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Nanex Gets $700k Whistleblower Award from SEC

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Re: Nanex Gets $700k Whistleblower Award from SEC

#71

Post by tptacek »

revelation wrote: post #67
tptacek wrote: post #37

Earlier quoted context omitted.

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…

Somethings off. If all this is is market making, why all the trouble with the microsecond latencies? Microwave links? Shared colos? That seems like a lot of cost everyone could save on by simply having the exchange enforce some minimum timings.

Because speed is an implicit and intrinsic "figure of merit" in automated market making: if you are faster than other market makers, you outcompete them.

There are two straightforward problems with microsecond-speed electronic trading:

* At very small timescales, possibly as a sort of inevitable consequence of the CAP theorem, correlations between instruments that should trade in lock step start to break down. Since you can make money correcting these mispricings, time and energy gets sunk into doing that, and that imposes costs on the rest of the market. It's uncertain how high those costs are, but they are small, and clearly a pittance compared to non-automated market making.

* Electronic trading provides very nice paychecks for pretty interesting technical work, which means some talent gets attracted to the market that would otherwise get paid less money doing something with more social value. How big a deal this is to you depends a lot on your worldview.

To me, neither of these issues seems worth the galactically high cost of restructuring all the markets in such a way that we'd reliably avoid these problems.

Re: Nanex Gets $700k Whistleblower Award from SEC

#72

Post by reverend_gonzo »

bonestamp2 wrote: post #62
reverend_gonzo wrote: post #28

Earlier quoted context omitted.

Market data is not non-public definition. NYSE was simply slow in aggregating market data during times of high volume. This did not affect you as a retail investor, as you get the NBBO price. This only affected you if you were an HFT firm with bad infrastructure who depended on the aggregate feed and not their direct line. Like tptacek said, the price for getting a direct line, while expensive, is not unreasonable fo…

> NYSE was simply slow in aggregating market data during times of high volume. Maybe I misunderstood, but it seems like they're saying that's not the case: FTA: "First, we had to rule out the possibility of the delay being caused by the consolidation process (which people often erroneously point out)."

By consolidation, he means the Consolidated Tape Association which takes feeds from all exchanges (NYSE, Nasdaq, AMEX, etc) and puts out a single consolidated feed that most non-HFT entities use because its good enough.

They get their data from NYSE from apparently an aggregate feed, which was unintentionally delayed by NYSE. In my opinion, they should have been getting the direct feed and doing all consolidation themselves.

However, HFT firms will still have a vested interest in making more efficient aggregate feeds than the consolidators/exchanges.

Re: Nanex Gets $700k Whistleblower Award from SEC

#73

Post by branchless »

tptacek wrote: post #60
branchless wrote: post #57

Earlier quoted context omitted.

We should put breaks on it because it's not creating wealth. If it's not creating wealth but people are becoming wealthy it's because money is being extracted via economic rent (due to monopoly). When firms make lots of money from trading platforms and then pay staff who go and consume real resources that is ultimately coming by transferring from wealth producers.

Economic rent? Monopoly? That was far more true of the firms HFT preys on, and not true of HFT firms at all.

The big exchanges are showing a little leg to the HFT players in exchange for kick-backs via fees.

EDIT: cannot reply due to HN rulz, hence inline...

The exchanges compete. The more asymmetric you make the platform for HFT vs the rest the more business you get.

Where would you trade? Somewhere you can win or not? Do I want a piece of that? I might let you know the incantations required if you pay me for the "service".

In theory other liquidity might move away but many ECNs have a very dominant position. For example NYSE.

Re: Nanex Gets $700k Whistleblower Award from SEC

#74

Post by chollida1 »

fatlasp wrote: post #65
reverend_gonzo wrote: post #23

What he's saying there was that due to inefficiencies in NYSE's infrastructure, the feed that went to the consolidation (which provides the NBBO) was delayed. Firms were able to then exploit those inefficiencies by dumping a ton of quotes into the market to cause it slow down those feeds. This is called quote-stuffing and is illegal and against exchange rules. (I don't know if this was illegal then.) From a technical…

I've seen a number of comments here suggesting that the data feeds are exhorbanently expensive. FWIW I'm getting the 'real-time NYSE data' (not the level two data but real time level one) for $2 / month on my tradingview membership. Not exactly breaking the bank

while that might be true, the data is only part of what you pay for.

The speed and format of the data is the other, and major component of what you pay for.

You are paying for what we'd call display only quotes, meaning you get these quotes so a human can visualize where the market is. If your strategies are based on trading once a day then this is fine for you.

The other way in which you will be throttled is how many quotes you can view at once.

If you trade options you won't be happy with only being able to view, say, 20 SPY contracts at a time as there are 1000's of contracts for sale.

