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

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

#121

Post by noxn »

throwaway283719 wrote: post #38

What is happening here is really quite simple, and doesn't deserve an entire blog post. There are two exchanges, A and B, and a market maker Jill is quoting (say) 10,000 shares on each of those two exchanges for $17. Big institutional trader Jack sees the 20,000 shares and decides that he wants to buy 15,000 of them, so he sends two orders for 7,500 shares each to A and B. Because of various effects (network latencie…

"Fresh Apples here! Only the best apples for 2 dollars!" - "I would like one, please." - "Thatll be 2.50, sir." - "What? I thought you just said 2?" - "Demand has just gone up."

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

#122

Post by harryh »

noxn wrote: post #121
throwaway283719 wrote: post #38

What is happening here is really quite simple, and doesn't deserve an entire blog post. There are two exchanges, A and B, and a market maker Jill is quoting (say) 10,000 shares on each of those two exchanges for $17. Big institutional trader Jack sees the 20,000 shares and decides that he wants to buy 15,000 of them, so he sends two orders for 7,500 shares each to A and B. Because of various effects (network latencie…

"Fresh Apples here! Only the best apples for 2 dollars!" - "I would like one, please." - "Thatll be 2.50, sir." - "What? I thought you just said 2?" - "Demand has just gone up."

That's wrong. It's more like:

"Fresh Apples here! Only the best apples for 2 dollars!" - "I would like every single apple you have, please. Also I'm buying all the apples from the guy across the street too." - "Thatll be 2.05 each, sir." - "What? I thought you just said 2?" - "Demand has just gone up."

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

#123

Post by kasey_junk »

noxn wrote: post #121
throwaway283719 wrote: post #38

What is happening here is really quite simple, and doesn't deserve an entire blog post. There are two exchanges, A and B, and a market maker Jill is quoting (say) 10,000 shares on each of those two exchanges for $17. Big institutional trader Jack sees the 20,000 shares and decides that he wants to buy 15,000 of them, so he sends two orders for 7,500 shares each to A and B. Because of various effects (network latencie…

"Fresh Apples here! Only the best apples for 2 dollars!" - "I would like one, please." - "Thatll be 2.50, sir." - "What? I thought you just said 2?" - "Demand has just gone up."

This is the flawed analogy that keeps being propagated that is completely untrue.

A much better one is to think of a string of gas stations running down the highway. They all have an advertised price. A tanker truck arrives at the first gas station and buys all the gas at the advertised price. It then goes down the road and buys all the next stations gas at the same advertised price. Then the manager of the 2nd gas station calls the 3rd and says hey, we've just gotten wiped out of gas there is a lot of demand. The 3rd manager raises his price accordingly. The tanker truck can then decide if it wants to buy more gas at the new price or just take what they currently have.

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

#124

Post by josephlord »

bmelton wrote: post #119
josephlord wrote: post #117

Earlier quoted context omitted.

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 opini…

As far as I understand it a contract is made when there is an offer and an acceptance of that offer. If you are Ebay/Amazon I don't think that you can show one price and then just happen to change it as the user accepts it. The price charged should be the one offered. If the product page shows a price and user puts it in their basket and orders in within a reasonable time (5-10 minutes) the offered price should be honoured even if the price changed in the 5-10 minutes and all customers going to the product page at that point see the new price.

Note: This is not the behaviour I expect to see of share trading platforms but it is the way consumer goods sales should behave.

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

#125

Post by kasey_junk »

josephlord wrote: post #118
kasey_junk wrote: post #86

Earlier quoted context omitted.

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.

A) Repeat after me. There is no front running in these scenarios. Front running happens between a client and his intermediary that has a fiduciary duty to him. Other market participants do not have that duty.

B) Yes, market making HFT are routinely fighting against other HFT that are designed to predict their behavior and make money from them.

The case for allowing it is simple. How do you disallow it without having even worse outcomes. There is quite a bit of evidence that suggests that for the average market participant HFT market makers are a positive not a negative.

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

#126

Post by kasey_junk »

downandout wrote: post #74
throwaway283719 wrote: post #67

Earlier quoted context omitted.

