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Interview With A High-Frequency Trader

Tyler Durden's picture




 

While the attached interview between the Casey Report and HFT expert Garrett from CalibratedConfidence will not reveal much unknown new to those who have been following the high frequency trading topic ever since ZH made it a mainstream issue in April of 2009, it will serve as a great foundation for all those new to the topic who are looking for an honest, unbiased introduction to what is otherwise a nebulous and complicated matter. We urge everyone who is even remotely interested in market structure, broken markets and the future of trading to read the observations presented below.

From Casey Report:

Interview with a High-Frequency Trading Expert

High-frequency trading (HFT) – wherein computers transact thousands of times per second with incomprehensible speed – now accounts for over 60% of all trades on American exchanges. How does this sweeping market change affect retail investors?
There are two very different answers to that question. Supporters claim that high-frequency traders (HFTs) are a net-positive market force because they provide liquidity and tighten bid-ask spreads. They say that high-frequency trading is rarely if ever used for nefarious purposes, and regulators make sure of it.

On the other side, detractors claim that HFTs regularly manipulate unaware investors and otherwise destabilize markets. They say that HFTs are a net-negative force on the market and should be reined in.

The answer surely lies somewhere in between. But which is closer to the truth? To find out, we talked to Garrett, an expert on market systems and high-frequency trading. Having experienced first-hand the problems HFTs can cause, he fits firmly in the “detractor” camp, for reasons you’ll read below. Garrett gave us excellent insight into how HFTs profit, along with tips on how to make sure they don’t profit at your expense.

I found this interview highly educational, and I hope you do too. It contains the kind of inside intelligence that separates the informed from the uninformed and allows us as individual investors to understand and adapt to our changing markets.

The Casey Report: Hello Garrett, and thanks for taking the time to chat with us. First, can you tell us your back-story and explain how you got into high-frequency trading and real-time trading research?

GARRETT: Sure. I worked for an asset management firm as a portfolio manager’s assistant. We used traditional fundamental analysis to calculate company prices. Beginning with the July 2011 crash, our strategy no longer seemed to be working. We lost a lot of our clients’ money – nearly 40%. It was brutal.

During that same time, I started to notice odd price movements on my charts, ones that I had never seen before. Prices would randomly spike in amounts and directions that made no sense. When I dug deeper, I realized the movements were too fast and too uniform to be human. Computers caused them.

My bosses didn’t understand this, and didn’t want to. I couldn’t raise my concerns because of the old-school culture of the firm. But that refusal to acknowledge the new reality – that computers were increasingly driving the market – was leaving my firm at an enormous competitive disadvantage. Essentially, the market was changing, and we weren’t adapting.

I began to study high-frequency trading on my own. I started by following a few professionals who were sounding the alarm, trying to alert investors that the game has changed. My favorite sources were (and are) Themis Trading and Nanex.

Eventually, I narrowed my focus to study the market micro-structure – which is basically what happens to orders after you click the “buy” or “sell” button on your brokerage platform. That’s where all the action is, and it’s where you can see exactly what the HFTs are doing.

I came to the conclusion that, because of HFTs, our markets are broken and fragmented. I left my old firm in mid-December, took my own money and started running my own shop, based on this premise. My strategy uses software to exploit the dislocations caused by HFT.

TCR: What made you think that high-frequency trading was behind those strange price movements you were seeing?

GARRETT: For one, the movement didn’t look like anything I’d seen in the past. It didn’t match human action. It was too fast, too consistent.

Anomalies would randomly pop up on my screen. A particular stock would drop 10% in one second, then run right back up a second later. I asked colleagues what these movements were and where they were coming from, but no one had an answer. Even the shortest-term charts, in which every data point represents one second and the data is extremely granular (or so I thought) didn’t yield any answers.

Eventually, through my own research, I realized that there was something more going on inside these one-second data points - something you can’t see on a standard chart. That’s where the HFTs operate – in milliseconds.

TCR: So you’ve made a career of exploiting the dislocations caused by HFTs. What’s your answer to the question on everyone’s mind: does high-frequency trading affect the average retail investor?

GARRETT: Absolutely, although the impact varies based on what type of investor you are. For a shortterm trader, someone who makes many trades per month, the effects are huge.

I think the best way to understand HFT’s impact on you is to understand its advantages over you. There are three major ones.

One, HFTs have better access to the market. They have what we call direct access, which means they don’t have to go through a broker to execute their trades. When you place an order with, say, Scottrade, Scottrade will choose which exchange the order goes to, and they’re going to execute the order where it’s best for them. They’re going to buy it at the best price they can and then sell it to you.

HFTs, on the other hand, can choose the exchange that they want to trade on. They can look at all the prices for a given stock on all of the exchanges and make their own decision, rather than having a broker make it for them.

Two, HFTs obviously have a major speed advantage over other investors. They glean this advantage in many ways: by putting their servers right next to the exchanges’ servers, by using very sophisticated equipment, and also simply by virtue of programming a computer to act on pre-set instructions, which it can do much, much faster than a human ever could.

Third, the best HFTs have an impeccable understanding of the market micro-structure: what happens after you submit an order to your broker? Where does your order go, how is it executed, how are orders prioritized? HFTs are experts on this, but very few retail investors even understand the basics.

TCR: It sounds like the average investor is seriously outgunned. But what about a retail investor with a longer timeframe who only makes 1-2 trades a month? Does he need to worry about high-frequency trading?

GARRETT: HFT affects all investors to an extent, because stocks are now priced differently than in the past. The market used to consist mostly of investors analyzing cash flows and balance sheets, trying to calculate a company’s fair value. HFTs, on the other hand, react to movements in stock prices alone. That is not necessarily a bad thing, but since HFTs are responsible for two-thirds of the trading volume, we have the strange situation where they can set the price based on what they perceive others’ perceptions to be.

Also, even long-term investors have to enter and exit their trades at some point, which is where the most risk is. You might enter the trade when the computers are doing their trending movements and inadvertently buy at a peak.

TCR: What are trending movements?

GARRETT: Trending movements are when an HFT deliberately moves a stock price up or down for its own benefit. For example, a computer can submit an overwhelming number of sell orders, knock the price of a stock down a few percentage points, then buy the stock back cheaply.

TCR: That sounds like overt manipulation.

GARRETT: It is, which is why investors need to understand how to protect themselves. One of the most important tips I can give you is to never enter stop-losses into the market. There are algos designed to sniff out stop-losses and manipulate them against you.

I’ve seen this many times: prices drop 2-4%, clear out stop-losses, then run up for substantial profits. So the poor retail investor gets his stop-loss tripped and sells on the cheap to an HFT, whereas the HFT buys cheap and profits once the price ramps back up.

TCR: Do HFTs target smaller or illiquid stocks because their prices are easier to move?

GARRETT: Sometimes, but I wouldn’t make that generalization. Counterintuitively, many HFTs target the most liquid stocks.

TCR: So what are some other ways that HFT shops make money?

