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If HFT Algos Were People They'd Be Perp Walked

Tyler Durden's picture




 

Submitted by Mark St.Cyr via Mark St.Cyr blog,

Suddenly the world is a buzz with the revelations that High Frequency Trading (HFT) may be doing more than actually harming the markets, it might be destroying the illusion they still are markets.

This past Sunday the world at large was introduced that maybe, just maybe, something was amiss in the financial markets. However, anyone with more than a passing interest in business, finance, and a little common sense could feel in their gut that something just wasn’t copacetic.

Between the Federal Reserve's massive QE experiment amplified by the arms race of algorithmic technologies (aka HFT) to shave off a piece of that pie for themselves, the last few years have been nothing less than breathtaking.

Currently I am staggered as I watch or read many in the so-called “smart crowd” taking to the financial media outlets professing their ire at (wait for it….) Michael Lewis’ assertion that: “the markets are rigged.”  This is where they have an issue? Really? I mean…Really?

Let’s put a few things into its proper perspective. HFT is currently a catch-all phrase or moniker. At one time when it was first introduced it could be (and was) argued it had a legitimate use in making markets more efficient. However that was some 10 years ago. Today’s HFT seems to have been on an evolution of exploitation and adulterated well past the point of resembling the good idea it once was hailed to be.

Efficient markets are when: real buyers, and real sellers meet, agree, and exchange with the least amount of friction to transact. Note the emphasis on real, it’s not there for style, real means an actual buyer or seller. Period. (Just so we’re clear and not falling down the black hole of what “is” is.)

This point is one of the underlying problems in the markets today. It’s not the only one HFT has adulterated, but it just might be the most important to this discussion. For what everyone seems to be missing as they defend HFT as the great market liquidity engine, that so-called “liquidity” more often than not is fake. So I ask: Is fake now acceptable in the financial markets? For if that’s true: Bernie Madoff might be looking for his get out of jail card.

We have laws on the books to protect the markets from people trading on inside information, fraud, and more. People get arrested and perp walked in front of the media as to make examples to show, “This can happen too you!” Yet, if machines are doing the same in an equivalent manner, that’s OK. For this is technology we’re talking here, and we all know without technology, the markets are nothing more than the pits. (pun intended)

Sometimes complicated issues have to be reduced to their smallest form to get an indication on whether or not something is good, bad, or indifferent. And once one reduces this all down to just basic common sense, you don’t need a supercomputer spinning algorithms near the speed of light to come up with the obvious answer of – Duh!

When someone within the financial markets comes across information that is deemed “confidential” then uses that information as to front run said information and profit by it, we throw them in jail for insider trading.

If a machine can detect you placing an order then within nanoseconds execute buy and sell orders throughout the exchanges as to skim a piece or to push markets in a beneficial direction to enrich itself. That’s fine. Are you kidding me?

Since when is it “legal” to insert oneself into a transaction they had no business being involved in? That is not “facilitating” that’s fraudulent skimming, for that “inserted freeloader” was not needed to transact. That’s front running pure and simple. And like I said earlier we perp walk people for that. But an HFT? Nope, that’s now looked upon as “improving liquidity” by the so-called “smart crowd.” Simply jaw dropping in my view.

Add to this the insane notion that these HFT outlets are providing, “deep markets.” Again, I’ll ask, what are we talking about here? Real buyers? Or, the illusion of real buyers? For if anyone remembers, the “Flash Crash” showed everyone just how real and deep the markets were.

All those quotes of illusive bids and ask were anything but illusive: they were illusions. The term “quote stuffing” and its consequences were first highlighted there. Now, it’s as if it never happened or better yet, is defended in an “ancient history” type dismissal.

Ancient history or not, if someone were to set up shop selling land deals at bargain prices touting that the demand was high and pointed to the surrounding landscape pointing out the row upon row of newly constructed facades as proof, you might think or find comfort in the notion, “Well if I need to sell there’s a chance I might find a buyer.”

