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A High Frequency Trader's Apology, Pt 2

chrisstucchio.com

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Re: A High Frequency Trader's Apology, Pt 2

#171

Post by tptacek »

teamonkey wrote: post #170
tptacek wrote: post #71

Earlier quoted context omitted.

Humans are also far less transparent than algorithmic market makers. Talk to professionals about the specialist system. It's (words chosen carefully) hard to take anyone seriously who pines for the good old days of 1970's and 1980's trade execution .

> hard to take anyone seriously who pines for the good old days of 1970's and 1980's trade execution. I've just read through the entire thread and I don't think anyone has suggested that.

"did major markets ever really have a huge problem with lack of liquidity, 20 or 30 years ago before HFT?"

Re: A High Frequency Trader's Apology, Pt 2

#172

Post by jellicle »

jeffem wrote: post #157
jellicle wrote: post #127

> Of course, it’s highly illegal to use trojans to rob retail investors and game the stock market, so this story is not particularly realistic. But in fact that entire scenario he just described is perfectly legal. The industry calls them "flash orders", and due to industry pushback against an SEC initiative to ban them in 2009, they are still legal. Nutshell description: - you put in an order to buy AAPL - your trus…

It's sad to see a comment like this on top of HN in the same way it would be to see a misinformed post about "hacking" rise to the top of a trading forum. I'm going to go out on a limb and say that you, and those who upvoted you, have little or no experience in financial markets. Comparing flash orders to front running a trojan is a terrible analogy. For one, the mechanics are not as you described (other commenters h…

No, it's not voluntary on the part of everyone involved.

Hint: the people doing the trades are not brokers.

>And even if we assume flash orders are evil, I think it's disingenuos to mention all of the SEC drama surrounding them without mentioning that several leading exchanges have voluntarily stopped the practice, and that flash orders make up a tiny percentage of total trading volume.

So you're going to argue, in the same post, both that flash orders are not front-running and that several exchanges, to avoid liability, have stopped doing them? Intriguing.

Re: A High Frequency Trader's Apology, Pt 2

#173

Post by jellicle »

JumpCrisscross wrote: post #165
jellicle wrote: post #127

> Of course, it’s highly illegal to use trojans to rob retail investors and game the stock market, so this story is not particularly realistic. But in fact that entire scenario he just described is perfectly legal. The industry calls them "flash orders", and due to industry pushback against an SEC initiative to ban them in 2009, they are still legal. Nutshell description: - you put in an order to buy AAPL - your trus…

A trojan informs the HFT of your order before you place it; it is thus front-running. Flash orders can't know your order before you place it - they just flash it to HFTs who fulfill it faster. The losers here are the slower market makers, not the retail trader. Equating flash orders and front-running does not make sense as the HFT doesn't know of the order before it is placed vis-à-vis the retail trader. The HFT appe…

>The HFT appears to have prevoyance vis-à-vis slower market makers

And also because they have paid to get the information 0.5 second sooner, so that they could trade on their insider information.

Re: A High Frequency Trader's Apology, Pt 2

#174

Post by SomeCallMeTim »

yummyfajitas wrote: post #102
SomeCallMeTim wrote: post #96

OK, answer me this: How does an HFT, in practice , add liquidity to a market? None of the examples given showed liquidity being added, because the people involved would have traded with each other directly without an HFT being there. Further, I submit that any HFT will only place a buy/sell spread in the case where the volume is high enough that they can complete their purchases within seconds or at most minutes. At…

None of the examples given showed liquidity being added, because the people involved would have traded with each other directly without an HFT being there....In every example OP gives... You clearly ignored one of my examples. Consider the example of Fry and Zoidberg. Fry places his sell order at 12:01. Leela and Bender are absent, so Fry's order goes into the book. Zoidberg places his buy order at $9.50 at 12:05. Th…

Ummm...so the only example where an HFT has helped someone out is the one where the HFT screwed up and lost money?

In other words, the better an HFT gets, the less benefit they're providing. This isn't doing much to convince me.

Yes, in that case, it would suck to be Fry. But the problem at that point is that the price dropped before Fry got his order in, and that's a price of doing business in the stock market. Considering that an HFT would do all in their power NOT to be helping Fry in that case, it doesn't really support your position. You're not in this to try to help people like Fry; you're in this to AVOID helping people like Fry as much as possible.

>If you want to take that risk, place an ALO order at the bid or ask price.

ALO? How does that differ from a limit order? I only ever use limit orders when buying or selling stock -- and pretty much every bit of investment advice I've read recommends that you only ever use limit orders, though advice on where to place your limit varies. If "most people" use market orders, well, most people also lose money in the stock market.

Re: A High Frequency Trader's Apology, Pt 2

#176

Post by SomeCallMeTim »

wtvanhest wrote: post #114
yummyfajitas wrote: post #102

Earlier quoted context omitted.

None of the examples given showed liquidity being added, because the people involved would have traded with each other directly without an HFT being there....In every example OP gives... You clearly ignored one of my examples. Consider the example of Fry and Zoidberg. Fry places his sell order at 12:01. Leela and Bender are absent, so Fry's order goes into the book. Zoidberg places his buy order at $9.50 at 12:05. Th…

I don't think that SomeCallMeTim understands that 0.10/share is a lot of money ($100,000) when a mutual fund is trading 1 million shares over 10 days. Now mulitply that by 60 holdings which are turned over 100% per year and you can see why pensions would want those mutual funds to save $6,000,000/year in liquidity costs. (Obviously mutual funds don't just do program trades, they also negotiate directly with each othe…

I get that $0.10/share is significant, or I wouldn't have bothered posting. Why be annoyed at a process that isn't costing anyone anything significant?

