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

#31

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

mrchicity wrote: post #26

JesperRavn wrote: post #17

Earlier quoted context omitted.

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.

For the purposes of this discussion, it's not a difference at all. The question is not what should be legal or not, but what customers would prefer, and what makes a better market.

If you ask a customer "would you like an exchange that gives people enough information to front run your order" or "would you like a broker who front runs your order" the answer in both cases would be a resounding no. The claim in the article is that you can create a better exchange by providing an equal footing for all participants.

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

#32

Post by tptacek » Fri, Jul 03, 2015, 5:41 PM UTC

In 2006, if I saw 100,000 shares of AMD offered, and I wanted it, I could go out and buy it. It was a simple as that. In 2007, if I tried to buy 100,000 shares, I would get 80,000. Then in 2008 I would get 60,000. The market is showing me a volume at a price that I can no longer buy or sell at. I can’t buy or sell what I see on my screen.

Another way to put this:

"Once upon a time, I was paid a fortune by a giant investment bank to move large blocks of stock on behalf of their spectacularly wealthy clients. As recently as 2006, if one of those clients needed me to move a block of 100,000 shares, I could do that at literally the click of a button. This despite the fact that I earned a commission on the trade; it must have been a very expensive button my bank owned! And this despite the fact that my 100,000 share order was bound to move the market, and so I was in effect acting on inside information. But that's just how this is supposed to work, right?

"Anyways, the markets evolved, and my giant investment bank could no longer earn massive commissions just by pushing a single button. Even though I knew my giant hedge fund clients were going to dump vast numbers of shares on the market, depressing prices for all the other investors, the markets no longer allowed me to trivially profit from that information! My 100,000 share orders get broken into small numbers of lots just like everyone else's. No fair!"

"So I started a new exchange to rewind the markets back to the glorious, equitable, fair, transparent days of 2006."

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

#33

Post by kasey_junk » Fri, Jul 03, 2015, 5:42 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?

The cynical answer to this is good marketing and savvy backers with a vested interest in getting retail customers to trade at a disadvantage.

The less cynical answer is that trading has always been a back and forth between sophisticated actors, some of which make money providing liquidity and some of which make money others ways but buying liquidity is a cost. The cheaper the latter can get from the former the better it is for them.

IEX is a dark pool setup directly for the benefit of savvy hedge fund types to move large blocks of trades and pass on those costs to others. Nothing wrong with it, but their moralizing in books is a little off putting.

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

#34

Post by kasey_junk » Fri, Jul 03, 2015, 5:44 PM UTC

dkfsls wrote: post #12

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.

There are a few problems with that. Exchanges make it difficult to know the current price. They sell fast data feeds to HFT shops allowing them to know about price changes before the rest of the market participants. Exchanges have tons of order types, not just limit and market orders. There are order types that specifically benefit HFT shops by allowing them to pick off limit and market orders. If you put in a limit…

There are also order types the specifically advantage large block traders at the expense of HFT market makers. IEX only offers those interestingly, while speaking out about the others.

There is also a big difference between pricing something at 9.90 when you think there is very little demand for it, and being prevented from changing the price when the demand changes.

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

#35

Post by tptacek » Fri, Jul 03, 2015, 5:46 PM UTC

avz wrote: post #5

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.

The fundamental idea of algorithmic trading doesn't really fall into the category of screwing-people-over. However, some techniques employed by institutions engaged in it can easily be seen as outright cheating. One common example is front running [1] where a player with access to real-time order information exploits the knowledge of pending trades from other players to turn a profit at the other players' expense. Th…

In order front-run someone, you must have a fiduciary duty to them. HFTs do not.

When you think about this broader proposed definition of front-running, where any anticipatory trading is "front-running", you quickly realize that virtually any informed trade could be described that way. Do extensive research on the supply chain of a billion dollar industry, notice a spike somewhere, and trade on that? You're front-running!

