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

#41

Post by JesperRavn » Fri, Jul 03, 2015, 5:52 PM UTC

yummyfajitas wrote: post #29

JesperRavn wrote: post #20

Earlier quoted context omitted.

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 o…

But if someone, somehow, developed a legal technical means to eavesdrop on the order you sent to your broker, and traded based on that, wouldn't it be fair to say that this is, in some sense, similar to front running? That is what the article is claiming, although the information is the information available at one exchange before it reaches another.

And going on with this analogy, wouldn't it be the case that we would want to prevent this eavesdropping if possible, because it has a similar effect to actual frontrunning, namely that the intermediary captures the information rents associated with your knowledge of the order you are about to submit.

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

#42

Post by yummyfajitas » Fri, Jul 03, 2015, 5:53 PM UTC

jasode wrote: post #38

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 excl…

Actually, what I'm saying is the following. Don't put resting orders out onto IEX - a big player will take your liquidity in a big trade and you'll suffer the inevitable price impact. I.e., putting your orders on IEX rather than the open market is just a way to funnel your money to JP Morgan.

It's far better to mingle your orders with HFT orders - that'll keep the big guys honest. You'll probably also pay lower fees.

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

#43

Post by kasey_junk » Fri, Jul 03, 2015, 5:53 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…

The problem is that front running requires 2 things:

- the ability to see orders ahead of someone, which this article implies you can, but you can't. - the fiduciary duty not to use someone's intent to trade against them.

HFT traders do not fall into either camp. They can't see your order before it goes to an exchange and they don't have a duty not to change their prices on one exchange in reaction to price moves on other exchanges.

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

#44

Post by tptacek » Fri, Jul 03, 2015, 5:54 PM UTC

mrchicity wrote: post #28

dllthomas wrote: post #15

Earlier quoted context omitted.

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 rule…

Modern market makers are very good at pricing a small spread to uninformed flow while making informed traders pay.

My understanding was that it's mostly the opposite, that MMs profit from uninformed order flow (so much so that they'll buy access to it from brokerages), and that informed traders were their predators in the market food chain.

At any rate: cost of trading has by every account I can find plummeted since the introduction of automatic trading. As recently as the 1990s, spreads were quoted in eighths of dollars, and there was widespread collusion to fix prices at quarters. In 70s and before, the markets were worse; basically organized fleecing operations.

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

#45

Post by bloateddevtards » Fri, Jul 03, 2015, 5:54 PM UTC

kasey_junk wrote: post #39

> 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…

Whatever the realities of the market, people have an expectation of "fairness", and are generally against the idea of a party or parties being able to insert themselves into a situation where they can essentially get a speed jump over the rest of the market by virtue of buying a place that enables this (microwave links, colo in the exchange etc.)

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

#46

Post by digikata » Fri, Jul 03, 2015, 5:55 PM UTC

kasey_junk wrote: post #39

> 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…

Why would a HFT maintain a huge inventory of stocks? If you make money on the ability to execute trades faster than others on the movement of stocks, you're losing money by holding them. It feels akin to a car maker holding an overlarge inventory of parts - it's just tied up capital that's not making you money. In HFT, don't you maximize the profit by holding as few stocks for a little is possible?

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

#47

Post by mrchicity » Fri, Jul 03, 2015, 5:55 PM UTC

JesperRavn wrote: post #31

mrchicity wrote: post #26

Earlier quoted context omitted.

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 arti…

Everybody wants to trade with no price impact. If you asked me if anyone else should be allowed to colocate their servers, I'd say no, just give me a monopoly please. One participant's desires don't make a good market.

Fair and non-discriminatory access to exchanges (not free, but anybody can pay to compete if they wish), fast trading engines and deep order book information are what let traders put up such tight spreads for customers in the first place. Vigorous competition between all market participants keeps prices fair.

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

#48

Post by bloateddevtards » Fri, Jul 03, 2015, 5:57 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…

Cute. Except the ones suffering the most from the HFT machinations were most likely pension and mutual funds, the ones most folks parents rely on. Not rich fucks or their catered hedge funds.

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

#49

Post by tptacek » Fri, Jul 03, 2015, 5:57 PM UTC

bloateddevtards wrote: post #48

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…

Cute. Except the ones suffering the most from the HFT machinations were most likely pension and mutual funds, the ones most folks parents rely on. Not rich fucks or their catered hedge funds.

Vanguard says exactly the opposite is true. Which makes sense: passively managed funds and funds with simple value-based investment parameters don't trade aggressively. On the infrequent occasions when they do trade, they benefit from the reduced cost of trading.

If you have your retirement fund parked in an actively-managed fund where you pay an annual fee to have someone who makes $500,000/yr base continuously push "buy" and "sell" buttons on their computer screen all day, you have bigger problems than HFT.

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

#50

Post by yummyfajitas » Fri, Jul 03, 2015, 6:00 PM UTC

JesperRavn wrote: post #41

yummyfajitas wrote: post #29

Earlier quoted context omitted.

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 o…

But if someone, somehow, developed a legal technical means to eavesdrop on the order you sent to your broker, and traded based on that, wouldn't it be fair to say that this is, in some sense, similar to front running? That is what the article is claiming, although the information is the information available at one exchange before it reaches another. And going on with this analogy, wouldn't it be the case that we wou…

The purpose of laws against frontrunning is to enable you to have a trusted relationship with your broker. There is no benefit to creating a trusted relationship with your adversaries.

Similarly, doctor/patient confidentiality laws are there to created a trusted relationship and make you comfortable admitting to your doctor that you had unprotected sex with lots of heroin addicted hookers in sub saharan Africa and you now need all the STD tests. In contrast, passing laws against journalists reporting on who visits hookers has no such benefit.