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High Frequency Trading: All You Need To Know

Tyler Durden's picture




 

In the aftermath of Michael Lewis' book "Flash Boys" there has been a renewed surge in interest in High Frequency Trading. Alas, much of it is conflicted, biased, overly technical or simply wrong. And since we can't assume that all those interested have been followed our 5 year of coverage of a topic that finally has earned its day in the public spotlight, below is a simple summary for everyone.

To be sure, the thinking behind HFT is hardly revolutionary, or even new. Although today HFT is closely associated with high speed computers, HFT is a relative term, describing how market participants use technology to gain information, and act upon it, in advance of the rest of the market. Near the advent of the telescope, market merchants would use telescopes and look out to the sea to determine the cargo hold of incoming merchant ships. If the merchant could determine which goods were soon to arrive on these ships, they could sell off their excess supply in the market before the incoming goods could introduce price competition.

That said, the real proliferation of technology in trading, started in earnest in the 1960s with the arrival of the NASDAQ, the first exchange to heavily use computers.

Ironically, while some form of HFT has been around for a long time, its true "potential" was first revealed in October 1987 with the first whole market flash crash, which resulted from an exponential propagation of program trading, which like right now with HFT, nobody truly understood. And even though some thought that Black Monday would have taught traders and regulators a lesson, it merely accelerated the incursion of computerized and algorihmic trading into regular markets, to such an extent that HFT now accounts for nearly three quarters of all exchange-based trading volume, while dark pools and other "off exchange venues" - or more markets that are not readily accessible to most - account for up to 40% of all total trading by volume up from 16% six years ago.

The rough chronology of algorithmic trading, of which HFT is a subset, is shown in the timeline below.

Over the past decade, following regulatory initiatives aimed at creating competition between trading venues primarily as a result of the overhaul of the National Market System Regulation (or reg NMS), the equities market has fragmented. Liquidity is now dispersed across many lit equity trading venues and dark pools. This complexity, combined with trading venues becoming electronic, has created profit opportunities for technologically sophisticated players. High frequency traders use ultra-high speed connections with trading venues and sophisticated trading algorithms to exploit inefficiencies created by the new market structure and to identify patterns in 3rd parties’ trading that they can use to their own advantage.

For traditional investors, however, these new market conditions are less welcome. Institutional investors find themselves falling behind these new competitors, in large part because the game has changed and because they lack the tools required to effectively compete.

In brief: The role of the human trader has evolved. They must now also understand how various electronic trading methods work, when to use them, and when to be aware of those that may adversely affect their trades.

Market venue competition began with the Alternative Trading System regulation of 1998. This was introduced to provide a framework for competition between trading venues. In 2007 the National Market System regulation extended the framework by requiring traders to access the “best displayed price” available from an automated visible market. These regulations were intended to promote efficient and fair price formation in equities markets. As new venues have successfully competed for trade volume, market liquidity has fragmented across these venues.

Market participants seeking liquidity are required by regulatory obligations to access visible liquidity at the best price, which may require them to incorporate new technologies that can access liquidity fragmented across trading venues. These technologies may include routing technology and algorithms that re-aggregate fragmented liquidity. Dark Pools – trading platforms originally designed to anonymously trade large block orders electronically – began to expand their role and trade smaller orders. This allowed dealers to internalize their flow and institutional investors to hide their block orders from market opportunists.

The use of these technologies can lead to leaking trading information that can be exploited by opportunistic traders. Information is leaked when electronic algorithms reveal patterns in their trading activity. These patterns can be detected by HFTs who then make trades that profit from them. Competition for liquidity has encouraged trading venues to move from the traditional utility model, where each side of a transaction would be charged a fee, to models where the venues charge for technological services, pay participants to provide liquidity and charge participants that remove liquidity. Many trading venues have become technology purveyors.

Broker-dealers have realized that they are often the party paying the trade execution fee, which is used by the venues to pay opportunistic traders a rebate for providing liquidity. To avoid paying these fees and internalise their valuable uninformed active flow, especially from retail customers, broker-dealers have also established dark pools. By internalising their flow or, in many cases, selling it to proprietary trading firms, they can avoid paying the trading fees that the venues charge for removing liquidity from their order books.

The irony is that in their attempt to streamline and simplify the market with Reg ATS and Reg NMS, regulators have created the ultimate hodge podge of trading venues, information leakage nodes, and countless opportunities to frontrun both institutional and retail order blocks.

 

Before we continue, let's take a look at perhaps the most critical and misunderstood concept around, one which HFT advocates are quite happy to (ab)use without really understanding what it means.

There is more: as we explained back in August 2009, the correct term to focus on isn't liquidity, but Implementation Shortfall, also known as Slippage, which is the toll HFTs collect from investors - this is, on average, the cost of spread and frontrunning. Implementation Shortfall (IS) Costs – comprised of 2 pieces: Timing Delay Costs - Any delay cost incurred between the Initial Decision (Open on Day 1) and the Broker Placement Price. Think of this as the cost of Seeking Liquidity; and Market Impact Costs - Price change between the time the Order is placed with the Broker and the eventual trade price. (those curious to learn more about the nuances can do so at this link).

