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High-frequency trading from Marketplace on Vimeo.
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Thanks, I needed that.
This doesn't make any sense. All HFT is overblown.
Just because you as an individual only lose a couple cents on a trade doesn't mean it's no big deal. It's the trading equivalent of the Office Space scheme of taking a fraction of a cent on each transaction. It's still a parasitic activity.
You mean like Superman 3?
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Bless those stick figures, even when they fuck up.
Awesome to bring out ol' Paddy Hirsch to breakdown the HFT bullshit! I referenced him to explain the toxic asset bullshit when it first came out as well...the whiteboard over at marketplace.org is a hell of resource...thanks for the reminder TD.
Thank you very much for supplying this video. I get it now.
Do you think you can find one on short selling?
theres a ton. get on youtube and start searching. or, gasp, read a book
http://marketplace.publicradio.org/display/web/2008/10/22/whiteboard_get...
goldman buying program firing on all cylinders
Until we have guys like Black back as regulators nothing will
change. We just
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There is no logical reason for any sane human being to buy boatloads into the close on a Friday, with such bad indicators.
"any sane human being" - that's why they employ computers that do not have to be sane or insane, just buy everything in sight. As for the "bad indicators", didn't you listen to Dennis last night - "who cares about the numbers, it's all about the sen-ti-ment" and sentiment is good (unless you listen to some students from Michigan, what do they know...)
Who turned on the SPY buy program .. wtf .. up 1% in last 30 minutes.
GS/Fed was battling most of the day to keep the market from melting down. At the end of the day, selling paused to see if the mkt would come all the way back.
It didn't, so that's a very bearish sign. GS must be running out of ammo.
Note the bearish harami pattern on the S&P weekly chart. Not a good TA sign for the bulls.
just buy a few and run the short stops into the close and let the dominos fall.
that's the problem with all these fancy programs that have trailing stops with them, they can be used to push the market any way GS wants
New law, shorts will be killed and the hands severed if they dare to take new positions
This is retarded. As I watch this I could do a market order for 1000 shares of GE through Ameritrade and get completely filled at NBBO if I am "smart" and route it direct to NASDAQ.
( "smart" = use that little drop down menu that lets you opt out of getting ripped off by NITE )
This trade would cost me a $10 commission and $5 in spread. This trade has never ever been cheaper or easier to do. And you could actually do up to about 30,000 shares of GE the same way in most cases.
NBBO is $0.01 wide and 1000's of shares deep in 100's of liquid stocks thanks to 100's of HFT guys competing for that measly $0.005 spread. Would you guys rather deal with a freaking specialist or some sleazy old skool NASDAQ market maker???
very valid points
ah, they got the headline they wanted.... snp stays above the 1000. That's okay then, forget about consumer lack of confidence and all the jobless and homeless, it's all about that nice comfy round number on the spoos
The explanation of the automatic market maker does not make sense. As explained, the buyer is executing an algorithm that "auctions up" the price in $.10 increments, starting at $24.50 and terminating at upper limit, which in the example is $25. The AMM starts at a price that is presumably above the buyer's upper limit, which is $27 in the example, then "auctions down" to $25. At this point the lecturer states that the order is "lifted" (whatever that means) and the AMM buys all the shares it can, then sells the shares to the buyer at $25.
This scenario should happen only if the buyer's algorithm has already auctioned up to $25, i.e., is the buyer has already cleared the market below $25. Or, I suppose, if the buyer's algorithm was written by a moron and will fill an order at $25 while there are still shares in the market at $24.XX.
Can anyone elaborate?
To me it seems that HFT is DETERMINING prices by its sheer dominance of trade volume. HFT's supply, HFT's demand = HFT's names price. You pump enough volume thru the machines and the tape begins to reflect whatever price your computer is pumping at.
Pop pulls up his Etrade account and buys or sells at the price determined by HFT. Not necessarily at a price determined by REAL supply and demand of buyers and sellers. Pops price is now determined by whatever the prevailing price is that HFT and Algo happening to be flipping shares between themselves at. And HFT's only objective is to pump volume thru and collect its fractions of pennies.
I don't much care about the pitance per trade that gets clipped. But I do care about how pricing is being determined.
After months of hearing about how un-American HFT activity is, this video gave me the insight I needed to understand why HFT. Complaining about how deep pocket players are skimming the market from other deep pocket players is like complaining that Hendricks Motor Sports is preventing NASCAR from being competitive. A person who cannot afford 20 engineers and $12 Million is diagnostic equipment should expect to never be a player on the race circuit. Same should go for traders. Goldman Sacks is a gaping you know what, but it is not because of hardware and software. Illegal activity is the problem.
Institutional investors who are purchasing millions of shares from other institutional investors must be trading amoung themselves and, after the deal is done, notifying the market of the deal. They do not use HFT techniques.
HFT is not the wolf waiting on Little Red Ridinghood so he can steal .3 of .01 of her lunch money.
