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A detailed exposé on how the market is rigged from a data-centric approach

nanex.net

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Re: A detailed exposé on how the market is rigged from a data-centric approach

#111

Post by harryh »

prof_hobart wrote: post #18
hft_throwaway wrote: post #5

Earlier quoted context omitted.

That's not what's happening here. Traders are arbitraging and reacting to public trades and orders on multiple markets. If you walk through a physical market where 8 apple carts are lined up, all selling apples for $1, buy every apple at cart #1, then buy every apple at cart #2, and so on, would you be surprised to find the price moving up or sellers stepping away as you approached carts #7 and #8? The same thing hap…

If you stood in front of all of those carts simultaneously and said "I'll take all of your stock at the advertised price", I'm guessing you'd be a bit peeves if someone else pushed in front of you and started buying some of the stock (the equivalent of the 1,570 shared bought by some random buyer at the exact point this order was put in).

What you are describing isn't what happened. What happened was you stand in front of the carts and yell "I'll take all of your stock at the advertised price" but all the sellers hear you say that too so they say, "man, if you want to buy out everything we're going to raise the price on you a bit."

This isn't a perfect analogy, but it's close.

You're making the mistake of thinking that HFTers are inserting themselves between the buyers and the people offering to sell. That's not right. The HFTers ARE the ones offering to sell.

Re: A detailed exposé on how the market is rigged from a data-centric approach

#112

Post by josephlord »

kasey_junk wrote: post #92
josephlord wrote: post #33

If you offer something for sale at a certain price and someone says "I'll buy it!" you have a contract at that moment. I don't fully understand the conditions under which you can cancel an order but it seems all the cancellations happened on exchanges where no orders had yet been fulfilled so I assume this means that the order had not yet arrived. This seems ethically just about OK to me but a sign that there is not…

Cancellations aren't free and they aren't instant. Every (reputable) exchange out there requires you maintain a fill ratio or you will be fined. That is, you have to maintain a minimum number of quotes that get filled before they are cancelled.

I don't know how "fill ratio" is defined. I don't see a problem in unfilled orders at prices that are never reached but if you pull out from the market as soon as someone offers the other side to your trade that doesn't sit well with me. I wouldn't mind companies offering small quantities at the current price and other quantities at progressively higher prices and cancellations/adjustments being made after a particular trade had been processed which would be a transparent way to handle it

What do you mean that the cancellations aren't instant? If they can outrun a bid to accept them that is instant as far as I'm concerned.

Re: A detailed exposé on how the market is rigged from a data-centric approach

#113

Post by josephlord »

throwaway283719 wrote: post #48
rtpg wrote: post #43

Earlier quoted context omitted.

>2. The only reason that Jill has a speed advantage over Jack is because she has paid for it! She has paid to co-locate her server at the exchange, and she has paid to use high-speed connections between exchanges. Are we going to declare that paying for a competitive advantage is suddenly immoral? If we want an efficient market,we need perfect information. Information asymmetry creates inefficient markets. The moral…

If you want a reasonably efficient market, you need some participants to have close to perfect information. There is no market anywhere in the world that is 100% efficient, because the costs of getting to efficiency are prohibitively high. It's like trying to reach the speed of light - you can expend more and more effort getting closer and closer, but you can never actually reach it. I'm not saying that what we have…

> If you want a reasonably efficient market, you need some participants to have close to perfect information.

I don't think this follows at all. It isn't clear that if the assumptions are almost true the outcome reasonably close to that if the assumptions were true.

Even if it does hold true remember that economists view monopolies as perfectly efficient solutions but that in that scenario it is efficient because the monopoly captures all the available value not the consumers. I also believe that the maths behind the efficient market hypothesis break down if its assumptions don't hold.

Re: A detailed exposé on how the market is rigged from a data-centric approach

#114

Post by kasey_junk »

josephlord wrote: post #112
kasey_junk wrote: post #92

Earlier quoted context omitted.

Cancellations aren't free and they aren't instant. Every (reputable) exchange out there requires you maintain a fill ratio or you will be fined. That is, you have to maintain a minimum number of quotes that get filled before they are cancelled.

