How The Pursuit Of "Light Speed" Broke Equity Markets, Or Why The NBBO Is No Longer Relevant

Tyler Durden's picture

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HistorySquared's picture

maybe we should just give an exchange a monopoly, that'll probably help. or let's go back to getting screwed by the specialists and paying 1000 times more in commissions. or perhaps we should institute a tobin tax, drive all the business offshore, decrease volume, and increase volatility. or wait, maybe the algorithms are doing their job and arbing out the inefficiencies. 

malek's picture

You seem to have missed the point completely. They are arbing the "inefficiencies" all right, but they will never "arb them out" as the inefficiencies (unfairnesses) are written into stone (rules carefully constructed for that purpose.)

HistorySquared's picture

they have driven latency to from milliseconds to nanoseconds. Anyone can invest and have the same setup to try to reduce that further. what exactly is unfair. the only unfairness comes in when the government comes in and grants a monopoly to "protect us" from those nasty models that are the reason retail investors can't make money. please. the question remains, what do you want to do about this so called "problem?"  

Marco's picture

Take in bids and offers and execute them delayed and en blocke, remove the advantage of latency altogether.

Rynak's picture

Exactly, forget complicated patches - just address the root issue itself: That it is even possible for the price to change in ns frequency. Simply reduce the resolution.... to, let's say 5 seconds.... and then execute orders in 5sec quantums - all HFT problems solved, and no workarounds possible.

malek's picture

Minimum bid/offer lifetime of 50 milliseconds, unless filled.
Which includes originator timestamps, by design.

Marco's picture

We have exchanged spreads for volatility ... it seems a rather poor trade to me.

HistorySquared's picture

What facts and statistics are you using to say volatility is out of control right now? The fact is volatility sucks right now, and the Greek "flash crash," that was by the way initiated by a long only fund, not high frequency algorithms, was 1/4th the size of the October '87 crash.  From a day in and day outperspective, large orders temporariliy move stocks 25 cents when they used to gap 50 cents to a 1.00 as specialists sought to fleece institutions. This is exactly because there are so many bots that come in to play market maker. 

Regarding your solution, can you imagine what a chart would look like with your solution to trade once every 5 seconds. During volatile times, it would be print, then a massive gap in prices, print, massive gap in prices. It's just a mini version of closing the market, then opening up with a gap in the chart. You're basically taking away liquidity when the market wants and needs it, trapping traders in their positions - like a mini version of a runaway limit moves in the futures market. I can't even fathom all the unintended consequences of your solution, but whatever they are, it's certainly not a drop in volatility. The rest of the world is still open remember. 

If you really want to create volatility, try to artificially suppress it. 

Rynak's picture

Oh noes, i'm "trapping traders in their decisions", and "closing and opening the market"...... for 5 seconds.....

i think i'm gonna cry.

traders? WHAT TRADERS? Humans cannot react faster than in a matter of 5 seconds anyways. The only ones who are affected, are bots...... so what are you complaining about.... that i discriminate the poor bots, because they can no longer outrun humans? Uh, yeah, that's precisely the point - plus heterogenous latencies.

And as for volatility - as you said yourself, liquidity/volume decreases with lower resolutions.... therefore, the argument that the same volume would be concentrated in steeper steps makes no sense at all. When resolution is lower, you don't make 10000 orders per second. You make just one, WAIT for the reaction, and THEN respond. What this means, is that crash/boom like situations will be just as steep as they are now, but with larger steps.... but all the artificial volatility, resulting from milisecond bitwars is taken out. Thus, the only thing that would change, compared to now, is HFT-induced  volatility - everything else would stay the same (of course it would! after all, how did we manage to trade in an orderly fashion, before HFT? If you remove what makes HFT possible, the market turns back to the same as how it was before HFT).

Again, we're talking about 5 seconds here. This CANNOT affect human trading... it cannot matter for human-made decisions.... it can only matter for bots creating millisecond wars, and frontrunning humans.

TBH, at this point, considering your above posts, it is quite clear that you are simply a HFT advocate.

CalibratedConfidence's picture

did you ever hear of the Flash Crash....that little bit of bullshit cost a lot of people a lot of money...maybe if it happens to you, you'll see things differently.


If your defending this, your a fucking retarded and a drifter here at Zerohedge


Jw n FL....nice post :)

Rynak's picture

Uh, what? A little bit of context here? Or was the post to which you replied removed, because it got junked into oblivion?

aminorex's picture

Disagree, I do, but please don't junk this guy.  He's making the devil's point, which needs to be heard.

