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First Goldman, now High Frequency Trading... The media onslaught is converging.
the final few minutes of this were an excellent example of the advancement of technology in the markets... he didn't describe this part, but people write algo's to execute more efficiently - then others write algos to detect what Algo1 was doing and capitalize on it. Then BrokerX writes Algo3 that's even smarter than the T1000 and capitalizes on its attempt to capitalize on Algo1.
Still, Pipeline develops ways to beat the latest algos and continue to make the markets even MORE efficient. Bravo. This is exactly why we shouldn't impose restrictions - capitalism and competition level the playing field for us.
I assume you read the Pipeline interview in the Whitney Tilson email.
of course. Pipeline is interesting because their business thrives on people trying to escape the HFTs... So they want to draw enough attention to HFT to panic the buy side traders, but NOT enough to panic the regulators and get HFT shut down - as that would negate their value added.
One thing to consider is that the technology is not going to go away. HFT technology is here to stay. It's an open question for the regulators to determine whether it can be made more fair by introducing more regulations. There's no easy answer for that, and in fact, I don't hear ZH proposing anything, just stirring the pot.
Hell yes, it sure CAN go away!
If the pressure keeps being put on them, they could be forced to remove their servers to a distance that introduces enough lag to prevent this sort of thing from working.
The core questions are broader than server colocation. For example, should "flash quotes" continue to be legit? But "electronic trading" that allows high speed transactions is here to stay. The clock is not turning back and for those concerned first understand what are the real issues, and then suggest some new regulations.
i thought the most interesting thing in the pipeline article was the constant reference to the "citizen-saver" who generates the big buy-side size. Nice political touch, that. Who's on the other side of this transaction, and why should they sell for less than necessary, given what's knowable through analysis of public information? Big size on the sell side comes from somewhere, probably often pensioners cashing in to pay for their cancer treatments. A wholesale market is great, but why would the sell side of such a market bend over for the buy side? Or does the pipeline guy think that both sides of the wholesale market would be equally ignorant, or agree to play nice before trading? Or that size cancels size in the long run and they will split the savings from the HFTs, where one side of the transaction randomly benefits from mispricing in a given transaction, but hopefully it all averages out in the long run with no adverse selection? Instead of paying up a tiny fee to be assured the price is accurate every time? I choose the latter.
You miss the point.
The fact that they are sucking cash out of the market w/o providing quality liquidity is a equivilent to a tax on the market (which goes to the HFT and not the gov't!), and could result in serious problems (LTCM style crash, but potentially much faster).
Great if the advance of a country was all about algos for trading and not a real economy. How about allocating and rewarding companies that have strong fundamental? To me what is needed is punitive capital gains taxes on ultra-short trades.
Great. You should tell us which fundamentals are important and how we should all value them. While you're at it, you should also define ultra-short term. HFT have a different view of fundamentals and price value. They then make decisions to trade. Any "tax" they earn from their trading is simply a tax on stupid execution from someone else.
So mutual funds deserve the profits? Arbitrage only took place when computers came about? Thanks goodness Alfred's technicians have a "solution" to the "problem" of HFT (at approximately 5:50). Sadly, there is nowhere to "flee" to if HFT is 70% of the market. Is there anyone without skin in the game to discuss this topic?
One wonders if this is getting enough attention that market rules will be redesigned before some (or many?) HFT(s) blow up a la LTCM.
The rules really are different for these guys if they can front run other buyers or sellers. If the other exchanges take the rebates away and force the HFT servers away from the excahnge servers then I bet we'd see this dry up quite a bit.
Why they so scairt to go up against humans without those obscene advantages?
The target is now firmly on GS's back....over 100M shares in GS was sold today...the number one most sold stock on strength...
Oh yea...#2 qqqq #3 SPY ...(compliments of GS prop desk)
70% of trading done by 2% of people.
Tyler, TY for putting cock pictures on the ticker-tape.
We need homework assignments.
HFT guys bursting into tears...
70% of the trading by 2% of the trading population?
Someone needs to get this issue to the Federal reserve watchdogs--if anyone knows who the sole 300 shares of the Federal Reserve are owned by, i bet you might find an ownership connection--this is a formidable task to perform since, with all that money that this private company has scalped for almost 100 years, it is said that these owners own 1/2 of the shares of the DOW, so I imagine it is a tangled web to try to unwind to find the flow of money. I pity the fool who (Mr. T's term) has to audit the Fed.
saying "Banana Republicish" is certainly not very. Nice work. Two points for civilization!