I don't know how "fill ratio" is defined. I don't see a problem in unfilled orders at prices that are never reached but if you pull out from the market as soon as someone offers the other side to your trade that doesn't sit well with me. I wouldn't mind companies offering small quantities at the current price and other quantities at progressively higher prices and cancellations/adjustments being made after a particul…

Well "fill ratios" are defined differently by each different exchange, but the simplest definition is the number of orders entered divided by the number of orders traded must be above a certain threshold or you will have negative consequences (fees, trade bans, etc).

Your description of how companies are pricing orders is exactly what's happening. On a given exchange no cancel can outrun a bid to accept a resting order. In fact, you don't have any idea that the bid has arrived until after a trade has happened.

What is being described in the article is that a trader is viewing an aggregate of all exchanges as if they were one exchange (either due to ignorance, naivety, bad tools, or due to misrepresentation). The trader then takes out an entire price level at one exchange (none of those orders are cancelled) before trying to do the same thing at the other exchanges. The participants who just got filled at exchange A, then cancel their orders at exchange B. To the trader who was viewing multiple exchanges as a single entity this seemed like it happened all at once, but to the traders who were viewing the exchanges, correctly, as different entities there is a timeline that is observable and public (in fact nanex describes it).

Re: A detailed exposé on how the market is rigged from a data-centric approach

#115

Post by josephlord »

bmelton wrote: post #44
josephlord wrote: post #33

If you offer something for sale at a certain price and someone says "I'll buy it!" you have a contract at that moment. I don't fully understand the conditions under which you can cancel an order but it seems all the cancellations happened on exchanges where no orders had yet been fulfilled so I assume this means that the order had not yet arrived. This seems ethically just about OK to me but a sign that there is not…

Plucking from throwaway's example. You have 20,000 copies of a book you just wrote. You put half of them on Amazon, and the other half on eBay, so Amazon has 10,000 and ebay has 10,000 of them. You see an order come in for 5,000 of them on Amazon. You think "Hot dog, these books are popular. I must be selling them too cheaply!" You immediately raise the price of all the books by 25 cents to capitalize on this. The bo…

Using the analogy of the books you are raising the price in the milliseconds between the customer clicking buy and packets of that request reaching ebay's servers and all after the user has seen your price and stock availability a second ago. I don't think this acceptable business practice, if you have seen a price and a stock you should be able to place the order and (unless another order that isn't front running has arrived first to deplete the stock) the order should be fulfilled even if you show a different price to the next visitor to the product page.

I can sort of see that but I don't quite understand why there are different exchanges. I can't see the benefit except to those for whom it is an arbitrage opportunity.

I would also expect there to be low cost systems by which you could place simultaneous orders on all exchanges (at the cost of a slight delay in the order starting to allow them all to be posted at the same time as the furthest one.

The HFT still seems to add little real liquidity. The spreads that are shown may be narrower but the real spread seems much higher.

Re: A detailed exposé on how the market is rigged from a data-centric approach

#116

Post by bmelton »

josephlord wrote: post #115
bmelton wrote: post #44

Earlier quoted context omitted.

Plucking from throwaway's example. You have 20,000 copies of a book you just wrote. You put half of them on Amazon, and the other half on eBay, so Amazon has 10,000 and ebay has 10,000 of them. You see an order come in for 5,000 of them on Amazon. You think "Hot dog, these books are popular. I must be selling them too cheaply!" You immediately raise the price of all the books by 25 cents to capitalize on this. The bo…

Using the analogy of the books you are raising the price in the milliseconds between the customer clicking buy and packets of that request reaching ebay's servers and all after the user has seen your price and stock availability a second ago. I don't think this acceptable business practice, if you have seen a price and a stock you should be able to place the order and (unless another order that isn't front running ha…

> Using the analogy of the books you are raising the price in the milliseconds between the customer clicking buy and packets of that request reaching ebay's servers and all after the user has seen your price and stock availability a second ago. I don't think this acceptable business practice

Speed shouldn't be the factor for why this isn't acceptable. The seller doesn't know that there are orders in the queue for the eBay order, they're just raising the price. That they're doing it quickly is just a matter of efficiency.

