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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

#71

Post by mrchicity »

foobarqux wrote: post #66
mrchicity wrote: post #21

Earlier quoted context omitted.

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?

Too close to secret sauce territory, but if you can predict the market is more likely to tick up than tick down or vice versa, then buying or selling at mid-market is +EV. Here are some publicly-available examples that are too well-known to work anymore, basically various features of the order book: http://www.orie.cornell.edu/engineering2/customcf/iws_events...

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

#72

Post by dcaisen »

Dan from IEX here. For folks genuinely interested in US equity market trading dynamics, this paper out of Columbia is an awesome primer. More objective than flash boys or what you'll read in the news.

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2580002

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

#73

Post by mrchicity »

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…

There's two sides to every trade though. Somebody wins, somebody loses. The orders on the other exchanges either belong to market makers or other uninformed traders.

If you structured the market so market makers couldn't see order flow as quickly, they'd charge a larger spread to everybody. Right now they charge a tight spread so long as the incoming order is small because they know at least some of the time they can get out of the way or try to dump their shares when a big order comes in. That's good for the small guy. They wouldn't even be there for the big guy to hit if you changed the rules. Instead the sales trader would only see half the shares at the best price and end up paying multiple ticks just like he does now.

If the orders on other exchanges are uninformed slow traders, they're going to lose either way, so we're really arguing over whether the savvy hedge fund or the fast aggressive HFT should get their money. If you're playing the game of making fractions of a tick, you're in the same execution game HFTs are in, so you better get fast.

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

#74

Post by mrchicity »

JesperRavn wrote: post #65
yummyfajitas wrote: post #50

Earlier quoted context omitted.

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.

Their ATS can only exist by free-riding on the public price discovery in displayed US markets under Reg NMS. They protect their customers from trading at "wrong" prices by letting traders on faster exchanges determine what the "right" price is for them.

As a thought experiment, imagine IEX captured 95% of market share as a displayed exchange. The 350 microsecond delay wouldn't matter since it's applied to everyone and there would be no reference markets for them to price against. It'd just be another market with a slightly slow matching engine. Relative speed still matters so fast traders would have an advantage.

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

#75

Post by JesperRavn »

mrchicity wrote: post #69
JesperRavn wrote: post #63

Earlier quoted context omitted.

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…

>The original trader still has the ability to capture his information rents in a single trade on one market... That's all anyone is guaranteed

Yes this is the essence of it. Based on other posts, I would guess that if you really wanted to make simultaneous trades in multiple markets, then you could. But even if HFT really did render this impossible, it's not a bad thing, since it trading in two exchanges simultaneously actually gives more rents to the large trader than the theoretical ideal of a single continuous double auction. And if you want to trade in A then trade in B based on the results of A, then you certainly don't deserve to be the first to make it to B.

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

#76

Post by msandford »

res0nat0r wrote: post #19
msandford wrote: post #11

Earlier quoted context omitted.

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.

So front running is currently rampant in every area of the NYSE and the regulators are looking the other way?

Before you try and suggest that the financial authorities are 100% competent, I would remind you that Bernie Madoff did in fact dupe many people for many years. Financial authorities included. In fact it was a non-governmental person who blew the whistle and starting the whole thing tumbling down.

So I'm not saying that it's rampant and everyone is looking the other way. But it's definitely a possibility. What people are SUPPOSED to do and what they ACTUALLY do often don't overlap anywhere near enough.

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

#77

Post by cpach »

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 :-)

As you very well know, HN votes are anonymous. Why make assumptions about who voted? It doesn't contribute to the discussion at all.

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

#78

Post by joesmo »

kasey_junk wrote: post #67
joesmo wrote: post #64

Earlier quoted context omitted.

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.

That also doesn't change the fact that it's an unfair advantage.

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

#79

Post by kasey_junk »

joesmo wrote: post #78
kasey_junk wrote: post #67

Earlier quoted context omitted.

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.

That also doesn't change the fact that it's an unfair advantage.

Why not? Anyone can pay for colocation & it's cheaper than ever.

Do you really mean it's not free?

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

#80

Post by joshu »

foobarqux wrote: post #14
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.

The rest of the world is still continuous.

Some of the massive block dark pools operate just like I said, so no, not really.
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