Then you walked over unbeknownst to find all those freshly constructed home facades were just that – facades resembling a Hollywood movie set. Then what would you think? I know what one should be thinking: “How do I contact the authorities? These people need to be put in jail!”

But if it’s a machine rendering a “virtual reality” showing demands of large bids or asks in any given instrument that’s OK, they’re providing a valuable service to the community showing what it could be like if there were real buyers and sellers I guess. Just don’t think of ever trying to sell or buy one of them, for they disappear faster than a snake-oil salesman can close up shop.

The only good thing that has come out lately on this whole issue of HFT is maybe for the first time in years the cover has been thrown off exposing the parasitic beast that’s been living just beneath the surface passing itself off as a symbiotic entity, rather than the pernicious monster its grown to be.

Now the only question left to ask is: Can they invoke the death penalty for this creature…

Without killing the patient?

 

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Tue, 04/01/2014 - 18:10 | 4615259 fonestar
fonestar's picture

Screw the HFT algos!

fonestar gots muh BTC muh BTC.

Tue, 04/01/2014 - 18:55 | 4615343 eclectic syncretist
eclectic syncretist's picture

Hello, this is fonestar of Zerohedge defame.

fonestar wants to take the time to address this counter-conspiracy that he is somehow a TPTB shill.  Nothing is further from the truth, fonestar has been in Bitcoin since 2011 and trades on localbitcoins.com as well as btc-e.com.  While fonestar acknowledges popular websites are polluted with shills pushing different angles, he is not one of them.

As for your assertion that fonestar is on Zerohedge to purposely keep geezers and goldbugs out of Bitcoins, it is nonsense.  No work has to be done with these people.  They wear their ignorance like a badge.  They were raised to believe stupid is tough and smart is weakness.  You can have fun with these people though and the only thing that will turn their heads is when Bitcoin continues to make meteoric new highs.  We are on the right side of history, we do not need to pander to the LCD to get where we are going.

Satoshi is coding for us what we could not code for ourselves.

https://bitcointalk.org/index.php?topic=470593.0

Tue, 04/01/2014 - 19:11 | 4615379 weburke
weburke's picture

If ye would only take all those who invest. but, too many got goxed unfairly.

Tue, 04/01/2014 - 19:20 | 4615407 fonestar
fonestar's picture

Teaches those cryptards to keep their c0inz on an exchange then!

Tue, 04/01/2014 - 19:12 | 4615381 fonestar
fonestar's picture

Hey, fonestar posted that a month ago over at bitcointalk.org?

Tue, 04/01/2014 - 18:20 | 4615266 Urban Roman
Urban Roman's picture

A surefire way to kill it would be to tax it.

...

Just put a $0.001 tax on each and every cancellation. If you really want to cancel that order, no problem. If you're canelling 100,000 of them a second, it's going to have a price tag on it.

Oh, and if you don't cancel and it fills, you have to eat it. Whether it's in your favor or not. That's trading.

Do that and prosecute for naked shorting and it would be a real market again. DJ 800, SP 90.

Tue, 04/01/2014 - 18:24 | 4615295 Timmay
Timmay's picture

Don't forget to add that trading "losses" cannot be deducted (or carried forward) against corporate taxes either.

Tue, 04/01/2014 - 20:22 | 4615588 Fidel Sarcastro
Fidel Sarcastro's picture

No Tax needed - just make all orders non-cancelable for 3 seconds.  They could never operate that way.

Tue, 04/01/2014 - 18:15 | 4615271 EconomicGenocide
EconomicGenocide's picture

The one thing no one is mentioning and avoiding like the plague is the fact that HFT's biggest job was to move the markets in a direction up via bid stuffing based on the relationship between the FED, banks and HFT houses. It was the main reason why no one cared about the scalping and front running going on. The main purpose was to move markets up to show to the masses that QE was working, while the funds were merely being laundered THROUGH the markets via the support of HFT.

 

The money is NOT THERE. There is 1000 S&P points of air under where it sits!!

