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A trading platform that outlaws what it sees as abusive practices

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

#61

Post by foobarqux »

vegabook wrote: post #24
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).

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 liqu…

It's more complicated than you suggest: If informed trading can't capture a good portion of the difference between the "true" price and the current price then there isn't an incentive to do it.

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

#62

Post by lucozade »

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…

Frontrunning is a crime because it's acting on privileged information. It's in the same boat as insider dealing. They have that privileged info because of their fiduciary relationship so it is relevant.

What the HFT guys are doing is not frontrunning because anyone can get hold of the same information they have (for a price). That information is not privileged (assuming deep pockets != privilege) so it's not frontrunning.

They're getting to the trade first because they're technically quicker than the routers the banks are using.

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

#63

Post by JesperRavn »

mrchicity wrote: post #47
JesperRavn wrote: post #31

Earlier quoted context omitted.

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 spre…

EDIT: I think you are right, although I would express things a bit differently. I'm writing a top level post with my thoughts.

ORIGINAL POST: When you make a trade, there are some information rents associated with that trade. If someone knew you were about to trade, they could capture all of those rents. When there is a monopoly on exploiting these information rents (as in frontrunning), they will be captured by the frontrunner. When there is perfect competition (as when a number of HFTs can trade in another exchange before your trade reaches it), these rents will be all wasted on technology to maximize speed, i.e. no one gets them, they become deadweight loss.

I understand that there are other issues, such as knowing whether a trade comes from a single seller or multiple smaller sellers. But this is a separate issue from simply trading ahead of other people. I don't understand why it's so controversial that an exchange would advertise the fact that traders can rely on their orders reaching the exchange before anyone else knows about it as a good thing.

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

#64

Post by joesmo »

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…

Whether or not HFTs are rushing to buy the stocks or they have the stocks already, doesn't change the fact that proximity to the data center allows HFTs an unfair advantage. It's unfair either way.

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

#65

Post by JesperRavn »

yummyfajitas wrote: post #50
JesperRavn wrote: post #41

Earlier quoted context omitted.

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 yo…

I really don't care about the law. The point is that if front running was legal, brokers would try to find ways to guarantee to their clients that they wouldn't do it. Similarly, the guy in the article advertises his exchange as preventing the equivalent of front running at the exchange level.

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

#66

Post by foobarqux »

mrchicity wrote: post #21
res0nat0r wrote: post #6

Earlier quoted context omitted.

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 lo…

> There are a million ways to trade orders that are statistically mispriced before the market actually moves,

Can you talk more about this?

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

#67

Post by kasey_junk »

joesmo wrote: post #64
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…

Whether or not HFTs are rushing to buy the stocks or they have the stocks already, doesn't change the fact that proximity to the data center allows HFTs an unfair advantage. It's unfair either way.

Someone always has and always will have closer proximity to an exchange. You'll notice IEX is hosted in a large exchange centric data center and allows colocation as well.

This proximity is actually cheaper, more standardized and easier to access now than it's ever been.

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

#68

Post by MereInterest »

tedks wrote: post #9
avz wrote: post #5

Earlier quoted context omitted.

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…

>The exchanges are only required to make order information public with a significant delay. However, they sell the real-time order information to a few market players enabling them to engage in the dubious tactics at the expense of other players. It's easy to see why you view this as unfair. But it is fair. Anyone can buy the real-time information if they have the capital. Obviously markets are going to be more frien…

I'm having a hard time figuring out whether you are being facetious or not. What you are describing is nepotism and bribery, not capitalism.

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

#69

Post by mrchicity »

JesperRavn wrote: post #63
mrchicity wrote: post #47

Earlier quoted context omitted.

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 spre…

EDIT: I think you are right, although I would express things a bit differently. I'm writing a top level post with my thoughts. ORIGINAL POST: When you make a trade, there are some information rents associated with that trade. If someone knew you were about to trade, they could capture all of those rents. When there is a monopoly on exploiting these information rents (as in frontrunning), they will be captured by the…

The original trader still has the ability to capture his information rents in a single trade on one market. Nobody can see it and step away or react before the execution goes through. That's all anyone is guaranteed. HFTs face the same problem. If they're trying to cross the spread to put on a trade or hedge, they also have market impact costs and slippage.

I think it's controversial because a lot of their marketing implies all HFTs do this as their primary business and thus add very little value. It creates this narrative of a parasitic activity that intermediates trades which would have already occurred where no risk is taken. I don't think that's the case in reality. All HFT strategies are looking at order books in the products they trade, and they definitely make money (or avoid losses) when someone executes inefficiently across exchanges, but there's more to it than that. HFTs are very successful in futures and non-US markets where products trade on a single exchange. How do they do that if they aren't good at predicting prices and taking risk?

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

#70

Post by dr_hercules »

tptacek wrote: post #49
bloateddevtards wrote: post #48

Earlier quoted context omitted.

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…

That's why ETFs and index funds, which simply match a market or index passively, are the real deal.

Going for more than market growth is a strategy only brokers, fund managers and banks make profit of.

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