Yea Andy Dufrense--
... there is so much about the privately held federal reserve and its GOLIATH power that are all wrong and contrary to the interests of the citizens of the United States.
The whole BS about 'keeping the fed independent' is such a red herring. What that idea really represents is keep the public from understanding how the fed really has all control over our elected officials (except for a few in the house of reps). If you look at the network of member banks and affiliates it is such a HUGE ALL POWERFUL MONOPOLY--this is the grand puppeteer of all of our presidents and elected officials ( minus a few patriots who coudn't be bought) . Is it any wonder the fed hired an x-enron lobbyist?
The Federal Reserve Act, giving the 300 shareholders of the private federal reserve corp ownership of this mononpoly needs to be called in at long last. The system and infrastructure and operations can continue, but instead of benefiting the owners of this privatly held corportation, it needs to be owned by we the people. This will go a long way in stopping the biggest drain of value from our currency. Amen.
Gosh. I've been blinded by science. Algorithms? Check. Pattern recognition? Check. Alpha predator capabilities? Check. Put your money to work in a game of hide-and-seek here.
The idiot masses really have no idea (Tyler included on this one). Anyone who thinks the old manual NYSE specialist made a better market than the HFT community is an idiot. Fills used to take minutes and slip DOLLARS away from the displayed non firm 100 share quote. The idea that the specialist firms used their firm capital to step up and buy stocks going down or "dampen" volatility was uninformed and frankly a scam, great marketing by the NYSE to make CEOs happy to list their company on the NYSE. After all the exchanges make dick on transactions, the real money is in listings. I love how the buy side thinks they should be able to come in and move a block of stock without any market impact all while some magic liquidity provider stands there making them a market, not moving the quote and not allowing anyone else to trade until the buy side trader is done. If everyone on the buyside is so convinced that their orders are being gamed, why not throw a head fake at the HFT shops and come back over the top of them with the real size you want to do. If all they are doing is front running, then all it takes is a little gamesmanship to get a better price and inflict a little pain. Also,to state that HFT is a binomial world that is either rebate driven or predatory shows how little one knows about the space. Not everyone is arbing dark pools or front running internalized orders. Yes Simons can generate higher returns than Buffet, he just doesnt have a strategy thats a scalable as WB. Its like comparing Saks to Wal-Mart and then saying no one can have a higher profit margin than Wal-Mart cause they are the best retailer ever. The populist bandwagoning and complete lack of understanding relating to the scope of strategies and the general effect of HFT on market microstructure is comical. DOES ANYONE HERE REMEMBER THE LIQUIDITY ON THE OLD NYSE DOT OR NASDAQ SELECTNET OR SOES SYSTEMS? Far fewer firms making far higher margins per trade, the scams that were perpetrated on ANY order back then were far more egregious than any HF shop arbing dark pools or rebate trading today.
how come just about everyone who comes on this site defending HFT posts as "anonymous"?
i don't necessarily defend hft but as i posted
below i am not sure that it is an open and shut
case.....i don't log in because i am too lazy to
do so....i am a high frequency visitor who comes and
goes too often for it not to be nuisance :-O
Love your picture ghostface.
Maybe you should ask our unknown friend Tyler Durden. (let me stress that I am not being critical of zero hedge/founding fathers/the economist for not disclosing the author.)
Anonymous to whom? Does it matter?
God damn, is this a cut and paste? Nobody gives a shit about the bad old days, we DEMAND a fair maket NOW. Colocation and front running by HFT are obviously not that. Cheap shit little scammers.
You are right! Trades should only be allowed to be placed from ONE fucking location in the entire world. Otherwise the proximity of ones computer to the matching engine might give them an advantage over a person living in a city, state, country farther away. If you are in Iowa, you have a latency advantage over someone trading in California. What an unfair market!!! Iowa traders scaming California traders. ITS SIMPLE PHYSICS. GOD YOU ARE A MORON. Why dont you go figure out how you can not work and collect free health care that I am paying for.
That was hilarious! Thank you.
Fair? What a pathetic word.
Jesse Livermore used to throw head fakes... until the bucket shops refused to trade with him. He had to stop. Small buyside firms are not the ones that will be headfaking anyone.
to me the debate is not clear cut.....
