This page has been archived and commenting is disabled.

HFT Algos Force Institutional Investors Off-Exchange

Tyler Durden's picture


Having discussed market microstructure and the parasitic impacts of high-frequency-trading for the last 5 years, it comes as no surprise that the block-trade-sniffing algos have had very significant impacts on the way institutional investors trade now. As WSJ reports, in fact the big boys are conducting more "upstairs trades," in which deals are executed among big institutions, bypassing the broader market, because the proliferation of algorithmic trading and other structural issues, including the fragmentation of the market, are hurting their ability to get the best prices and execute large trades quickly. While the concerns aren't all new, big investors say the cat-and-mouse games are growing more elaborate - and counterproductive - by the day.


Via WSJ,

Some of the world's biggest investors are changing the way they trade in U.S. markets in response to what they say are rising risks for institutions of their size.


The strategies include conducting more "upstairs trades," in which deals are executed among big institutions, bypassing the broader market, as well as other sophisticated order-routing techniques designed to avoid pitfalls that have become increasingly apparent to investment managers.


Investors say such measures are increasingly necessary because the proliferation of algorithmic trading and other structural issues, including the fragmentation of the market, are hurting their ability to get the best prices and execute large trades quickly.


A trade has the possibility of wending its way through 13 exchanges and more than 40 "dark pools," off-exchange trading venues that don't publicly display stock trades. A trade could also be executed inside a large broker-dealer that matches buyers and sellers from its own holdings.




The intricacy of the equity markets creates unnecessary steps for large investors and distracts portfolio managers from increasing returns, said Mr. Brooks of T. Rowe Price.


"It's like trying to fill up your gas tank, but you have to go to 15 gas stations," Mr. Brooks said. "By the time you get to the 15th one, they've increased the price because they've heard you were coming. Wouldn't someone rather go to two or three stations and fill up the tank in blocks?"

Still believe HFT provides liquidity and makes the market 'more' efficient?


- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Mon, 12/09/2013 - 10:43 | Link to Comment Grande Tetons
Grande Tetons's picture

The exception is when they are selling paper gold. 

Mon, 12/09/2013 - 10:57 | Link to Comment Jumbotron
Jumbotron's picture

We are rapidly coming to the universal acknowledgement that laissez-faire is as bankrupt a concept as communism.  Particularly when you combine the magic of high-technology.  Don't ge me's GREAT on paper.  But EVERYTHING is great on paper......until it is met with the unstoppable force of human corruption.

There are only TWO ways to curtail this kind of shit.  One....let it run its cource until the inevitable blow up and HOPE that a cleaner, better system comes out of ths ashes. (Not likely....look at history) need even more regulations with TEETH like permanent loss of income and gains and LONG jail time and a life-time ban on trading.  But of course....this kills the golden goose.  And no one is willing to do that.'s Choice Number One.  However, after the collapse you will see even MORE in-roads by the Socialist types over the whole injustice of it all.  But that's what you get.  You HAVE to....HAVE to....HAVE to....really LOWER THE BOOM on the cheats and the criminals who take advantage of laissez-faire or else you let the very ones championing it end up destroying it and ushering in collectivism for ALL of us.

Mon, 12/09/2013 - 11:02 | Link to Comment BaBaBouy
BaBaBouy's picture

HORRIBLE !!!!!!!!!!!11
The little Guy Is FUCKED By HFT.
I Have Barely Traded Anything And Just Hanging On To Positions
In Hopes Of Some Turnaround...

HORRIBLE... Thanks Oblama...

Mon, 12/09/2013 - 11:05 | Link to Comment Four chan
Four chan's picture

funny, i have been off the exchanges since hfts.

nobody likes a rigged game endorsed by the us government.

Mon, 12/09/2013 - 11:19 | Link to Comment Enslavethechild...
EnslavethechildrenforBen's picture

Institutional investors?

More like institutional murderers...

Mon, 12/09/2013 - 11:25 | Link to Comment smlbizman
smlbizman's picture fishing for fonestar fish...shhhh...


Mon, 12/09/2013 - 23:39 | Link to Comment Exponere Mendaces
Exponere Mendaces's picture

Tyler is secretly in love with Bitcoin. Who wouldn't be, looking at how it trades? It actually has honest-to-god DECLINES that end in a nice little dampened oscillation like the "good old days" of the equities and futures markets. And massive rallies as well. Chart indicators actually function because there isn't a team of bearded economists pumping billions into the market to "create jobs" and "stimulate the economy".

