You're now on the archive server. Commenting has been disabled.
Real-Time Limit Order Book: Facilitating Market Gaming?
So I stumbled upon this highly technical academic University of Pennsylvania piece on VWAP algo's and I noticed this excerpt:
"Our most interesting results, however, examine the VWAP trading problem in a new online trading model capturing the important recent phenomenon of limit order books in nancial markets. Briefly, a limit buy or sell order speci es both the number of shares and the desired price, and will only be executed if there is a matching party on the opposing side, according to a well-de ned matching procedure used by all the major exchanges. While limit order books (the list of limit orders awaiting possible future execution) have existed since the dawn of equity exchanges, only very recently have these books become visible to traders in real time, thus opening the way to trading algorithms of all varieties that attempt to exploit this rich market microstructure data."
Now I am no HFT trader, and so I do not know if they are referring to the Flash-type programs that are frequently discussed here at ZH or if there is an entirely seperate program whereby participants have access to real-time limit order books. If the latter is true, this may be an issue worth exploring further, since it seems to me that potentially abusive algorithms could be designed to utilize the limit order interest available in the market and construct artificial floors or ceilings on prices, given the market's microstructure.
It seems clear to me that real-time knowledge of other traders' limit orders could allow for gaming and market manipulation, much the same way that large short interests are squeezed.
Could this be how sizable HFT players such as Goldman are making a large proportion of their profits? Should this not be consideredmarket manipulation in the same way that large corporations may illegally underprice their competition out of business only to raise prices once a monopoly is breached?
I met with a client a few days ago who sold a business years ago and has put him in retirement he had 15 monitors setup for day trading just to play with money. He's a venture capitalist and invests in businesses. I told him about the free casino bonuses i was getting and playing with and got him all excited about one more thing to do with his money.
TBH, I think it's a little naive to trade via the limit book. Your algs could be manipulated so easily by fake limit orders.
Well, the point of flash orders is that some people can see data before others. No matter what, markets will probably always be structured in this way.
For example, Level II quotes are similar in that not everyone gets the same amount of access to the quotes. Also, if you colo your servers next to the quoting service you might get faster/higher priority access to those quotes .. much in the same way flash traders were getting priority access.
The question is, who owns the level II quotes? NASDAQ? Or can we find a way to spread the ownership around so that we don't have this one monopoly/gate keeper than can charge whatever it wants to for colo access.
This has nothing to do with flash orders, nor does it have to do with seeing other individual traders' limit orders (at least identified by trader). It is simply referring to the "level II" or "depth-of-book" quote data now available from most electronic exchanges. Anyone with an E-Trade account can see this data, and certainly any institutional trader (HFT or not) looks at the complete order book, rather than the traditional "inside market" view of just the best bid and best ask.