Tue, 04/01/2014 - 19:19 | 4615406 AlaricBalth
AlaricBalth's picture

Nothing but an HFT Potemkin Village.

From the article: "Then you walked over unbeknownst to find all those freshly constructed home facades were just that – facades resembling a Hollywood movie set."

According to the story, Grigory Potemkin erected fake settlements along the banks of the Dnieper River in order to fool Empress Catherine II during her visit to Crimea in 1787. The phrase is now used, typically in politics and economics, to describe any construction (literal or figurative) built solely to deceive others into thinking that some situation is better than it really is.

Tue, 04/01/2014 - 23:17 | 4616051 francis.sawyer001
francis.sawyer001's picture

Your like the only person here who get's it, do you realize this?

 

The FED-FIAT to INFINITY for free is the issue, but "HOW DO YOU LAUNDER", 100's of trillions of dollars to make it appear as WEALTH(MONEY) as opposed to FIAT.

The HFT machine, ... is just like the wizard of oz, where just for a moment the curtains are pulled back, but don't worry, they'll quickly be closed.

Once the NSA/CIA takes over TRADING, you'll never here another peep about 'fraud' or 'rigged'

Tue, 04/01/2014 - 18:16 | 4615275 Ignatius
Ignatius's picture

Fuck 'the market', go start a small business.

Tue, 04/01/2014 - 18:22 | 4615292 seek
seek's picture

That's not exactly a cake walk these days either.

Thanks to the Fed, everything is rigged and everything is fucked, small business included.

Tue, 04/01/2014 - 19:04 | 4615366 nevadan
nevadan's picture

Absolutely.  It amazes me that everyone has their panties in a wad because an author and a trader have the audacity to utter the word "rigged" in connection with the markets.  But nary a peep about QE and the billions pumped into the markets.  That couldn't be rigging could it?

Tue, 04/01/2014 - 23:14 | 4616041 francis.sawyer001
francis.sawyer001's picture

Campbell calls it "MYTHOLOGY"

I call it 'controlled debate'

 

Even here are on ZH there is mythology of DEBT associated with the FED-FIAT, when in truth its just free money created out of YELLEN's ARSE to infinity.

 

Today OBAMA declared OBAMA-CARE a success, so now he goes off to wall-street and slews dragon's (HFT), its a great narrative.

Back here on ZH now nobody dares to mention AIPAC, or ZIONISM for fear of death.

*

Cass Sunstein told you he would control the internet debate, what he failed to mention is that he will also control your mind.

 

Tue, 04/01/2014 - 18:26 | 4615300 f16hoser
f16hoser's picture

Here, Here!

Tue, 04/01/2014 - 19:18 | 4615401 slightlyskeptical
slightlyskeptical's picture

What would be a good small business to start? I own a small business already and hate it, though it pays the bills most of the time.

Tue, 04/01/2014 - 18:16 | 4615278 asteroids
asteroids's picture

Now you know why dark pools exist. Why guys with "size" trade with each other. Given time, the muppets will get eaten alive by HFTs.

Tue, 04/01/2014 - 18:21 | 4615290 Waterfallsparkles
Waterfallsparkles's picture

Kind of like having a tape worm in the Market.  If you do not get rid of it,  it will kill the host.

Tue, 04/01/2014 - 18:26 | 4615299 cougar_w
cougar_w's picture

HFT is arbing network latency, rather than actually front-running. All the orders go in as placed -- nothing is actually held up or delayed -- the algos just happen to get their orders in ahead of anyone else.

Anyone doesn't get all that then maybe you understand now why Congress and the SEC are standing around looking gobsmacked.

Tue, 04/01/2014 - 19:05 | 4615319 Algosaurus Rex
Algosaurus Rex's picture

Wrong. HFTs exploit front-running explicitly via exotic order types. Ever heard of Hide Not Slide, Hide And Light?

Tue, 04/01/2014 - 19:59 | 4615521 cougar_w
cougar_w's picture

We may be talking about different things, which is fine, it is a large field now.

