Nanex Gets $700k Whistleblower Award from SEC • Hacker News Board

Re: Nanex Gets $700k Whistleblower Award from SEC

#31

Post by tptacek » Wed, Mar 02, 2016, 5:44 PM UTC

branchless wrote: post #20

kbenson wrote: post #8

Earlier quoted context omitted.

IIRC, HN's yummyfajitas goes into a lot of details in his blog posts on HFT[1]. My own understanding is that it provides liquidity and reduces bid/ask spreads, resulting in a more accurate stock valuation. I'm not sure the negatives, but I'm not a trader nor do I follow such things all that closely. 1: https://news.ycombinator.com/item?id=3852341

We'd have liquidity without this endless war on getting closer to zero. They are adding nothing and soaking up qualified grads who could be building something useful. This is a great example of how the modern economy fails to link wealth created with wealth extracted.

That's true, but it's true of a lot of other things (for instance: huge fractions of all the devs working at Google and Facebook). Meanwhile, trading tech is (IMO) much more fun to work on than a lot of the work Googlers do, lucrative, and not concentrated in the Bay Area.

I'd rather we found a way to get everyone to work on drug discovery and civic engagement, but unfortunately, we don't generally put regulatory brakes on technologies simply because they attract developers that would otherwise be working on our pet issues.

Re: Nanex Gets $700k Whistleblower Award from SEC

#32

Post by PhantomGremlin » Wed, Mar 02, 2016, 5:44 PM UTC

chollida1 wrote: post #6

So essentially the exchanges offer multiple data feeds. These feeds are differentiated by a couple of points. 1) How much market data they give out. Typically this is broken into 3 levels: - Level 1, Just the top of book quote, this is the best bid and offer and their corresponding number of shares at this price level. - Level 2 Depth of market at each price level, same as above but you can see all liquidity offered.…

new order types that allow firms to sweep liquidity at one exchange only( ie not rout-able orders)

You say that like it's a bad thing. My understanding is that an "intermarket sweep order"[1] (aka ISO) is essential to the proper functioning of the market. Otherwise, here's what used to happen all the time:

- the "true" market for XYZ is $10.00 bid, $10.01 offer. (Let's ignore the mantra of relativity that "simultaneity does not exist").

- in this case lets assume NASDAQ prices currently reflect that "true" market, and prices disseminated by NYSE are stale.

- a buy order arrives at NASDAQ, willing to buy at $10.01

- NYSE is supplying stale data, claims it has stock for sale at $10.00

- without ISO, NASDAQ can't allow the transaction to occur at $10.01, but is obligated to respect the stale data it is receiving from NYSE. NASDAQ must reject the order, or route it to NYSE.

- SUCKERS! the NYSE quote was stale, but the order was not transacted on NASDAQ. And, there is no longer any stock for sale at $10.00 at NYSE, so it won't be filled there either!

Here's an article that claims that ISOs are a form of protection against high frequency traders:[2]

   Brokers that don’t use ISOs in fast market
   conditions disadvantage their clients and
   subsidize the profits of HFTs

That article was from 2012, but does illustrate the problem that ISOs were attempting to solve. It's not a panacea, because as the article points out, HFTs are also free to use ISOs for their own purposes.

[1] https://en.wikipedia.org/wiki/Intermarket_sweep_order [2] http://tabbforum.com/opinions/why-hfts-have-an-advantage-par...

Re: Nanex Gets $700k Whistleblower Award from SEC

#33

Post by mrbill » Wed, Mar 02, 2016, 5:45 PM UTC

For someone who knows next to nothing about trading, but has read "Flash Boys", any other recommended books on the topic?

Re: Nanex Gets $700k Whistleblower Award from SEC

#34

Post by CyberDildonics » Wed, Mar 02, 2016, 5:46 PM UTC

tptacek wrote: post #15

tsunamifury wrote: post #9

So essentially the NYSE is a provably fixed game, with large HFT houses paying for the right to trade on non-public information, and it hides behind the idea that it was just a few hundred milliseconds. All the while they are selling non-public information as a product that is deliberately used to micro-manipulate the market? I mean, deep down I always knew this, but to have it all spelled out is shocking because it…

So, no? From 2008-2012, if you paid NYSE (one of like 15 different exchanges that trade NYSE-listed stocks) for a proprietary feed --- something that costs more than most idle home day traders can afford, but would be affordable by any YC startup --- you were getting an edge in competing with other electronic trading systems . If you were a retail investor or a mutual fund, what NYSE was doing probably didn't impact…

> what NYSE was doing probably didn't impact you at all.

Then where does all the money HFT firms make come from?

Re: Nanex Gets $700k Whistleblower Award from SEC

#35

Post by tptacek » Wed, Mar 02, 2016, 5:46 PM UTC

nostromo wrote: post #27

Google should open a stock exchange. Sure, they'd be weary of the immense regulation involved. But I imagine they're much more qualified to build a fair, fast and accurate trading system than any of the existing exchanges are.

What would be more "fair" or "fast" or "accurate" about Google's exchange? I've gotten to do software pentests of several huge exchanges. They work pretty much the way you'd expect them to. A lot of things people are just starting to do in web software (message-mediated microservices) were idiomatic in finance in the 1990s.