Why is liquidity so critical? Because it goes hand in hand with the concept of the modern exchange, since the measure of consummated liquidity is a key variable in determining the successfulness of any trade venue. It also goes to show why HFTs never operate in a vacuum but in explicit symbiosis with exchanges. It was Zero Hedge who pointed out in 2012 that HFT is a critical component of exchange revenue streams, ranging anywhere between 17% and all the way up to 32%.

 

It is this inextricable link between the venue and the algos that dominate the venue, that has led many to suggest - correctly - that one of the key culprits for HFT proliferation is the dominant exchange business model, known as the Maker-Taker model, in which the liquidity provider is paid (in practical terms it means paying those who provide liquidity with limit orders even it the limit orders are merely "flashed" subpenny orders frontrunning a major order block), while charging liquidity takers (those who take away liquidity with market orders).  This is summarized in the panel below.

No matter the reason, one thing is certain: the use of HFT has exploded.

With the equity markets becoming electronic and prices quoted by the cent (as opposed to the previous eighths of a dollar), the traditional, “manual”, market makers have found it difficult to keep up with the new technologically savvy firms. The playing field has been tilted in favor of HFTs, who use high speed computers, low-latency connectivity and low latency direct data feeds to realize hidden alpha... or as some call it - frontrunning.

HFTs can follow active, passive or hybrid strategies. Passive HFTs employ market making strategies that seek to earn both the bid/offer spread and the rebates paid by trading venues as incentives for posting liquidity. They do this efficiently across many stocks simultaneously by utilizing the full potential of their computer hardware, venue-provided technology and statistical models. This strategy is commonly known as Electronic Liquidity Provision (ELP), or rebate arbitrage.

These ELP strategies can also be signal detectors. For example, when ELP strategies are adversely affected by a price that changes the current bid/ask spread, this may indicate the presence of a large institutional block order. An HFT can then use this information to initiate an active strategy to extract alpha from this new information.

Active HFTs monitor the routing of large orders, noting the sequence in which venues are accessed. Once a large order is detected, the HFT will then trade ahead of it,  anticipating the future market impact that usually accompanies sizable orders. The HFT will close out their position when they believe the large order has finished. The result of this strategy is that the HFT has now profited from the impact of the large order. The concern for the institutional investor, that originally submitted the large order, is that their market impact is amplified by this HFT activity and thus reduces their alpha. The most sophisticated HFTs use machine learning and artificial intelligence techniques to extract alpha from knowledge of market structure and order flow information.

The ubiqituous presence of HFT also means that one of the key considerations when placing an order is "smart order routing" which take into account such concepts as latency arbitrage and order size. This is furhter simplied in the panel below.

Which brings us to the topic of whether all HFT does is simply frontrunning, legal as it may be, and allowing firms like Virtu to post "liquidity providing","trading" profits on 1,237 of 1,238 trading days. The answer - no. At least not explicitly. The full list of HFT strategies, broken down by their impact on various stakeholders is shown below. Again, at least on paper, some strategies are beneficial if mostly to the retail investor. The biggest question, however, is - is there such a thing as a retail investor left at a time when market trading volume has fallen to decade lows, and where HFT now comprises the bulk of lit volume.

And while on paper HFT does provide benefit, the reality is that in practice the consequences of HFT are almost unique negative. Putting aside the ethical implications of whether one views frontrunning as legal or not, the far bigger unintended consequences of HFT is that it has made trading venues inherently far more unstable and prone to sudden and unexplained crashes. Putting aside the best known HFT-induces market crash, the May 2010 "flash crash", more recently the market has suffered several adverse events as a consequence of the new fragmented, for-profit, market  venue environment. In some cases, these events resulted from the unpredictable interaction of trading algorithms; in other cases they were the result of software glitches or overloaded hardware.

KNIGHT CAPITAL LOSS – OVER $450 MILLION + WAVES OF ACCIDENTAL TRADES

A software malfunction from Knight caused waves of accidental trades to NYSE-listed companies. The incident caused losses of over $450 million for Knight. The SEC later launched a formal investigation.

GOLDMAN SACHS – $10S OF MM + TECHNICAL GLITCH IMPACTS OPTIONS

An internal system upgrade resulting in technical glitches impacted options on stocks and ETFs, leading to erroneous trades that were vastly out of line with market prices. Articles suggest that the erroneous options trades could have resulted in losses of $ 10’s of millions. Goldman Sachs stated that it did not face material loss or risk from this problem.

NASDAQ – 3 HOUR TRADING HALT DUE TO CONNECTION ISSUE

Due to a connection issue NASDAQ called a trading halt for more than three hours in order to prevent unfair trading conditions. A software bug erroneously increased data messaging between NASDAQ’s Securities Information Processor and NYSE Arca to beyond double the connection’s capacity. The software flaw also prevented NASDAQ’s internal backup system from functioning properly.