Ideally you'd be able to view 20 contracts per date( once a week) multiplied by 2 for both puts and calls over the next 3 months, which is 20 * 2(put and call) * 12 (3 months of 4 week contracts).

This is alot of data to stream over the internet considering that those quotes probably change 200 time a second each.

Re: Nanex Gets $700k Whistleblower Award from SEC

#75

Post by tptacek »

samstave wrote: post #70
tptacek wrote: post #37

Earlier quoted context omitted.

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…

Can you define "not especially lucrative"? I.E. how much money is a good HFT firm making at scale?

Virtu, one of the very largest HFT firms, had revenues of ~$750MM, with net income around $120mm, in 2014. Goldman Sachs made $34bn.

Re: Nanex Gets $700k Whistleblower Award from SEC

#76

Post by ethbro »

reverend_gonzo wrote: post #28
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…

Market data is not non-public definition. NYSE was simply slow in aggregating market data during times of high volume. This did not affect you as a retail investor, as you get the NBBO price. This only affected you if you were an HFT firm with bad infrastructure who depended on the aggregate feed and not their direct line. Like tptacek said, the price for getting a direct line, while expensive, is not unreasonable fo…

> Like tptacek said, the price for getting a direct line, while expensive, is not unreasonable for a business. The largest cost will be salaries for the people writing your code and maintaining your infrastructure.

Be that as it may in reality, per below quote I assume that behavior is still illegal.

"A crucial sub-ruling in the regulations prohibits exchanges from giving stock quotes to special groups faster than to the public. This sub-rule is of such importance, that without it, the rest of the rules (Reg. NMS) essentially become meaningless."

Re: Nanex Gets $700k Whistleblower Award from SEC

#77

Post by tptacek »

branchless wrote: post #73
tptacek wrote: post #60

Earlier quoted context omitted.

Economic rent? Monopoly? That was far more true of the firms HFT preys on, and not true of HFT firms at all.

The big exchanges are showing a little leg to the HFT players in exchange for kick-backs via fees. EDIT: cannot reply due to HN rulz, hence inline... The exchanges compete. The more asymmetric you make the platform for HFT vs the rest the more business you get. Where would you trade? Somewhere you can win or not? Do I want a piece of that? I might let you know the incantations required if you pay me for the "service"…

What does this have to do with my comment, or your comment that preceded it?

You understand that exchanges compete with each other, right? The markets are now decentralized; there are like 15 different lit exchanges on which you can trade stocks.

Re: Nanex Gets $700k Whistleblower Award from SEC

#78

Post by PhantomGremlin »

TheNanex wrote: post #48

Yikes. Lots of misinformation here. First of all, this has nothing to do with High-Frequency Trading. It's about the NYSE not delivering a product (SIP real-time data) while collecting $100M a year for that service. This was happening for at least 3 years. I am a champion of free markets. The term "High-Frequency Trading critic" is a label others use when they either can't understand and/or refute solid evidence. I'm…

It's about the NYSE not delivering a product (SIP real-time data) while collecting $100M a year for that service

And, just to be clear, the NYSE generously agreed to pay a $5M fine as punishment?

The actual SEC order is linked to by Nanex, and can be found here: http://sec.gov/litigation/admin/2012/34-67857.pdf It explains NYSE's failings in more detail, e.g. "Inadequate Compliance Efforts" and "Failure to Retain Business Records".

Re: Nanex Gets $700k Whistleblower Award from SEC

#79

Post by kasey_junk »

revelation wrote: post #67
tptacek wrote: post #37

Earlier quoted context omitted.

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…

Somethings off. If all this is is market making, why all the trouble with the microsecond latencies? Microwave links? Shared colos? That seems like a lot of cost everyone could save on by simply having the exchange enforce some minimum timings.

A couple of things:

1) It is a common fallacy that there is "the exchange" or "the market". The market is an aggregation of exchanges (and non-exchange traded instruments) across a wide variety of jurisdictions and localities. But even though there is no central coordination between all that jumble, the instruments are correlated. That is, the change in price, demand, or availability of one is a signal about the pice, demand and availability of the others.

2) The market is made up of participants who exist on a band of price/time sensitivity. That is, someone like a retail trader doesn't have extreme price sensitivity but may have time requirements. In trading that style of participant is known as "dumb" (oh traders, you so PC).

3) Market makers make all their money trading spread for time but thats not where the latency games come into play. The latency is because...

4) Smart money is price sensitive (or price informed) and they tend to be where market makers lose money. Smart money tends to be either prop traders with particular algos, large block hedge funds or other market makers. Those are the people who cause market makers to play latency games, because its a vector a market maker can control that keeps them smart. They will never be smarter than the hedge fund that knows its going to buy a bunch of shares and therefore drive up the price, but they can at least jump out of the way quicker than the other smart money.

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