More_sellers_than_buyers's picture

This is what you get when the regulators listen to the loudest guys in the room ie. Goldman.  To hell with the public and the creation of the greatest tool in the history of mankind to raise capital(The NYSE)...The Goldmans of the world wanted no interferance with the public on their quest to squeeze every damn nano penny out of everyone else.  As a former specialist I can guarantee you that not all of us were screwing you.  I can't tell you haow many times I told the big firms to go screw themselves because they were looking to screw the public.  I used to be able to stop them...then they just changed the rules so they could do it anyway, and eventually they got rid of us all.  I stood up for the little guy every damn day and I was not alone.  Now, there is NO one to stop them.  Its a damn shame if you ask me.  Remember, we may have been middlemen, but no one ever knew if I was long or short.  I was an impartial middle man who had a fiduciary responsibility to stand up for all the players and I had to answer for every single trade I made.  Sure it took 2 or 3 seconds to execute a market order back then, but I ask everyone were we not a hell of alot better off then than now??

lolmao500's picture

And we finally an answer to the question... Were republicans full of it all this time about the debt ceiling?

House Republicans brace for compromise on debt
Oh regional Indian's picture

India had it's own little flash crash Friday. After hours at that.
Some 1,500 outsized trades were unwound.

The system is reaching out, testing, testing, relentlessly testing. HFT is already here....just warming up.

Of anecdotal interest perhaps:

"ICICI was India’s most prolific card issuer during the boom but halved its cards portfolio to about Rs 4,800 crore ($1.08 billion) at end-March 2011 versus 2008. Private lender HDFC Bank and foreign banks such as Citigroup and Standard Chartered are the most active card issuers in a country where state banks have 70 per cent of the overall loan market.

Card usage is low in India, with total spending of Rs 75,500 crore ($17 billion) in the year that ended in March, central bank data show, equivalent to just 4 per cent of retail sales in an economy where more than 90 per cent of shopping takes place in mom and pop stores.

Between 2005 and 2007 the number of cards in India jumped by 50 per cent, peaking that year at more than 26 million. After the financial crisis, it fell to 18 million. Indian consumers, on the whole, have not fully embraced the idea of using credit cards, preferring debit cards instead, with roughly 230 million in circulation."

The above quote from:

Trends are clear eh?


Imminent Crucible's picture

Tyler managed to cram 222 words into his opening sentence, a new record. A flash crash in high-frequency verbiage.

malek's picture

Full stops are for punters.

hbjork1's picture



lolmao500's picture

I love the Orlando police...

This guy understand what the new America is all about... Hilarious...

Bastiat's picture

Awesome!  Another good story I stumbled across today:  a guy took viagra and wore sweatpants with no underwear to the airport--he went through security 4 times until he got a full pat down.  The TSA officer resigned after that, saying:  "I'm going home to make love with my wife.  I never want to touch another stranger." 

JW n FL's picture


NASHVILLE INT’L AIRPORT — A Wyoming man walked through a TSA checkpoint with a raging erection on Tuesday, daring TSA officers and even fellow passengers to give him an invasive pat down.

“I’m next,” Warren Kelvin, 34, screamed as he pushed to the front of the security line. According to TSA officials, Kelvin had ingested two Viagra and wore sweatpants without boxers for his Southwest flight from Nashville to Phoenix.

“I thought he was carrying a baton in his pants,” said Amanda Watershed, second shift supervisor of the A Terminal at Nashville International Airport. “Nope… That was his penis.”


Thanks to the original poster!!!

lolmao500's picture

Yeah well that story is fake. Sorry.

Bastiat's picture

Oh damn.  It looks like an Onion sort of site.  Ah well, my optimistic bias led me to accept it too quickly.    On the other hand there is a true story, linked on Drudge about a Colorado woman who got arrested and charged with a felony for groping the breasts of a TSA agent.  It would be an interesting trial if it came down to what makes it OK for the TSA agent to do that all day but not OK for the defendant.  What ever happened to tit-for-tat?

Seriously:  is *anything* OK if you're wearing a uniform and following orders?  Molesting children clearly is, how about body cavity searches?  What if one was ordered to use his penis in a body cavity search because it is longer than a finger?  Would that be OK?

I hope someone actually does the Viagra/sweatpants routine--political guerilla theater.



John_Coltrane's picture

Still, its mighty funny indeed!  Stories like that and the fact that issues like the speed of light and violation of special relativity are mentioned in financial discussions distinguishes this site from any other and will have me coming back for more.  I believe the uncertainty principal, the Fermi exclusion rule that keeps us from falling through floors, Godel's undecideability theorm, and the equivalence of inertial and gravitation mass should be included in future articles and discussions. 

Waterfallsparkles's picture

Wonder if he was gay or just showing off.

JW n FL's picture
by lolmao500
on Sat, 07/16/2011 - 13:20

I love the Orlando police...

This guy understand what the new America is all about... Hilarious...





Fantastic!!! We need are more Police wearing more Body Armor than the Marines get to use on the Front Lines!! That will save America.



ebworthen's picture


This would explain the shake outs, the wildly oscillating spikes, the algos hitting the networks with different trade frequencies and amplitudes so they can feel out the speed and responses of other algos and ad-hoc control measures.


slewie the pi-rat's picture

LOL  i'll be out by the tree with a few silver dollars & FRNs if you wanna trade stuff...

i haven't "traded" since the 20th C.  can ya still use limit orders?  all or none? good for the day?

too old-fashioned?  unless you're all chromed out in hi freek, i mean. 