NASDAQ – DATA TRANSFER PROBLEMS FREEZE INDEX FOR 1 HOUR

An error during the transferring of data caused the NASDAQ Composite Index to be frozen for approximately one hour. Some options contracts linked to the indexes were halted, though no stock trading was impacted. NASDAQ officials state that the problem was caused by human error. Although the market suffered no losses, this technical malfunction – the third in two months – raises considerable concerns.

Which brings us to the culmination of 50 years of changing technology, namely the changing investor-broker relationship.

Traditionally, investors spent their efforts seeking alpha and brokers were charged with sourcing liquidity. Liquidity could be sourced via the upstairs market or the stock exchange. The stock exchange operated as a utility that consolidated liquidity. Beyond generating alpha, the only decision for an investor was choosing a broker to execute their trades. Today, investors are still concerned with generating alpha. However, the trading process required to execute their alpha strategies has become more complex. The consolidated utility model has been replaced by a market that is highly fragmented with for-profit venues vigorously competing for liquidity which is provided primarily by HFTs.

This new environment puts brokers in a difficult position. They have a fiduciary responsibility to provide best execution to their clients. This requires them to invest in new technology to source liquidity and defend against HFT strategies. And because many of these venues now pay rebates for liquidity, which is quickly provided by HFTs, brokers are usually left having to pay active take fees to the venue. And at the same time that brokers are incurring these costs, investors are pressuring them to reduce commissions.

These pressures on brokers’ margins are creating conflicts of interest with their clients. By accessing venues with lower trading fees, or attempting passive order routes of their own, brokers can reduce their operating costs. However, these trade routes are not necessarily best for the investors.

Sophisticated investors now demand granular execution information detailing how their order flow was managed by their broker so they can ensure they are receiving the best execution. While brokers provide aggregate performance reports, investors can build a more complete analysis, including broker performance comparison by using more granular information.

Summarized visually - Before:

And After:

* * *

So putting it all together, what is the current state of the market? Ironically, when one strips away all the bells and whistles of modern technology, it all goes back to a concept as old as the first market itself - namely alpha, or outperforming the broader market.

In order to find hidden alpha, it is important to first understand where market participants are with respect to information utilization. The light grey area in the chart below represents the typical institutional investor, playing the role of the “ostrich” or “compiler”, either choosing to ignore the changes around them or to use information only for basic compliance tasks. Most HFTs belong in the light blue “commander” stage; they take command of the information around them and let it guide their business. Taking advantage of the information opportunity, and finding hidden alpha, requires a firm to move up the stages of adaptation.

COMPLEXITY: This measures the sophistication of the use of information in directing action. Whether the information is trade data or newsfeeds, it can be put to use in more or less sophisticated ways, from simple arithmetic to complex statistical methods coupled with strong strategic understanding. Arithmetic uses aim at providing no more than basic accounting measures of values, volumes and gains and losses. Statistical methods aim to identify patterns in information that can be used to guide trading. Strategic understanding introduces game theory, anticipating the reaction of other market participants when an investor employs a particular trade strategy.

FREQUENCY: Each trade an investor makes provides an opportunity to learn. Gathering information from every trade, as opposed to a select few, helps give the investor a better understanding of how those trades may perform in the future. The more frequent the analysis, the more relevant the findings will be.

ITERATION: Findings serve a purpose only if they are acted upon. The key is to use information to guide actions whose outcomes are then analyzed and the findings reapplied. This creates a continuous iterative loop that drives towards ever greater efficiency.

BREADTH: Knowledge sharing with similar objectives (e.g. institutional investors trading large blocks) could lead to a more efficient investment implementation process for all participants. Working together, institutional investors can share block order implementation experience and data, as a utility. The result of this could help participating institutional investors defend against market impact losses and protect proprietary strategies.

HFT firms will likely plateau at stage 4, “commander”, as they are less likely to share any information in a utility concept; trade execution is their proprietary intellectual capital. Institutional investors, on the other hand, have the potential to reach stage 5, “optimizer”. For institutional investors, their proprietary intellectual capital usually lies within their investment decisions, not their trade implementation routes. Institutional investors are thus more willing to collaborate with eachother to work against trade strategies that cause them market impact.

Regardless of an investor’s disposition towards trading strategies; leveraging advanced technology or committing to more traditional trading strategies, it is important to realize that advanced technology trading is today’s reality. Investors need to strongly consider taking the appropriate steps to protect against the potential negative repercussions of, as well as position themselves to find the hidden alpha within, today’s advanced market.

