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A Glimpse At Predatory Prop Trading At Work
From Sal Arnuk at Themis Trading
We are working a buy order for a customer of ours (it is not in the large cap top 100 names where HFT blesses us with their liquidity), and trying to float our bid in as the market is heavy.
Essentially, we are bobbing and weaving, changing our trading venues, and pegging at times off the bid side of the NBBO. Some predatory proprietary algorithm keeps trying to join us on the bid on the ISE, so as to stop our pegged bid from further floating down, so that they can short our stock at inflated prices in our destination (without hitting the stock in the ISE).
This is what we deal with every day. Our brethren on the buyside relate, as they deal with this too. We know this is par for the course. And we know that many of our savvy buyside friends protect against this with antigaming software and good old fashioned attention. But it does go to show you that if you aren’t watching your order flow closely, the pennies and nickels stolen from you can really add up.
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Good luck Sal. Keep fighting.
Good luck Sal. Keep fighting. Stick and move.....stick and move.
stolen? Its called trading! just hit market and pay up! or write an algo...
"or write an algo"
Ya really think algo-war is the way, troll ?
TD, why dont you complete "Anonymous" with "coward" as it really is ?
I agree with the anon.
There's no constitutional right to be able to move a 6 figure block of stock without moving the market. People have been finding ways to legally trade in front of size for as long as there have been markets. Are you going to ban trend-following technical strategies as well?
Anyone trading in size these days has it so much better than 20 years ago, when they'd have just had to give up 1/2 a point to get the trade done.
Why are so many people rallying to the defense of the huge institutions who make these big trades? If they weren't all so damned "too big to fail" they wouldn't leave such an exploitable footprint.
Any trader cares to a little further explain the process?obviously this is highly specialized,even though one gets the general idea. Still,step by step explanation of the issue would be facinating(makes you think you arre watching the movie The Matrix).....
Summary: Trading is like poker, and involves strategy and skill to avoid giving too much info to your opponents. If you let the market know you are buying a stock in quantity, it will respond and make you pay a higher price... etc.
The poster here is blaming the rules of the game for the fact that he does not possess sufficient skill to work his order in a way that satisfies him.
I can't believe anyone would use Themis as a broker given that they (a) admit they can't compete well in the market and (b) resort to vague accusations against other traders rather than adapting to the marketplace.
And what does Themis charge for this "good old fashioned attention"?
Ummm it's a business. People don't do it for their health. Grow up.
So what Themis does (bobbing and weaving, changing trading venues, trying to get other market participants to sell to them for as little as possible), that's "business." But what the "predatory prop trader" does (joining the NBBO from some other venue on the ISE), that's somehow criminal?
Not to mention, Sal is making quite a leap to assume that whoever's joining the NBBO on the ISE is the same entity that's taking out his pegged order elsewhere.
If you are trying to avoid other traders from costing you pennies and writing blog posts about it, it is surely a reasonable question to ask what the fee for that improved execution is.
If Themis charges a penny per share and is getting a penny per share better execution by "working it the old fashioned way", then the client is no better off.
Trading costs, factoring in commissions to exchanges, SEC, FINRA and spreads have never been lower, and if the human brokers at Themis disagree, then I really would love to know what they add to commissions on top of the exchange/ECN fees, and how those fees compare to say Pipeline's.
will this guy ever learn?
or he just wants to be congratulated from his brainless clients for running pre-historic (i.e. manually) systems?
try taking the other side and game them, ffs !!!
Matador
Stocks are for asshats.
I wonder if one enables "PunkBuster" if that would help...
Biff
PunkbusterA or PunkbusterB?
Great reference biff
Hehehehe
Yea put these prop desks on the global ban list!
As much as i love listening to Joe on bloomberg or on that other sad excuse of a station, here his colleague is just complaining for no reason.
Its a job for prop desks to smartly float their bids into the market, whether through a dark pool, or whatever means they find necessary, to save their clients money in the long run. Obviously they can't send out an xMM order of shares in a second, but you couldn't do that even before HFT without the risk of the frontrunning specialist who wanted to make a few dimes off you as well.
Is it at all possible to see a counter-argument to HFT-hatin' that does not mention all those "front-running specialists" that were supposedly robbing everyone blind? And tell me why it's better for Loyd (15 CPW) to front run everyone and not Vinnie (Staten Island?) I know this is the company line on the anti-HFT stance, and to tell you the truth, it's so common to see it in blog comments like this that I suspect that story line is being astro-turfed to build it's cred. The answer to that is so freakin what? Bust Vinnie when he does it and bust Loyd when he does it.
But stop justifying one thievery with the other.
When did Vinnie start trading, I thought he was a landscaper?
Uh no, Vinnie is in the waste management business. That's why he started trading stocks.