Here's my take on it. Old skool front-running is a kind of insider trade, when a trader holds a client's (usually large) order while he places his own against it. He runs in front, as it happens, because he is in physical control of the order precedent.

Computerized HFT as it is usually discussed here is about running faster. Seems like the same outcome, but the method is completely different and evolves from asymmetric access to information and faster technology. I think that is why it remains legal (tho maybe not for long).

What is critical here is that HFT doesn't need to "hold" anything. There is no "trader" making a decision on who gets to go first. The machine reads the trades coming in via slower routes and fires off another (advantageous) trade on a much faster route. It is someone leveraging their technology advantage, rather than interfering with order flow. The big players are apparently headed toward "ultra-low latency direct market access" where they simply beat the crap out of anything else trying to get in the door, whatever else they might be trying to do. It's brute force, like a crowbar. They throw all the hardware they can at it, over the fastest connection they can buy. The exchanges are making serious bank selling them access. Some of this kit are one-off bespoke hardware engines (no software at all, just boards full of custom ASICs running at native clock speeds) and they are now so fast they can't use optical fiber networks because light travelling over glass is too slow. They take exchange data over air via microwaves to get a slight edge. These guys are playing at the limits of the speed of light over media.

This shit is getting crazy. I was writing way-out-there fiction about HFT a few years back that is now verging on fact. I had software HFT algos going up against Fortran (all hardware) at wire-speeds and the way she beat them was by using massive parallel computing and exotic matrix math running in 64 dimensions. Of course she pwned them.

The firebird could still kick their asses though, I bet. Maybe she needs an excuse to revisit the Exchange ... but right now I've no idea what angle I'd work. Facts on the ground are rapidly getting ahead of my imagining.

In the spirit of the orignal article (perp walks) maybe she goes to NY on some other business and gets picked up by the FBI for HFT and put before a judge. That sounds like it could be funny as hell. Though I know for a fact there is no jail cell can hold her.

Tue, 04/01/2014 - 21:18 | 4615764 Pseudonymous
Pseudonymous's picture

This is fascinating stuff! I love the thing how this kind of stuff leads to great innovations and improvements in telecommunication, hardware, algorithm and various other technologies, that can later enter into the mainstream. This reminds me a lot of the Bitcoin ecosystem, which still seems to lag behind in a lot of respects. Bitcoin only had its first ASICs (and extremely simple ones at that, not ones for trading purposes) enter the scene about a year or so ago, after going through CPUs, then GPGPUs, then FPGAs before that. In Bitcoin and altcoin  mining there is an arms race for developing faster and more efficient chips that do simple proof-of-work (SHA-256 hashes; "altcoins" are other cryptocurrencies similar to Bitcoin, many of which use different algorithms). They are currently catching up with Moore's law. Rumors are that Bitcoin ASICs developers might get 20nm chips on the market before GPU or CPU manufacturers do, because they can tolerate higher error rates. Miners also have some incentive to obtain lower latency connectivity with other miners. Traders on exchanges for cryptocurrencies and various related securities definitely have similar incentives. They also definitely use some trading "bots", but I doubt they are very sophisticated currently. And all this is going on low-key and unregulated. You should consider looking into these Bitcoin related stuff.

Tue, 04/01/2014 - 21:39 | 4615825 cougar_w
cougar_w's picture

Bitcoin might not be undermined by fast hardware, but by someone opening up a mathematical hole. Not even a flaw in the algorithm, but an actual novel mathematical solution to the work problem.

Failing that, some of the actual hardware hacks might be mind-blowing. How about the first practical application for quantum computing, or a new branch of mathematics expressed as a custom ASIC design.

This stuff is nuts. I love it.

Tue, 04/01/2014 - 23:40 | 4616101 LibertarianMenace
LibertarianMenace's picture

"Perfecting" information just invites chaos to dinner. Given the improvements in the technology of both speed and volume, it's not too hard to imagine waking up one morning to a global stock value of zero.

