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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

#71

Post by snsr »

throwaway283719 wrote: post #45
carlob wrote: post #42

Earlier quoted context omitted.

There is still something that nags me. I've heard a bunch of explanation about liquidity and how HFT allows for large orders to be fulfilled, but it seems like this is quite the opposite. What purpose does this serve? Is society as a whole better off when Jill is able to make this .05 per share more? I wouldn't frame the debate as 'god given rights' and 'competitive advantage'. What I really want to know is why a soc…

What's great is that we don't have to engage in thought experiments about what would happen if we didn't have trading activity with fast computers on a millisecond scale - we can just look back to any time before the 1990s, when most market making was done by humans, on human time scales. Before 2001 the minimum tick size on any exchange was 1/16th of a dollar ($0.0625) and before 1997 it was 1/8th ($0.125), so the a…

Thanks for the perspective - very helpful.

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

#72

Post by deathflute »

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…

Excellent analysis. I am sick of seeing these Nanex posts(rants); the lack a basic familiarity of market microstructure mechanisms.

The market maker is not sitting there to let you run him over and thank you for it.

As a price taker, the trader has to incur slippage due to the market impact of his large order.

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

#73

Post by downandout »

growse wrote: post #68
downandout wrote: post #62

Earlier quoted context omitted.

2. The only reason that Jill has a speed advantage over Jack is because she has paid for it! She has paid to co-locate her server at the exchange, and she has paid to use high-speed connections between exchanges. Are we going to declare that paying for a competitive advantage is suddenly immoral? Here's the problem with that: the number of available ultra-close connections to the market is finite. If you carry this o…

This is obvious for any market that has a single physical location. People who stand next to the apple seller get local apple price information faster than those standing in the next town. You've also got a very peculiar definition of winning. A person who wishes to buy 10,000 Ford shares who places an order at $17 only to find that in the meantime the market has shifted to $17.01 and therefore purchases at that pric…

>You've also got a very peculiar definition of winning

Not really. The stock market is a giant pool of money. These parasite traders are nothing more than leaks in that pool. With enough of these leaks, the pool runs out of water. Additions of water to the pool (through a combination of rising market values and more investment) at various times will overshadow the effect of the leaks, but they are there nonetheless.

A person who wishes to buy 10,000 Ford shares who places an order at $17 only to find that in the meantime the market has shifted to $17.01 and therefore purchases at that price hasn't "lost"

Actually, they have lost. They lost 10,000 pennies, or $100, and received absolutely no value in return. That money is gone, never to return, into the pocket of an HFT. It has simply evaporated from the market.

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

#74

Post by downandout »

throwaway283719 wrote: post #67
downandout wrote: post #62

Earlier quoted context omitted.

2. The only reason that Jill has a speed advantage over Jack is because she has paid for it! She has paid to co-locate her server at the exchange, and she has paid to use high-speed connections between exchanges. Are we going to declare that paying for a competitive advantage is suddenly immoral? Here's the problem with that: the number of available ultra-close connections to the market is finite. If you carry this o…

It's empirically not true that "whomever has the closest connection always wins and everyone else always loses" as is evidenced by the fact that there are multiple competing market makers who are all profitable. Arguments of the kind "let's carry this to its logical conclusion" are almost always fallacious, because they ignore limiting factors, or alternative explanations. If your only advantage is speed then you nee…

>there are multiple competing market makers who are all profitable.

That doesn't disprove my statement. The "multiple competing market makers who are all profitable" all have extremely fast connections to the market. They compete on relatively equal footing speed-wise, and so other factors come into play. But everyone outside of the small group of players with that speed advantage will always be paying a tax to those who do. And good luck compensating for your lack of speed by out-predicting large teams of MIT-educated quants with unlimited technology budgets. As an individual investor, your only hope for profit is that market values of the stocks you invest in rise by more than the tax you have to pay to HFT's. You better buy and hold, because with every transaction, you're paying them an additional tax.

When market values are rising, these effects go unnoticed because everyone is generally making money. That doesn't make the tax we are paying to these HFT's any more fair or less damaging to the market.

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

#75

Post by laichzeit0 »

noonespecial wrote: post #9
simplemath wrote: post #7

Earlier quoted context omitted.

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?

I'd say its worse than that. As you reach for each apple in the cart you've chosen, someone with an empty cart runs over and grabs it just before your hand can close around it, takes it back to his own cart and marks it up a few cents.