I stated specialists engaged in frontrunning just matter-of-factly. It wasnt a direct insult (perhaps you were once working the floors of the NYSE?) as much as a statement which, IMO, leads me to believe whatever specialists DIDN'T frontrun a huge order where they knew they could get away with arbitrage, were Saints.
A specialist frontrunning an order is no different to me than a home broker buying a foreclosed home from the bank for cheap (because he knows its a 99% almost sure thing to be sold due to any extraneous factor) and then pocketing the difference when finding a buyer. Though one is illegal and the other one isnt, there was literally NO WAY to tell if someone working the floor of the exchange was frontrunning unless they were ratted on. I dont care if its the boys on S.I or the guys on 85 Broad doing the frontrunning; im a realist - if its gonna happen, its gonna happen anyway.
I wouldn't say it was for no reason.
Isn't his complaint that he can't even test the market without some computerized spider latching on to his every little move?
Wasn't front running one of the biggest reasons for reducing the power of the specialist?
A specialist had a job to add depth to a market (different than a MM though). When computers were found to be able to do the same thing, the SEC made it a rule that people are no longer needed, just machines.Or, so called Designated Market Maker Units were introduced. These DMMUs cant see the order book, thats pretty much the only difference.
Im not for/against this btw, just stating the facts.
Yeah but don't the DMMUs (their algos) have the additional info of knowing when an order is done? On a buy order, they simply short the last piece, flip to the offer and drive the price down until covered.
I cant speak for the algos cause i dont have any personal experience there but i suppose anyone powerful enough can code something to do what you are stating (albeit for a short time until arbitrage is finally exploited). But as for the straight DMMU, yes they know when an order is complete, but thats it.
I dont believe your simple scenario would work though - if you have any such algo's attached to a very liquid stock, you cant simply short whatever you bid on right after (effectively flipping on the dime as you say) because, i.e. in todays limitless offer market, youll get crushed with the constant runup of numerous algos programmed specifically to do the opposite of your arbitrage scheme.
Bro' you can't speak for the specialist and you can't speak for the algos so maybe you should tone down your pontification.
Dear Zeropower,
You do not know what you are talking about. Have a nice day.
newsflash: "predatory trading" is redundant. Trading IS predatory!
too bad the Themis boys have joined the ZH war on dark pools... dark pools would be a nice place for them to go and hide in a situation like this, so they could execute their order without being "preyed" upon.
So you are mad because someone is outsmarting you? If they get short and you are right about buying then they lose. If they are giving a bid that keeps your bid higher, then why don't you just hit it? You make it seem like you should be able to set a program that just keeps backing away and you are mad someone is calling you out on your lazy strategy.
This makes no sense. If the algo wants to short and Themis
is a buyer, than the algo is helping Themis.
The problem I see is that the algo that keeps matching their
bid on ISE can actually get filled without Themis getting filled. Fragmented markets don't respect time priority, and
cause trading costs to go up.
"This makes no sense. If the algo wants to short and Themis
is a buyer, than the algo is helping Themis."
Thats not it at all. This has little or nothing to do with market fragmentation. Themis needs liquidity to fill his complete bid. When the algo keeps shorting, it removes this liquidity (that is, if this algo works like most, it could be a variant however that somehow shorts and posts a bid right after, im not familiar with these however).
The guy posted this isnt a massive stock that has tons of machines working their penny-magic, in which case there would be no problem. Im guessing this is a mid-cap stock with not many followers (read: HFTs).
If Flash was eliminated then a hidden order should solve the problem.
Agree with you, even though flash isnt the only thing showing unimportant 1k orders like from you or me, but the more market-moving 1MM institutional or HF orders.
Themis is providing liquidity by bidding. If someone is removing liquidity by shorting, then that should help Themis fill their order. If the algo is shorting against an equivalent bid on a different venue, then it is a market
fragmentation issue.
I don't think Themis knows what they are talking about. They
should be happy if someone is shorting when they want to buy.
those pennies and nickels are going to GS, and what's good for GS is good for America.......right?
Kind of like the scam that Peter, Samir and Micheal Bolton pulled on Initech...
Michael Bolton
WTF didnt know he was into market scams, but his mullet excuses him from any potential SEC investigation. Yes, it is so awesome.
Bolton was down here in Naples last winter, turned the old chicks on. Can't remember that the mullet was still there, think maybe not.
doesn't matter if it was there or not. the moment you grow a mullet you are protected from any prosecution for 100 years. Its a voodoo thing. google it.
So tell me. What's your favorite song of his?
Michael Bolton
No not that Michael Bolton.
Themis is starting cry a bit too much. Pegging the bid = no thought strategy. If you are not smart enough to find pieces of logic to improve your decision making more than pegging whatever bid is out there, you will get beat. Right now, based on the crying from Themis, they are getting beat.