GARRETT: There are many different strategies. Some take advantage of rebates, which are financial incentives the exchanges offer for being a market-maker.

Here’s where I should clarify that not all HFTs are bad. I’m very sour on HFTs in general because I’ve seen the havoc they can wreak, but there are good ones. Market-makers increase liquidity and make the markets more efficient. That’s great. There are good HFTs.

Some HFTs try to read and process the news quicker than everyone else. There are algorithms designed to read newspaper headlines, search for key words and execute trades based on what they read, all in seconds or less. I wouldn’t say this is particularly nefarious, because the HFTs in this case are just doing what humans do – trading the news – but faster.

That said, it can create problems. Awhile back, there was an errant news release about Boeing going bankrupt, and the HFTs started selling because they saw the keywords “bankruptcy” and “Boeing.” The story turned out to be an error.

In that situation, most human traders would pause and think, “Wait a minute, I’ve never heard a thing about Boeing going bankrupt. What’s going on here?” But the computers don’t think. They just execute their instructions, and in this case, it caused a crash.

Then there are the manipulative algorithms, the ones that prey on other investors.

TCR: Can you give us an example?

GARRETT: Sure. Many HFTs will make near-simultaneous trades on different exchanges and profit because of the delay in one of the exchanges. An example will help me explain: let’s use the NASDAQ and EDGE exchanges, and say that ABC stock is trading at $1.00.

The HFT will send a bunch of quotes (offers) to NASDAQ and EDGE, trying to sell ABC stock at $1.01. Once the NASDAQ order is accepted, the HFT can simultaneously cancel the $1.01 sell order on the EDGE exchange and replace it with a buy order at the original price of $1.00. EDGE immediately accepts that $1.00 order, because its system has not caught up to the new price of $1.01, and the HFT’s net position becomes zero.

This is possible because of latency, which is jargon for delay in the system. The net result is, the HFT captures a $0.01 arbitrage.

By scalping this tiny amount from many trades, the profits add up quickly.

A second example: HFTs can model other traders’ behavior. When someone trades through Scottrade or Interactive Brokers, their order has a unique number attached to it – the same number every time a client places an order. This number is bundled with all relevant trade information (time, price, etc.) and sold as an encrypted “enhanced data feed.” An HFT can then use those past results to predict the trader’s behavior.

TCR: So HFTs try to predict what you’re going to do before you do it. Do the brokers admit to selling this information? Can traders opt out?

GARRETT: This data is standard and available to anyone who wants to buy it, so it’s not that HFTs are purchasing illegal information. But the data set is huge and is only of practical use to players with very fast and powerful computers – meaning HFTs. And yes, most brokers I have encountered will allow you to opt out of having your unique number attached to your information.

To be clear, I’m not saying HFTs track your individual account and literally jump in front of you right before you trade. But they do use this information on the aggregate to model traders’ behavior. So an HFT could have a very good idea of when traders on, say, E*TRADE’s book will enter into a certain transaction.

TCR: Many defenders of HFT claim that it is a net-positive force in the market because it provides much-needed liquidity and tightens the spread between bid and ask. Are those claims true?

GARRETT: As I said earlier, there are many different HFTs that do many different things. But in my experience, in the aggregate, both of those claims are false. High-frequency trading will reduce liquidity when we need it most, and will flood the system with nonsense at other times.

Case in point, computers regularly withdraw liquidity just before news releases. Oil is a great example. The other day, there was a status report scheduled at 10:30, and around 10:28-10:29, the buy orders on USO (United States Oil Fund, an ETF that aims to track oil) dried up. That doesn’t happen with human traders.

So anyone who wants to get out of USO before the news release is out of luck; they can either take a bad price or wait until liquidity comes back.

Contrast that with the end of most trading days, when HFTs are unwinding their positions; I actually turn my platforms off for the last 10 minutes of the day because the action is confusing and useless. Sure, there’s plenty of liquidity as the HFTs unwind, but the action is just nonsensical. There’s no new information being introduced, no price discovery. It’s just scalping.

The whole liquidity argument is just a justification. On net, HFTs hurt liquidity more than they help.

I also don’t buy the argument that HFTs keep the bid-and-ask spread tight. I’ve seen algorithms that quote as far away from the NBBO as they are legally allowed to.

TCR: Can you expand on that?

GARRETT: SEC rules say traders can quote up to 8% from what the National Best Bid and Offer is, and they’re allowed to “drift” another 1.5%. So legally, traders can trade 9.5% above or below the NBBO.

Well, there are algos that probe the market, starting by submitting an order close to the NBBO, then working out to the fringes. These orders only last for milliseconds – they are not intended to be hit, only to sniff out other traders’ orders. So the algo works its way out, trying to get a bite on a price further away from the NBBO, and thus more favorable to them.

That is not a recipe for a tight spread. Now, the spread might look tight on your screen, but when you actually go to fill an order, you won’t get it, because the order has already been withdrawn.

Think of it like a dying star. When a star dies, we still see its light here on Earth, because the light is still traveling to earth. When an HFT cancels an order, your comparatively slow computer still sees the order for awhile. Then you try to fill it and it’s “Sorry, that order no longer exists.”

TCR: So are the quotes on Google Finance or Yahoo Finance reliable?

GARRETT: They are reliable enough to use as a broad snapshot. But I would not trade on them.

TCR: What markets are least affected by HFT?

GARRETT: I don’t know the answer to that. I see HFT the most in equities, but that’s just because I trade equities. It’s also prevalent in futures and Forex.

Within equities, HFTs tend to focus heavily on ETFs. The manipulation is far less in most individual stocks.

TCR: Good to know. What long-term effects do you see as a result of HFT?

GARRETT: I think the biggest issue is the erosion of trust. The markets are becoming so difficult to understand, and there are so many predators, that I think people will start to withdraw and place their money elsewhere.

When investors start to realize (a) they don’t know enough about the market, and (b) the learning curve is so steep as to be almost unnavigable for someone with a full-time job, they’ll start to take their money elsewhere. Instead of the stock market, why not go to lendingclub.com? Then they can at least invest money with someone in their community and actually know what’s happening with their capital. Not to mention, it will probably get them a better return.

This is a little off topic, but dark pools are another example of shady market practices. Dark pools are arrangements between large institutions to trade blocks of shares among themselves. The problem is, these trades can only be seen by the participants – you and I can’t see them. They occur outside the market.

Themis Trading did a white paper called the Phantom Indexes, and they found that only 30% of all traded assets are traded on visible exchanges. Think about that: it means that indexes – like the Dow and S&P 500 – are being calculated with only 30% of actual volume. The majority of trades – 70% – occurs in the dark and is not factored into the indices.

It’s a little bizarre if you ask me. I don’t understand why that’s allowed. But it’s another example of market trust being whittled away. It won’t be easy to earn it back.

TCR: So you think the average investor will begin to shun the stock market?

GARRETT: Yes, but I also think it’s possible that companies like PIMCO and BlackRock create their own exchanges and compete to make things fairer for their clients. That would be a viable alternative to our national exchanges, which are losing credibility fast.

