Whitney Tilson Probes Deeper Into High Frequency Trading

Tyler Durden's picture

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Anonymous's picture

and this from Larry Tabb - - High-Frequency Trading and Capital-Constrained Dealers Scuttled LSE's Exchange-Traded Contracts for Difference (CFDs), Says TABB Group - -


Anonymous's picture

>>Pipeline's Al Berkeley Roasts High-Frequency Traders as "Natural Enemy" of Institutions

yawn. markets are predatory. sharks dissect whales. they always have. they're just faster and more efficient now. besides, in the market it's always you against the world.

i think we should provide nicely embroidered crying towels with the 1099 for losers.

Miles Kendig's picture

Then why refer to the trading locations as "markets"?  Just call them the shark tank and let the sharks have at each other.  The crying towles you refer to should be issued to the folks that believe the biggest worry they have to face is a fine.  The law of the flats is coming to a market near you and most sharks have no concept of reality until it meets them like a baseball bat.  Then its light out and snivling suits all the way to popo.  If Wall Street cannot handle the concept of self regulating markets and neither can those worthless wastes of air in alphabet soup land then it is time to be introduced to the reality that is the flats off South Main Street for the worthless wastes of quality O2.

cougar_w's picture

Indeed so. Louis XVI, meet your new barber.

It's easy to say "this is just the way it is, chump, eat cake" when you really like it the way it is. But that didn't save the artificially maintained French nobles, and it isn't going to save this artificially maintained economy.

The knives are coming. Run and hide, bargain with the devil, plead circumstances -- it won't matter. Reality bites.


Anonymous's picture

we're really not so different. if you applied all of those violent fantasies to trading, you could do very well.

cougar_w's picture

No we are not. But I offer that the fate of the French noble class while violent was real enough. It applies here, though not to trading.

It is how you take apart something that is too big to fail outright; you cut it up, and then you devour the parts.


Anonymous's picture

CNBC does not have the investigation skills to do some real work. Instead they run around some story about prostitution, small crimes, post enron, worldcom collapse story and crap that other people have already investigated. If they are runing these petty stuff they are having kiddy fights with the blogosphere. What a disgrace that network.

jbeyer's picture

Tyler, why are you posting the views of a man who had "until a few days ago...never heard an explanation of what high-frequency trading"?  A really solid expert on the topic.


One huge flaw in the criticism of HFT is that it creates added volatility.  For the HFT players who are making money off of rebates, they would REDUCE volatility.  If a stock's spread is 9.00-9.01, with 1,000 shares on both the bid and the ask, a market order greater than 1,000 shares moves the price.  If you instead have a lot of HFTraders on both 9.00 and 9.01, and 3,000 shares are on both the bid and the ask, the price will not move when that 2,000 share market order comes in.  This REDUCES the volatility.

DebtorShredder's picture

This liquidity/volatility argument is getting old.

Under what conditions are HFT's required to trade?

Under what conditions are HFT's forbidden to trade?




jbeyer's picture

Are you saying that my liquidity/volatility argument is getting old?  Or the argument of the critics of HTF is getting old?


What does the conditions under which HFTs are required or forbidden to trade have to do volatility?  Are you are suggesting that because HFTs are not required to always post orders, their liquidity is temporary?  Are you advocating a return to specialists working on eighths?  Because that wasn't inefficient AT ALL!

DebtorShredder's picture

I'm not advocating anything, but lest we not kid the people into believing that because someone has the ability to trade, quickly or not, doesn't require or forbid them from doing so.

What happens when the depth of the order book is not so balanced? Using your simple example, let's say one side has 1,000 shares and the other 10,000 and this unbalance has a stock down $4.00 for 3 hours. Can HFT's still "add liquidity"? Are they forbidden from overloading the book any farther down?

Your example assumes a normal working market, but I never hear of the examples when market conditions aren't normal to justify these programs.

The one thought about human specialists is that their speed is pedestrian compared to computers. Inefficient yes, but they allow for time to reflect and analyze markets. There isn't enough new information to justify 5 microsecond trades.

jbeyer's picture

You are missing my point.  Many critics of HTF claim that they make the bulk of their money from rebates.  To make money off of the rebates, you don't want to hold inventory.  You want to have your buy and sell orders balance each other.  In your unbalanced example, the HFTraders might make money from pushing the market, but they aren't making it from the rebates.  If you want to claim that HFTraders make money by artificially pushing the market one way or another, fine.  Make that argument.  But for the people who claim that HFTraders are making money on the rebates, they can't also argue that they are increasing volatility.  Because any HFTraders who are making money from rebates are reducing volatility.