Penny increment trading has greatly aided this practice. If we go back to .05 and .10 increments it will bring more liquidity into bids and offers, thereby making it harder for the HFT's to establish positions and it will also make position taking much more risky for the HFT's. This may eliminate least some of the problem.
The only people with a financial incentive to return to larger quoting increments than pennies are market makers that used to gouge in 1/8ths....
Zerohedge...by continuing to show your bias and absolute ignorace to this area, you are diminishing the value and legitimacy of this site. Themis has a huge conflict of interest and are in fact using super short term algos to execute for their clients. They are playing the same game they are complaining about, but on the side where they make money via commish rather than profit. Another way to say that is they are not good enough traders to make a living via profits, and so they charge commish instead.
Sal's argument here is so incredibly weak. Pegging the bid is dumb. The fact he suggests he is smarter by pegging the bid while switching venues shows how far behind the curve he is. Tyler, I suggest you contact some prop trading algo firms to quote - or at least another commish whore who has a clue so that your web-site attracts more intelligent users
Though there is a bias on this site, i prefer this than hearing the annoying DOW 10,000 bias on major networks (still waiting for them to drop the stupid DJIA and finally follow the S&P). While i agree the argument of the post is weak, it still doesnt negate the fact that HFT algos are smarter than you will ever will be, and are there to steal money away from you.
If youre telling me pegging the bid is dumb than i propose that you sir have never worked at a prop desk and dont realize there is no way to outsmart a computer that can do millions of calc/second while youre there trying to figure out how to not spill coffee on your keyboard while working your margin Schwab account increasing your limit order by every penny as you chase CIT hoping to be able to afford next month's $500 rent.
> HFT algos are smarter than you will ever will be, and are there to steal money away from you.
Just how do you distinguish between stealing and earning beyond their power supply?
> there is no way to outsmart a computer that can do millions of calc/second
For short term trading, that is correct - which is why humans (like Joe and Sal) working trades "the old fashioned way" as they've previously put it - is likely not the best execution that could be realized for their clients... and firms like Pipeline could probably do better.
zeropower - this is exactly why we need dark pools... but for some reason, ZH continually tries to convince its audience that dark pools are bad. i'll say it again: dark pools are the antitode for HFT. If the HFT algos are outsmarting you and making better, faster use of the available information than you can (which, they surely are), THEN you need a place with less information, thus BY DEFINITION, a more level playing field: hence ; dark pools.
dark pools are unnecessary since some ECN's have hidden orders. dark pools lead to fragmentation, which is bad for liquidity
you have no clue. Why would you assume any of those things. Please, keep your algos blindly pegging to the bid so you telegraph your order to the street. Makes my job nice and easy.
Proof that humans can outsmart cpus is abundant. I know many manual traders who day trade and make money every month. Some times its lean, and sometimes the payout is big...but the better traders win consistently.
You have no clue re my experience or leverage, although stoop to assumptions - which leads me to believe you have no real argument that holds water. Its like a 6 year old calling me a name.
Im not trying to tell you traders cant make money, i know you guys can and do bring in some nice cash working a 100% commission job whether its at a prop desk or trading your own account. My argument is rather about how computers can do and outsmart, outbid, outprofit you every single day. As much as computers are needed in the work force, perhaps keeping a flowing order-book is just not the optimum use.
I didnt mean to use childish antics to insult you but i assumed you werent talking from experience and just chose the 'other side' of the debate on this thread.
exactly! and how does he equate himself to "brethren on the buyside" Themis is clearly engaged in a sell side activity here, with seemingly little value added
Themis 10 years ago : "Damn that specialist. He keeps messing up my picture! "
Themis today : "Damn those predatory algos and HFT mooks. They keep messing up my picture ! "
Nice to see you keeping up with the times. Keep crying foul.
So your partner thinks the entire stock market is 35-40% over valued and anyone or any computer who competes with your bids and offers is a crook? You simply cannot be serious. TD this is amateur hour. Get rid of these turkeys. Who would send an order to these clowns ?
rickets=peterpeter=KidDynamite
it is an amazing coincidence that we only see you when there is an article on HFT and HFT related matters, and it is an amazing coincidence that all three of you take the same " but but, it ads liquidity " defense line.
I am disappointed in GS, JPM and all the other players, their choice of PR/spin firm really sucks. One would think that from all the money they have stolen, they would chose a better firm. Well, it only shows how much they really don't give a shit about perception.
i am most certainly not the same person as rickets or peterpeter, although I do generally agree with peterpeter's comments, and i 100% agree with Rickets' comment above - do you disagree, Cheeky? if so, please explain why. He's 100% correct, and I don't even think it's a matter of opinion - it's a matter of fact.
sorry i don't post enough in non-HFT threads for you, Cheeky - ZH's threads on other topics are usually more on point than the HFT threads, which are becoming more and more sensationalized brainwashing attempts, as this Themis thread is evidence of.
actually, i agree with you, this post is kind of fail considering Themis and their trading strategy; and i do apologize for equating you with peterpeter and the other dude; mistake on my part, it just seemed odd. Again, sorry, you made a fair and balanced point in your previous posts. My bad. But peterpeter is a troll, that much i can say.