The federal exchanges have sold their character. Take co-location, for example, which is when HFTs put their servers as close as possible to the exchange to gain a speed advantage.

I understand that NASDAQ wants to make money by selling these spots. But not everyone can be located directly next to the exchange. So Goldman buys a co-located spot for millions of dollars, which is great for them, but not so much for everyone else. Once again, the little guy gets bilked.

TCR: Do you think there will be regulatory responses? Might the government ban HFT?

GARRETT: I don’t see how. The quicker players will always have an advantage. There will always be traders located closer to the exchanges than others. But there are some steps that would help.

One proposal that I like is to mark the orders that are designed to last for 250 milliseconds or less – the ones that are designed never to be filled. That way, when I see an order on my screen, I’ll know if it’s a legitimate order or just a computer trying to accomplish who knows what.

The thing is, the SEC already has rules against placing orders not intended to be filled. Obviously, it doesn’t enforce them very well.

I think anything that would slow down the market a bit would help. That would bring more humans back as a percentage of traders, which is a good thing. TCR: What about a transaction tax?

GARRETT: That sounds like a sad excuse to raise revenue. It’s not going to deter the big guys with the deep pockets. Once again, it would end up hurting the little guys, who already pay much higher transaction costs.

As I’m sure you and your readers are well aware, raising the cost of doing something doesn’t usually have the intended effect. The government has tried to make it more expensive for people to get DWIs, guns and drugs. None of it has worked.

If anything, a transaction tax will hurt the marginal players. The big, deep-pocketed institutions would be fine with a tax. They might even welcome it.

Remember, it’s all about speed, and you’re not going to fill that gap by taxing people. You’re only going to fill it by controlling the way information is streamed. It needs to be slowed down.

TCR: Before we wrap up, can we recap and summarize how HFT affects the individual investor and what he/she can do about it? From our conversation, I count three broad types of manipulation.

The first occurs during the transaction, when you’re buying or selling a stock. For example, an algo could use your stop-loss against you.

GARRETT: Yes. Keep stop-losses in your head, not entered into the market.

Also, we didn’t talk about this, and it should be obvious, but I’ll say it anyway: don’t place market orders unless you want to get shammed. If you place an order and see the price is $15.60 on your screen, your order can be rerouted, filled on a different exchange for, say, $15.65, and you just donated 5 cents a share to an HFT.

TCR: We’ve always advised our readers to use limit orders, even before HFT. Now it’s doubly important. The second major impact is that HFT actually misprices stocks, meaning market prices are different than they would otherwise be in the absence of computers.

GARRETT: Exactly. Fundamental investors used to dominate the market. They would buy and sell based on companies’ results.

Today, HFTs outnumber humans in trade volume and thus are a stronger force on prices. HFTs buy and sell based on what they perceive others’ perceptions to be, as quirky as that sounds. So instead of analyzing revenue and expenses, computers analyze how other market participants act, and trade accordingly.

TCR: It seems that normal investors can counteract this by investing for the long term. HFTs create a lot of noise, trying to guess what other traders will do. But ultimately, if a company is profiting, its stock will do well.

GARRETT: Precisely. You don’t want to get into a trading battle with them. But if you have a long-time horizon, fundamental investing can still work.

TCR: Third, computers manipulate stock prices up and down, using the movement to their advantage. This seems to be the most nefarious and overtly manipulative. Is there any way to counteract it?

GARRETT: You can mitigate this risk by being patient with your orders. If you enter a limit order and it isn’t hit in the first hour, don’t impatiently move it. Stand your ground. That way, you can dictate the price you take, even in the midst of all the HFT noise.

Also, HFTs love to manipulate ETFs, much more so than individual stocks. So that’s something to keep in mind.

TCR: Great. Anything else?

GARRETT: I do want to add one more thing: talking to you about this actually hurts my trading system in the long run, but truthfully, my strategy of exploiting dislocations shouldn’t exist. For all I know, I’m taking money from my parents’ retirement fund because their financial advisor doesn’t understand what he’s doing. I want my kid to be able to invest legitimately when he’s older. Pillaging unsophisticated investors is bad for everyone in the long run, so I want this information out in the open.

TCR: Well, this has been a very educational discussion, so mission accomplished. Thank you very much for speaking with us today.

GARRETT: My pleasure.

An expert on market micro-structure, Garrett leverages his vast knowledge of stock exchanges to build trading
systems. A former “traditional” investment professional, Garrett now operates a profitable system that capitalizes
on the market dislocations created by HFT. He resides in upstate New York and has a B.S. in finance from Niagara
University with a concentration in economics. He is the founder of CalibratedConfidence.com and is a frequent
contributor to FloatingPath.com.

 

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Fri, 08/03/2012 - 13:51 | 2676330 diogeneslaertius
diogeneslaertius's picture

MISSION ACCOMPLISHED!

 

someone find me an aircraft carrier to land on

Fri, 08/03/2012 - 13:52 | 2676335 Pladizow
Pladizow's picture

Hal 2000 Bitchez!

Fri, 08/03/2012 - 13:54 | 2676338 diogeneslaertius
diogeneslaertius's picture

this is why stacking physical makes sense to me

 

they literally swapped the real economy for a HAL-2000 series holographic matrix at some point in the last century

 

its like that scene in Raiders of the Lost Ark when Indy does the switcheroo with the bag of sand for the golden idol

 

well folks, a giant engineered, artifical, fraud-based boulder is now chasing us towards a pack of spear-wielding ponzi cannibals

 

see you in Syria and or Iran?

 

haha cheers <3

Fri, 08/03/2012 - 14:23 | 2676396 MillionDollarBonus_
MillionDollarBonus_'s picture

The accusation of HFT manipulation by frustrated amateur traders is just embarrassing. The theories about "spoofing" and "stub quotes", are so conspiratorial that they are simply ridiculous. I am a very open minded person, but even I have to draw the line here. These accusations go beyond the point where normal rational people have any interest. Sometimes, when ideas just get too crazy, they need to be ignored, and I would say that HFT conspiracy theories are in this category.

Fri, 08/03/2012 - 14:25 | 2676407 CalibratedConfidence
CalibratedConfidence's picture

even though they have been deemed illegal by the SEC and captured on a repeated basis by many of us who track it and publish openingly for everyone?

Fri, 08/03/2012 - 14:30 | 2676428 redpill
redpill's picture

Good interview Garrett, reinforces my perception that this market is not worthy of participating in.

Fri, 08/03/2012 - 14:37 | 2676449 CalibratedConfidence
CalibratedConfidence's picture

Thank you much.  Like Tyler said, it's nothing new to those who have been around for awhile dealing with the topic but with the new Broken Markets book out from Themis this ought to help any new comers catch up

Fri, 08/03/2012 - 16:48 | 2676813 veyron
veyron's picture

This article is propaganda.  Next time find a factual source, or let me give a discourse on HFT.  The best way to describe the complaint is "Blaming the Road for Shitty Drivers".  Given the subtlety of the argument, I'll save it for a separate rant, but for now lets pick apart what this joker said.