Tue, 04/01/2014 - 23:55 | 4616116 Pseudonymous
Pseudonymous's picture

If Bitcoin is able to lead to the development of quantum computers, that alone would make it worth it. Cryptocurrencies will be able to survive by switching to existing cryptographic primitives that are not broken by quantum computing or to quantum cryptographic ones. There is even theoretical work in outright quantum money, which as a concept is completely different from Bitcoin (you can see a long and somewhat boring presentation about quantum money here: https://www.youtube.com/watch?v=q_74oAuMIXw from Peter Shor, who is also responsible for the very quantum algorithm that would break most of the currently used crypto, should practical quantum computers be developed),

As for mathematical breakthroughs, some of these would actually have no immediate effect on cryptocurrencies and would allow plenty of time to make the protocol stronger before any damage can be done. A breakthrough that greatly increases the speed of proof-of-work computations (such as faster ASICs) would be accommodated just as all the previous increases have been, provided that the breakthrough becomes public knowledge.

The thing that makes Bitcoin so powerful is that there is a vast amount of computing work already done (the proof of work, asserting the validity of all past transactions and therefore current balances), that would *all* need to be re-done from scratch by anyone who would want to try to propose an alternative, fraudulent history of the transactions. In the worst case scenario - an unexpected mathematical breakthrough so huge that breaks multiple primitives simultaneously, utterly and instantly, I think there would be enough trust among the community to agree on a last good state of the Bitcoin's public ledger to be subsequently used as the basis from where the updated version of Bitcoin would resume. That would mean, at worst, the reversal of some very recent transactions and all the balances staying effectively frozen for the time it takes to release a fix (which probably wouldn't be long). That, I think, is the very worst case scenario and I'm personally comfortable with that.

Tue, 04/01/2014 - 23:58 | 4616138 cougar_w
cougar_w's picture

An interesting take. Thank you for sharing that.

Tue, 04/01/2014 - 18:59 | 4615356 eclectic syncretist
eclectic syncretist's picture

you are not only wrong, you are one of THEM!

Tue, 04/01/2014 - 20:02 | 4615543 cougar_w
cougar_w's picture

If I was one of them, I'd be rolling in money. It's tempting.

I could be off somewhere refining 64-way Olmsford/Burns type-3 matrix algebra, but instead I'm just wasting my life here with you ZH punks.

Tue, 04/01/2014 - 18:27 | 4615301 f16hoser
f16hoser's picture

The "Digital; Green Mile!"

Tue, 04/01/2014 - 18:28 | 4615305 Its_the_economy...
Its_the_economy_stupid's picture

they are "people". The Supreme Court said so

Tue, 04/01/2014 - 19:06 | 4615360 williambanzai7
williambanzai7's picture

Wall Street has always been about technology and maximizing its use to screw the public.

This HFT phenomena is a parasite, but it is not the central banking virus at the centrer of the system. 

I read this as a sign that they recognize their days are numbered.

Tue, 04/01/2014 - 23:10 | 4616030 francis.sawyer001
francis.sawyer001's picture

The HFT lobbyists said early on "There will be hearings, but don't destroy HFT, because without HFT the liquidity of the market will evaporate".

Everybody in WASH-DC knows that wall-st butters their bread,

The HFT is just an ALGO to create the perception of 'trading', so that the world still see's the USA as a trading center.

There will come a time, when only fake virtual trades are the majority trades on the market, as real people with real money will have long ago moved to ASIAN, and European banks and exchanges, and markets.

*

So HFT skims cream from the MARKET, the MARKET orginates from FREE FED FIAT, and the HFT is just one of many ALGO's that LAUNDER the FIAT clean to be passed around in NYC.

Got to  create the illusion of WEALTH not orginating out of the FED's asshole.

 

Tue, 04/01/2014 - 19:16 | 4615393 khakuda
khakuda's picture

Agreed. I would add that the Federal Reserve has done just as much if not a lot more to destroy what used to be known as markets.

