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

#91

Post by cscurmudgeon » Wed, Jul 16, 2014, 1:29 PM UTC

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.…

Exactly. The poor hardworking people who get to invest in the stock market should have all the benefits of liquidity without paying for it.

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

#92

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

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…

Cancellations aren't free and they aren't instant. Every (reputable) exchange out there requires you maintain a fill ratio or you will be fined. That is, you have to maintain a minimum number of quotes that get filled before they are cancelled.

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

#93

Post by kasey_junk » Wed, Jul 16, 2014, 1:32 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…

That is not at all true. It is perfectly legal and valid to place quotes at a price that you expect is valid and change them once interest is detected. This is a standard market dynamic and one that makes the markets work.

Your analogy is not all how HFT works. A better analogy would be a string of gas stations going down the highway. A tanker truck comes to the first one and buys all it's gas. Then the second one, and then the third. The manager at the third station calls the fourth and tells them to raise their prices. How is it scummy to do that, but not to buy up all the gas at what is clearly a too low price?

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

#94

Post by downandout » Wed, Jul 16, 2014, 1:33 PM UTC

cscurmudgeon wrote: post #91

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.…

Exactly. The poor hardworking people who get to invest in the stock market should have all the benefits of liquidity without paying for it.

Right, because without HFT's there would be no one investing in the markets at all.

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

#95

Post by kasey_junk » Wed, Jul 16, 2014, 1:34 PM UTC

downandout wrote: post #81

growse wrote: post #76

Earlier quoted context omitted.

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.

But your analogy is backwards. HFT (of the market making variety) are putting water into the pool, not taking it out.

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

#96

Post by industriousthou » Wed, Jul 16, 2014, 1:34 PM UTC

downandout wrote: post #81

growse wrote: post #76

Earlier quoted context omitted.

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.

I'm pretty sure he was asking how that concept applies to financial markets.

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

#97

Post by kasey_junk » Wed, Jul 16, 2014, 1:38 PM UTC

_delirium wrote: post #87

throwaway283719 wrote: post #70

Earlier quoted context omitted.

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…

How do you pick the timeframe? Seconds are still too fast for humans. Minutes would be too fast for people who are not professional traders, hours would be too fast for people who can't be near a computer all day.

There is always a locality advantage in the market, this has been true as long as there have been markets, and it will be true forever. Why do we as market participants care?

The other problem with your scenario is that you make market making more risky. The riskier it is, the higher the profits must be. This means that the market makers must keep the bid/ask spread higher (their means of making a profit). This cascades to all of us in the form of higher execution costs.

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

#98

Post by _delirium » Wed, Jul 16, 2014, 1:43 PM UTC

kasey_junk wrote: post #97

_delirium wrote: post #87

Earlier quoted context omitted.

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…

How do you pick the timeframe? Seconds are still too fast for humans. Minutes would be too fast for people who are not professional traders, hours would be too fast for people who can't be near a computer all day. There is always a locality advantage in the market, this has been true as long as there have been markets, and it will be true forever. Why do we as market participants care? The other problem with your sce…

> The other problem with your scenario is that you make market making more risky.

The problem with the current scenario is that it makes market making more expensive, as it requires a lot of technological investment into the microsecond arms race. This means the market makers must pull in more revenue from their trading to cover these expenses, before they even get to thinking about making a profit. This cascades to all of us in the form of higher execution costs. The huge amount of money being spent on HFT infrastructure, software development, etc. is ultimately being paid by market participants. It's worth considering if this is an arms race worth funding to the max, or if 99% of the benefits could be had much more cheaply just by putting a floor on execution latency, thereby rendering this whole millisecond-shaving industry unnecessary.

At the very least, I'd be interested in seeing rigorous models that show a benefit to, say, markets that can trade at 1-microsecond granularity vs. 1-millisecond vs. 1-second.

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

#99

Post by downandout » Wed, Jul 16, 2014, 1:47 PM UTC

kasey_junk wrote: post #95

downandout wrote: post #81

Earlier quoted context omitted.

>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.

But your analogy is backwards. HFT (of the market making variety) are putting water into the pool, not taking it out.

It's not backwards. Market making HFT's are like a casino's bankroll. The only purpose that their bankroll serves is to suck money out of the pool.

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

#100

Post by rahimnathwani » Wed, Jul 16, 2014, 1:48 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…

OK. So it's because there are multiple markets. We want multiple markets because competition, but multiple markets mean latency which means HFT using info from one exchange as a signal in another exchange.

If I could wave a magic wand then we would have one exchange which was run as a public service, by some beneficent person with no profit motive. I don't have a magic wand :(

I agree that the current situation is the result of the market structure (multiple competing markets) but I don't agree that this is how markets are supposed to work. The reason I say this is that people with no knowledge of market microstructure (e.g. ordinary people or people with undergraduate degrees in economics) would not expect this kind of 'arbitrage' to be possible. I hesitate to call it front-running because this is a term better reserved for instances where a client relationship and non-public information exists.

I take your point that the situation we have now (multiple exchanges without specialists) may be better than we had before (a single exchange with specialists) but I still don't think it's _fair_.

I wonder what would happen if I could wave my magic wand and have multiple exchanges with no specialists and zero latency...