 

"HFTs have better access to the market. They have what we call direct access" -- you can pay 30K/mo, like me, and get that direct access as well.  If you are going to protest that the costs are too high, that's fair, but there are plenty of more things that are costlier (millions of dollars of commissions to be part of goldman's Assymetric Information clique)

 

"When you place an order with, say, Scottrade, Scottrade will choose which exchange the order goes to" -- You agreed to it.  it is Scottrade's business decision to work with market makers and choose where to route, not HFT's fault

 

"HFTs obviously have a major speed advantage over other investors." -- a bugatti veyron is faster than a horse and buggy.  Does that make it unfair?  If so, there are much larger things to complain about, like insider trading and dark pools etc.

 

"HFTs have an impeccable understanding of the market micro-structure" -- Nothing secret here.  All the numbers are available and its relatively simple to get access to the pools.

 

"HFTs, on the other hand, react to movements in stock prices alone." -- Technical traders react to movements in stock prices alone.  Does that mean we need to outlaw TA?

 

"Trending movements are when an HFT deliberately moves a stock price up or down for its own benefit." -- this happened long before HFTs were in existence.  IN FACT, Jim Cramer colorfully described it here: http://www.youtube.com/watch?v=gMShFx5rThI

 

"Many HFTs will make near-simultaneous trades on different exchanges and profit because of the delay in one of the exchanges. " -- this is a fault of segregated exchanges.  People used to do this with phones decades ago, calling between Chicago and NY.

 

"HFTs can model other traders’ behavior." -- front-running was a common practice when there were brokers you had to call orders into.  HFT isn't front-running like brokers, but they can watch historical patterns and discern behaviors.  Nothing wrong with that.  Hell, people were doing this a century ago.

 

"order has a unique number attached to it – the same number every time a client places an order. This number is bundled with all relevant trade information (time, price, etc.) and sold as an encrypted “enhanced data feed.”"  PATENTLY FALSE.  If you are curious, read the damn spec: http://www.nasdaqtrader.com/content/technicalsupport/specifications/data...

 

"But the data set is huge and is only of practical use to players with very fast and powerful computers" -- It's not fair that a bugatti can reach over 200 MPH but my BMW can only hit 180.

 

"Case in point, computers regularly withdraw liquidity just before news releases. Oil is a great example. The other day, there was a status report scheduled at 10:30, and around 10:28-10:29, the buy orders on USO (United States Oil Fund, an ETF that aims to track oil) dried up. That doesn’t happen with human traders." -- the reason this didnt happen in the past was because the spreads were so large.  Spread expanding from 1 to 3 cents is negligible GIVEN THAT THE SPREADS WERE 6 CENTS BACK THEN.  1 < 6 and 3 < 6

 

" I actually turn my platforms off for the last 10 minutes of the day because the action is confusing and useless." -- there are all kinds of OTHER manipulation, such as options expiration magic, that are glossed over and that the author attributes to HFT

 

"there are algos that probe the market, starting by submitting an order close to the NBBO, then working out to the fringes. These orders only last for milliseconds – they are not intended to be hit, only to sniff out other traders’ orders. " -- Specialists would play the same games years ago, excpet there they would play favorites and choose winners.

 

" I think the biggest issue is the erosion of trust. "  -- WORST ARGUMENT EVER.  The erosion of trust stemmed from INSIDER TRADING and MFG/PFG and PONZI SCHEMES.  Those are outright stealing of money.  HFT is a scapegoat for those behaviors.

 

"Themis Trading did a white paper called the Phantom Indexes, and they found that only 30% of all traded assets are traded on visible exchanges." -- market making is an old practice.  Madoff ran such a business many years ago, before HFT.

 

Frankly ZH needs to get off of the anti-HFT circlejerk and ask someone who actually trades (I used to blog at http://veyronb.wordpress.com before I was flooded with requests) to give a clear explanation.  I would gladly do so if asked.

Fri, 08/03/2012 - 16:57 | 2676831 CalibratedConfidence
CalibratedConfidence's picture

You can factual data on my webpage, on ZeroHedge, on Nanex, and on Themis Trading in their white papers.  Enjoy the intellectual curiosity. 

 

PS  I actually trade

Fri, 08/03/2012 - 17:11 | 2676865 Dr. Acula
Dr. Acula's picture

So no rebuttal?

 

Fri, 08/03/2012 - 17:49 | 2676931 MachoMan
MachoMan's picture

From a macro perspective, I think it's unwise to dispense with the "confidence" issue as well as the "you've got a faster car than me" argument.  I think they're inescapably intertwined.

A very large problem with our present society is the wealth gap.  Herein, you're describing a method whereby you provide literally no value to society...  all you do is scalp idiots...  you make the market nothing but a trap for the unweary.  I'll posit that this isn't helping the situation...  it's taking a hotbed issue (the wealth gap) and rubbing it in peoples' faces...  "sorry charlie, you should have ponied up that $30k/mo and gotten co-located"...  well, that's fine and dandy and all, but it will simply lead to sharks trading with one another...  sharks eating each other...  and then the last shark dying a lonely death.  Ultimately, a balance is needed.

Realistcally, Veyron is much of the time describing "situational ethics" or "relative ethics".  For example, "these abuses have been going on forever".  I think it's near sighted and convenient for a trader to utilize this argument...  what about ending the practice?  What about absolutes?  What about actually making an attempt to improve the situation?  Oh, it's better than it used to be?  Well, let me speak for everyone and say that's totally reassuring... 

It's the same as the political structure...  if you don't want to reform, that's fine...  but the whole thing is going to get destroyed by itself...  you can reform prior to destruction, but at some point you pass the event horizon...  and this is why confidence and trust are so important...  (and also why the FED does nothing but focus on manipulating them, given it can't actually help the economy proper).

Fri, 08/03/2012 - 18:01 | 2676974 Dr. Acula
Dr. Acula's picture

>I think it's unwise to dispense with the "confidence" issue

It's the busted trades that make me lose confidence in the fairness of the exchanges.

>It's the same as the political structure...  if you don't want to reform, that's fine... 

I can't reform that. I have more chance of being struck by lightning on my way to the polling station than I do of reforming it. And I can't withhold dollars since I'm threatened with being enslaved and put in a cage if I try. But I can withhold dollars from a stock exchange. I can choose to create my own exchange.

>you're describing a method whereby you provide literally no value to society...  all you do is scalp idiots

What's the difference between doing this on a 1 ms or 1 month time frame? Taking money away from those who make bad decisions is part of the market process. And "value to society" is meaningless; society is not a thinking or acting being with a scale of values.

Fri, 08/03/2012 - 18:36 | 2677073 MachoMan
MachoMan's picture

It's the busted trades that make me lose confidence in the fairness of the exchanges.

I think your perspective represents the exception and not the rule...  Simply put, you're not a great bellwether for judging public sentiment...  may the mob have mercy on your soul.

