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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

#21

Post by noonespecial »

dzderic wrote: post #15
noonespecial wrote: post #12

Earlier quoted context omitted.

Its a bit of a joke. Its a network thing, not a finance thing. What it does is adds a delay and more importantly, a bit more random delay to the time it takes the order to reach the exchanges server. Once you add in the non-determinism, HFT basically falls apart because you can't take your truckload of cash and buy yourself a place in a datacenter that's 2ms closer to the exchange and front-run everyone. It would be…

This "solution" will only make it harder for regular folks to execute orders, since HFTs will beat the randomness by shooting multiple orders through multiple order gateways.

Guess we'll need a hierarchical token bucket with stochastic fairness queueing as well.

We don't just need it to be random. We need there to be no way of ever quite knowing if any given order will beat another order to the exchange (within a given time period, of course). They won't know if they can beat joe ordinary, and they definitely won't know if they can beat the other HFT's. That might be enough to put a lid on it.

Edit: For those playing along, here's the metaphor. Joe goes to market to buy sheep. Bill knows Joe is going so he sends a fast runner ahead of him to buy the cheapest sheep in town first so he can mark them up and sell them to Joe when he arrives. We try making everyone wait at the town gate for a random amount of time to give Joe a chance to arrive and get through. So Bill (being very rich) just sends 10 guys so one is very likely to be let in before Joe anyway. Next we introduce the stochastic filter. We make everyone line up and then shuffle the order every once in a while, but Bill still has more guys so he might still get one in first more often than not. Finally, we add the token bucket. For every one guy that we know employed by Bill admitted, we make the next one wait twice as long to get in, so if Joe and 10 Bills show up, Joe and the first Bill are essentially on even footing again because the 2nd through 10th Bill would have to wait too long to matter.

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

#22

Post by mmaldacker »

simplemath wrote: post #7
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…

Except that what's happening is that the order is against a "cart" with sufficient inventory to completely fulfill the initial order, and other actors are interrupting the transaction to add carts 2-n. Is that not the case?

It's not the case. The trader wanted 20 000 shares, there was a combined amount of 24 800 shares, i.e. every exchange had less then 20 000.

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

#23

Post by mmaldacker »

DevX101 wrote: post #13
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 buyers were to time divide their order and time it so the request ended up at each exchange at the exact same millisecond, would this prevent others from reacting to the big trader?

Yes, this is what a good broker does.

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

#24

Post by Lazare »

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).

You would be peeved. Doubly so, because in the context of finance, that's actually illegal.

But the key word in your example is "simultaneously", and it's the thing that did not happen in this example. This is more like "I bought all the apples at the first cart, and by the time I got to the second card, half the carts had raised their prices, and most of the apples at the remaining parts had been bought by enterprising traders who decided there must be something special about apples all of a sudden".

It's hard to see the problem. Or the solution.

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

#25

Post by Lazare »

DevX101 wrote: post #10

Can someone explain what's happening with the order cancellations? What causes it? Who is the party that is canceling orders?

"Holy shit, someone is working there way through every broker, buying ever share of Ford stock they have! ...huh, I've got some Ford stock for sale. Maybe if I quickly pull it out of the shop window, and change the price, I can make some extra cash!"

That's what it is: People are seeing the orders pour through the various exchanges, and are reacting to it. If they were seeing the orders before they hit the exchanges, that would be front running, and it would be illegal. But Nanex appears to be showing people responding to orders after they hit the exchanges, and that would seem to be legal and moral.

The moral is that if you want to buy so much of a single stock that you can't even buy it all from a single exchange, you MAY end up paying a bit of a premium, unless you're quite good at hiding what you're doing. And in this example, the purchaser was not. It's a story as old as markets.

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

#27

Post by gd1 »

noonespecial wrote: post #21
dzderic wrote: post #15

Earlier quoted context omitted.

This "solution" will only make it harder for regular folks to execute orders, since HFTs will beat the randomness by shooting multiple orders through multiple order gateways.

Guess we'll need a hierarchical token bucket with stochastic fairness queueing as well. We don't just need it to be random. We need there to be no way of ever quite knowing if any given order will beat another order to the exchange (within a given time period, of course). They won't know if they can beat joe ordinary, and they definitely won't know if they can beat the other HFT's. That might be enough to put a lid o…

"For those playing along, here's the metaphor. Joe goes to market to buy sheep. Bill knows Joe is going so he sends a fast runner ahead of him to buy the... "

Seriously, how many times have we discussed this issue on this site and we still get this bullshit. Bill doesn't know Joe is going. He doesn't. Get it through your thick heads.

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

#28

Post by nhaehnle »

Lazare wrote: post #24
prof_hobart wrote: post #18

Earlier quoted context omitted.

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).

You would be peeved. Doubly so, because in the context of finance, that's actually illegal. But the key word in your example is "simultaneously", and it's the thing that did not happen in this example. This is more like "I bought all the apples at the first cart, and by the time I got to the second card, half the carts had raised their prices, and most of the apples at the remaining parts had been bought by enterpris…

There are two possible solutions.

The first solution is to forbid multiple marketplaces for a single virtual asset. Honestly, the service provided by these marketplaces is very simple, and could be provided by a non-profit organization that is bound by law to ensure low barriers to entry. This would be a win for everybody, really.

The second solution is to enforce that markets operate on a synchronized heartbeat with sealed bid changes. It would work somewhat like this:

T=0: Bids from the last heartbeat are published; market starts accepting bids for the next heartbeat, but those bids remain sealed T=1: Market stops accepting bids T=2: Trading engine matches bids, executes orders, and publishes all bids; market starts accepting bids for the next heartbeat, but those bids remain sealed (that is, the market is now in the same state as it was at T=0)

Have one time unit be something like a minute, and force markets trading the same asset to be sufficiently synchronized.

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

#29

Post by nhaehnle »

Lazare wrote: post #25
DevX101 wrote: post #10

Can someone explain what's happening with the order cancellations? What causes it? Who is the party that is canceling orders?

"Holy shit, someone is working there way through every broker, buying ever share of Ford stock they have! ...huh, I've got some Ford stock for sale. Maybe if I quickly pull it out of the shop window, and change the price, I can make some extra cash!" That's what it is: People are seeing the orders pour through the various exchanges, and are reacting to it. If they were seeing the orders before they hit the exchanges,…

The question, from a society-design point of view, is whether it is useful to have a whole class of people who engage in what is ultimately a zero-sum game and therefore an arms race, and whether it wouldn't be better to design markets in such a way that a large buy order can be placed without having to be an expert at HFT.

After all, the market is supposed to be useful for organizing long-term investments. The short-term stuff is pretty far removed from the progress of society.

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