1. front running should be illegal and should be controlled by an appropriate trade execution process flow which makes it impossible. however i am not knowledgeable enough to know where in the current flow that change would need to be made.
2. hft trading cannot be illegal per se - only if it results in front running
3. if it can be shown that hft increases market volatility then i would argue 1. is volatility necessarily bad or wrong? 2. should that become the new expectation - high volatility - enter at your own risk? 3. can a change in the order execution process be inserted that would mitigate volatility yet still permit hft?
4. inasmuch as hft represents technological innovation - i.e. automating previously manual steps, then i am not sure that a cogent argument can be brought against hft except in the case of front running.....
5. if hft and front running are necessarily synonyms and inextricably linked then i would agree that hft is a problem....i.e. are there reasons other than front running for practicing hft?
6. hft are slices just as in the case of approximating the area under a curve - i am sure that integral calculus has some interesting things to say about what is happening with hft vs lft......
7. the argument about market based solutions vs regulatory solutions is valid....
8. if co-location of trading servers with exchange servers is bad - and i agree that it is on the basis of preferential treatment - then at what point is geographical proximity a sin? what if the servers are located in the building next door, or next city, or next state....at what point does server proximity stop becoming an unfair advantage?
9. as much as i hate goldmas sachs they cannot be hated just because they have better technology....they must be hated because they are breaking laws or serving mammon over god.......
htf do you create line breaks in this pos editor???
"8. if co-location of trading servers with exchange servers is bad - and i agree that it is on the basis of preferential treatment - then at what point is geographical proximity a sin? what if the servers are located in the building next door, or next city, or next state....at what point does server proximity stop becoming an unfair advantage? "
Time. There needs to be a small time lag introduced. Quantifiable.
This doesnt work, no mater the internal delay, the speed of light still applies to the dissemination of the prices after a lag. This exists on certain markets already, everyone still co-locates to the matching engine. 100ms of latency affects .000001% of the traders in the world. Its not like you were just about to arb the stock on your ameritrade platform when some damn co-located supercomputer took the trade before you. The penny spread is the best thing that ever happened to retail traders. Its never been cheaper in terms of brokerage or slippage to transact stock.
Damn. Thank you for clarifying that, and the post above.
ok but there are two issues here....1. the cost
of the trade (i.e. commission) 2. the cost of the
goods (i.e. the stock or underlying security)....
the real issue is what effect does hft have on the
cost of the stock.....so we have to isolate what is
driving its value....if it is front running that is
one issue which should be dealt with by regulation
and the goosehow....if it is merely hft per se then
it is murkier....
There is no true "fair value". A stocks price reflects the short term supply and demand as well as the varying perceptions of "fair value" the volume or velocity of this discovery process is simply a function of the available technology. Unless we let Barney Frank set the price of stocks every day, there is going to be volatility. Volatility creates opportunity. The idea that stocks must always move higher in a controlled manner if a fallacy marketed by the asset managers who generate fees ON ASSETS, not on trading or investing profits. You have to step back and think about everyone's interest.
i agree that volatility is not a sin and should
not be regulated....i only insist that front
running be proscribed....i do not consider
inferential models to be true front running....
I'm anon #13748, The cost of trades thing occured to me too, I'm fine with a higher cost if everyone else (robots) has to pay it too. I'm paying to trade, rather than paying a tax to HFT operators who don't pay for their trades.
Its no different than any other biz. You get a price discount for buying in bulk. You can get a pretty good deal if you shop brokers. Some day trading brokers will charge you .006/share and pass thru rebates, some even less. The only way you can the lowest cost is to start your own BD. No different than anything else in life, you cant buy most things are Wal-Marts cost. You have to pay a little more because you are retail. Just make sure you are getting the best deal you can, I doubt you trade enough to justify your own BD.
No, I don't. Don't get me wrong, I'm not upset by the costs, but the idea that HFT's are not paying their share. The main thing that bugs me is the affect they have on the markets, the charts get all fucked up. If the markets have no purpose other than making money, they should be in Vegas. Thank you all for your comments!
then it's time to innovate....new charts may be
needed but perhaps new interpretations of existing
onese are needed...
i am not being a smartass defender of hft but on
the other hand i don't think it is going away...