* * *

So the bottom line: HFT is legal frontrunning... but also so much more.  In fact, like the TBTF banks, HFT itself has become so embedded in the topological fabric of modern market structure, that any practical suggestions to eradicate HFT at this point are laughable simply because extricating HFT from a market - which indeed is rigged but not only by HFTs at the micro level, but more importantly by the Federal Reserve and global central banks at the macro - is virtually impossible without a grand systemic reset first. Which is why regulators, legislators and enforcers will huff and puff, and...  end up doing nothing. Because if there is one thing the TBTF systemic participants have, is unlimited leverage to collect as much capital due to being in a position of systematic importance in a market, rigged or otherwise.

Finally, if push comes to shove, and the fate of HFT is threatened, watch out below, because if HFT's presence, glitchy as it may have been, led to the May 2010 flash crash and the subsequently unstable market which has exhibited at least one memorable crash every single month, then the threat of pulling the marginal trader which now accounts for 70% of all stock churn and volume (if certainly not liquidity) would have consequences comparable to the Lehman collapse.

* * *

Finally, for all those still confused by HFT, here is the ultimate simplification.

Source: Oliver Wyman, Hidden Alpha in Equity Trading

 

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Sun, 04/06/2014 - 16:53 | 4630440 SmilinJoeFizzion
SmilinJoeFizzion's picture

How are those Japan futures looking?

Sun, 04/06/2014 - 17:12 | 4630464 toys for tits
toys for tits's picture

These companies have to be fools to put billions on the line for this software mania when we've seen that they have problems getting Excel formulas correct.

 

Oh wait, I'm the fool. I forgot they're TBTF.

Sun, 04/06/2014 - 17:48 | 4630542 negative rates
negative rates's picture

Better title would have been "low frequency".

Sun, 04/06/2014 - 17:59 | 4630578 Drifter
Drifter's picture

Gosh, it's all so complicated, way above my head.

My silver coins look so nice, so simple, such a bargain, no HFT worry, no counterparty risk, no Tums and sleepless nights.

Buy what Wall Steet hates. Or say they hate. Doesn't matter, it's a bargain.

Sun, 04/06/2014 - 18:13 | 4630610 lordylord
lordylord's picture

This is the obvious result of capitalism.  Just kidding liberals/RINOs!  This is fascism. 

Mon, 04/07/2014 - 09:40 | 4631918 Oh regional Indian
Oh regional Indian's picture

In this simple (TLDR) piece, I found the last lines disturbing.

Now they are such a big part of the flow that yanking them would kill the market?

Nice, wait till the silent predator becomes a symbyote and then declare it bad.

So, now, when one dies, the whole thing dies.

How convenient.

ori

Sun, 04/06/2014 - 18:21 | 4630622 nmewn
nmewn's picture

"Gosh, it's all so complicated, way above my head."

lol...somehow I don't believe you.

Thats a compliment by the way ;-)

Sun, 04/06/2014 - 19:35 | 4630814 zerozulu
zerozulu's picture

If you want very  fast click, goto mouse properties and drag the slider to the extreeem right. That all you can do.

Sun, 04/06/2014 - 20:18 | 4630868 Drifter
Drifter's picture

Yea, it really is nmewn.

Ok it's frontrunning, scalping trades a few pips up to a few cents when trades pass the HFT on their way to the exchange, I get that. And it's just at-market orders not range-bound orders (my terms), I get that. And it's done in a few milliseconds so it's not noticed in time stamps, I get that.

But those charts make my head swim. And I really don't care, I'm not in those markets.

I'm not dumb, show me an electrical schematic, give me a couple minutes with it, and I can tell you what you wana know about it.

I just don't care about this HFT stuff, not even academically, it doesn't affect me.

And it's nothing compared to humongous overt frontrunning Fed lets PDs do and trillions in bailouts and all that.

Btw, how did you come up with that strange handle? I can't even pronounce it.

Mon, 04/07/2014 - 04:02 | 4631535 cdm
cdm's picture

my money (silver coin ...) says

 

nmewn == enemy within.

 

 

i want to be on his side

when i grow up.

Mon, 04/07/2014 - 12:08 | 4632550 Problem Is
Problem Is's picture

Willfully ignorant Amerikan... not a compliment by the way... And it does affect you...

Mon, 04/07/2014 - 18:47 | 4633879 nmewn
nmewn's picture

No, it was a compliment.

Thu, 04/10/2014 - 00:07 | 4642120 MeelionDollerBogus
MeelionDollerBogus's picture

This part is not academic: seeking local optima in a short time window means having no regard for the massive co-operative interfering pattern which can spike prices many large % in just a few seconds or minutes above where they should be, which rips off investors because prices return a few minutes later with massive losses to traders, or worse, cause flash-crashes which then force exchanges to halt, maybe reverse trades, or possibly let damages sit as they may which can chain-react to crash entire economies. That definitely affects you even with zero trades in the system. It's down -1000 in 5 minutes and if not restored will lead to dow -1500 the next day and if that's not rectified in 30 days it means some significant & damaging % loss of the work-force all across the economy.

Mon, 04/07/2014 - 10:36 | 4632138 eclectic syncretist
eclectic syncretist's picture

And what's the difference between HFT and front-running again?  Oh yeah, HFT is still legal.  Thanks Eric (dick) Holder.