Tue, 04/01/2014 - 19:26 | 4615435 Goldilocks
Goldilocks's picture

"Since when is it “legal” to insert oneself into a transaction they had no business being involved in?"

Life Call Commercial "I've fallen and I can't get up!"
http://www.youtube.com/watch?v=bQlpDiXPZHQ (1:00)

Tue, 04/01/2014 - 19:48 | 4615437 slightlyskeptical
slightlyskeptical's picture

The HFT traders should be treated like the traitors and financial terrorists that they are. No doubt about it, HFT is simply front running of orders, which is clearly illegal under current securities laws. The guys doing it know it is illegal, the public knows it is illegal, but the guys at the SEC and CTFC are too busy watching porn and fantasizing about being HFT traders themselves to stop it. Kind of like the poor voting Republican, although to be fair, simply to vote is voting against yourself in most cases.

Tue, 04/01/2014 - 19:28 | 4615444 nakki
nakki's picture

Like I've said before HFT is the new "bag men" skimming the casino, but is small time relative to counterfeiting 6-7 trillion dollars over 6 years. Probably more like 8-10 but what's a few trillion between friends. So they'll bring out the talking heads and argue about HFT, while the real crime goes unpunished. At one point the money I had worked 30 years for was something, not a huge amount but at least I could earn money on it without having to gamble with it. Now its chump change earning nothing becoming more and more worthless as time goes by. What amazes me is that I know tons of people with absolutely nothing and yet banks can create $$ out of nothing, and that's the real scam.

Tue, 04/01/2014 - 20:06 | 4615551 cougar_w
cougar_w's picture

Good point.

The HFT thing is going to be used to explain (justify) the next market crash. A different set of problems (and opportunites) altogether, but yes the scale is vastly different.

Tue, 04/01/2014 - 20:10 | 4615564 Dr. Engali
Dr. Engali's picture

You are kidding right? You're citing the rule if law? We have just been threw five years of extreme lawlessness where the banks and the politically connected have robbed the nation blind. Maybe you should retitle this If 'Algos Were a Small Time Retail Investor They would be Sodomized by the System'.

Tue, 04/01/2014 - 20:22 | 4615587 cougar_w
cougar_w's picture

The hell but that was funny.

Tue, 04/01/2014 - 20:50 | 4615673 Dr. Engali
Dr. Engali's picture

Threw=Through.... I hate being a retard sometimes. Then there are those moments when being retarded has it's perks, like when my wife wants me to go shopping...... Ahhhh never mind, I'll go, you're fucking retarded and can't read the list.

Tue, 04/01/2014 - 21:02 | 4615721 cougar_w
cougar_w's picture

My wife is ruthless. Accuses me of being senile (it's a fair cop) and still sends me to do the shopping. Then she texts me the shopping list an item at a time on the theory that it's just as good as being there telling me what to go get.

Well it works, so I've got no easy way out.

Tue, 04/01/2014 - 21:10 | 4615742 Dr. Engali
Dr. Engali's picture

Lol..... Yeah I get hammered with the senility commentary too. It wouldn't bothered me so much if it weren't.... Hey wait, what were we talking about?

Tue, 04/01/2014 - 21:18 | 4615763 1stepcloser
1stepcloser's picture

Don't fuck with Johnny 5, Janet

Tue, 04/01/2014 - 22:28 | 4615945 stant
stant's picture

hft is a old game , the crooks have moved on to mega data.

Wed, 04/02/2014 - 00:00 | 4616140 cougar_w
cougar_w's picture

I would have to agree. If GS is gunning for HFT then the real game must have moved to a different casino.

Wed, 04/02/2014 - 23:50 | 4620021 advill
advill's picture

They are a obscure  and unknow  layer of cost taking money of ALL the  operations is what Nasdaq or NYSE does but they are MARKETS and we know why they are getting paid through our clear and established commisions.

 

If they are going to exist they must be clear, regulated, and must provide to the market something that today nobody does.....I don't think is the case  of HFT companies.

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