I hear you, but I still do fine. I believe that markets have a societal and economic function that has been a great benefit for a couple thousand years, but I don't see HFT as contributing to that.
I mean, 70% of the trading done by 2% of the people? Can we call that a market?
Not paying their share? do explain. If they execute as much as everyone thinks they do, they pay for the SEC, the exchanges you trade on, and the clearing firms you clear your trades through. Please tell me what you're pay for that evil HFT are avoiding.
I think you've hit the nail on the head, whether you realize it or not. First and foremost, frontrunning is and should remain illegal. All other aspects (that I am generally insufficiently aware of) of HFT are what they are: just another order, although maybe a bit faster than we're used to. The issue is not HFT, it is the allegations of frontrunning that rubs everyone the wrong way.
1,2 etc- Front running is highly illegal already. No HFT algo is front running unless it is doing it illegally.
3 Lots of things cause volatility- CNBC, News, Large institutional orders. Volatility is caused by a number of things and you cant get rid of HFT because it causes volatility.
8 co- location is open to anyone who wants to pay. Does everyone have a right to GS research at the same exact time if it can move the market? These are simply decisions a market participant needs to make. Pay for Bloomberg? Pay to co-locate? Pay to hire an analyst? Pay to have level 2 data?
NYT also has a piece here - http://www.nytimes.com/2009/07/24/business/24trading.html?_r=1&hp
On the surface, I don't see much wrong with HFT. Mutual funds have to adapt. Small pikers like myself, it doesn't really matter much. But, I'm sure there are some really smart retail guys out there that could beat these banks at their own game with their own algos. Problem is, they don't get a server rack next to the BAC post. Nor, do they get the rebate. I'm sure a lot of independent prop firms could get in on this too. That's my main problem. Only a select few get access to proximity and the rebates.
Gotta wonder.....Has this hit the eminis? I would think, how can it not have? Or, are the spreads there too wide? I doubt it since I haven't heard the CME handing out rebates.
Rebates are only available to broker dealers or those big enough to negotiate a pass thru with their BD. A rebate is paid on EVERY limit order in the market. The BD's move their order flow to whatever exchange is paying the highest rebate/per volume tier at the time.
The e minis are the most heavily traded HF product in the world. The CME does not pay a rebate to anyone, exchange fees can be reduced if the trading party owns a membership(there are several types).
How about a randomizer of XXX milliseconds at the exchange. All orders arriving will have a mandatory delay placed on them of random XXX milliseconds. Response algorithms will never be sure they are front running with their trade -- unless a GS client wants to place a trade and the GS trading desk acts to front run it. That seems like the kind of thing that would have so many people in GS aware of it that the risk of exposure would be too high. I suspect it doesn't happen.
99.9% of high frequency shops are not front running anyone in the traditional sense. They are able to see the market data move before anyone due to many technical, modeling and development advantages. The randomizer is currently used on a big FX ECN, it doesnt prevent co-location advantages. Its not like someones tells them that Janus is buying 500K AAPL at market in 2 seconds. The technology advantage is seen as front running. In reality its detecting correlations and predicting the next move before everyone else. The predictions are often wrong, but on average they are right more than wrong leading to a small edge.
It seems like people are using the term "front running" very loosely. The guy being interviewed called it "predatory front running". It a broker is front running his own clients' orders, well that's illegal. But if a trader, man or machine, is simply detecting that there is a size buyer out there and he or the machine goes high bid and takes the offer -- well that's not "front running". That's what traders do. Machines do it really fast on behalf of the trader who programmed it. Big deal. Get your own machine or do a better job of executing your order.
agreed and that is a point which i did not make
clear in my 9 point post....
"I'm Living on a Chinese Wall"
apologies to Johnny Thunders
Now is this HFT part of the FED's Plunge Protection?
or is is the Greedy Goldmen with their Sacks?
On Bloomberg channel itself: http://www.youtube.com/watch?v=thq9Bqw_iuY
the solution is actually quite simple.
Markets exist as a means to allocate capital among investment opportunites.
Markets have evolved into a casino. New games are introduced on a regular basis and they mirror the attention span of the average person.
Tax trading profits away and people will seek value-returning investments differently.
There isn't a "quite simple" solution.
Markets exist as a way to transfer money from you to them. Pure and simple.