Its a thing of beauty. Shame that the exchange phase will only last until the end-to-end supply loops denominated in Bitcoin are created, then the second phase begins, and "cashing out" becomes less of a necessity.


Mon, 12/09/2013 - 11:24 | Link to Comment fonestar
fonestar's picture

HFT non-involvement is another reason I love Bitcoin.  It trades like a wild and free asset in an age of control and manipulation.  Classic buy and sell action.

Mon, 12/09/2013 - 12:13 | Link to Comment Debt-Is-Not-Money
Debt-Is-Not-Money's picture

Be careful what you wish for:


Also- - Watch the world currencies flow into BTC in real time.

Mon, 12/09/2013 - 12:19 | Link to Comment SWRichmond
SWRichmond's picture

In a world where the breakdown of the rule of law is commonly observable, it is easy but incorrect to "blame capitalism".  Capitalism relies utterly on the rule of law.  There is nothing capitalist about this system.  The system is owned by the banks, and the banks are inarguably kept afloat by the taxpayers against their will.  The banks openly flaunt their ability to game the system, paying miniscule "fines" of looted taxpayer money when they get "caught".  For the banks, "do as thou wilt is the whole of the law".

Their intention is obvious: "Possession in nine points of the law".  Once they own everything, they will begin to complain about enforcement.  But not one second before then.

Mon, 12/09/2013 - 12:44 | Link to Comment Fredo Corleone
Fredo Corleone's picture

"How do I get out of this chickenshit outfit ?"

Mon, 12/09/2013 - 13:40 | Link to Comment Jumbotron
Jumbotron's picture

Capitalism is not better in the long run than any other system SWRichmond.  It was thought up in the mind of man. was doomed to failure from the get-go.

Like different types of growth media in various petri dihses....some growth media will enhance or detract from the growth of various bacteria and or fungi.  But that shit will grow eventually.

Evil....found in the hearts and minds of ALL mankind WILL ALWAY find a way out and THRIVE in any system.  It is the spiritual version of RNA (a virus).  It will gather bits and pieces of the DNA of its host in order to better feed off of it and mutate in order to survive.....even if it is purged out of the system.

Capitalism is NOT a religion nor is it God inspired.  And even if it were.....we humans were bound to screw it up.  As we will ANY system of governance and/or economy.

Mon, 12/09/2013 - 11:20 | Link to Comment Fuh Querada
Fuh Querada's picture

great tits

Mon, 12/09/2013 - 14:56 | Link to Comment 1000924014093
1000924014093's picture

If you had been anywhere in the S&P the last couple years, you would be making a lot of money, hft algos or not.

Mon, 12/09/2013 - 14:54 | Link to Comment 1000924014093
1000924014093's picture

If you had been anywhere in the S&P the last couple years, you would be making a lot of money, hft algos or not.

Mon, 12/09/2013 - 11:52 | Link to Comment Big Whisky
Big Whisky's picture

I disagree with the idea that laissez-faire is bankrupt. 

This article highlights the CORRECT way to change, correct, fix, and advance, a working system: to let the individual players voluntarily choose.  If I am reading the article correctly, the big players are indeed finding ways around HFT-dominated areas.  I say, more power to them.  I'm sure many traders (maybe most) would prefer an exchange consisting of only live people; i.e., no HF-Algo-Bots allowed.  What's wrong with this?  Nothing.  If the market demands it, let a "no-algos allowed" exchange come about.  

There are no doubt plenty (even if they are a minority) that would prefer to continue robo-trading.  There is no reason why the robo-traders should be sacrificed at the alter of Majority Whim.  Let them keep robo-ville.  Why should there not be a platform everyone?  Laissez-faire would bring this into being.  

Regulation is not diametrically opposed to laissez-faire.  It is only opposed to government decreed, non-voluntary regulation being forced upon people.  Laissez-faire can come with very strict regulations, through property rights.  "This exchange is hosted and owned by XYZ, Inc.  If you violate our no-robo policy, you will be banned."   

Only a free market, laissez-faire, would provide a place for all willing participants.  The best answer is always more individual freedom.  

Mon, 12/09/2013 - 12:52 | Link to Comment StateofFraud
StateofFraud's picture

Regulation is worse than meaningless when the government has been captured by the "regulated" for their own interests.

Mon, 12/09/2013 - 13:43 | Link to Comment Jumbotron
Jumbotron's picture


This is the ESSENCE of Corp/Fed.