John_Coltrane's picture

I want more conditional orders where if the price goes down after I'm filled I get to cancel and rebid (oh- that's the HFT stuff isn't it)

cosmictrainwreck's picture

+100 you get my vote for new SEC chair...uh, spot's already taken, you say? shit

StychoKiller's picture

"A Trade Supreme!" -- paraphrase of John Coltrane

lolmao500's picture

What's gonna be nice if the US default is that the municipalities bond market will blow up, bankrupting hundreds if not thousands of cities... which will force them to fire tens of thousands of cops... YAY!

superflyguy's picture

That's not very good.

What will they do? Do you think they'll suddenly start farming? Or work somewhere else that doesn't involve arresting and treating people like criminals?

In my opinion, there are several jobs they're most likely to take first after they're kicked out:

- join TSA

- join private security companies (become contractors)

- organize into a criminal organization and terrorize everybody else

- join military (not likely, first it's too dangerous and second, they're laying off to - drones are better soldiers anyway)


delacroix's picture

they are already employees, of a criminal organization

pesamystik's picture

You have to love how our patriotic congress called congressional fucking hearings over steroid use in sports. I mean, we're talking about a few baseball players who juiced and we're going to get the U.S. Congress involved? Meanwhile, we have billions being scalped in rigged markets, and not a peep.

To be fair, average joe six pack is a fucking moron and probably cares more about Roger Clemens shooting HGH up his ass than whether some Wall Street shyster is scalping pennies off his paycheck every minute. You had Schumer a few years ago write some half-hearted letter about flash trading, but none of it really dealt with HFT. In fact, since then, the HFT lobby has made sure nobody is going to make a real issue of this. 

It's a Wild West darwinian battle, and everyone but the well capitalized whiz kids are winning. You are losing. This is just one more racket in a long line of rackets cooked up by the elite.

Slightly unrelated to HFT (but all these things are sort of interconnected now), here is an interesting bunch of graphs about the increasing workload of Americans (the article is good too).

oldmanagain's picture

The ultimate chart trend is the top percentages wll just hire robots. Animal spirits will have been fulfilled.

oldman's picture

Hey, bro',

I woke up two days ago with the sense that this has already occurred. Without humans in the loop the virtual reality works perfectly except, for 'animal spirits'; now all it has to do is feed us or---------------------------------------------?

I think that we are locked by our own minds in a place that no longer matters. Your last line in line with my sense of this is changed to:

Animal spirits have been fulfilled.

Thanks, oldmanagain- om

oldman's picture

"It is impossible to verify that a trade received the best price"


How can one be certain that a trade even occurred?

It seems more and more to this oldman that this virtual farce of a market is only evidence that the machine has self-destructed.

One of these days it will say, "we stopped you out and took the money from your account, the additional from your bank, but there is still a balance due to be paid now."

And you will say "----but, I had no position."

"Yes, you did-------------you lost---send us the balance due immediately We know where you live."

And the machine is always right---it can do anything it wants to because you entered the game and gave it credence. Are you going to argue with a gun to your head?

I used work these markets but they were almost real then-----now? good luck!

darkstar7646's picture

Why any sane person still "trades" in a "market" where the average share of stock is "held" for only eight seconds is beyond any sense of my comprehension!

AmCockerSpaniel's picture

So right you are. I'm of the opinion that buy and hold is the only sane thing. And holding paper is not an option. I hold PM, and read the mail here to get insight as to when to add to my holdings.

PulauHantu29's picture


In heaven you'll get "fairness" ...on earth you get Goldman Sachs.

billsykes's picture

So lets look at this info, they are frontrunning stocks able to manipulate buy/sell orders, are placing millions of trades a millisecond and account for the majority of action on most major exchanges.

My question is, if these HFT firms have so much advantage where is the profits from these firms, why aren't new billionaires being minted daily? Why are the owners not front and center of forbes or buying up entire cities made of gold?

You would think that these shadowy firms need to start out somewhere, raise money somewhere, be on the radar somewhere?

Where would info be to find out what type of return these guys are making?


Why doesn't someone go retro and have a pit traded exchange again?

JW n FL's picture
by billsykes
on Sat, 07/16/2011 - 14:50


My question is, if these HFT firms have so much advantage where is the profits from these firms, why aren't new billionaires being minted daily?



You are dumb fucker arent you? you dig ditches and live under a rock? is this your first day here at Zero Hedge? are you retarded?


come out from under your rock and read a lil you fucking short bus hermit!

billsykes's picture

SO cocksucker you are saying only the big banks are doing it?

why don't you school me and tell me that besides jp & gs who else is involved?

pesamystik's picture

Billy, you have to understand that there are many HFT operations and a lot of people involved in them. HFT is probably not producing billionaires, but it is producing plenty of millionaires. Remember, these algos make small profits that accumulate, but it takes away for serious money to add up. You can't lose but it takes time to win.