Mon, 04/07/2014 - 00:10 | 4631369 candyman
candyman's picture

where r the regulators?

Sun, 04/06/2014 - 17:25 | 4630487 Cattender
Cattender's picture

NEWSFLASH::: FREE $$$$ FROM THE FED = Stocks going UP... and UP and UP! it's so cool and it NEVER FAILS!!!!

Sun, 04/06/2014 - 18:33 | 4630637 lordylord
lordylord's picture

Until the middle class loses half of their wealth again and then beg for MORE government.

Sun, 04/06/2014 - 20:14 | 4630910 Kirk2NCC1701
Kirk2NCC1701's picture

"Japan futures", you ask?  How about "iRobot futures" or "Soylent Green futures"?

Personally, I'm going long on "Guillotines futures" and short on "iBanker futures". 

More than "haircuts" or "close shaves" may be eminent during the Big Correction.  ;-)

Sun, 04/06/2014 - 17:05 | 4630455 achmachat
achmachat's picture

is it possible that you have an ocular fetish?

Sun, 04/06/2014 - 17:08 | 4630456 blindman
blindman's picture

it is a human thing.

Sun, 04/06/2014 - 17:25 | 4630486 goBackToSleep
Sun, 04/06/2014 - 18:09 | 4630603 blindman
blindman's picture

t shirts are important.
moar funny is always true too

Mon, 04/07/2014 - 09:44 | 4631928 Oh regional Indian
Oh regional Indian's picture

Nice one BM. Love the tempo and badass bass on that song :-) And the conga. Nobody uses congas anymore. Or such bold sounding guitars either!

Mon, 04/07/2014 - 18:17 | 4633711 blindman
blindman's picture

i've got an interesting link for you. i'll leave it here and someplace more conspicuous. jackson makes great records, no doubt about it, great "session" musicians is a big part of it. jesse ed davis on guitar, him and david lindley often associated with great guitar tracks with jackson browne and others or their own. here is the link .... . https://www.youtube.com/watch?v=q9Me42csgzU Life-Changing Clawhammer Guitar Demo - Steve Baughman

Mon, 04/07/2014 - 18:22 | 4633797 blindman
blindman's picture

has been said the "eyes are the window to the soul"
and i guess i may have taken that to heart early on
for better or worser. the sight-vision thing seems to
be a nearly infinite source of potential. there,
it is admitted.

Sun, 04/06/2014 - 17:02 | 4630453 Mr Giggles
Mr Giggles's picture

So the bubble grows larger and larger, no one but business scalping business, it sails away in to the distance taking what we laughingly call money with it. all that counts is reality. I mean come on billionaire what is that about. theft.

Sun, 04/06/2014 - 17:22 | 4630479 kchrisc
kchrisc's picture

Summary of it all: The whole, and every market, is contolled by W.O.P.R.

"To you want to make a trade?!"

Sun, 04/06/2014 - 17:23 | 4630483 gimme-gimme-gimme
gimme-gimme-gimme's picture

I think they can sum this up really easy:

HFT all you need to know
------------------------------

Piece of shit day traders getting ripped off by even bigger pieces of shit HFT front running scalpers.

Both of these guys are the retailer investors enemy, so let them have at each other. Really good entertainment seeing them trying to pickpocket each other.

Sun, 04/06/2014 - 18:49 | 4630686 Cadavre
Cadavre's picture

Piece of shit day traders getting ripped off by even bigger pieces of shit HFT front running scalpers.

The farking HFT advantage is not so much the aglor engines as it is the fact they trade in a completely different dimension than 1 minute tick yokels  managing  portfolios for John Q. Even that zany E-mini crowd gets a goo ass raping from them divine HFT putas . HFTs are the right had of god, They are the invisible hand, They are the fat finger, and "FLASH CRASHES" are not mistakes, they are an intentional gutting of of allocation traders working one minute tick with stupid stop loss 101 contrived trading models.

Buy or sale at market, well do ya, punk?. The HFT see all them "at market" orders on de queues and milk `em dry like a crank slut milks cocks in a meth lab.

Them HFT shops don't need to go go throgh no farking broker brpker, HFT operators don't seed no farking SEC ticket.  HFT get to sift through the entire farking order queue. They don't pay no farking broker fees or execution fees.

THey can cancel "sniff 1em out" orders, on a dime, and reorder without batting a farking eye!

They don't even need no farking money - the FED prints it up for `em on demand. They can can flush the FX market in a nano, and then price up the ask at next nano.

It's not about transaction fees or taxes - it is all about the dominion acquired through a co-located pipe - and dat all it be!

 

What should the sign be on all equity, FX, futuresm and options exchanges?
"
Abandon hope all ye who enter here"

It's a suckers game, more etucal to bet on the outcome of a dog or cock fight than the price moves in paper that gas no value!