To give you a sense of where I'm coming from, I run my own money for a living.  I run a number of strategies that I'll term MFT (mid frequency trading).  I don't need to co-locate next to the exchange's servers, and my algorithm examines and possibly updates my orders every ten seconds.  The rebate is a bonus, but is not how I make money.  Brokers commissions end up eating most of the rebate.  Trust me when I say that my trading reduces market volatility.  I am the guy who is pushing prices back to the mean.  If you want to find a culprit for market vol, talk to the fine folks at Direxion.

DebtorShredder's picture

HFT's actually have the best of both worlds, which makes them deadly twice. In calm markets, they have little risk, just trading for the rebate, which begs the question to their utility. (Padding exchange volumes?)

The second condition is that they have the ability to quickly push the market far, especially if liquidity is light. If someone HAS to trade, they can interfere greatly with execution prices.

It doesn't sound like your situation is what people are complaining about when this issue arises.

KidDynamite's picture

a ZH commenter wrote the following on one of the first posts here about Saluzzi and Themis:

"Frontrunning is trading in front of a customer order. It is illegal. Collecting and analyzing publicly available information and trading based on your insights is legal. And guess what, someone will be the fastest and most accurate in doing this. The result of their actions is to translate meaningful information (strained from a stream of mostly noise, it's incredibly difficult to do) into price changes which make the price more accurate relative to what's knowable at the time. Unfortunately for people like Saluzzi, a 19th century "tape reader", a lot of the information that quicker, more talented, machine-using, more insightful players uncover is information about large size that he's trying to deceptively move without anyone knowing the truth about what he's doing. There's nothing wrong with what Saluzzi is trying to do. What's wrong is crying foul when the one-sided benefit you wanted to obtain is defeated by people who have made a bigger investment in what's important for trading. The big winners in all this are small traders who are not fleeced by large professional size deceptively getting them to buy or sell at insufficient prices. I can understand Saluzzi's campaign against technology and modern information processing, it's his ox that's getting gored. The thing that's truly hilarious is that what Saluzzi wants to be legal, his "tape reading", is just another example of where professionals have an edge over the little guy. But it would never occur to Saluzzi to outlaw what HE does, only what his competitors are doing better than him."


it's tough to argue with that.  Why does Saluzzi think it's ok for him to "read the tape" and try to out trade others but it's not ok for someone else to do it better?

Thanks for posting two sides to the story at least, TD.  Good to see that even if Tilson is clueless, his clients are not.

Anonymous's picture


Thanks for pointing that out. I really objected to the repeated, inappropriate use of the term "front-running" in this interview. I have never before heard this term used to describe a completely legitimate behavior, looking at the book and the tape, to try to gauge what orders are in the market, to make the best possible decisions. It is completely disengenous to use the term front-running like that when speaking to members of the general public that probably would not know the difference. He is not arguing against HFT or advanced technology. He is arguing against publicly available market data.

And what about the term "citizen-savers"? Does he not know that most hedge fund money comes from institutional investors like pension funds and endowments? Or is he just spinning the issue for his own benefit?

Anonymous's picture

Never mind this. Did you see Microsoft? This really tells the tale. The second dip is underway. I'd say that "recovery" lasted about 3 weeks. The question is: how the hell does the economy survive the second dip? Can you answer me that?

cougar_w's picture

"This economy" might not survive. Let's hope it does not, it has nothing going for it now.

The next economy will be different. The mighty beasts will have largely burned themselves to cinders with all their flailing. That ought to clear some things up. Then you take hold of what there is left and pull it up again. Move forward. Repeat.

It worked that way 1,200 years ago as a new merchant class emerged from the Dark Age and found itself blinking in the bright light of Medieval Europe. Should still work. Maybe we find out shortly. It's how they used to make "history".


Anonymous's picture

Didn't you hear ? It's a jobless, economyless recovery. The idea is to plump up the 401Ks, 529Ks fast so that people shut up and skynet can carry on with its noise that no one hears.

cougar_w's picture

Economyless economic recovery. You know, with talk like that they'll make you FED chairman.

Anonymous's picture


You forgot to rotate the "H" in your logo by 90 degrees.....either direction works.

Keep up the fantastic effort. Based on the response, "they" are feeling the heat.....

Anonymous's picture

SLP, SLP, SLP. 'nuff said.

Anonymous's picture

Stocks are a speculative asset and stock markets are therefore a gambling arena. Insiders always screw outsiders. It's simply vigorish. I'd never spit on a bookies shoes but only because he is likely to have a lot of muscle nearby. On the other hand if I ever do run into Loyd B I'll lay a big hocker on his $700 loafers in a heartbeat.

