Hacker News Board Hacker News, browsed like a classic message board
Live data from Hacker News

A trading platform that outlaws what it sees as abusive practices

theverge.com

Post reply on HN
Print view View original

51–60 of 81 posts

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

#51

Post by kasey_junk »

digikata wrote: post #46
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?

The short answer is that they have to. Resting orders from yesterday are always faster than microsecond orders from right now.

So a market maker that was super fast but didn't rest orders, would be competing with one that is as fast as them and willing to rest orders. So, the resting order ones win and drive out the non-resting order ones.

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

#52

Post by mrchicity »

tptacek wrote: post #40
x5n1 wrote: post #36

Earlier quoted context omitted.

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 manag…

They may scalp profits from hedge funds that trade actively, but guess what, they're playing the same game: trying to trade at attractive prices. With two pros competing with one another, why does one side deserve sympathy? I don't see Burger King whining to the press when McDonalds outearns them.

For the average passive indexer who buys some ETFs or mutual funds every quarter it's meaningless at worst, and probably a net benefit since these products have tighter prices now.

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

#53

Post by JesperRavn »

kasey_junk wrote: post #43
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…

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…

The article claims that by colocating in one exchange, HFT can see you order arrive at exchange A, and send orders to exchange B before your order reaches exchange B. I don't know if this is true, but this is the most important part of the article. Given the fixed latency they introduce, you can send your trades to IEX before sending to any other exchange, safe in the knowledge that no other exchange will react to that information before your order.

No one is talking about the fiduciary duty. Fiduciary duty is just a way to define a default contract into law. E.g. brokers could write a contract saying that they promise not to front run. But since this is something that almost every client would want, it's just written into law instead.

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

#54

Post by tptacek »

mrchicity wrote: post #52
tptacek wrote: post #40

Earlier quoted context omitted.

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 manag…

They may scalp profits from hedge funds that trade actively, but guess what, they're playing the same game: trying to trade at attractive prices. With two pros competing with one another, why does one side deserve sympathy? I don't see Burger King whining to the press when McDonalds outearns them. For the average passive indexer who buys some ETFs or mutual funds every quarter it's meaningless at worst, and probably…

I think we're saying the same thing.

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

#56

Post by tptacek »

Donch wrote: post #55

Read "Flash Boys" for a better insight into how much difference variable latency between exchanges and clients makes to the profitability of fast execution of trades. https://en.wikipedia.org/wiki/Flash_Boys

Flash Boys is a god-awful mess. Two better alternatives:

Kovacs' _Flash Boys: Not So Fast_ which in the best possible way reads like a long-form ELI5 Reddit post about modern trading and all the WTFWAT moments in Lewis' book: http://www.amazon.com/Flash-Boys-Insiders-Perspective-High-F...

Patterson's _Dark Pools_ which tells the story of Island and the ECNs and the advent of automated trading. Patterson is more ambivalent about HFT than Kovacs, and does a good job of explaining the Core Wars phenomenon of modern trading from '98 to the mid-'00s.

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

#57

Post by mrchicity »

tptacek wrote: post #44
mrchicity wrote: post #28

Earlier quoted context omitted.

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…

Yes I mean if I think the fair price of a stock is $100, and I knew who I was trading with, I might bid 99.99 offer 100.01 to a retail trader, but bid 99.95 offer 100.05 to a bank or hedge fund. The retail trader probably doesn't have short-term info and he's not going to keep trading in the same direction so I don't need to make as much spread.

On exchange markets you can't really tell who you trade with so you have to guess.

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

#58

Post by Donch »

tptacek wrote: post #56
Donch wrote: post #55

Read "Flash Boys" for a better insight into how much difference variable latency between exchanges and clients makes to the profitability of fast execution of trades. https://en.wikipedia.org/wiki/Flash_Boys

Flash Boys is a god-awful mess. Two better alternatives: Kovacs' _Flash Boys: Not So Fast_ which in the best possible way reads like a long-form ELI5 Reddit post about modern trading and all the WTFWAT moments in Lewis' book: http://www.amazon.com/Flash-Boys-Insiders-Perspective-High-F... Patterson's _Dark Pools_ which tells the story of Island and the ECNs and the advent of automated trading. Patterson is more ambiv…

Read all three! Thanks for the reading list extension and gratuitous downvote :-)

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

#59

Post by tptacek »

Donch wrote: post #58
tptacek wrote: post #56

Earlier quoted context omitted.

Flash Boys is a god-awful mess. Two better alternatives: Kovacs' _Flash Boys: Not So Fast_ which in the best possible way reads like a long-form ELI5 Reddit post about modern trading and all the WTFWAT moments in Lewis' book: http://www.amazon.com/Flash-Boys-Insiders-Perspective-High-F... Patterson's _Dark Pools_ which tells the story of Island and the ECNs and the advent of automated trading. Patterson is more ambiv…

Read all three! Thanks for the reading list extension and gratuitous downvote :-)

I upvoted you.

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

#60

Post by kasey_junk »

JesperRavn wrote: post #53
kasey_junk wrote: post #43

Earlier quoted context omitted.

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…

The article claims that by colocating in one exchange, HFT can see you order arrive at exchange A, and send orders to exchange B before your order reaches exchange B. I don't know if this is true, but this is the most important part of the article. Given the fixed latency they introduce, you can send your trades to IEX before sending to any other exchange, safe in the knowledge that no other exchange will react to th…

There is a major caveat to what they are reporting that gets to the heart of this.

HFT can't see your order as it arrives on exchange A before it arrives on exchange B, they can see the results of an order. That is, they can see a large trade happened on price X on A. With that information they may want to change their prices on exchange B and they may be able to do that before you can also place an order on B.

There are lots of ways to mitigate this other than using a dark pool like IEX. All the exchanges offer exotic order types to make this easier for instance, and large block traders have for years had execution algorithms that spread their orders around venues and over time to minimize price impact.

That IEX offers another option for large block traders does not bother me at all, that they market it via underhanded moralizing i find distasteful.

Finally, in this context front-running has a specific meaning and it requires a fiduciary duty for it to be front running. By using that term incorrectly you ARE bringing fiduciary duty into the conversation, whether you want to or not.

Post reply on HN