The merry-go-round of politicians leaving office to go into the private world that THEY regulated only to UNREGULATE or GET AROUND regulations that THEY passed.....of course....for the appropriate amount of money.

Undoing their fuck-ups is TOUGH work.....and has a HIGH price tag.

Mon, 12/09/2013 - 14:12 | Link to Comment Jumbotron
Jumbotron's picture

Laissez-faire is COMPLETELY BANKRUPT if there is nobody WILLING and/or ABLE to enforce prudent regulations and laws on those who abuse Laissez-faire.  Otherwise you have anarchy.....which will always be rejected by the population which of course will be answered by the very politicians and politics that you believers in the religion of Laissez-faire you find objectionable.

And there is WAY TOO much money to be made to uphold the laws you need to properly safeguard Laissez-faire.  AND EVEN IF you did that in this would not be long until lobbyists would be complaining that our competitors have an unfair advantage and thus an economic advantage because of the prudent laws AND their enforcement already on the books.

Laissez-faire is fucked either way.

Mon, 12/09/2013 - 10:43 | Link to Comment TeamDepends
TeamDepends's picture

How can they cut the power, they're animals!!!

Mon, 12/09/2013 - 10:48 | Link to Comment falak pema
falak pema's picture

Soon when Yellen becomes queen of FED her SOLE job will be to Arbitrage between the interests of overpowerful oilgarchs who hold the US economy by the nuts.

All in one duck soup...Pity that Groucho isn't there to add a touch of Marxism. 

Mon, 12/09/2013 - 10:49 | Link to Comment Leveraged Algorithm
Leveraged Algorithm's picture

I just can't believe this is a problem.....:)

Mon, 12/09/2013 - 10:50 | Link to Comment youngman
youngman's picture

We have  a caste system for the markets now....the Elite get their own..and the rest of us get the trash pile....they never lose....we never win..

Mon, 12/09/2013 - 11:20 | Link to Comment Enslavethechild...
EnslavethechildrenforBen's picture

Enforced by armed military drones disguised as amazon delivery service

Mon, 12/09/2013 - 12:42 | Link to Comment WTFUD
WTFUD's picture

youngman, wouldn't have it any other way or i would be forced to rid myself of my slave mentality!

Mon, 12/09/2013 - 10:50 | Link to Comment Offthebeach
Offthebeach's picture

Have the Fed be the buyer of last resort for stocks, playd out C-section scared pole dancers, used Yugos.....

Mon, 12/09/2013 - 14:42 | Link to Comment Nobody For President
Nobody For President's picture

Did you mean 'scarred' pole dancers?

Mon, 12/09/2013 - 16:27 | Link to Comment Offthebeach
Offthebeach's picture

Thems to.

Mon, 12/09/2013 - 10:52 | Link to Comment icanhasbailout
icanhasbailout's picture

When I first learned of HFT something like 5 years back, I predicted it would create the need for an integrity-based market exchange where no algorithmic trades were permitted.

Mon, 12/09/2013 - 10:55 | Link to Comment Rainman
Rainman's picture

Going back to paper and pencils with no erasers.

Mon, 12/09/2013 - 11:11 | Link to Comment ParkAveFlasher
ParkAveFlasher's picture

"Man was not made for the law.  The law was made for Man."  There is a great lesson here, but I doubt that anyone will understand it until the Devil himself comes to Collect.

Mon, 12/09/2013 - 10:55 | Link to Comment RaceToTheBottom
RaceToTheBottom's picture

Well we would not want them to be in the same market as the little people would we?

Gated communities >>>> Gated Marketplaces

Mon, 12/09/2013 - 10:58 | Link to Comment Jumbotron
Jumbotron's picture

Well said.  Bravo.

Mon, 12/09/2013 - 10:58 | Link to Comment Jumbotron
Jumbotron's picture

It's a big club....and YOU AIN'T IN IT !

Mon, 12/09/2013 - 11:04 | Link to Comment Winston Churchill
Winston Churchill's picture

Not at all new.

A friend of mine managed the investment portfolio of a large

insurance company back in the 1980's.Even then they spread their trades

around the market to avoid moving it.The algos are just a new wrinkle to

an old face.

Mon, 12/09/2013 - 11:36 | Link to Comment More_sellers_th...
More_sellers_than_buyers's picture

Your looking at it wrong.  How can you hope to have a large trade without moving the market? At least it was a market.  Large guys, small guys, mom and pop, research from hundreds of firms.  Now its a computer and 3 firms.  This is what they wanted.