Re: Nanex Gets $700k Whistleblower Award from SEC

#36

Post by chollida1 » Wed, Mar 02, 2016, 5:46 PM UTC

PhantomGremlin wrote: post #32

chollida1 wrote: post #6

So essentially the exchanges offer multiple data feeds. These feeds are differentiated by a couple of points. 1) How much market data they give out. Typically this is broken into 3 levels: - Level 1, Just the top of book quote, this is the best bid and offer and their corresponding number of shares at this price level. - Level 2 Depth of market at each price level, same as above but you can see all liquidity offered.…

new order types that allow firms to sweep liquidity at one exchange only( ie not rout-able orders) You say that like it's a bad thing. My understanding is that an "intermarket sweep order"[1] (aka ISO) is essential to the proper functioning of the market. Otherwise, here's what used to happen all the time: - the "true" market for XYZ is $10.00 bid, $10.01 offer. (Let's ignore the mantra of relativity that "simultanei…

>> new order types that allow firms to sweep liquidity at one exchange only( ie not rout-able orders).

> You say that like it's a bad thing.

Umm I said no such thing. Please don't make thing up.

The order types are useful to market makers and help prevent locked markets, which REG NMS prohibits.

I use them every day and I"m not at an HFT firm.

Re: Nanex Gets $700k Whistleblower Award from SEC

#37

Post by tptacek » Wed, Mar 02, 2016, 5:47 PM UTC

CyberDildonics wrote: post #34

tptacek wrote: post #15

Earlier quoted context omitted.

So, no? From 2008-2012, if you paid NYSE (one of like 15 different exchanges that trade NYSE-listed stocks) for a proprietary feed --- something that costs more than most idle home day traders can afford, but would be affordable by any YC startup --- you were getting an edge in competing with other electronic trading systems . If you were a retail investor or a mutual fund, what NYSE was doing probably didn't impact…

> what NYSE was doing probably didn't impact you at all. Then where does all the money HFT firms make come from?

First, HFT firms aren't especially lucrative compared to other finance specialties, so one answer to that question is "nowhere".

Second, HFT firms compete with other finance firms, so what money they do make comes from bidding down the costs those firms were imposing on the rest of the market.

If you're a retail trader, automated electronic traders make money off you by outbidding the markets to quote good prices to you for your dumb market orders, and then pocketing the spread --- in other words, they make money the same way market makers have always made money; they just make less of it at an instant, but at a far larger scale.

The same is true of mutual funds, which is why Vanguard --- the firm most people would say is the most trustworthy in all of finance --- has repeatedly claimed that HFT has lowered their cost of trades.

Re: Nanex Gets $700k Whistleblower Award from SEC

#38

Post by nostromo » Wed, Mar 02, 2016, 5:50 PM UTC

tptacek wrote: post #35

nostromo wrote: post #27

Google should open a stock exchange. Sure, they'd be weary of the immense regulation involved. But I imagine they're much more qualified to build a fair, fast and accurate trading system than any of the existing exchanges are.

What would be more "fair" or "fast" or "accurate" about Google's exchange? I've gotten to do software pentests of several huge exchanges. They work pretty much the way you'd expect them to. A lot of things people are just starting to do in web software (message-mediated microservices) were idiomatic in finance in the 1990s.

Look no further than the linked article.

> a high quote rate from any NYSE stock will cause a corresponding delay in all NYSE public quotes! Anyone with this knowledge can easily cause latency on demand across many stocks, by simply blasting quotes in any one stock

Or another link from this thread.

> U.S. stock exchanges have invested huge sums of money creating two-tier markets - building and offering faster data and technology infrastructures at a price that only a small niche of traders can benefit from or afford, while at the same time continuing to offer slower products to everybody else.

https://www.iextrading.com/about/press/op-ed/

Re: Nanex Gets $700k Whistleblower Award from SEC

#39

Post by djsumdog » Wed, Mar 02, 2016, 5:51 PM UTC

tsunamifury wrote: post #9

So essentially the NYSE is a provably fixed game, with large HFT houses paying for the right to trade on non-public information, and it hides behind the idea that it was just a few hundred milliseconds. All the while they are selling non-public information as a product that is deliberately used to micro-manipulate the market? I mean, deep down I always knew this, but to have it all spelled out is shocking because it…

Is this the same thing that was discussed in the documentary Wall Street Code (http://topdocumentaryfilms.com/wall-street-code/) where certain types of order/purchase types actually bumped your position in the queue?

Re: Nanex Gets $700k Whistleblower Award from SEC

#40

Post by clarkmoody » Wed, Mar 02, 2016, 5:52 PM UTC

epx wrote: post #22

Nuclear reactors are planned in a way that their response time is in human scale e.g. they take something like 20 seconds to increase or decrease activity. This leaves room for human intervention. IMHO markets should do something similar: create something like 30-second barriers for trades. Trades that cross the bid/ask are carried out. Trades submitted cannot be canceled until the next 30s cycle. Trades outside of t…

The thing about many of our markets today is that they are international, with different rules in each jurisdiction. Supposing you implemented this system in the entire US, the HFT firms would simply shift their efforts to trading venues where order books are not quantized. Then they would take the real-time information and take advantage of the US exchanges.

Think about the billions (trillions?) of trades that occur on minescule timescales now and how often we have flash crashes. Sure, HFT algos interact with one another constantly, but flash crash investigations have uncovered both human (manual entry) and algo error as their root causes. Part of what makes flash crashes more severe is when HFT safety protocols kick in and they remove their orders from the market, causing liquidity to dry up and exacerbate the crash.