It's empirically not true that "whomever has the closest connection always wins and everyone else always loses" as is evidenced by the fact that there are multiple competing market makers who are all profitable. Arguments of the kind "let's carry this to its logical conclusion" are almost always fallacious, because they ignore limiting factors, or alternative explanations. If your only advantage is speed then you nee…

>there are multiple competing market makers who are all profitable. That doesn't disprove my statement. The "multiple competing market makers who are all profitable" all have extremely fast connections to the market. They compete on relatively equal footing speed-wise, and so other factors come into play. But everyone outside of the small group of players with that speed advantage will always be paying a tax to those…

You aren't paying a tax to HFTs. You are receiving a substantial discount to trade due to them being there. Fees are lower than they've ever been, spreads are tighter and technology is cheaper. You are in fact reaping the "peace" dividend of the HFT wars.

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

#127

Post by harryh »

josephlord wrote: post #124
bmelton wrote: post #119

Earlier quoted context omitted.

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 opini…

As far as I understand it a contract is made when there is an offer and an acceptance of that offer. If you are Ebay/Amazon I don't think that you can show one price and then just happen to change it as the user accepts it. The price charged should be the one offered. If the product page shows a price and user puts it in their basket and orders in within a reasonable time (5-10 minutes) the offered price should be ho…

With the advent of electronic price labeling in retail stores we will soon live in a world where the price can change after you've picked up an item of the shelf and before you check out at the front of the store.

http://www.marketingmagazine.co.uk/article/1181195/real-time...

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

#128

Post by josephlord »

kasey_junk wrote: post #125
josephlord wrote: post #118

Earlier quoted context omitted.

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.

A) Repeat after me. There is no front running in these scenarios. Front running happens between a client and his intermediary that has a fiduciary duty to him. Other market participants do not have that duty. B) Yes, market making HFT are routinely fighting against other HFT that are designed to predict their behavior and make money from them. The case for allowing it is simple. How do you disallow it without having…

A) I wasn't saying that there was front running in the scenario, just that the exploitability of front running by deliberately trying to trigger it was probably a deterrent.

Not convinced about that statement about average market participants, also define average market participant and explain where the HFT's profits come from if not other participants.

How do you disallow it?

My initial suggestion was to slow down cancellations so that they take substantially longer than a new trade does to pass through the system. My perception is that it might reduce the visible liquidity/availability but not the real liquidity as much of the visible liquidity disappears when someone tries to trade against it.

Another suggestion would be to move to a single exchange

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

#129

Post by josephlord »

harryh wrote: post #127
josephlord wrote: post #124

Earlier quoted context omitted.

As far as I understand it a contract is made when there is an offer and an acceptance of that offer. If you are Ebay/Amazon I don't think that you can show one price and then just happen to change it as the user accepts it. The price charged should be the one offered. If the product page shows a price and user puts it in their basket and orders in within a reasonable time (5-10 minutes) the offered price should be ho…

With the advent of electronic price labeling in retail stores we will soon live in a world where the price can change after you've picked up an item of the shelf and before you check out at the front of the store. http://www.marketingmagazine.co.uk/article/1181195/real-time...

I don't think that this would be legal in the UK unless on upwards changes the labels changed a reasonable[0] time before the prices. Unfair Commercial Practices Directive and probably some other laws would probably cover it.

[0] A small shop could probably do it much quicker than a large supermarket which might have to allow for people being in there for an hour.

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

#130

Post by harryh »

josephlord wrote: post #128
kasey_junk wrote: post #125

Earlier quoted context omitted.

A) Repeat after me. There is no front running in these scenarios. Front running happens between a client and his intermediary that has a fiduciary duty to him. Other market participants do not have that duty. B) Yes, market making HFT are routinely fighting against other HFT that are designed to predict their behavior and make money from them. The case for allowing it is simple. How do you disallow it without having…

A) I wasn't saying that there was front running in the scenario, just that the exploitability of front running by deliberately trying to trigger it was probably a deterrent. Not convinced about that statement about average market participants, also define average market participant and explain where the HFT's profits come from if not other participants. How do you disallow it? My initial suggestion was to slow down c…

Yes, HFTs profit from other participants because they are selling a service: liquidity.

There have ALWAYS been sellers of liquidity. Due to automation human sellers have been replaced by computers that cost far far less. So the cost of liquidity has gone down DRAMATICALLY. Spreads used to be a quarter (or higher). Now they are a penny. That's a 25x reduction!

Here's the chief executive of Vanguard (the world's largest mutual fund company) talking about how HFTs have lowered trading costs for their clients:

http://www.cnbc.com/id/101615521

If you slow down cancellations or otherwise try to slow information flow to HFTs you will simply raise their risk which will force them to raise the price they charge for selling liquidity by increasing spreads.

Stop thinking of HFTers as parasites and think of them as service providers and you'll have a clearer picture of reality.

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