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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

#51

Post by [deleted] »

noonespecial wrote: post #46
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…

What if it is a third party who is the HFT? Mary sees Jacks buy on A and uses the speed advantage to buy Jill's shares on B preventing Jack from finishing the transaction and Jill from reacting to increased demand. What if Mary was created solely for this purpose? When does it turn from arbitrage to rent seeking?

[deleted]

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

#52

Post by prof_hobart »

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…

I think part of the problem is a disconnect between what the customer conceptually thinks is going on (a single buy request, as far as I can tell) and what is going on behind the scenes - a bunch of individual purchases being made by the broker.

If it wasn't possible for people not directly involved in those individual purchases to listen in and react to them quicker than the broker can fulfil the remaining purchases, it wouldn't be a problem. What is going on may well not actually be illegal, but as an individual trader it's not something you'd expect to be able to happen so it's definitely worth knowing about.

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

#53

Post by mmaldacker »

nhaehnle wrote: post #28
Lazare wrote: post #24

Earlier quoted context omitted.

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…

Your second solution already exists and is called an auction. Most exchange have an auction before market open and one after market close. Some even have auctions during the day.

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

#54

Post by twoodfin »

mrow84 wrote: post #34
gd1 wrote: post #27

Earlier quoted context omitted.

"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.

Somewhat farcically perpetuating the metaphor, is it not the case that Bill gets to know that Joe is interested in buying sheep once Joe has bought a few of them? And at that point Bill can outrun Joe and make money from his (very near) future purchases? That was my reading of the article - it seems that either there is a flow of information from the trading events to the fast traders, or the scenario portrayed in th…

Somewhat farcically perpetuating the metaphor, is it not the case that Bill gets to know that Joe is interested in buying sheep once Joe has bought a few of them?

He doesn't know with certainty. He can guess that's what Joe is doing, but he could be wrong and be stuck with sheep that he can't sell for the price he intends to ask. Every second he owns sheep is a second he's taking a risk that they'll go down in price, not up.

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

#55

Post by ryanjshaw »

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…

> But Jack has no god-given right to be able to buy shares at the price he likes best

It seems like the disagreement really lies here. I'm not a finance expert so I'll probably get a few things wrong but is it fair to summarize the two perspectives as follows?

1. Jill is merely quoting a price for independent blocks of shares on independent exchanges. If a buy order is placed against that quoted price, she has the right to reissue quotes elsewhere. This is no different from Jill selling apples at the market on 1st street, as well as at the market on 2nd street, then receiving a large order on 1st street that prompts her to call her sales manager on 2nd street and have him increase the price of apples there. Or for Janice, sitting next to Jill's stall on 1st street, overhearing the sale at $17 and repricing her apples upwards for when the demand inevitably spills over to her stall.

2. Jill is making an offer to sell a combined block of shares at a particular price. Even though her offer is broken up over multiple exchanges, since a single buy order can execute on multiple exchanges her offer should hold across all of these exchanges. Yet she is taking advantage of the physical makeup of the market to bait large orders (thereby revealing market demand) and then switch to higher prices (thereby capturing a larger profit).

I emphasized "quote" and "offer" above because they capture two different concepts in contract law. I'm not sure if the concepts are the same in financial markets but the principle seems to be at the root of the disagreement. If Jill was merely "quoting", unless the rules of the exchange specify otherwise, she is free to reissue her quote and therefore perspective #1 makes sense. If Jill was making an "offer" however, presumably she should be bound to the terms of her offer regardless of the physical details around how she publishes that offer, reinforcing perspective #2.

So: do the market rules have such a distinction? I found the link [1] below which suggests both perspectives are valid - depending on the type of market one is participating in, if I understand it correctly. Is this a matter of people confusing the two types of markets? (I have to say that perspective #2 seems pretty impractical to me in markets with multiple exchanges participating, and #1 doesn't negatively impact the market -- either it makes economic sense for Jack to pay the new price or not, why do we care if he saves a few bucks if we fiddle with the rules?)

[1] http://www.investopedia.com/ask/answers/06/quoteorderdrivenm...