I can't reform that. I have more chance of being struck by lightning on my way to the polling station than I do of reforming it. And I can't withhold dollars since I'm threatened with being enslaved and put in a cage if I try. But I can withhold dollars from a stock exchange. I can choose to create my own exchange.

Ok...  It's one thing to be defeatist about it...  it's another thing altogether to use your defeatism as moral justification for your actions.  Needless to say, "if you can't beat them, join them", isn't a very solid foundation for an argument...

What's the difference between doing this on a 1 ms or 1 month time frame? Taking money away from those who make bad decisions is part of the market process. And "value to society" is meaningless; society is not a thinking or acting being with a scale of values.

You're trying to play the ol' switcheroo on us...  punishing people for their actions is fundamental to any functioning market...  we all get that.  However, the devil is in the details.  HFT seeks to inherently punish people for participating in the market, not necessarily for making bad decisions once they've entered the market.  In other words, buying a product that has bad reviews or that is inherently prone to failure is completely different than the store pickpocketing you as you enter and exit the building...  misdiagnosing the proper value of a product is completely different from having that value obscured from your view and then punitively exploited once you try to buy...

The other aspect that I don't see mentioned is the illegality of making offers that you don't intend to keep...  can you still claim that decisions, made on the presumption that people follow the law, are really "bad" decisions?  The fact that regulators are asleep at the wheel (and/or corrupt) is some sort of moral justification for breaking the law?  Doesn't this really tie back into the wealth gap and ultimately how it gets exploited?  Doesn't this flow back into why confidence is eroding?  Ivory tower arguments are neat and all, but they're usually pretty shallow.

Let's face it...  you've got a short duration for your arbitrage game...  get it while the getting is good I guess...  but don't be shocked when the mob takes your spoils.  I would say I'd see you on the field, but because of HFT (and many other reasons), I don't participate in the markets.  Good luck.

Fri, 08/03/2012 - 20:40 | 2677267 Dr. Acula
Dr. Acula's picture

>you're not a great bellwether for judging public sentiment

I'll give you that. I guess people should be free to choose or start their own stock exchanges with rules that please them. HFT's do not bother me, but busted trades do. That's why I stay out of these exchanges.

>it's another thing altogether to use your defeatism as moral justification for your actions

I think you misread. I don't need any special justification for the actions I was talking about (e.g. paying taxes, not voting, avoiding the stock exchange), apart from "I want to". I think it's quite a stretch to call any of these actions "immoral".

>The other aspect that I don't see mentioned is the illegality of making offers that you don't intend to keep

As long as you legitimately withdraw or rescind it before someone accepts, it is not fraud. I can see how it would be annoying though. Again, it comes down to the exchange's particular rules and what pleases you. Net of people's particular preferences, I think market forces will tend to push money into the exchanges that are the most free, i.e. that have the fewest impediments to trading. I think such exchanges would permit quote stuffing and HFT's but not arbitrary busted trades. But let the market decide. 

Sat, 08/04/2012 - 10:58 | 2677911 MachoMan
MachoMan's picture

As long as you legitimately withdraw or rescind it before someone accepts, it is not fraud. I can see how it would be annoying though. Again, it comes down to the exchange's particular rules and what pleases you. Net of people's particular preferences, I think market forces will tend to push money into the exchanges that are the most free, i.e. that have the fewest impediments to trading. I think such exchanges would permit quote stuffing and HFT's but not arbitrary busted trades. But let the market decide.

So you're really going to propose that these trades are meant to be completed by the HFT, at the time they are made?  That walking up or down the price was the natural consequence of trades that were meant to go through but just didn't?  Seriously?  Further, the article mentions SEC rules, not exchange rules...  Again, we get into a scenario whereby advocates of HFT are basing their legitimacy of the model on the general lawlessness of the financial arena, without reference to any sort of moral foundation...  without reference to whether we as a society value the behavior enough to allow it...

Fri, 08/03/2012 - 16:57 | 2676833 resurger
resurger's picture

Veyron wtf is this .... what the hell has gotten into you?

Fri, 08/03/2012 - 17:18 | 2676882 Dr. Acula
Dr. Acula's picture

I'm guessing he understand the benefits brought about by the free market.

That's why he knows that critizing the action of HFTs is counterproductive. Some HFTs successfully redistribute capital to where it's urgently needed. They profit by speeding the market to equillibrium.

 

Sat, 08/04/2012 - 00:23 | 2677540 redpill
redpill's picture

The free market is based upon the notion that there is equity in price discovery.  Once you have lost that, it is not a free market, it is a controlled market.  That's just pure definition.

 

Fri, 08/03/2012 - 17:31 | 2676848 Dr. Acula
Dr. Acula's picture

Excellent points.

Really, the only advantage of HFT's is that when they make catastrophically bad decisions, they get a free bail out. If they sustained financial losses like everyone else, you would see the crappy HFT's be shutdown or liquidated quickly. Possibly all of the HFT's would be eliminated. Why not let the market decide?

And HFT's do not have magical powers. Even a ukulele-playing octagenarian can kick the crap out of a nanosecond-trading computer at speculation.

I love all the -1's, and the lack of rebuttals. I wish I could short critical thinking.

 

Fri, 08/03/2012 - 17:34 | 2676908 MsCreant
MsCreant's picture

Veyron's post was thought provoking.

What about the idea that when criminal behavior is being engaged in, it can do it so much faster and undetected than without HFT? Quote stuffing, etc.

Fri, 08/03/2012 - 17:45 | 2676909 Dr. Acula
Dr. Acula's picture

>criminal behavior is being engaged in

Do tell.

>Quote stuffing, etc.

Who is victimized or aggressed against by "quote stuffing"? Are there counseling services available for the victimized quote stuffee? Really, you can own a stock, but you can't own its value. That exists in other people's heads.

One thing I haven't seen mentioned here is that HFT's seem to aggressively drain capital from would-be market manipulators like the Facebook stock underwriter. This is a great win for the market.

 

Fri, 08/03/2012 - 17:56 | 2676949 MsCreant
MsCreant's picture

Wouldn't it be better to have a clean game, if you are going to game?

When they put out fake offers to see where the other players stops are, when the other player thinks no one can see where their stops are, (taking a peek over his/her shoulder at the cards so to speak) would you not say that is a crooked game? And that it is the HFT environment that enables that possibility AND makes it hard to detect and discipline the offenders?

I don't claim to be an expert here, I would surely be a fucked muppet if I had not pulled out of the market in late 2006. HFT does seem to enable dishonesty that can't happen without it.

Fri, 08/03/2012 - 20:30 | 2677268 veyron
veyron's picture

HFT didn't add any new structural fleecing, but in the discussion we saw there were a whole slew of ways investors were fleeced. I want to emphasize that these problems existed before HFT so that the discussion stops attacking small problems and really starts addressing much larger and more systematic corruption.

Fri, 08/03/2012 - 20:53 | 2677301 Dr. Acula
Dr. Acula's picture

I don't see how there can be fleecing in a stock exchange. If you don't want to participate in a trade, don't.