 

Mon, 04/07/2014 - 10:02 | 4631981 Stuck on Zero
Stuck on Zero's picture

All you need to know about HFT: People making billions by performing no useful function for society.  No value added.  Nuff said.

 

Sun, 04/06/2014 - 17:23 | 4630485 booboo
booboo's picture

Remember, the worlds largest creature the Blue Whale (not to be confused with the London Whale) gets that way by skimming off one of the worlds smallest.

Sun, 04/06/2014 - 17:27 | 4630490 I Write Code
I Write Code's picture

OUT

STANDING

post!

Sun, 04/06/2014 - 17:27 | 4630491 ghengis86
ghengis86's picture

What, no quote stuffing?

Sun, 04/06/2014 - 17:29 | 4630492 earleflorida
earleflorida's picture

Five Years and still the best consumer analysis the average joe-sixpack can get!

Just come to ZEROHedge and get it?

Tyler gives it out for Free... and yet Tyler gets but a fringy-kind-of-Ht from the world of Finance!?!

Absolutely the Best, Tyler!

Your ship has arrived on the world stage...

Regards ;-)> 

Sun, 04/06/2014 - 17:51 | 4630553 negative rates
negative rates's picture

What he said.

Sun, 04/06/2014 - 18:46 | 4630675 centerline
centerline's picture

+1.  If ZH keeps up the critical analysis there will be a time that ignoring ZH will become completely impossible.

Sun, 04/06/2014 - 21:25 | 4631104 Seeking Aphids
Seeking Aphids's picture

Very true....I am seeing increasing references to ZH articles in mainstream media....stuff you can't find anywhere else.......ZH kicks ass. 

Mon, 04/07/2014 - 03:03 | 4631501 Philalethian
Philalethian's picture

United...we ALL Stand...

Divided...we ALL Fall...

Family and world community...will save us ALL!

Grace and gratitude for all you ALL express in the good written works here on ZH.

http://www.youtube.com/watch?v=Wu4oy1IRTh8

 

Mon, 04/07/2014 - 03:14 | 4631505 Bankstein Swiss...
Bankstein Swissgoldberg's picture

I m here to learn about what will happen in the future. Can't find a better source.

Mon, 04/07/2014 - 03:28 | 4631517 Bearwagon
Bearwagon's picture

In order to learn something worthwhile here, you'd better put on appropriate headgear. (Yes, I am talking tin-foil, but to be honest, for best results it should at least be a massive Rhenium-hat.) ;-)

Sun, 04/06/2014 - 17:31 | 4630500 dbTX
dbTX's picture

All you ndeed to know is that if you are a trader outside a HFT operation, the market is rigged.

Sun, 04/06/2014 - 18:12 | 4630590 Drifter
Drifter's picture

All you need to know: It's a big rich club and you ain't in it.

(credit George Carlin)

Mon, 04/07/2014 - 03:13 | 4631502 Philalethian
Philalethian's picture

"All you need to know is that if you are a trader outside a HFT operation, the market is rigged."

Shucks, the whole dad dern freaking matrix is rigged.

Who profits from war?

http://www.youtube.com/watch?v=5hfEBupAeo4

 

Sun, 04/06/2014 - 17:32 | 4630502 dbTX
dbTX's picture

Excuse the fat finger.

Sun, 04/06/2014 - 17:33 | 4630511 Ban KKiller
Ban KKiller's picture

Long live the free market! Regulations? We don't need them as the free market will sort things out for the best.

Criminals almost always rationalize their reasons for crime. At least I do...

 

Sun, 04/06/2014 - 17:35 | 4630515 davey
davey's picture

I have three businesses and have notified Fidelity that unless they change there order flows I will take away there 401 k and payroll business with us.i hope everyone jumps on board and votes with there feet. PS TD Ameritrade has also been put on notice by me personally. Shame on them both.

Sun, 04/06/2014 - 17:38 | 4630523 Solarman
Solarman's picture

I'll make it even simpler.  It is insider trading.  No different than a land speculator being tipped off to where the highway interchange is going or the next metro station, and buying up the land to sell to the uninformed for a profit.

 

Just faster, in smaller amounts, and more frequently.

Sun, 04/06/2014 - 18:53 | 4630696 espirit
espirit's picture

Moar Simpler:

Matrix Metrics.

Sun, 04/06/2014 - 17:38 | 4630524 RaceToTheBottom
RaceToTheBottom's picture

So when liquidity makers can generate profits based on trades, they are no longer providing liquidity, they are generating profits.

Who ever designed that system needs to be shot.

Sun, 04/06/2014 - 17:52 | 4630558 negative rates
negative rates's picture

It was you.

Sun, 04/06/2014 - 18:52 | 4630691 22winmag
22winmag's picture

Perhaps Vietnam would be kind enough to offer the U.S. some firing squad consultants.

Mon, 04/07/2014 - 19:46 | 4634075 RaceToTheBottom
RaceToTheBottom's picture

Filling out the H1B documentation......