There aren't enough good "investment opportunities" to handle the amount of money at play. You saw this during the dot.com boom. Ultimately, the issuance (ideas) becomes so crazy that the machine cannot handle the demand.
That's why IPO's are crucial. It keeps the supply healthy. The more companies that go bankrupt, the more the money gets concentrated. Might be good for a well run company, provided there are still a few left, but it's bad for the exchange business. Why would anyone sell, unless the business went bad? The exchanges need to keep money moving and taking their piece every time.
There really isn't too much money at play for "good investment" opportunities if you modify the amount of available leverage.
Taxing trading profits will do two things. 1) cause a dramatic contraction of traders and firms on wall st. 2) cause violent and unpredictable moves in prices, dramatic increases in spreads, and cost mom and pop at home way more (although they will be blind to it) as it will cost their mutual funds way more to execute orders in the form of higher commissions (exchanges and brokers will have to increase prices to compensate for vastly lower commissions), higher prices (higher spreads and less liquidity = implementation shortfall). The taxes that were hoped to be gained from short term traders will fall upon mom and pop as the short term traders would be gone. Law of unintended consequences.
The comments to this article are at least more educated than we have been seeing in recent weeks on zerohedge. But, if you are not in the business then you need to educate yourself before blindly lashing out and calling for pitchforks and rioting. Believe it or not, Wall st is no more or less corrupt than any other industry in the world. Its just linked more intimately to more peoples lives and strikes an emotional cord. Believe me, 95% of those on wall st want a fair market and are not involved in scams to hose the general public any more than an the oil industry or the medical community
A HFT will turn the dial and adjust for any tax you try and charge. Nothing will change with a tax for HFT. Markets have always had an aspect of "casino" as you call it.
Any guesses on whom that 2% might be?
the 2% is an estimate. And I am confident its wrong. The only way they can calculate it misses a massive piece of information- not everyone comes to market under their own MPID.
Does anyone know if this high frequency trading is being used on Globex/Nymex?
I guess the entire "investment" concept is passe.
There are currently investigations looking at commodity trading by the big boys since farmers and processors can no longer use the commodity markets to hedge their risk. If the purpose of the commodity markets is to allow producer to offset risk and that function no longer exist, what is the rationale for the markets to exist?
All technical discussions aside, if the markets cannot function as intended, then the current system has to be replaced.
pipeline is holding on by a thread and was a never was so they cannot be referred to as a has-been. If they put out a decent product (ie Liquidnet), they would not have to whore themselves out to the media
GOLDEN TIMES FOR NERDS
What we are seeing is that there are companies who help you trading with Counter Flash Trading. Meaning that the software dedects when your trading bid is dedected by Flash software from a counterparty and swiftly millisecond you of the hook.
I predict that it won't be long or every trade is essentially software driven, no humans anymore only Terminators will do the job.
So how the heck does this benifit the real economy? Answer: Not only doesn't the real economy profit from it but it costs the real economy loads of money only to keep a rigged crony system in place with people who earn insanely to much with doing essentially notin!
This wil be a NERD WAR between the most cunning software skimming loads of money out of the real economy which is allready suffering immensely.
So, who's gonna do somtin about it? My quess is that notin will be done until this system eats itself out from the inside. People in the business won't like to see their easy money cow go. You can't rely on them cause they profit unashamedly from this rigged system.
Only somebody from outside the business could make sane decisions and unfortunately we've got nobody outside the rigged system, they are all insiders. So, until than it's just waiting for the final countdown for the collapse.
Quite heartening to see all the Guy Fawkes (V for Vendetta) masks. Takes so long to get approved, that it almost becomes irrelevant, but it would make reading easier if one could know how to distinguish one Anonymous from another... no matter.
You can't ban hammers because they've been used to harm others, just as you can't ban computer programs because they can be used for evil, assuming it was created for good.
The problem is a systemic one and of a social nature, where we've been educated to lie, cheat, and steal from others before they get a chance to do it to us.
In England (I don't know if it is still the case today), newspaper were stacked in unlocked containers, and people could take it and not put money; but for as far as I've known that system to be in use, not a single shilling was stolen.
Now, in our present culture, we're told that if it's not illegal, it is OK to do, so taking unfair advantage of others is as acceptable as not paying for the newspaper is in the US. We boxed and locked both papers and money, and money and boxes are broken and papers stolen.
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