Cheeky,
I am a self employed software engineer developing and running my own software to trade my own strategies with my own capital. I do not write under any other names, nor am I employed by any firms other than my own.
I believe that gives me insight into issues touched on in HFT threads, and generally threads about market structure and trade execution... and that is where I generally comment.
If knowing something about a topic and expressing an opinion that is different from Tyler's makes me a troll in your mind, so be it.
What amazes me is that you seem to have so much to share with this blog on so many different topics (more often than not unrelated to the thread you are writing in...).
Your language is offensive, you are often misogynistic, and you take issue with anyone offering an opinion counter to Tyler's... You seem to relish picking fights in an anonymous setting, rather than contributing anything useful to a discussion under the thread you are posting.
Do you even know what misogynistic means; i think not.
Apparently a poor one, given that your major defense line, when i confronted you with facts, was that it was too EXPENSIVE for GS, JPM and the lot to build the kind of software Tyler was writing about in the post where we had that discussion.
I believe you would be able to do the same, if you were a little less programed by the system you defend, and a little more focused on actually thinking imaginatively and critically, and not follow blindly what you are being served.
You know, there is more in this world than writing algos and money.
your naiveness amuses me, carry on !
Sorry Cheeky...wrong. I am a short term trader...but do not play the HFT game at all. I dont trade stocks under 10 bucks, and dont have any strategies that try to play the adding liquidity game. I am very knowledgable in the area, and have traded for myself for over a decade and use algos for much of my biz now. I hate traditional Wall St and think its a bunch of idiots trading someone elses money. I trade my own, and work hard. I think flash orders and dark pools should be banned. But, short term trading is not evil...and anyone trading within the laws should not be yelled at simply because they are faster or execute better than someone else. I personally dont care if I have several second latency....and sometimes I miss trades because of that....but I dont for a second get mad at someone for being faster or smarter than me. Thats my choice for not investing in whats needed to beat them. I focus on finding more alpha in different ways. Themis is angry about exactly what they do themselves - people flashing bids and stepping in front of large orders. Dont tell me they dont do the same. Sal himself says he was taking advantage (or trying) of an abundance of sellers moving the market down so they implemented a biding strategy. Thats the same as stepping in front of order flow....which is what they are complaining about. Kettle, meet Pot.
again, apologies
read my reply to Kid
yes, i can, sometimes overreact and not act rationally, and i apologize
it was a mistake on my side
Dude, you need some ointment on those rug burns?
best wishes.
so let me get this straight: a trader - whose job is, ostensibly, to prey on the mistakes/flaws of others in a zero-sum game - is complaining that other traders are employing a strategy that is more successful at doing just that?
It appears the problem people working in the field have w/ comp trading isn't the systems per se but the fact that "others" are using them. What a bunch of whiny wannabe-egalitarians. Maybe we can all send letters to our congressman and get them to ban XYZ so those who fail at trading can be subsidized by those who don't. Isn't that the core of American Democracy-Plutocracy? A perennial conspiracy of inferiors against their betters? Just keep Group A and Group B fighting like animals for each others loot and they'll never see that Group C is robbing them both.
I compete with trading programs every day in the index futures and when they jam the market through a stop of mine I simply accept the fact that I had the wrong trade/stop working, move on, and reserve the blame for myself. Does it suck to lose on the trade? Sure, but that's trading; most of the time it does suck.
You don't have a right to get your bid filled, you only have a right to place one. Basically, stop bitching and adapt.
The Einsteins at Themis should keep on trumpeting why they will be out of jobs soon - - - - - -
they will be replaced by algos . . . . geniuses
Themis
rodeo clowns of trading
Typically the way this works in an illiquid product is as follows:
Themis wishes to work an offer and shows some size as best offer. The algo realizes this and might take out a few rows on the bid, and place an even bigger offer below that of Themis while working a bid near where he took out the rows. This clears out the bids, lowers the market accordingly and Themis is forced to cross and take out the algos bid if he wants to execute.
There are several problems with this strategy: It is very risky as size is require dand the algo could easily be gamed. Unless the algo has an efficient hedging mechanism or a true arb and proceeds to manipulate a less liquid market in this sense, he is at considerable risk in the long-term.
A possible workaround that Themis might imploy is to work iceberg orders to just cross the market at an appropriate time and anticipate the effect in much the same way that algo does.
Mr. Geithner. Your expertise is staggering. I feel better than good.