I also know that HFTs are taking money out of the equation, not adding money into the equation. If they weren't, they wouldn't be doing it -- and if the only value they're adding is reducing the time that a trade takes place by minutes or seconds, then I still submit that the value added to the stock market isn't worth the ACTUAL dollar cost.

The OP pointed at the example with Fry and Zoidberg. In that case, Leela either makes $0.05/share on the transaction (which otherwise would have gone to Fry and/or Zoidberg), or takes a hit of $0.50/share. In the latter case Fry (say that's you're mutual fund) makes $0.50/share more than they would have otherwise, but that money doesn't come out of thin air -- it's lost by Leela.

But in order for HFTs to do well, they have to make more money than they lose, so for every case like the above where Fry does better than he would have otherwise there is more money lost by people who would have done better without the interference of HFTs.

So for every $100,000 saved by a mutual fund, much more is being siphoned off by HFTs, for no real added value.

Re: A High Frequency Trader's Apology, Pt 2

#177

Post by MrMan »

jellicle wrote: post #140
grandalf wrote: post #134

Earlier quoted context omitted.

This is done in order to avoid intra-ETN transaction costs. There is nothing malicious or underhanded going on. This has always happened. Suppose you're in a room with your investor club and you want to buy 500 shares of AAPL. The evil "flash order" is akin to mentioning to your local group "hey guys I want to buy 500 shares of AAPL at $x, in case any of you want the other side of the transaction". If none of your lo…

>There is nothing malicious or underhanded going on. And yet most market participants think banning them is a no-brainer. http://blog.themistrading.com/when-exchanges-attack/

Themis is not 'most market participants.' Do not take their word for anything. They made their names scaring managers about HFT, they have an axe to grind. They offer manual execution of trades. They offer to execute the old and honorable way, not the new sneaky way.

They prey on the fear and ignorance of their audience.

Re: A High Frequency Trader's Apology, Pt 2

#178

Post by cynicalkane »

jellicle wrote: post #173
JumpCrisscross wrote: post #165

Earlier quoted context omitted.

A trojan informs the HFT of your order before you place it; it is thus front-running. Flash orders can't know your order before you place it - they just flash it to HFTs who fulfill it faster. The losers here are the slower market makers, not the retail trader. Equating flash orders and front-running does not make sense as the HFT doesn't know of the order before it is placed vis-à-vis the retail trader. The HFT appe…

>The HFT appears to have prevoyance vis-à-vis slower market makers And also because they have paid to get the information 0.5 second sooner, so that they could trade on their insider information.

You're confusing flash orders on ETNs with paying exchanges for flash orders. Only the DirectEdge exchange has flash orders. That's a pretty minor thing.

Re: A High Frequency Trader's Apology, Pt 2

#179

Post by cynicalkane »

jellicle wrote: post #172
jeffem wrote: post #157

Earlier quoted context omitted.

It's sad to see a comment like this on top of HN in the same way it would be to see a misinformed post about "hacking" rise to the top of a trading forum. I'm going to go out on a limb and say that you, and those who upvoted you, have little or no experience in financial markets. Comparing flash orders to front running a trojan is a terrible analogy. For one, the mechanics are not as you described (other commenters h…

No, it's not voluntary on the part of everyone involved. Hint: the people doing the trades are not brokers. >And even if we assume flash orders are evil, I think it's disingenuos to mention all of the SEC drama surrounding them without mentioning that several leading exchanges have voluntarily stopped the practice, and that flash orders make up a tiny percentage of total trading volume. So you're going to argue, in t…

If you're a consumer trading equities, NBBO rules protect you from being sniped at a detriment to you. In fact, flashing over ETNs is sometimes used to fulfill NBBO rules. These rules might be bad for higher-order reasons concerning liquidity and efficiency, but to a first approximation the consumer has nothing to fear from his order being fulfilled via flash.

It honestly isn't clear to me at all what you're griping about. It's like you read an article on the Internet and suddenly you're an expert on flash orders. I am not an expert on flash orders (and someone correct me if I am wrong), but it's pretty clear to me you're very confused.

Re: A High Frequency Trader's Apology, Pt 2

#180

Post by MrMan »

jellicle wrote: post #172
jeffem wrote: post #157

Earlier quoted context omitted.

It's sad to see a comment like this on top of HN in the same way it would be to see a misinformed post about "hacking" rise to the top of a trading forum. I'm going to go out on a limb and say that you, and those who upvoted you, have little or no experience in financial markets. Comparing flash orders to front running a trojan is a terrible analogy. For one, the mechanics are not as you described (other commenters h…

No, it's not voluntary on the part of everyone involved. Hint: the people doing the trades are not brokers. >And even if we assume flash orders are evil, I think it's disingenuos to mention all of the SEC drama surrounding them without mentioning that several leading exchanges have voluntarily stopped the practice, and that flash orders make up a tiny percentage of total trading volume. So you're going to argue, in t…

No claim was made that exchanges discontinued flash order types because of concerns about front running, nor that any kind of liability was the reason behind the retraction.

The practice was stopped because it became unpopular due to the dramatization of HFT in the media. In the presence of a large number of fragmented equity exchanges, flash orders facilitate lower transaction costs and lower latency.

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