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For the Love of Money

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Re: For the Love of Money

#211

Post by dredmorbius »

[deleted] wrote: post #207
dredmorbius wrote: post #196

Earlier quoted context omitted.

By getting in before you on the seller. HFT arbitrages the price differential by means of moving faster than you can. Rather than buying Wigets-R-Us at $100/share, the HFT slips in with a, say, $99.99 offer to the seller, and offers you $100.01. Rinse, wash, repeat a few million times a day, and those two cents add up. And it's cost you (and the seller) a penny a share each. The numbers are made up here, but that's t…

[deleted]

There are numerous ways:

http://www.stocktrading.com/HFTDennis.ppt

http://online.wsj.com/news/articles/SB1000087239639044403240...

Broker-dealer internalization, queue jumping, flash trading. Regulators are years behind the traders on methods.

Trading center proximity is a big one. The Internet travels at the speed of light (actually, somewhat less than that). Which is finite and within the bounds of algorithmic trading. The HFTs get pricing data before the general public, even if it's just a few thousandths of a second (5000 km is about 0.01 light seconds, 500km is 0.001 ls).

With HFT operating at the 250 microsecond level, 75 km is significant.

http://queue.acm.org/detail.cfm?ref=rss&id=2536492

Or just plain cheating. Remember the Chicago Faster-Than-Light trades?

http://www.theverge.com/2013/10/3/4798542/whats-faster-than-...

Re: For the Love of Money

#212

Post by harryh »

infinii wrote: post #182
harryh wrote: post #167

Earlier quoted context omitted.

Charlie, as a guy who regularly buys and sells large volumes of stock, is just talking his book. It would be great for him if he could make large transactions without the stock price responding quickly to this new information. But it would be bad for everyone he transacted with. To make this concrete: Say Charlie & Warren wake up one day and decide Company X is undervalued and that they want to by 5% of it. They star…

"But what if you were one of the people selling to Charlie. Before HFTs made the price faster you were the one getting screwed!" The sellers sell at their ask price (or at my bid), it's their decision to sell. If you offer to sell something to me at $10, I haven't "screwed" you just because someone else was willing to pay $11. It absolutely is front running. Moving the price of a stock to your advantage because you k…

If we're talking about limit orders than HFTs have no effect at all and might as well not exist. I'm talking about market orders.

Also what does it even mean to "Move the price of a stock to your advantage" ?

Re: For the Love of Money

#213

Post by dredmorbius »

harryh wrote: post #210
dredmorbius wrote: post #196

Earlier quoted context omitted.

By getting in before you on the seller. HFT arbitrages the price differential by means of moving faster than you can. Rather than buying Wigets-R-Us at $100/share, the HFT slips in with a, say, $99.99 offer to the seller, and offers you $100.01. Rinse, wash, repeat a few million times a day, and those two cents add up. And it's cost you (and the seller) a penny a share each. The numbers are made up here, but that's t…

Am I trying to place a market order or a limit order for Widgets-R-Us in the scenario you describe? Precision is important here.

A limit order only specifies your price. Nothing keeps the HFT from getting between you and another long-term trader in that case. Which can have a few effects.

One is that the seller loses on additional value. The other is that the HFT has bought from a seller who would have sold to you, but sees a higher buy price and sells to that instead, so you miss your trade.

For low-volume traders these aren't huge issues, but for institutionals or others looking to make or exit a large position the costs can mount. Again: HFT wouldn't be undertaken if there wasn't value to be extracted in doing it, and that value is coming directly from other buyers and sellers, just as when you introduce a middleman to any other transaction.

Re: For the Love of Money

#214

Post by harryh »

dredmorbius wrote: post #213
harryh wrote: post #210

Earlier quoted context omitted.

Am I trying to place a market order or a limit order for Widgets-R-Us in the scenario you describe? Precision is important here.

A limit order only specifies your price. Nothing keeps the HFT from getting between you and another long-term trader in that case. Which can have a few effects. One is that the seller loses on additional value. The other is that the HFT has bought from a seller who would have sold to you, but sees a higher buy price and sells to that instead, so you miss your trade. For low-volume traders these aren't huge issues, bu…

HFTs certainly are making money. But they're making money by making the market. And they're making a lot less money than they used to which you can see because spreads have shrunk dramatically. This is because computers can do this job much faster and cheaper than the humans who did it before could.

It's the same kind of automation we've seen in many other industries.

Re: For the Love of Money

#215

Post by gd1 »

dredmorbius wrote: post #205
gd1 wrote: post #200

Earlier quoted context omitted.

You have no actual idea how a limit order book works do you?

You have no idea how to actually write an informational comment rather than hinting at some received wisdom and greater general understanding without actually revealing any of it, wrapped in condescension which actually lands far of the mark and fails to address the points raised here, do you?

Fine, I'll attempt to parse through your example.

"Rather than buying Wigets-R-Us at $100/share, the HFT slips in with a, say, $99.99 offer to the seller, and offers you $100.01."

So, 2 possibilities, you don't say, but you are sending a limit order to buy at $100 or a market (or marketable limit, or fill-and-kill) order to buy at $100. Apparently, you seem to be suggesting that there is a seller in the market, presumably offering at $100. Now, you seem to be suggesting that the HFT sees your order before it hits the matching engine (nonsense) and also that they can somehow re-negotiate with the seller and get him to lower his limit sell to 99.99 (I'm not sure how, do they send goons around to kneecap him if he doesn't? All in the 20 milliseconds your order is on the way to the market?).