Not for each apple. At the very worst case you get the first apple you tried to reach for. After that all further apple prices may change. Then you can reach and take another one and all further apple prices may change, etc.

You'll notice that there was a quote at exchange A and exchange B. You reached for, and got, an apple at exchange A. Now you're trying to reach for an apple at exchange B and you're surprised that it's a different price.

People are mostly pissed because the time between reaching for the apple at A and B is so fractionally small that they feel there shouldn't be a difference in price. That's really the only issue they have.

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

#76

Post by growse »

downandout wrote: post #73
growse wrote: post #68

Earlier quoted context omitted.

This is obvious for any market that has a single physical location. People who stand next to the apple seller get local apple price information faster than those standing in the next town. You've also got a very peculiar definition of winning. A person who wishes to buy 10,000 Ford shares who places an order at $17 only to find that in the meantime the market has shifted to $17.01 and therefore purchases at that pric…

>You've also got a very peculiar definition of winning Not really. The stock market is a giant pool of money. These parasite traders are nothing more than leaks in that pool. With enough of these leaks, the pool runs out of water. Additions of water to the pool (through a combination of rising market values and more investment) at various times will overshadow the effect of the leaks, but they are there nonetheless.…

What does this even mean? "Eventually the pool runs out of water". What?

Last I checked, the stock market was a market. Anyone is allowed to play, and like most things in life, you can pay to upgrade (either your connection, your analyst talent, etc. etc.). Look at the recent Barclays dark pool fiasco to find out what the liquidity in a market without HFT and transparent books looks like.

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

#77

Post by stevejones »

throwaway283719 wrote: post #60
ryanjshaw wrote: post #55

Earlier quoted context omitted.

> 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…

It is supposed to be the case that you do not place orders on an exchange that you have no intention of executing. i.e. if you place an offer which you intend to withdraw then replace with a higher one the moment you detect interest in the offer then you are breaking the rules.

In general it's also pretty scummy to do it. Imagine a shop seeing you taking items from shelves at an advertised price and saying "Well that shows there's demand in these goods so we're raising the prices on everything in the customers basket before they get to the checkout."

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

#78

Post by laichzeit0 »

bmelton wrote: post #44
josephlord wrote: post #33

If you offer something for sale at a certain price and someone says "I'll buy it!" you have a contract at that moment. I don't fully understand the conditions under which you can cancel an order but it seems all the cancellations happened on exchanges where no orders had yet been fulfilled so I assume this means that the order had not yet arrived. This seems ethically just about OK to me but a sign that there is not…

Plucking from throwaway's example. You have 20,000 copies of a book you just wrote. You put half of them on Amazon, and the other half on eBay, so Amazon has 10,000 and ebay has 10,000 of them. You see an order come in for 5,000 of them on Amazon. You think "Hot dog, these books are popular. I must be selling them too cheaply!" You immediately raise the price of all the books by 25 cents to capitalize on this. The bo…

Yeah, and if this happened at, let's say, 10 hour intervals, I'm sure the average layman would have no problem with the "fairness" of this. People are getting their panties in knot because it's somehow "unfair" that this can happen at the millisecond level.

I personally don't have a problem with this type of trading activity. A few guys are making easy money. So what?

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

#79

Post by stevejones »

don_draper wrote: post #17
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 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?" If some guy had a business where his sole service was to sit in the apple cart market waiting to front run me and then immediately sell…

There's an analogue in the entertainment industry: ticket touting.

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

#80

Post by stevejones »

bmelton wrote: post #44
josephlord wrote: post #33

If you offer something for sale at a certain price and someone says "I'll buy it!" you have a contract at that moment. I don't fully understand the conditions under which you can cancel an order but it seems all the cancellations happened on exchanges where no orders had yet been fulfilled so I assume this means that the order had not yet arrived. This seems ethically just about OK to me but a sign that there is not…

Plucking from throwaway's example. You have 20,000 copies of a book you just wrote. You put half of them on Amazon, and the other half on eBay, so Amazon has 10,000 and ebay has 10,000 of them. You see an order come in for 5,000 of them on Amazon. You think "Hot dog, these books are popular. I must be selling them too cheaply!" You immediately raise the price of all the books by 25 cents to capitalize on this. The bo…

The difference would be that you cancel all the orders currently in progress, so a bunch of people who've clicked "buy" are now in the lurch.
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