A detailed exposé on how the market is rigged from a data-centric approach • Hacker News Board

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

#81

Post by downandout » Wed, Jul 16, 2014, 1:11 PM UTC

growse wrote: post #76

downandout wrote: post #73

Earlier quoted context omitted.

>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.

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

Well, when you have a pool, and water is constantly being sucked out of it, even a tiny bit at a time, eventually you will have no water left in the pool. Not a hard concept.

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

#82

Post by gd1 » Wed, Jul 16, 2014, 1:12 PM UTC

stevejones wrote: post #77

throwaway283719 wrote: post #60

Earlier quoted context omitted.

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…

Huh? The rule is you can't place orders that you have no intention of executing at the time you place them. You're perfectly entitled to change your mind afterwards, or adjust your price as new information becomes available. You just can't place orders when it is your goal to not have them execute, and that was your goal before you even sent them.

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

#83

Post by ska » Wed, Jul 16, 2014, 1:15 PM UTC

asgard1024 wrote: post #64

throwaway283719 wrote: post #48

Earlier quoted context omitted.

If you want a reasonably efficient market, you need some participants to have close to perfect information. There is no market anywhere in the world that is 100% efficient, because the costs of getting to efficiency are prohibitively high. It's like trying to reach the speed of light - you can expend more and more effort getting closer and closer, but you can never actually reach it. I'm not saying that what we have…

> If you want a reasonably efficient market, you need some participants to have close to perfect information. Is this proven somewhere or you just assume the optimal strategy for markets is continuous? I mean, it's not clear that the optimal strategy for "slightly imperfect markets" is at all close to the optimal strategy for markets with perfect information. And I actually doubt it can be proven, in the general case…

Not only is it not clear, intuition from other areas of optimization would suggest it's unlikely to be true.

I've asked a couple of economists about this, but didn't get a satisfying answer. To be fair, it wasn't their area at all - and I may just have misunderstood what they were saying.

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

#84

Post by kasey_junk » Wed, Jul 16, 2014, 1:19 PM UTC

erpellan wrote: post #36

A solution: Discrete double auctions. Instead of continuous trading, the exchange can divide up the day into a series of small windows (say 100ms). When you come to trade in the market, you have to wait for the next window to open. You submit your order and you find out what happened at the end of the window. This way nobody has any timing advantage and the delay is barely noticeable to 'normal' traders (waiting 1/5…

Actually there are lots of discrete auctions in the electronic trading world. For instance the S&P futures contracts trade this way before the open and depending on your perspective they have more "shenanigans" being played by HFT players. Not less.

There are 2 major issues that no one brings up when they say "simply add discrete auctions". A) what happens when there are more participants on 1 side of a price than on the other, what is the tie breaker after price? B) How does this solve the distributed systems problem of multiple exchanges trading at the same time?

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

#85

Post by 30thElement » Wed, Jul 16, 2014, 1:19 PM UTC

zelos wrote: post #57

nhaehnle wrote: post #29

Earlier quoted context omitted.

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.

Is this comment real? You made this comment on a site that most people use to waste time, and where one of the top posts is an Assembly implementation of Flappy Bird.

Fun fact: HFT has an annual revenue ~1/50th[1][2] of Google's. What's worse: a few hundred people wasting their time moving prices of select stocks a few pennies, or several thousand wasting their time collecting scary amounts of data about you to try and get you to click an ad?

[1]http://en.wikipedia.org/wiki/High-frequency_trading#Market_s...

[2]http://en.wikipedia.org/wiki/Google

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

#86

Post by kasey_junk » Wed, Jul 16, 2014, 1:20 PM UTC

laichzeit0 wrote: post #78

bmelton wrote: post #44

Earlier quoted context omitted.

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?

Actually it's not easy money at all. It is very risky money done on razor thin margins.

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

#87

Post by _delirium » Wed, Jul 16, 2014, 1:22 PM UTC

throwaway283719 wrote: post #70

rahimnathwani wrote: post #66

Earlier quoted context omitted.

Jack is not upset because he couldn't buy the shares at the price he wanted. He is upset because someone was offering shares at a specific price, and Jack was willing to pay that price, but the order was not executed. The reason the order was not executed is not because someone else accepted the offer before him, or because Jill cancelled before he tried to accept. It was because Jill was able to see his acceptance i…

Here is our point of disagreement, then - I think that this is exactly how markets are supposed to work (in the presence of multiple exchanges). The job of a market maker is to supply liquidity at a price/risk tradeoff that is reasonable to them, subject to the information available to them. If there are multiple exchanges, and someone trades with them on one exchange, then the set of information available to them ha…

Do you have opinions about a third proposal that's occasionally floated, (c) discretize the market's timeline to something smallish but not miniscule? For example, the market maker can move their quotes however often they want, but changes take effect on the next tick, which happens every (say) 1 second. So therefore you can't trade on advance knowledge in the sub-second range, and market makers can't gain a trading advantage vis-a-vis investors solely by having a slightly lower latency connection to the exchange.

It's possible there's some massive downside to that, but afaict the advantages of liquidity that market-makers provide mostly accrue at larger timescales. So it's not clear the millisecond-shaving game is really improving markets (though it provides interesting challenges for technologists).

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

#88

Post by kasey_junk » Wed, Jul 16, 2014, 1:24 PM UTC

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…

"After all, the market is supposed to be useful for organizing long-term investments"

This is a very HN specific way of thinking (and probably obvious given the startup culture here) but it is not a truism. Many, many, many (perhaps most) market participants are not involved in the markets to organize long term investments. They are there to hedge risk (whole classes of exchanges exist nearly solely for this, think commodities markets).

But that is the glory of the markets. You can be a participant who is looking for long term investment, Southwest Airlines can be there to hedge risk, and I can be there to make a dime fast and we can all participate in what seems to be a zero sum game and win.

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

#89

Post by TheOtherHobbes » Wed, Jul 16, 2014, 1:27 PM UTC

Lazare wrote: post #41

nhaehnle wrote: post #28

Earlier quoted context omitted.

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…

Well, yes, those are potential solutions. But are they solutions to the problem we actually have? Indeed, what problem do we have? Do we, in point of fact, even have a problem that needs solving? The core complaint is some unnamed institutional trader really wanted to buy a very large number of shares in one go at a very low price, while other institutional traders wanted to sell the shares at a higher price. Why are…

Yes. We have the problem that the 'financial industry' is running some kind of insane MMORPG which excludes and abuses most of the population to make a fast buck.

What markets should do to be efficient is invest in clever, talented people doing clever, talented things.

Every step back from that is economically inefficient, because it makes it harder to create a population with deep reserves of wealth and opportunity.

Games like this one are the equivalent of having someone cut in front of you on the freeway in a semi.

It's not efficient, it's just banal abuse of a system that is supposed to reward good ideas and filter out bad ones.

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

#90

Post by bakhy » Wed, Jul 16, 2014, 1:27 PM UTC

An interesting contradiction appears here. On one hand, this increases market efficiency, or so we're told. On the other, we are also told that if a big pension fund wants to avoid being played like this, they should spend money on their own HFT equipment.

It seems there is only one clear winner here - the IT people making money off developing HFT systems.