The slam against HFT is identical to the slam being put on college football. Only the best and successful schools are getting the best high school players. That is the way it is in America. There is nothing wrong about it. Illegal recruiting activity is the problem.
Targeting Flash trading as a problem is like Coca Cola stating that Pepsi Cola has an unfair advantage because it is uses in store coupons rather than advertised specials.
I see this HFT thing as being a morals problem-the people in the industry lack morals.
I thought HFT was the boogie man. It is not.
Either because the guy making the video thought that pennies would not make his point, or because he's just not that bright or informed.
There is in practice with an equity like GE the ability to even place an order 50 cents above the NBBO and have anyone else see it... since it would instantly fill at a price at or close to the NBBO. Noone would see the $25 - except for the exchange/ECN computer matching the buy against sell orders at or closer to the NBBO. Noone could ever see the $25. It is just ridiculous.
Most people on here think that some aspect of HFT is itself illegal or immoral. So if it is not HFT that is the boogie man, what specific immoral/illegal activity do you think IS going on.
I believe that the immoral activity is the monopoly of the trading floor that is possible only with the help of the owner of the trading floor.
Being the inarticulate boob that I am, my best way of expressing what I only believe to be the problem, is to apply an example that uses ideas and concepts that I know very little about.
If the trading floor has a specific amount of bandwith that can be used at any one time to make trades, then the owner of the floor has the ability to reserve bandwith for a trader, although that reserve activity causes said bandwith to not be in use at all times.
This is an immoral activity.
If the market is soo liquid, then why buys someone with a limit that is so much above the market? In the example a limit of 24.51 should have worked.
I had to turn this putz off at 10:15 into the video. There were many many mistakes made prior to this point (I would need a video and my own white board and 10+ minutes to document them).
But, the part that just made me turn it off was when he said you could be a HF trader and make money even if you lose on the trade, due to the liquidity rebate. Simply not possible.
The minimum to lose on a trade before factoring in fees and rebates is $0.01 per share. The maximum to get back per share in rebates is $0.003 per share. Ignoring the fact that there are SEC, NASD and NSCC fees regardless of adding or removing liquidity - it is quite simple math to show that there is no way to lose money on a trade (i.e. at least 1 penny per share) and still come out ahead on the trade due to rebates.
There were lots of other mistakes... but this one just made me unable to take anymore of this crap.
It is pretty bad, but as a summary of all the misinformation presented here over the last few months, it serves well.
Seems perfectly legal. The HFT is doing no more than what the floor traders used to do but faster.
In the example show, even the little guy is trying to get an edge by breaking up his trade into blocks.
As far as I am concerned, you put your trade out at a limit order and it gets filled, you have zero complaint. What goes on underneath the covers feigh. Now if you placed a market order out there and did not get the best trade, then I am bugged, but a limit order, that is a license to get stripped.
HFT is just the crook's tool of this time.
Think about it this way. GS makes 100 million/day trading profits. That money is coming from somewhere. Somehow, somewhere, someone is putting liquidity in the system as in trading losses, bad trades, etc.
GS and others simply raped the markets.
There's still opportunity to make money but you have to realize that HFT is manipulating or at least skewing the market's movement.
You can outsmart the computer because the computer is only as smart or greedy as the bastard that built the system.
Think tick tack toe and war games...
GS makes money by taking risk away from clients and handling it themselves. There is no one else doing it as well, or on as large of a scale as Goldman. That's why they are profitable. Their clients are happy to take pay a premium for a risk bid to avoid the complexity of the market. They do not have to cheat or do anything amoral to make money. They just have to be better at managing risk. And knowing how far they are ahead of the competion, their profits are not a surprise.
Speaking of managing risk, if you knew that once you screwed up (which everyone statistically does unless one is gaming the system blatantly) the government (or Buffett) would always back you up and make sure you survived regardless of the societal costs, do you think your risk/reward ratio may be skewed? In other words, if you have zero risk, every venture has infinite upside on a relative basis. In that context it is completely obvious that Goldman will be profitable by leaps and bounds in any environment.
The reason why VaR calcs are irrelevant is because for Goldman they are well... irrelevant.
I am very surprised you made that statement you did.
Tyler,
Why do you think everyone must eventually screw up, or that there is no such thing as riskless gains?
Just because plenty of fools (some with Nobel prizes) have blown up, does not mean that there everyone will (yes - on a long enough timeline, our planet's sun explodes so I will not take issue with your blog's slogan).
If you are a market maker in thousands of equities (not derivatives), trading hundreds of thousands of times per day, with a model that makes money on each trade 50.1% of the time, and a trade book that is roughly balanced between being long and short - then there is little reason to believe that you will ever blow up. It's statistically hard enough to have a losing day if you make enough trades with the slightest edge (something most people here seem to ascribe incorrectly to theft rather than the law of large numbers).