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

#56

Post by gone35 »

noonespecial wrote: post #46
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…

What if it is a third party who is the HFT? Mary sees Jacks buy on A and uses the speed advantage to buy Jill's shares on B preventing Jack from finishing the transaction and Jill from reacting to increased demand. What if Mary was created solely for this purpose? When does it turn from arbitrage to rent seeking?

Same thing: now it is Mary who trades her short exposure risk for a bet that Jack's buy offer of $17.00 is not his maximum willingness to pay, while Jill just gets to fill her original sell order instantly (as opposed to "waiting" a few ms for the offer to arrive at her exchange). In both cases, Jack's is being forced to reveal more about his true valuation of the stock by paying up closer to his best possible offer.

Note in a perfect auction it should be Jill who receive the $17.05; but exchanges are more like (millisecond fast) mail-order catalogues, where the prices you quote are fixed the moment you send off your order. It would piss many people off that you only got half the items you wanted every time because the listed prices "went up" in between the time you mailed your order; but it would also make the whole thing closer to an auction.. so that's that.

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

#57

Post by zelos »

nhaehnle wrote: post #29
Lazare wrote: post #25

Earlier quoted context omitted.

"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…

That's what I've always thought as well. We have large numbers of very intelligent people dedicating all their efforts to playing games with the values of real companies. It seems like a massive waste of talent IMHO.

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

#58

Post by mrow84 »

twoodfin wrote: post #54
mrow84 wrote: post #34

Earlier quoted context omitted.

Somewhat farcically perpetuating the metaphor, is it not the case that Bill gets to know that Joe is interested in buying sheep once Joe has bought a few of them? And at that point Bill can outrun Joe and make money from his (very near) future purchases? That was my reading of the article - it seems that either there is a flow of information from the trading events to the fast traders, or the scenario portrayed in th…

Somewhat farcically perpetuating the metaphor, is it not the case that Bill gets to know that Joe is interested in buying sheep once Joe has bought a few of them? He doesn't know with certainty. He can guess that's what Joe is doing, but he could be wrong and be stuck with sheep that he can't sell for the price he intends to ask. Every second he owns sheep is a second he's taking a risk that they'll go down in price,…

Yes, that makes sense. From what I understood of the article, and it really isn't my area so maybe I got something wrong, a buy order was not filled completely even though there were sell orders available to fill it. Doesn't that mean that people cancelled their orders whilst the buy was being filled, meaning that they must have been able to execute market actions out of order? That would put people who can act quickly at a big advantage on getting the price they wanted, because they can cancel and re-bid at a higher price. Sure it's a gamble, but it seems like one with little to lose.

I've probably misunderstood something, but it certainly seems to be an issue that gets people very exercised. I presume there must be some competitive advantage in being fast, otherwise people wouldn't do it, so surely the only real issue is whether or not the consequence of exercising that advantage is socially advantageous?

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

#59

Post by willvarfar »

All exchanges should have synced clocks and all messages should have a timestamp up to 2 seconds in the future when they will be published by each exchange. The buffering would be internal to each exchange and not shared with anybody. You can only cancel after what you are cancelling is published. This would allow everyone to make all exchanges publish at once so people with fast cable between exchanges can't beat out those that don't.

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

#60

Post by throwaway283719 »

ryanjshaw wrote: post #55
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…

> But Jack has no god-given right to be able to buy shares at the price he likes best It seems like the disagreement really lies here. I'm not a finance expert so I'll probably get a few things wrong but is it fair to summarize the two perspectives as follows? 1. Jill is merely quoting a price for independent blocks of shares on independent exchanges. If a buy order is placed against that quoted price, she has the ri…

Yes, I think that's a fair summary.

I don't know much about contract law, but it may be interesting to know that a resting order on exchange, with a set price and size, is called a quote.

The terminology offer is used in financial markets for a resting order to sell, distinguishing it from a bid which is a resting order to buy, although many market participants will actually use the terms bid and ask rather than bid and offer. Whether this is to avoid confusion with the contract law term, I have no idea.

It won't surprise you to learn that I also think that your perspective #2 is unworkable in a situation where you have multiple exchanges (how would it work - would you require that quotes on exchange B must remain for a specified period after a quote on exchange A is hit? That doesn't seem sensible).

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