What is commonly held as among the worst kind of financial "crimes", insider trading, is in fact harmless. This is a victimless crime because you can only own a stock and not its value; you aren't "victimized" when your stock drops in value. And really all trading is insider trading because it's based on knowledge that not everyone else in the universe has. Why should someone with the knowledge and ability to benefit from the knowledge without hurting others not act on it?

Insider trading shouldn't be solved by armed thugs; really, corporations who don't want corporate officers doing this should set up voluntary contracts to punish the undesired behavior. Or they can permit it as a component of compensation for the officers. Again, let the market decide what's best.

Insider trading offers a more efficient way of disseminating price information - the whole point of the market. Arbitrary restrictions like having to wait for an official report interferes with the functioning of the market and there are potentially very creative information distribution systems precluded by this.

 

Fri, 08/03/2012 - 21:08 | 2677327 malikai
malikai's picture

At my old shop, one of our client firms actually got in trouble for a variant of quote stuffing. The regulators actually caught wind of it and had an investigation. I got to spend a lot of time wasted providing them with the orders and giving them a statement and all that jazz.

The regulator did nothing in the end.

It was a silly little shakedown.

I think that's the real problem. The regulators don't care unless your firm is "out".

Fri, 08/03/2012 - 21:14 | 2677338 trebuchet
trebuchet's picture

@veyron - your point is succinct and well made - pre HFT of course there was market shennanigans. HFTs do it faster and dont do all the things humans can think of either while their particular advantages speed/processing allow them t odo some things that werent possible before.

People defending "free markets" somehow think that free markets involve benign trading where somewohw the market "elminates" bad behaviour, when truly free markets are lawless and chaotic and most players do ANYTHING for an edge - even trying to work out how to "out play" the other players....

 

Fri, 08/03/2012 - 18:14 | 2676963 MachoMan
MachoMan's picture

Care to comment on where the money comes from?  If you're nickel and diming institutions who are too big to fail and incessantly bailed out with taxpayer money, then how do you morally justify partaking?  I have to presume that your income from scalping them is larger than your tax contribution towards their capital deficiencies....  Why do you expect J6P to come to your rescue?  Do you really think that your arbitrage is something valued by anyone of substance?  The whole thing is a dodge... 

Granted, I guess it's a bit more civil than holding a gun to my head (to get the taxes from my pockets in the first place), but I'm failing to see how I'm any better off by your acts...  in a system that bails out TBTF, you're simply a conduit for taxpayer largesse...  and by being co-located, this does not somehow transform your acts into something noteworthy...  something valuable enough to endorse and to publicly protect.

It's not a great win for the market...  it's a great win for people who've figured out a neat way to skim the money supply before it hits real labors' hands...  kudos?  Just don't expect it to last...  I wonder what FOFOA would say about this...  or how he would classify the first to get the freshly printed dollars...

Fri, 08/03/2012 - 20:41 | 2677233 Dr. Acula
Dr. Acula's picture

>If you're nickel and diming institutions who are too big to fail and incessantly bailed out with taxpayer money, then how do you morally justify partaking?

Taking from a thief is not wrong. Specifically we're talking about looking for opportunities where the entity with the stolen money is doing something foolish, like propping up a stock.

>Do you really think that your arbitrage is something valued by anyone of substance?

If I make a profit, and I value it, that is enough. Why is it any of your business? Socialist much?

>Granted, I guess it's a bit more civil than holding a gun to my head

Quite. Also, consider this. Robbing someone on the street is wrong. 100 people doing the robbing makes it no less wrong. 1,000,000 people robbing your property and calling it "taxation" is still wrong. Or is there is some magnitude above which the crimes becomes justified?

Likewise, consider this. Trading requires two voluntary participants.  Trading once a month is moral. Trading once a day is still moral. Trading every millisecond is also moral. Or is there some cutoff frequency above which the consensual acts become a wrong?

>in a system that bails out TBTF, you're simply a conduit for taxpayer largesse...

With this line of (wrong-headed) thinking, in a system that provides public roads and courts and protection services, you are automatically a thief.

 

Fri, 08/03/2012 - 21:22 | 2677346 malikai
malikai's picture

I'm part of the "cripple HFT by slowing them down" camp. 

The markets are there to serve trade in the real world, not serve the fastest computer and ultimately the exchanges/broker houses.

Nevertheless, I agree with most of your conclusions. I also can't help but see the inevitable end for our current direction.

Sat, 08/04/2012 - 11:24 | 2677954 MachoMan
MachoMan's picture

Taking from a thief is not wrong. Specifically we're talking about looking for opportunities where the entity with the stolen money is doing something foolish, like propping up a stock.

First, do not attempt to propose that HFT exists simply to recoup money from thieves...  that is patently ridiculous.  So the HFT out there are only seeking to defend justice and liberty for the rest of us schmucks...  OK.  Hopefully you wear a cape and mask while trading.

Second, taking from a thief, IF THEY STOLE FROM YOU, is not wrong, TO THE EXTENT YOU RECOUP YOUR LOSSES.  Otherwise, you're then stealing.  Obviously there is some wiggle room here with the proper punishment/retribution for the theft, but I dare say in the HFT realm, there is no such governor...  there is no limiting action.  Aside from the fact that the scalpees in this situation probably didn't steal anything from the HFT scalper...

If I make a profit, and I value it, that is enough. Why is it any of your business? Socialist much?

Actually, no...  we prohibit certain behaviors because they are morally wrong (e.g. stealing).  If you steal my bike, you definitely earned a profit and you can certainly value it, but would it be my business?  Is it enough that YOU value it?  Give me a break.  The point is that your actions don't exist in a vacuum...  and, ultimately, affect all of us.

Quite. Also, consider this. Robbing someone on the street is wrong. 100 people doing the robbing makes it no less wrong. 1,000,000 people robbing your property and calling it "taxation" is still wrong. Or is there is some magnitude above which the crimes becomes justified?

Likewise, consider this. Trading requires two voluntary participants.  Trading once a month is moral. Trading once a day is still moral. Trading every millisecond is also moral. Or is there some cutoff frequency above which the consensual acts become a wrong?

Misdirection much?  You're telling me that everyone in the market consents to being front run, quote stuffed, or otherwise having the price of their trades obfuscated and used against them?  Do all citizens consent to being taxed merely because they are citizens?  We can just pack up and leave, right?  Again, you're completely avoiding answering the question of morality as well as value to society.  Needless to say, I think you've got a tenuous position if you're going to advocate people are simply "willing" to be scalped.

With this line of (wrong-headed) thinking, in a system that provides public roads and courts and protection services, you are automatically a thief.

Actually, it would be more akin to putting up a private toll road on an existing public road that is cared for and maintained by the government.  Maybe I missed the memo, but I'm not sure that was ever part of the bargain.  Nor would all citizens remotely have any chance to use the "public road" or "courts" or "protection services" in this case, given the costs of infrastructure, co-location, etc. are prohibitive.  The use of public services isn't just a rich man's game.