Mon, 12/09/2013 - 11:02 | Link to Comment buzzsaw99
buzzsaw99's picture

the "market" is a farce, a mirage, a vapor

Mon, 12/09/2013 - 11:11 | Link to Comment orangegeek
orangegeek's picture

Call the turd Yellen.  It's buying up everything.

Mon, 12/09/2013 - 11:17 | Link to Comment ThisIsBob
ThisIsBob's picture

The exchanges (whores that they are) are entirely responsible for this.  They encourage and facilitate these hft shenanigans.  Here's hoping they get hoist on their own petards.

Mon, 12/09/2013 - 11:34 | Link to Comment BearClaw
BearClaw's picture

Las Vegas bookmakers have the same problem when the betting line starts to move.

Mon, 12/09/2013 - 11:52 | Link to Comment GrinandBearit
GrinandBearit's picture

Anyone with a 401k/IRA really needs to remove themselves from these Skynet algo markets.   

I cannot wait until this HFT nonsense blows up in their face.  Many sheeple are going to get sheared.

Mon, 12/09/2013 - 12:14 | Link to Comment withglee
withglee's picture

Add a random number of seconds to the timestamp of the order before it goes into the system. Bammo ... the problem (advantage) disappears.

Mon, 12/09/2013 - 12:24 | Link to Comment magne13
magne13's picture

IF the big guys are so concerned and they are not participating in the markets, why don't they just reopen an exchange that does'nt allow electroniic access and one whos contracts are not fungible with electronic marketplaces, i.e. if you buy a contract on the new all human exchange, you have to sell that contract on the all human exchange.  HFT does nothing for liquidity except steal it, when vol rises it pulls all bids and offers.  HFT also drives out speculators which are needed to provide actual bids and offers for speculative purposes.  HFT does not provide liquidity for speculative purposes it is in the market to either front run or get in and out within one full second.  I know in the bond futures market it costs at least 3 ticks to do a 1k lot where back in the ole days of the pit, you could hit one guy with that order and not even take it bid or offered.  For that reason alone electronic access can be exposed to how it has single handedly destroyed "marketplaces". in an arena where you can simoultaneously be bid and offered at the same time, it is no wonder the global financial markets are so rigged and nobody believes in them.

Mon, 12/09/2013 - 15:41 | Link to Comment percyklein
percyklein's picture

Take a look at the IEX solution -- if it is in fact a solution.

Mon, 12/09/2013 - 12:31 | Link to Comment percyklein
percyklein's picture

Off-board negotation of block trades is nothing new, but once upon a time , some of you may recall, the involved broker-dealer was a member of an exchange with rules that required that the negotiated trade be brought to the exchange floor to interact with other buying and selling interest found there in the auction trading system. That might shave off part off the deal to fill floor interest, fill at the best emerging execution price for the block all the limit orders in the book at that price, and so on. There might be so much interest on the floor that it became clear that the block price negotiated upstairs was wrong and would have to be something else to get done on the floor without being broken up so much. So maybe the upstairs deal had to be renegotiated. Of course, prices move, so nothing was certain. But it all worked and the trade did not take place off-floor in a vacuum with no interaction at all with the rest of the market. Was this "fair"? Well, there were the regionals and brokers would seek out the place where there was the least chance of encountering other trading interest. And other trading interest not present in or represented in the chosen exchange market (mostly market professionals and customers on the NYSE book) was cut out. All imperfections.  At the time the SEC was actually working on solving those problems, to the consternation of dealers and big institutional players with absolutely no sense of resonsibility to the markets generally (they hated the idea of getting in an order or price queue with perfect strangers). Anathama today to suggest at the SEC that doing this might be a good idea -- a sure way to end your career.  But  it seems to me to have been fairer then and to have been headed toward something even more fair than what we're left with now. Big players and dealers have always wanted to avoid the little people and now they can -- so the small investor drops out of the thing altogether and price discovery through collective order interaction is declining rapidly. What will take it's place? Hmmm?  Talk about killing the golden goose! This is a better way to run the railroad? Not in my book.

Mon, 12/09/2013 - 12:34 | Link to Comment FieldingMellish
FieldingMellish's picture

The exchanges killed themselves by allowing HFT. It adds nothing but removes confidence.

Mon, 12/09/2013 - 21:24 | Link to Comment sumo
sumo's picture

WSJ hand-wringing = Old Money whining about Nouveau Riche quants.

Who gives a fuck, besides bailout recipients? There are no markets anymore, just predatory wealth transfers from poor to rich.

Do NOT follow this link or you will be banned from the site!