> I can sort of see that but I don't quite understand why there are different exchanges.

Yeah. No idea there.

> I would also expect there to be low cost systems by which you could place simultaneous orders on all exchanges

There are.

Re: A detailed exposé on how the market is rigged from a data-centric approach

#117

Post by josephlord »

bmelton wrote: post #116
josephlord wrote: post #115

Earlier quoted context omitted.

Using the analogy of the books you are raising the price in the milliseconds between the customer clicking buy and packets of that request reaching ebay's servers and all after the user has seen your price and stock availability a second ago. I don't think this acceptable business practice, if you have seen a price and a stock you should be able to place the order and (unless another order that isn't front running ha…

> Using the analogy of the books you are raising the price in the milliseconds between the customer clicking buy and packets of that request reaching ebay's servers and all after the user has seen your price and stock availability a second ago. I don't think this acceptable business practice Speed shouldn't be the factor for why this isn't acceptable. The seller doesn't know that there are orders in the queue for the…

Fair enough speed isn't really the criteria. In the Ebay example Ebay know what price they showed the customer on the product page when they went to the checkout and should fulfil it if they can (provided the transaction is completed in reasonable time - a couple of minutes in the book buying world). This is maybe an illustration of the problem with the analogy rather than being a useful insight into the trading system.

Re: A detailed exposé on how the market is rigged from a data-centric approach

#118

Post by josephlord »

kasey_junk wrote: post #86
laichzeit0 wrote: post #78

Earlier quoted context omitted.

Yeah, and if this happened at, let's say, 10 hour intervals, I'm sure the average layman would have no problem with the "fairness" of this. People are getting their panties in knot because it's somehow "unfair" that this can happen at the millisecond level. I personally don't have a problem with this type of trading activity. A few guys are making easy money. So what?

Actually it's not easy money at all. It is very risky money done on razor thin margins.

I don't think that makes the case for allowing it any stronger.

What I do wonder is if these market reactions are so automatic and predictable whether there is a way to game them (I'm sure people already do this). It is probably a deterrent to front running on a large scale.

Re: A detailed exposé on how the market is rigged from a data-centric approach

#119

Post by bmelton »

josephlord wrote: post #117
bmelton wrote: post #116

Earlier quoted context omitted.

> Using the analogy of the books you are raising the price in the milliseconds between the customer clicking buy and packets of that request reaching ebay's servers and all after the user has seen your price and stock availability a second ago. I don't think this acceptable business practice Speed shouldn't be the factor for why this isn't acceptable. The seller doesn't know that there are orders in the queue for the…

Fair enough speed isn't really the criteria. In the Ebay example Ebay know what price they showed the customer on the product page when they went to the checkout and should fulfil it if they can (provided the transaction is completed in reasonable time - a couple of minutes in the book buying world). This is maybe an illustration of the problem with the analogy rather than being a useful insight into the trading syst…

I think that the analogy works pretty well, surprisingly. I see no functional difference between changing the price in near real time as a reaction to another order on another exchange as I do "Hey, let's wait til midnight", which might equally screw the guy trying to put his order in at 11:59:59.

That said, I'm not an expert in the field, and I've just pieced this information from other posts. I have no strong opinion on the matter, but after throwaway's explanation (and all the subsequent discussion), my uninformed position agrees with his; that this article is exaggerative, and not indicative of anything being 'rigged'.

Moving fast, at least in my opinion, isn't cheating.

If they were raising the price on Ebay in response to the same customer's buy offer on Ebay, I would consider that unseemly, but not even necessarily unfair, as it only assumes that the buyer is willing to pay the newly raised price, and has approximately as much risk of losing the sale as making it.

Re: A detailed exposé on how the market is rigged from a data-centric approach

#120

Post by thingylab »

I don't see how this proves the market is rigged. What I do see is: 1) One market participant is being less than clever by trying to buy, in one order, 80% of the offered quantity, and 2) Another market participant realizes this, and reacts accordingly.

The post is written as if the world should freeze once the client sends an order. He was 'stolen' shares. Really?

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