" and offers you $100.01"

...but let's assume that somehow the magic omnipotent packet-sniffing HFT knows your order is enroute to the exchange, can force market participants to lower their offers, now you're claiming that it can force you to buy at $100.01. Why didn't you send a limit buy at $100, if that's the price you wanted, you saw, and were prepared to pay?

>wrapped in condescension

If you want to write entire paragraphs about something you know nothing about, you're not really adding to the conversation are you? So you'll open yourself up to a little condescension.

Re: For the Love of Money

#216

Post by ItendToDisagree »

tim333 wrote: post #108
ItendToDisagree wrote: post #56

Earlier quoted context omitted.

That is an interesting question about being a billionaire without exploiting anyone . I'm genuinely curious about that. Not that I think being a Billionaire automatically makes you an asshole. I'm just curious if that is possible just from a logistical standpoint. Somewhere along the line someone gets screwed right?

There are various ways to be a billionaire without exploiting. Maybe the cleanest is if you make something that people think is worth that eg JK Rowling and the Potter stuff. Although she's given some to charity.

That is an interesting one I hadn't thought of. Artists creating art (or other creative works) and making it big. Good one! It doesn't all have to happen as a cut throat business transaction sort of thing.

Re: For the Love of Money

#217

Post by dredmorbius »

harryh wrote: post #214
dredmorbius wrote: post #213

Earlier quoted context omitted.

A limit order only specifies your price. Nothing keeps the HFT from getting between you and another long-term trader in that case. Which can have a few effects. One is that the seller loses on additional value. The other is that the HFT has bought from a seller who would have sold to you, but sees a higher buy price and sells to that instead, so you miss your trade. For low-volume traders these aren't huge issues, bu…

HFTs certainly are making money. But they're making money by making the market. And they're making a lot less money than they used to which you can see because spreads have shrunk dramatically. This is because computers can do this job much faster and cheaper than the humans who did it before could. It's the same kind of automation we've seen in many other industries.

But they're making money by making the market.

That's ... an unsubtantiated assertion. Lots of evidence to suggest the situation's otherwise, at least in large part.

There was an excellent ACM paper posted to HN a few weeks back:

http://queue.acm.org/detail.cfm?ref=rss&id=2536492

Re: For the Love of Money

#218

Post by dredmorbius »

gd1 wrote: post #215
dredmorbius wrote: post #205

Earlier quoted context omitted.

You have no idea how to actually write an informational comment rather than hinting at some received wisdom and greater general understanding without actually revealing any of it, wrapped in condescension which actually lands far of the mark and fails to address the points raised here, do you?

Fine, I'll attempt to parse through your example. "Rather than buying Wigets-R-Us at $100/share, the HFT slips in with a, say, $99.99 offer to the seller, and offers you $100.01." So, 2 possibilities, you don't say, but you are sending a limit order to buy at $100 or a market (or marketable limit, or fill-and-kill) order to buy at $100. Apparently, you seem to be suggesting that there is a seller in the market, presu…

Thanks, that's better than your first pass, though I'm still not buying the story. My social engineering effort worked though.

I'll freely admit I find this confusing. And that's with having studied this shit in school and worked in the financial industry (in trading no less).

There are a number of methods of getting inside or around the order book, most of which involve breaking rules. But the regulators aren't even playing catch-up, they're so far behind.

HFT is very time sensitive, operating at or within the 250 microsecond window -- that's the time a light beam takes to travel 75 km. So one way of jumping in on the order is being, say, a few thousand km closer to the exchange than some other trader.

As to limit orders (and you really haven't explained how the order book avoids this), by beating others to the trade on both sides of the order, the HFT can get in and spin the equity, taking a cut, or stealing your trade (you look to buy at $100, seller is at $99.99, HFT buys at $99.99 but finds a buyer at $100.01).

The point is that by inserting themselves between other traders, by virtue of speed, HFTs skim a proft. It's small (and was enabled largely by decimalization), but can be made up for in volume.

The saving grace is that the HFTs are up against one another (at least until they start colluding), so they're weaving complexity traps against one another that wear down the advantage. Though there's the risk of more flash crashes and other disasters resulting from processes they barely understand themselves.

Re: For the Love of Money

#219

Post by gadders »

perfunctory wrote: post #206
jackgavigan wrote: post #192

I've long since grown tired of these sensationalist, populist, polemical, self-flaggellating, attention-seeking, pseudo-confessionals by ex-bankers (usually failed ones, although they'll rarely admit that, preferring to portray themselves as having quit for moral reasons, rather than having been unceremoniously fired), getting all angsty about their previous life as an evil, greedy, detached-from-reality monster. Ger…

I am curious how do you tell a pseudo-confession from a genuine one.

See if they have a book or other project to publicise.

Re: For the Love of Money

#220

Post by foobarqux »

harryh wrote: post #167
panarky wrote: post #129

Earlier quoted context omitted.

Charlie Munger, vice chairman of Berkshire Hathaway, argues that high-frequency trading is "legalized front-running". I think it is very stupid to allow a system to evolve where half the trading is a bunch of short-term people trying to get information one-millionth of a nano-second ahead of somebody else. It’s legalized front-running; I think it’s basically evil and it should never have been able to reach the size t…

Charlie, as a guy who regularly buys and sells large volumes of stock, is just talking his book. It would be great for him if he could make large transactions without the stock price responding quickly to this new information. But it would be bad for everyone he transacted with. To make this concrete: Say Charlie & Warren wake up one day and decide Company X is undervalued and that they want to by 5% of it. They star…

You can have the price react quickly without needing to invest in microsecond response times by having auctions every 5 seconds or so as suggested by Larry Harris.
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