Sun, 04/06/2014 - 18:06 | 4630596 nmewn
nmewn's picture

"Putting aside the ethical implications of whether one views frontrunning as legal or not,..."

Yes, what is legal and what is ethical are often times at variance with each other, quite the paradox. Like government "officials" trading in their own accounts as they pass or defeat this or that legislation (front running)...its a very small club...lol.

"...the far bigger unintended consequences of HFT is that it has made trading venues inherently far more unstable and prone to sudden and unexplained crashes."

Which is bad for the retail investor who has already placed his/her trailing stops. Once stopped out, they can't re-enter (IRS wash rules) and even if he/she disregarded the rule (say, using a friend or families account) they are forced to pay still another commission for the same, when nothing was wrong with the stock.

Of course not to mention, compromising their own integrity & ethics by finding ways around "the rules", to make another "legal purchase", when they never should have been stopped out to begin with.

The easiest thing to do is not participate in a fraud where commissions are churned and tax liabilities are locked in completely beyond your control.

Sun, 04/06/2014 - 23:14 | 4631278 Godisanhftbot
Godisanhftbot's picture

 wash rules, yeah.

 

 I knew a guy traded 7000 diff symbols one year cause he didnt want to mess with that.

 

 now he's ..............washed up.

Sun, 04/06/2014 - 18:10 | 4630604 buzzsaw99
buzzsaw99's picture

Front running the levered longs is all fun and games on the way up. What pisses me off is that the epic crash that should be coming will not be allowed to happen.

Sun, 04/06/2014 - 18:22 | 4630627 The Wisp
The Wisp's picture

Ever try to Stop a falling wall of water... ? ain't happening Dude..

Sun, 04/06/2014 - 20:37 | 4630625 ToNYC
ToNYC's picture

U2 slow; you can't see me, I'm HFT and I do what comes natural. Presto perfecto, not a penny ever at risk.

Sun, 04/06/2014 - 18:26 | 4630633 q99x2
q99x2's picture

Another great weekend article.

Sun, 04/06/2014 - 18:42 | 4630668 williambanzai7
williambanzai7's picture

He who has the greatest processing power wins...this applies across the entire ponziverse.

Sun, 04/06/2014 - 18:43 | 4630670 mccvilb
mccvilb's picture

I need new glasses before I can read those charts, Tyler. Not that it will make any difference. HFT?

Mon, 04/07/2014 - 01:38 | 4631444 Dr. Sandi
Dr. Sandi's picture

You have to stop looking at this stuff when you start to need glasses. Otherwise you could go blind.

Sun, 04/06/2014 - 18:57 | 4630709 ebworthen
ebworthen's picture

Kinda wordy.

Could have just had the last picture (Person/Computer).

That, or a picture of an Antelope being pulled down by a Lion.

Mon, 04/07/2014 - 04:24 | 4631543 StychoKiller
StychoKiller's picture

Bring on the plunging Wildebeests!

Sun, 04/06/2014 - 19:19 | 4630762 Goldilocks
Goldilocks's picture

The History of Computers
http://inventors.about.com/library/blcoindex.htm

1955 (In Use 1959)
Stanford Research Institute, Bank of America, and General Electric
ERMA and MICR     The first bank industry computer - also MICR (magnetic ink character recognition) for reading checks

Inventors of the Modern Computer
http://inventors.about.com/library/inventors/bl_ERMA_Computer.htm

Sun, 04/06/2014 - 19:23 | 4630786 kahunabear
kahunabear's picture

I couldn't care less. I buy value at my price and it has served me well. 

Sun, 04/06/2014 - 19:28 | 4630795 Yardfarmer
Yardfarmer's picture

Welcome to the NWO-New Wired Order

Sun, 04/06/2014 - 21:10 | 4631055 22winmag
22winmag's picture

Dup

Sun, 04/06/2014 - 23:05 | 4631259 bardot63
bardot63's picture

Thanks for Cliff Notes, but I'd rather read the book. 

Sun, 04/06/2014 - 23:11 | 4631271 Godisanhftbot
Godisanhftbot's picture

Been calling it HFT SCUM for 6 years.

 

two words, all you need to know

 

dont need no fucking war and peace.

get rid of them or gtf out of the room.

 

Mon, 04/07/2014 - 03:30 | 4631512 Philalethian
Philalethian's picture

Here's is a note for you all to take and put under yer hat.

The vast majority of Sheriffs in the USA are well aware of the babylonian plans to kill the country, and what the banksters are going to do. They are taking all the military equipment they can get and plan on turning it on the DHS and foreign troops when they violate the constitutional rule of law. City slicker...meet Cowboy.

Many of the deputy sheriffs are ready, as well as many police forces. They all prepare for the call to duty as arrest warrants are being made out now. They will be ready to process the minute they declare martial law after another expected false flag event. The citizenry also prepares for them to hit the county borders in the deadly early morning nights. The window may be opened sometime after Passover. There are long lists of those who are proven to be responsible for all the world's problems.