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

#36

Post by x5n1 » Fri, Jul 03, 2015, 5:46 PM UTC

tptacek wrote: post #32

In 2006, if I saw 100,000 shares of AMD offered, and I wanted it, I could go out and buy it. It was a simple as that. In 2007, if I tried to buy 100,000 shares, I would get 80,000. Then in 2008 I would get 60,000. The market is showing me a volume at a price that I can no longer buy or sell at. I can’t buy or sell what I see on my screen. Another way to put this: "Once upon a time, I was paid a fortune by a giant inv…

whose money do you think is in those hedge funds? it's all a question of what game you want to play. the players are always the same. it's capitalism after all.

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

#37

Post by mrchicity » Fri, Jul 03, 2015, 5:46 PM UTC

msandford wrote: post #11

res0nat0r wrote: post #6

Earlier quoted context omitted.

Front running is already illegal.

So is the police killing someone on a "nickel ride" like what recently happened in Baltimore. But if there's no enforcement of the laws, or if the regulators disagree with the sentiment of the rest of the population, the notional illegality of such activities is of little practical value.

Do you think it should be illegal to look at the order book for a stock (public info), formulate a prediction, and trade on that prediction? Seems much different than a broker trading ahead of his client.

Large informed traders and intermediaries like specialists/locals/market makers have been in a cat & mouse game since the dawn of time. Back in the day, big hedge funds would split their orders through multiple brokers or try to make their intentions. It's natural that one seeks to hide his intentions and buy/sell without moving the price the other wants to get the hell out of the way or trade with the big order. That's just competition.

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

#38

Post by jasode » Fri, Jul 03, 2015, 5:47 PM UTC

yummyfajitas wrote: post #27

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…

I think what you're saying is, in essence, IEX's current incarnation of handling stock transactions does not exist in a vacuum -- because they are only a trading technology platform instead of an exchange like NYSE & NASDAQ. As a technology platform, they are really just "clients" of other exchanges and therefore, they're the tail trying to wag the dog.

If they become a full-fledged exchange with stocks listings exclusive to IEX, then those stocks would have better "fairness" characteristics that Brad Katsuyama claims.

Therefore trading AAPL through IEX may incur a financial penalty for being on the "slow" IEX system but trading YC2019Unicorn stock exclusive to IEX may not.

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

#39

Post by kasey_junk » Fri, Jul 03, 2015, 5:48 PM UTC

> They could see my order at BATS, race me to the next exchange, and cancel all their sell orders and buy whatever is left, buy everything up, then turn around and try and sell stock back to me at a higher price. So that was the game.

This is the heart of the problem with IEX's explanation of the markets, and why I think most people view HFT as unfair. But its not how cross exchange market making actually works. The HFTs are not rushing to buy up existing inventory from others who are selling it, in an attempt to screw others. They are the ones who are originally offering to sell it in the first place. They aren't rushing to buy, they are rushing to change the price of their inventory.

The metaphor I like to use is that of a chain of gas stations running down a highway, owned by the same people. If a tanker truck pulls up at the first two and buys up all their gasoline, it would be perfectly reasonable for those first 2 to call ahead to the rest down the highway and tell them to raise their prices, as they clearly were being used to supply someone else's industry at lower prices than they should.

That phone call is what IEX prevents, so that their customers (guys with big tanker trucks) can buy gas without impacting the price of gasoline.

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

#40

Post by tptacek » Fri, Jul 03, 2015, 5:49 PM UTC

x5n1 wrote: post #36

tptacek wrote: post #32

In 2006, if I saw 100,000 shares of AMD offered, and I wanted it, I could go out and buy it. It was a simple as that. In 2007, if I tried to buy 100,000 shares, I would get 80,000. Then in 2008 I would get 60,000. The market is showing me a volume at a price that I can no longer buy or sell at. I can’t buy or sell what I see on my screen. Another way to put this: "Once upon a time, I was paid a fortune by a giant inv…

whose money do you think is in those hedge funds? it's all a question of what game you want to play. the players are always the same. it's capitalism after all.

Whose money do I think is in those hedge funds? I don't know, a whole bunch of millionaires?

If the direction you're heading is "modern trading is scalping profits from pension funds and mom-and-pop mutual fund retirement plans", you'd probably want to be prepared to refute Vanguard's chief investment officer, who says HFT has in general improved outcomes for one of the world's largest and most trustworthy fund managers.