 

Sat, 08/04/2012 - 12:08 | 2678039 MsCreant
MsCreant's picture

Good job Macho. I'm glad you weighed in on this. The person you are talking to is smart, but lost. I hope what you have said is at least bothersome, maybe a burr under the saddle.

Fri, 08/03/2012 - 18:50 | 2677114 Oquities
Oquities's picture

often, when i sell options, i enter my bid at a mid-spread price.  i'm a chipmunk in your backyard, but when i bid 3-5 options above bid/below ask,  someone frequently jumps in line in front of my new price.  they see me coming, these HFT pricks.  fidelity responds to my inquiries with..... duuhhh, we route to the best market.... duuhhhh!

Sat, 08/04/2012 - 10:29 | 2677874 ToNYC
ToNYC's picture

Blah. Blah. HFT is a fraud on the essential price discovery mechanism. Humans are the point of the lance here, and humans stand up for at least 2 full seconds before they can withdraw a bid of offer. There is no greater point here.

Fri, 08/03/2012 - 14:56 | 2676498 MillionDollarBonus_
MillionDollarBonus_'s picture

Well, I'm not aware of all the facts here, but it seems to me that this is not an issue that is worth any thought or consideration whatsoever. These ideas are spitefully endorsed by raving, day trading conspiracy theorists on Zerohedge, who are so bitter and twisted about their trading losses that they look for any excuse to blame their shocking trading performance on “the Fed” or “HFTs” or “the government”. I don’t know about you, but I'm finding these ramblings increasingly wearisome.

Fri, 08/03/2012 - 15:02 | 2676517 francis_sawyer
francis_sawyer's picture

Are you running for President or something?

Fri, 08/03/2012 - 16:38 | 2676794 JohnnyBriefcase
JohnnyBriefcase's picture

Honestly, I think it would be an improvement.

 

MillionDollarBonus

           2012!

  Fuck the future!

Sat, 08/04/2012 - 01:56 | 2677571 zhandax
zhandax's picture

I doubt he would be aware ZH existed if someone hadn't paid him to troll it.  Back to HFT and ignore the sponsored distraction.

Fri, 08/03/2012 - 17:53 | 2676942 OpenThePodBayDoorHAL
OpenThePodBayDoorHAL's picture

I remember news conferences by Ronald Reagan. Some reporter would ask a question, and Reagan had no clue how to answer. So he'd say "Well, I don't know about those facts, but I know when the American people get together and pull like a team we can make a big difference..."

Having said that, I would gladly vote for Reagan today. That's after voting for McGovern, Carter, Mondale, Dukakis, Clinton, Kerry, and Obomba. Obomba's a fraud, amd Mitt is a joke.

Fri, 08/03/2012 - 15:11 | 2676542 slyhill
slyhill's picture

douchebagsayswhat

Fri, 08/03/2012 - 16:04 | 2676713 DavidC
DavidC's picture

slyhill,
Follow MDBonus's comments and you'll see it is irony (VERY, and VERY DRY!).

If it's not, I've been laughing my sides off at some seriously misguided soul's comments!

DavidC

Fri, 08/03/2012 - 15:51 | 2676649 fuu
fuu's picture

Well, now we know who doc_in_the_house  is.

Fri, 08/03/2012 - 15:56 | 2676669 CalibratedConfidence
CalibratedConfidence's picture

you lost me at "I don't have all the facts, but seems to me".  are you a FoxNews morning anchor by chance?  or a CNBC producer?

Fri, 08/03/2012 - 17:24 | 2676894 CCanuck
CCanuck's picture

Should have quit with last post, stay away from name calling and stay to the point, your humour is best when not directed at the Bitchez. You always get more great responses and questions, when you state 'Your Position' without further explainations.

Keep up the OK work MBD, I almost always laugh reading your posts.

Cc.

Fri, 08/03/2012 - 19:38 | 2677201 WillyGroper
WillyGroper's picture

BaBye

Fri, 08/03/2012 - 14:29 | 2676426 redpill
redpill's picture

Don't take MillionDollarBonus_ seriously, it's a troll account.

Fri, 08/03/2012 - 14:45 | 2676466 AlaricBalth
AlaricBalth's picture

MDB cracks me up!! Probably laughing his ass off as he types. 

Fri, 08/03/2012 - 15:49 | 2676642 fuu
fuu's picture

It would have been more fun to watch the big brain flail at the sock puppet.

Sun, 08/05/2012 - 15:07 | 2679908 MeelionDollerBogus
MeelionDollerBogus's picture

oh, you're here on ZH too! Cool. this is me

Fri, 08/03/2012 - 15:12 | 2676547 trebuchet
trebuchet's picture

MDB - let me get this right:  if i gave you access to the exchange feeds, a speed advantage and an ability to track large customer quotes and times and an ability to trade the news before anyone else and a SHITLOAD of money to trade a LARGe amount of stock , you would forego all those to simply 

1. look at differences between bid -offer spreads and use your tech to choose the best

2. decide what positions to be in at any given time by fundamental analysis

3. while clearly recognising that a sudden and large set of small sell orders could push price down and sudden but large set of buy orders could push price up, you would NOT USE that ability to yo-yo  prices and make profits in the interim, but intstead in the interest of price stability - add buy orders when people tried to do sell down the price and add sell orders when other algos/hfts tried to sell up the price?

 

You  - MDB - would FOREGO profit in the interest of liquitdy, market stability and fairness???  Yeah , right.......  

Just like the algos are acting in everyones interest

Fri, 08/03/2012 - 15:22 | 2676571 trebuchet
trebuchet's picture

PS  - since reading ZH ive made consistent and significant market beating returns. Prior to reading ZH i was in the muppet category getting taken to the cleaners.  

 

i think you're just jealous you havent got the brains or the balls to tell it like it is and MDB is just a handle you dream were a reality ... oh well

 

 

Fri, 08/03/2012 - 15:23 | 2676575 imbrbing
imbrbing's picture

MDB is my HERO!

Fri, 08/03/2012 - 15:53 | 2676658 trebuchet
trebuchet's picture

of course you are, MDB..

Fri, 08/03/2012 - 15:31 | 2676591 Itch
Itch's picture

Nice one tyler, but i dont think you need to sweet-talk people into this one, they are already mostly convinced.

Fri, 08/03/2012 - 15:36 | 2676603 larz
larz's picture

MDB WTF

Fri, 08/03/2012 - 16:48 | 2676815 Bansters-in-my-...
Bansters-in-my- feces's picture

MDB,you are a fucking loser.

But I'm embarrassed to tell you.

Fri, 08/03/2012 - 17:47 | 2676851 MillionDollarBogus_
MillionDollarBogus_'s picture

Yes, I am a loser. 

Off my meds, too.

Sorry for the trolling, but I really have no other talent...

Sat, 08/04/2012 - 05:22 | 2677639 Theosebes Goodfellow
Theosebes Goodfellow's picture

The captain said to John Henry
"Gonna bring that steam drill 'round.
Gonna bring that steam drill out on the job.
Gonna whop that steel on down. Down, Down.
Whop that steel on down."