They all know. Everybody knows!

http://www.youtube.com/watch?v=h27HRNm_r4U

 

Mon, 04/07/2014 - 08:04 | 4631734 weburke
weburke's picture

yeah but no one will look at the poison. not now, not then. who bought the beer...why. 

Mon, 04/07/2014 - 04:15 | 4631541 guidoamm
guidoamm's picture

Maybe someone can shed some light on this for me. 

Given the above, front running trades does not seem to be the only thing HFTs do.

If HFTs can front run then, inherently, they can also create the illusion of liquidity in a stock or a sector thus directing investment in that stock or sector?

From what I understand, HFTs can trade one single stock a Bazillion times in 1 minute without there actually being any demand or settlement. This creates the illusion of liquidity in a particular stock which will then attract investment from real investors?

Surely this is the criminal part?

 

 

Mon, 04/07/2014 - 09:32 | 4631904 MarcusAurelius
MarcusAurelius's picture

Well discussed Tyler. There have always been front runners in the system which going back through histrory were not always easy to spot. However with the advent of this newer technology along with the newer technology that is able to spot the thievery, the only thing that has been really accomplished in the fact that what little respect the exchanged had has now been wiped away. 

It is part of the natural consequences of their actions. The little guy doesn't really have to understand the whole process or whether it is legal or not. He sees it simply as another ploy from a dirty industry that has done nothing for him and everything for itself over the years. You would think that the industry would be working especially hard since the 2008 crash to try to somehow gain credibility in some way but the fines and illegal activities just continue and it serves only to severe any tie that Wall Street ever had to gain respect (if it ever had it). 

Mon, 04/07/2014 - 09:46 | 4631935 ak_khanna
ak_khanna's picture

The only reason HFT firms are being investigated now, after years of front running orders, is that they could be eating into the profits of too big to fail banks.........

http://www.marketoracle.co.uk/Article40231.html

Mon, 04/07/2014 - 11:15 | 4632168 franciscopendergrass
franciscopendergrass's picture

High Frequency Trading is not as bad as government HTF (high frequency taxing).  Every fucking transaction I make, they force me to pay 9.75% sales tax right off the bat.  WTF.  My income, property, vehicle (registration), the traffic Gestapo (traffic fines), and god damn everything else.  Uncle Sam has the best scam going on.  Much better than the HFT traders.

That is what I get for living in California.  If Kennedy were alive, he would have ordered the Bay of Pigs invasion on San Francisco and Sacramento in order to get rid of this socialist nonsense. 

Mon, 04/07/2014 - 11:04 | 4632259 Fix It Again Timmy
Fix It Again Timmy's picture

It's Uncle Scam, by the way....

Mon, 04/07/2014 - 11:15 | 4632308 Remington IV
Remington IV's picture

Latency Arbitrage = Chimps with machine guns

Mon, 04/07/2014 - 12:18 | 4632583 Sundling
Sundling's picture

Very simple to understand - my head just exploded..

 

Mon, 04/07/2014 - 12:39 | 4632642 shovelhead
shovelhead's picture

95% Order cancellation rate?

Hmmmm.

Dat be monkeyshines.

Mon, 04/07/2014 - 14:26 | 4633028 Papasmurf
Papasmurf's picture

The solution is easy.  Require paper delivery on every trade, via USPS.  The market would change to investment instead of scalping.  Investing benefits capitalism, scalping doesn't.   The arguements that HFT are benefical is equivalent to saying termites benefit a house.

Mon, 04/07/2014 - 15:42 | 4633252 assistedliving
assistedliving's picture

oh, u mean its like me in my Ford Pinto racing that guy in that Merc SLS?

Thu, 05/01/2014 - 21:23 | 4718449 ozzzo
ozzzo's picture

So Bruce Lee is at the grocery store, and he follows you down the aisle, and when you reach for the lettuce or whatever he grabs it first, because he can move so fast that he can always beat you to the lettuce, or whatever you are trying to buy. So you go through the store trying to buy stuff, but you can't, because Bruce is taking everything that you reach for and putting it in his cart. Pretty soon Bruce has his cart full of stuff that you wanted to buy, and you don't have anything, and he goes "I noticed that you wanted to buy stuff like this, and I'm here to help! My prices are only slightly more than the normal store prices."

You look over at the cashier and he doesn't seem to have a problem; in fact he appears to be winking at Bruce Lee and counting money. So what are you going to do? You hand over your money to Bruce and he sells you the stuff that you wanted, with a 1% markup. Now imagine that somehow Bruce manages to make this process super-complicated, so that he can explain the 1% markup by saying that he provides liquidity to the market, or something, and you won't be able to determine whether he is telling the truth. And out of his 1% he liberally pays off the store management, clerks, regulators, etc., so everyone is happy. Now automate Bruce with a million little cyber-mice running greedy little mouse-wheel algorithms sucking a tiny percentage out of every trade, and that's HFT.

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