Discussion on High Frequency Trading and its Impact on the Markets

[The Blue Owl]

I think certain statistical arbitrage algos would pick this up and trade on it.
Eg. for example say 0.1% quotes on the exchanges present this behavior. certainly possible since not everyone has access to dark pools. Say some strategy notices this during backtesting and observes that 65% of the time when such a situation occurs, the quotes stay there long enough that you can trade on it (here long enough means the quotes are there for > the latency time to go to and from the exchanges). Then you can buy X shares at one exchange, and within a few microseconds sell X shares at the other exchange for essentially risk-free profit 65% of the time. Hence arbitrage. Nothing illegal here, simply market makers doing their jobs and making markets more efficient.

I see. I think I get now why so many sell-side people say that Lewis doesn't understand how the market is supposed to operate.

Meanwhile, on the other side, the buy-side people stand with him. Maybe this is just a case of one team being pissed at the other for making them pay more for their liquidity. I certainly don't know enough to be able to form a definitive opinion, and the more I learn about it, the less evidence I see of outright fraud. However, a sizeable contingent of qualified market participants feel that much of this intermediation is unnecessary, and tilted too much to the benefit of the middlemen. I'm not a professional, so I feel I must give them the benefit of the doubt, too.

It's a very complicated subject, and the hype doesn't help. I guess I'll keep reading.

 

[hershey101]

I see. I think I get now why so many sell-side people say that Lewis doesn't understand how the market is supposed to operate.

Meanwhile, on the other side, the buy-side people stand with him. Maybe this is just a case of one team being pissed at the other for making them pay more for their liquidity. I certainly don't know enough to be able to form a definitive opinion, and the more I learn about it, the less evidence I see of outright fraud. However, a sizeable contingent of qualified market participants feel that much of this intermediation is unnecessary, and tilted too much to the benefit of the middlemen. I'm not a professional, so I feel I must give them the benefit of the doubt, too.

It's a very complicated subject, and the hype doesn't help. I guess I'll keep reading.

I mean of course people will say the "middlemen" get too much. Whatever the middlemen get is out of the buy-side's pockets. In the grand scheme of things, today's new-age middlemen (programmers, and math geeks) work for orders of magnitude less than what the old-age middlemen (brokers, floor traders, basically the people who were did the most morally questionable things in wall st.) got.
In the end, people want to trade infinite amounts, immediately, and for no fee... Thats an ideal world that never will come about. For now, as an individual, I'm happy paying $3 for my trades on IB and that $0.01 bid/ask cross. What I'm not happy about is paying $10-$20 for other types of transactions (futures, options) and another $50-$100 for the bid/ask cross.... Thats where we need more middlemen making things more efficient.
The best part is that the people who complain the loudest were the people that once acted as middlemen for 10x the price, and are now are replaced by smarter, more sophisticated individuals who have kept pace with technology, and educated themselves, while the old guard wants to do as little work as possible and still maintain the 10x price for brokering transactions.

 

[The Blue Owl]

I mean of course people will say the "middlemen" get too much. Whatever the middlemen get is out of the buy-side's pockets. In the grand scheme of things, today's new-age middlemen (programmers, and math geeks) work for orders of magnitude less than what the old-age middlemen (brokers, floor traders, basically the people who were did the most morally questionable things in wall st.) got.
In the end, people want to trade infinite amounts, immediately, and for no fee... Thats an ideal world that never will come about. For now, as an individual, I'm happy paying $3 for my trades on IB and that $0.01 bid/ask cross. What I'm not happy about is paying $10-$20 for other types of transactions (futures, options) and another $50-$100 for the bid/ask cross.... Thats where we need more middlemen making things more efficient.
The best part is that the people who complain the loudest were the people that once acted as middlemen for 10x the price, and are now are replaced by smarter, more sophisticated individuals who have kept pace with technology, and educated themselves, while the old guard wants to do as little work as possible and still maintain the 10x price for brokering transactions.

But in the example I gave from the book, I don't pay $0.01, but $0.04, even though there is a better offer available. Yes, what the HFT does here is arbitrage, but I don't benefit from it, since eventually my order would have been routed to the exchange with the best price anyway due to Reg NMS. I end up losing the spread without getting any benefit.

I shouldn't pay even $0.01 to cross that spread, since the offer was already there from a natural trader. No liquidity has been added, and I'm already paying a trading fee to my broker. That the broker sells my order to HFTs and the exchanges let the HFT cheetas roam free on their domains rubs the small traders the wrong way, and robs big traders of cash without any greater good being provided in the process (or so they feel.)

 

[Cosmacelf]

Bingo. All this talk about "liquidity" is crap. The HFT doesn't execute the trade until there is a buyer, and then they jump in front of the buyer. How does that add liquidity?

HFTs also muck up the markets when they post 100 share buy or sell limit orders and then cancel the orders when they see someone trying to take them up on it.

The basic problem here is that HFTs have unequal access to a better price feed (the SIP is slow in comparison), and ability to jump in front of others. Considering how much the SEC likes their "fairness" doctrines and the like (like reg FD), I'm more than a little disappointed that they haven't acted on this issue.

