.

The idea that HFT is front running any more than a human market maker is a fallacy. What HFT does, is to properly price the liquidity in the market. Previously, large institutional or more likely hedge fund orders would be priced very tightly, because it was in the market maker's interest to know the direction of the flow. By "winning" the trade he/she would have an information advantage on the subsequent likely move…

I don't follow what you say here - my understanding has it that spreads have grown tighter since computerizing things (and generally that a tighter spread is more efficient).

[deleted]

Re: A trading platform that outlaws what it sees as abusive practices

#26

Post by mrchicity » Fri, Jul 03, 2015, 5:32 PM UTC

JesperRavn wrote: post #17

res0nat0r wrote: post #8

Earlier quoted context omitted.

Front running is already illegal, so if any group is doing that they are already breaking the rules of the game, and should be punished/stopped if found out.

What some HFT traders are doing is economically equivalent to front-running, but is not legally front running since they are not front running the orders of their own clients. All of this is explained in the article, so if you disagree, it would make more sense to read it, find the parts you disagree with, and argue against them, rather than skim the article and then argue with our collective rehashing of the article…

That's a huge difference though. A broker owes a duty to his client not to screw him over. He's supposed to be helping the client. A prop trader has no duty to others in the market. He's their adversary. They're both competing to buy underpriced shares and sell overpriced ones.

Re: A trading platform that outlaws what it sees as abusive practices

#27

Post by yummyfajitas » Fri, Jul 03, 2015, 5:35 PM UTC

It's pretty silly to describe IEX as curbing "abusive" practices.

What IEX is attempting to do is build a platform where large traders can move lots of shares while their smaller counterparties are stuck absorbing the price impact. This is potentially useful for large traders (e.g. Goldman, JP Morgan and Citi, as mentioned in the article) but bad for small traders.

What's actually kind of "abusive" is IEX's marketing - they are encouraging unsophisticated investors to direct liquidity to them rather than having brokers route for best execution.

http://www.iextrading.com/insight/letter/

This letter directs your broker to route your trades to IEX, rather than the best available venue. This means you may be stuck paying IEX fees - which could be greater than other venue's fees - and of course, you are providing liquidity to sharks who want to make sure you absorb the price impact of their trades.

Re: A trading platform that outlaws what it sees as abusive practices

#28

Post by mrchicity » Fri, Jul 03, 2015, 5:38 PM UTC

dllthomas wrote: post #15

vegabook wrote: post #10

Earlier quoted context omitted.

The idea that HFT is front running any more than a human market maker is a fallacy. What HFT does, is to properly price the liquidity in the market. Previously, large institutional or more likely hedge fund orders would be priced very tightly, because it was in the market maker's interest to know the direction of the flow. By "winning" the trade he/she would have an information advantage on the subsequent likely move…

I don't follow what you say here - my understanding has it that spreads have grown tighter since computerizing things (and generally that a tighter spread is more efficient).

The spread is tight for small orders, but if you keep hitting them in one direction, market makers quickly get wise to this and start pulling back. The cost to trade for large funds isn't just the bid-offer spread, but also how quickly the market reacts to their flow. Modern market makers are very good at pricing a small spread to uninformed flow while making informed traders pay.

This is also why big funds want rules like trade-at (all orders must trade on-exchange) which eliminate the ability for market makers to explicitly segregate order flow. If all retail orders went to exchanges, market makers would give tighter prices on average to win the retail flows. Basically retail traders would subsidize institutional ones.

Re: A trading platform that outlaws what it sees as abusive practices

#29

Post by yummyfajitas » Fri, Jul 03, 2015, 5:40 PM UTC

JesperRavn wrote: post #20

joshu wrote: post #7

if you have continuous trading, you are going to have complicated interactions (such as outlined in the article.) instead, an occasional crossing (once a day? once an hour?) would provide much more "fairness" since everything happens at once, at the expense of "timeliness". back when I worked in this industry (a decade ago) POSIT provided something a lot like this you can't have it both ways, though.

Their system is not fundamentally different from discrete trading, since they have delay lines going into and out of their servers. So while everything is continuous, if you want to observe the market, then do a trade, then observe the result of that trade, etc. there is maximum rate you can do this. This is what prevents front running[0], according to my understanding. Once you submit an order, no one can react to t…

This is what prevents front running, according to my understanding. Once you submit an order, no one can react to that information within a time greater than round trip latency to the servers.

That's not correct. Front-running is the crime by which your broker trades ahead of you after you state your intent to trade. Your broker does, in fact, see your trades before they reach the market (the broker is actually the one pushing them to the market). It's mainly a crime because your broker has a fiduciary duty to act in your best interest, and because the broker occupies a privileged position as an intermediary, not because there is something inherently wrong with demand anticipation.

Of course, it is correct that no one besides your broker has the physical ability to react to that information.

Re: A trading platform that outlaws what it sees as abusive practices

#30

Post by mrchicity » Fri, Jul 03, 2015, 5:40 PM UTC

sneak wrote: post #3

res0nat0r wrote: post #2

I'm no stock expert, but I still don't see how people are getting "screwed" by hft. If you are concerned about a price fluxation just place a limit order. Simple as that. If you don't care, then place a market order. There's always been someone out there with more information, smarter people, and now faster connections than you. It's never been a level playing field and will never be.

Then why are we seeing market demand for his service?

Advertising 101: Fear monger. Sell solution to the fear.