GS needed to be bailed out for sure - but it was not because of their HF trading.
Yes, I agree that the government backstops skews the risk-reward ratio. And it also puts an unnacceptable burden on society. But that does not explain thier profits, many firms have government backing now, and none as successful as Goldman. My point was to explain their profitability without claiming they are doing something illegal (they may very well be doing something illegal, but you do not have to assume that to explain the profits).
Goldman has a product, principal risk, for which there is huge demand and little competition. There are three ways to make money in the trading business. Prop-traders add liquidity to the public markets and get paid via p&l. Principal risk is adding liquidity among the firm's client base, normally for larger block trades, again paid via p&l. And agency trading is getting a commission to fill an order.
Prop trading is dominated by hedge funds, Principal risk taking is dominated by Goldman, and the agency business is for everyone else. Where do you think the world's best traders go? Do you think they work in the agency business? No, they go to work for a hedge fund or a risk desk. Now imagine being an investor trying to move a large, vulnerable order. Do you call your agency broker and agree to pay him 3 cents a share to put your order into last years vwap algo, all day long being chewed up by the more sophisticated, more motivated prop-traders on the other side?
Or, you have the option of calling the Goldman risk desk, taking a known, fixed haircut on your order up front, and let them worry about the prop-traders out there. You can see how this market is very desirable for Goldman, but not because they are doing something wrong. They are providing a valuable, in-demand service that customers are happy to pay for.
So getting back to your point, the only way we can get rid of the government backing for GS, is if the market contains more principal risk takers, and we do not have to depend on one. But that can't happen if the public thinks that all hedge funds are bad, all banks are bad, everyone is evil, risk-taking is bad, dark pools are bad... it goes on and on.
You bring up good points, however this one is critical:
"So getting back to your point, the only way we can get rid of the
government backing for GS, is if the market contains more principal
risk takers, and we do not have to depend on one."
A classic anti-trust issue. And claiming that creation of prop investment pools (hedge funds, Goldman by proxy, etc) is a product of (broad) public opinion is naive.
I'm not sure if its an anti-trust issue unless GS's size keeps others out of the market. Other banks have shown that they are not as good at controlling their risk. That's their problem, not that GS is too big. Many hedge funds could enter the market, but they don't want to starting looking like i-banks and be subject to whatever future regulatory punishments are in store.
I'm not advocating the notion of "anti-trust" however, to speak to your statement, GS is keeping others out of the market place. Its bailout comes at the expense of newer and better firms (i.e., better risk managers) taking its place.
You sure equities trade in .01 increments?
*Directed at Peter.
Given the broad brush strokes that the video makes, I'll say yes - I am sure.
For equities priced above $1.00, there is no sub-penny pricing.
Orders can not be submitted for equities above $1.00 with anything other than penny pricing (read Reg-NMS), however trades can occur at sub-penny pricing for certain order types where the matching engine of the exchange is responsible for moving the price (i.e. a pegged to midpoint).
If you look at the volume weighted frequency with which an equity like GE trades with sub-penny prices, it is a non-issue - and I will stand by my statement that you can't make money trading GE if you are taking losses on the trades.
What do you mean there is no sub-penny pricing? On hundreds of stocks i can put in a limit/stop at such an arbitrary number like $5.565...
I didn't get the part where he says that AMM will buy GE after it discovers the limit is $25 - ok AMM knows there is customer buying up to $25 but if there would be any offer below $25 in the market the customer program would already take it so where is AMM going to buy below $25 ? I guess he could start snapping all offers below $25 and then sell it higher but he doesn't know size so he is quite open to manipulation from the customer side. Sorry guys for asking dummy questions but I'm not a trader.
You're a better trader than the guy in the video.
What happened to Tyler? Where is Tyler today? What did you do with Tyler?
There's no way the real Tyler would have posted this medley of garbage.
Now Milton, dead air is no air.
this presentation was quite lovely and others of this ilk should be posted....
on the whole, this is looking like a tempest in a teapot....flash orders are simply automations of processes which have occurred since time immemorial....to remove it is like saying that stores in malls are bad because lawanda up the street has a brand new pair of shoes she don't want no more and could sells them to you fer a big discount...evil stores...
it's not as sinister as it might sound...and it certainly is nothing is new as the lecturer noted...
on the other hand, i would be willing to consider the idea that liquidity rebates are market skewing because it incentivizes trading which might not otherwise occur...
I think we are all badly in need of a drink!
Bottoms up!
man, this guy in the video looks like the 80s De Niro.
"Are you talking to me?" lol
Is nice ;)
Hft algorithm sniffs for patterns - even if we baited & switched (some dog stock instead of one worthwhile) & shorted on the other side, and even if we got the algorithm to scarf up a ton of dog stock while we shorted it - it wouldn't matter because the the algorithm's owner (gS, for ex.) reaps the liquidity rebate.
Yes, on that drink. A double. Indeed.
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