As described in Lewis' book, though, it sounds like enough of the SEC staffers are being given nice high paying jobs once they leave the agency at HFTs and exchanges. Thus they campaign inside the agency to not make changes. "regulatory capture" at its finest.

 

[apvbguy]

Bingo. All this talk about "liquidity" is crap. The HFT doesn't execute the trade until there is a buyer, and then they jump in front of the buyer. How does that add liquidity?

HFTs also muck up the markets when they post 100 share buy or sell limit orders and then cancel the orders when they see someone trying to take them up on it.

The basic problem here is that HFTs have unequal access to a better price feed (the SIP is slow in comparison), and ability to jump in front of others. Considering how much the SEC likes their "fairness" doctrines and the like (like reg FD), I'm more than a little disappointed that they haven't acted on this issue.

As described in Lewis' book, though, it sounds like enough of the SEC staffers are being given nice high paying jobs once they leave the agency at HFTs and exchanges. Thus they campaign inside the agency to not make changes. "regulatory capture" at its finest.

smh, I cannot comment because the mods would toss me

 

[hershey101]

smh, I cannot comment because the mods would toss me

Why would the mods toss you?

 

[TSLAopt]

Bingo. All this talk about "liquidity" is crap. The HFT doesn't execute the trade until there is a buyer, and then they jump in front of the buyer. How does that add liquidity?

HFTs also muck up the markets when they post 100 share buy or sell limit orders and then cancel the orders when they see someone trying to take them up on it.

The basic problem here is that HFTs have unequal access to a better price feed (the SIP is slow in comparison), and ability to jump in front of others. Considering how much the SEC likes their "fairness" doctrines and the like (like reg FD), I'm more than a little disappointed that they haven't acted on this issue.

As described in Lewis' book, though, it sounds like enough of the SEC staffers are being given nice high paying jobs once they leave the agency at HFTs and exchanges. Thus they campaign inside the agency to not make changes. "regulatory capture" at its finest.

Spot on...and not only is it bad enough that HFTs are front running everyone but they are also root causes of the entire electronic market "glitches"...the Flash Crash, to the FB IPO, to the Knight debacle, etc. who knows what and when the next "glitch" will be, or if it's much worse than a "glitch" and puts the whole market into a downturn...it's crazy that more people don't realize this danger.

There will always be people that like to "take the other side" of what the public wants...in this case it is very obvious that the public is on the side of Michael Lewis so these 'contrarians' come out in droves just to argue the other side, which is healthy.

 

[hershey101]

Spot on...and not only is it bad enough that HFTs are front running everyone but they are also root causes of the entire electronic market "glitches"...the Flash Crash, to the FB IPO, to the Knight debacle, etc. who knows what and when the next "glitch" will be, or if it's much worse than a "glitch" and puts the whole market into a downturn...it's crazy that more people don't realize this danger.

There will always be people that like to "take the other side" of what the public wants...in this case it is very obvious that the public is on the side of Michael Lewis so these 'contrarians' come out in droves just to argue the other side, which is healthy.

Err... HFTs are responsible for the FB IPO? Really??? Have you read up on what the acutal problem was or are we just playing the game of "blame any technology glitch on HFTs". The FB IPO issues were because NASDAQ has ****** technology. Worse than NYSE.. How can you blame exchanges having incompetitent programmers on HFTs? Same with the Knight debacle. It was essentially some guy who didn't check proper configuration settings and plugged a test strategy into production, once again, how does that equate to "HFTs are evil"? And read any academic research report, they all state HFTs were net buyers during the flash crash (i.e. liquidity provision)...

 

[TSLAopt]

Err... HFTs are responsible for the FB IPO? Really??? Have you read up on what the acutal problem was or are we just playing the game of "blame any technology glitch on HFTs". The FB IPO issues were because NASDAQ has ****** technology. Worse than NYSE.. How can you blame exchanges having incompetitent programmers on HFTs? Same with the Knight debacle. It was essentially some guy who didn't check proper configuration settings and plugged a test strategy into production, once again, how does that equate to "HFTs are evil"? And read any academic research report, they all state HFTs were net buyers during the flash crash (i.e. liquidity provision)...

HFTs are not evil. Read the Michael Lewis book and it will make more sense. HFTs are just taking advantage of a system that has flaws. The exchanges (e.g. NASDAQ) have created very complex order types at the request of HFTs that they make most of their revenue from as a result of the make or take model. The book tries to explain some of these crazy order types (e.g. 'Hide not slide' order type) that no investor would ever care about, but HFTs trading in a world of milliseconds and nanoseconds use to one-up Investors and other HFTs.

hershey,
please read the book from cover to cover, it is a fun read.
Anyone commenting about HFTs on ths thread I would highly suggest doing that as well. Even if you work in the industry it is likely you don't understand it to the point Michael Lewis describes it from speaking with people at all different levels in the HFT industry. He mentions in the book specifically that most people working in the HFT industry have very narrow vision about their specific job at their firm and are left in the dark on the big picture on purpose so that they don't realize all the money their employers can make off of their unique expertise.