EQ's picture

I find Tilson's arguments to be a little like fishing in the neighbor's pond for the supposed big one that always got away.  High frequency trading isn't going to knock at stock from $10 to $5.  The big issue for me is transparency.  If Wall Street isn't transparent, how can anyone really determine wtf is going on?  But, in theory, in an open market seeking price discovery, as I said before, what is the difference between high frequency trading and a million day traders causing price aberrations?  If they are able to manipulate the market, which it seems as though they are doing, that's another matter.  But, then Wall Street manipulates every market it is in.  Monopoly access to capital.  And generally, therefore, rig the system for monopoly profits.

At some point in time, if transparency and fairness doesn't return to markets, people, firms, countries, whatever, will just leave.  We saw this last year when the SEC banned short selling.  Shares imploded anyway because they took away a vital part of the market.  Rigging the market has the same effect. 

Goldman Sachs rigs markets not by their creative genius but by setting the table in their favor by gaining an asymmetrical access to information.  ie, Government lobbying, etc. 

Anonymous's picture

Goldman is skimming like the mafia don it is. Kiss the ring o.k. But they can't have the opportunity to program huge moves, pump and dump, and swipe large option positions. If they have the power to kill, they will kill, and the pols know it.

Anonymous's picture

Step #1: Read an opinion or idea on Zero Hedge.
Step #2: Wait a few weeks/months.
Step #3: Hear same opinion/idea from more mainstream, "credible" sources.

And Repeat.

Ruth's picture

As he said on his piece on Bloomberg at 5 we have to hide and outrun them.  Why don't they just seperate the two traders on different exchanges, almost like residential and commercial.  HFT traders/Bots on one and Human trades on another?

jbeyer's picture

Because the HFTraders/bots would have much tighter spreads and all of the humans would then want to trade on that exchange.  Joe Saluzzi would love to have a 'human' market where he can have spreads of an eighth.

Ruth's picture

I don't think it's fair that not all traders get to see what's on the table at the same time, I would have thought timing would be the only difference, first come first serve.  I can see getting discounts on fees because of bulk, or incentive for computer/streamline functions, as you never want to slow the machine down for human sake, but really some of the stuff sounds just plain illegal from a layperson's pov.  I've guess I've got some advice for you hide duck and run, is that the way you're rollin?lol

jbeyer's picture

Ruth, there are two reasons why an HFTrader might see orders before other people.  The first is if someone who is processing order flow (e.g. Goldman) is peeking into the orders that they are processing.  If this is happening, this is illegal, immoral, horrible, etc.  Nobody can defend this.

The second reason would be due to flash orders, and this is much more benign.  Flash orders are designed to improve execution for the person placing the order.  Basically, someone places a market order, and they will get pricing at the NBBO.  With a flash order, instead of executing at the NBBO, a message is sent to all those who have subscribed to flash orders, and requests for improved pricing is made.  Frequently, someone who receives that message will offer a price better than the NBBO.  This means that the person placing the market order get a BETTER price that they would have otherwise.

erich's picture

Co location seems inherently unfair in a free market. 

KidDynamite's picture

not as long as it's an option available to anyone (which it is).  your name doesn't have to be "goldman sachs" to colocate.

Anonymous's picture

Tyler by the way,

Thanks for posting some real stuff. It's too bad it was too long and intellectual for most of the usual fanboys. Seems like most of the comments are from insiders who get it.

Anonymous's picture

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.

Gwaihir's picture

I understand your comment that HFT is better but isn't the discussion is it good enough and if not, how can it be improved? Lack of transparency is seldom in the public interest.


Anonymous's picture

You guys dont get it. The argument is not whether it is legal or ok or moral to try to detect institutional footsteps; no issues there. But if exchanges and trading that have ONLY RECENTLY become for profit give one set of players an afvantage over others, it is not fair. It has also potentially huge and crippling effects on the security of stock trading in the USA. And if that is at question, then look out for apital outflows.

Even Home Baseball Stadiums dont move the outfield wall in or out depending on who is at bat.

And finally, 98% of the market participants are Retail, Mutual funds, ERISA money, etc. If they have no confidence in the system, it will implode globally. It is all fair and good to create and chase bubbles, be they in housing, DOTCOMS, OIL, BONDS or whatever. You just can't leave something vital to out nation's security as a casualty in the wake.

PB's picture

I agree with #13858.  I think the mutual fund analogy is the best so far.  If investors lose confidence in stock market, they will withdraw funds.  The last thing the economy needs is another scandal a la Madoff.  And read that NYT article:  $21B a lot of money.  I'm sure that is split between market makers and front-runners, but $10B for front running is a lot still.

No More Bubbles's picture

Wall Street is doing what it's ALWAYS done, it's just more and more people are trying to play the same game and it's gotten harder and harder to make money without scamming someone else.  For a long time it was thought of as legitimate since it was "investing" but now it's clear it's just numbers and symbols to gamble on. 


The entire thing has devolved into a TOTAL FARCE!