John Henry told his captain,
"A man ain't nothin' but a man,
But before I let your steam drill beat me down,
I'd die with a hammer in my hand. Lord, Lord.
I'd dies with a hammer in my hand."

~Lyrics from Pete Seeger's rendition of John Henry

Sat, 08/04/2012 - 12:11 | 2678042 MsCreant
MsCreant's picture

Chilling. +++

Sun, 08/05/2012 - 15:29 | 2679863 MeelionDollerBogus
MeelionDollerBogus's picture

http://www.nanex.net/aqck2/3507.html

There were buy orders with prices higher than sell orders in the same order book. For hours. The order book opened and remained crossed until 13:50, just like the top of book quote sent to the SIP NANEX reported earlier.

There's physical evidence, that's not a conspiracy theory.

-1 vote - I didn't see any mention of Libertarians, free markets, Austrian Economics or Krugman.

* * * *

5. There is no Sheriff in Town (SEC)

We don't think we'll ever get an answer to the most disturbing find regarding the Facebook IPO that we posed on May 31, 2012

How can trading at Nasdaq not be affected, when our Regulation NMS requires that orders must be routed to the exchange at the National Best Bid or Offer (NBBO). Nasdaq was not the NBBO for over 2 hours. How could a broker prove that a customer received the best price when the only available (and official) audit trail (UQDF) doesn't include Nasdaq quotes for over 2 hours?

Fri, 08/03/2012 - 15:32 | 2676412 Dr Benway
Dr Benway's picture

Read 'Dark Pools' and it was very good, though a bit fluffy at the end. This HFT stuff is WTF and BS.

 

I think this is gonna be a beautiful day though.

Fri, 08/03/2012 - 14:50 | 2676480 YuropeanImbecille
YuropeanImbecille's picture

If you beat the Algos you go to jail:

 

http://www.ft.com/cms/s/0/ff2db7bc-9f40-11e1-a455-00144feabdc0.html#axzz...

 

I can right now front run the algos with the latency Vs direct pipe taken into consideration, I would be in jail first thing tomorrow morning for fucking with the money masters. (read: zionist-satanist fucktards).

 

Fri, 08/03/2012 - 16:46 | 2676730 Daily Bail
Fri, 08/03/2012 - 14:17 | 2676381 Silver Bug
Silver Bug's picture

HFT is all that is left. The market has been almost completely hollowed out.

 

http://silverliberationarmy.blogspot.ca/

Fri, 08/03/2012 - 14:27 | 2676419 AlaricBalth
AlaricBalth's picture

"Your culture will adapt to service us. Resistance is futile."

Fri, 08/03/2012 - 16:20 | 2676758 beachdude
beachdude's picture

86% of market trading is HFT.

Fri, 08/03/2012 - 16:01 | 2676680 rbg81
rbg81's picture

We lost a lot of our clients’ money – nearly 40%. It was brutal.

Sorry, but I'm calling Bullshit here.   As I understand it, HFT algorithms exploit volume and speed, but the stock price skew is a few cents (or even fractions there of) on any given trade.  You're doing thousands of trades to turn those pennies into real cash (think "Office Space").  Further, I'll speculate that once you average it all out, the fluctuations are effectively noise.

My point: this guy claims to have been working for an "Old School" trading firm.  As I understand it, old school firms evaluate company fundamenals to invest for the mid to long term.  In short, an HFT algorithm probably should only affect those "old school" approaches at the margins, if at all.  If you're losing up to 40% of your clients $$, its because if you're trying to do HFT with shitty computers and/or algorithms.

Fri, 08/03/2012 - 16:56 | 2676830 SWCroaker
SWCroaker's picture

I read it as his firm's old school fundamental based advice lost their clients 40%; they were not doing HFT at all, probably buy and hold with excellent P/E and yadda yadda.   Author moved into the HFT arena as a consequence, and today writes algorithms that piggy back on the algorithms.  He never mentioned whether his old school firm ever altered their approach.

Furthermore; *some* classes of HFT do the penny scalping thing.  Newer, more "evolved" variations seem to be quite effective at micro pump and dumps, running the stops and then making you pay to re-establish.  To be blunt: outright manipulation of any and all who have stop orders sitting out there to be harvested.

Fri, 08/03/2012 - 19:20 | 2677172 rbg81
rbg81's picture

Exactly.  But the author seems to blame HFT for the firm's "brutal" losses--which does not seem to make sense.  Its like apples and oranges.

Sun, 08/05/2012 - 16:41 | 2676849 CalibratedConfidence
CalibratedConfidence's picture

it was non HFT.  The article shows you at the start that I tried to bring this to their attention and they ignored me so I left.  They were a buy/hold firm with $600MN AUM.  typical fundamental shop, nothing special and I can assure you there was nothign close to HFT aside from MOSY taking care of the different portfolios.

Also, we lost money because we were pricing assets based on fundamentals.  The pricing issues came about when we built up the big positions in the different portfolio's.  It was difficult to build 50,000 to 100,000 share positions at a price that was beneficial to us for the expected holding period.  Each block that was sent would be beat by an HFT order and many of these "seaking" algo's picked that up, would walk price up and trade the interm, them drop it back.  It was a game we had to play that was entirely unnecessary.  The losses hit when computers machine read all that Euro news and the whole market dove.  The point of me mentioning that was that I saw long-term investment as nearly dead.  To have the S&P 500 lose north of 40% twice in 15 years was unacceptable and I no longer wanted to have people place their entire retirement savings into a market only to make a historic 8-10% while having clients pay a 1% management fee and lossing 1.5% to inflation.  It was a stupid trade for all these people to be making with their savings. 

Fri, 08/03/2012 - 15:59 | 2676681 rbg81
rbg81's picture

Thoughts?

Fri, 08/03/2012 - 13:52 | 2676336 diogeneslaertius
diogeneslaertius's picture

but in all seriousness, holographic #EconomicDeathstar running in a basement of goldman sachs

Fri, 08/03/2012 - 14:02 | 2676352 Dr. Engali
Dr. Engali's picture

It amazes me how they can ramp this market up 230 points and then keep it within a few points all day.

Fri, 08/03/2012 - 14:17 | 2676373 e-man
e-man's picture

I commented yesterday that there is no longer a real "market," there is only a "racket" run by magicians.  And just like a magic show, the racket is designed to make you ooh and aah...long enough to get us past the election.

Enjoy the show, but remember to load up on gold and popcorn.

 

Fri, 08/03/2012 - 14:22 | 2676393 Daily Bail
Daily Bail's picture

Solid post, Tyler.  Enjoyed reading that.

So the following AUDIO is what happens when HFT goes very, very wrong.  For anyone who hasn't heard this before, this is how Armageddon probably sounds:

Listen To The Stock Market Flash Crash - Tick By Tick
Fri, 08/03/2012 - 14:41 | 2676446 Hype Alert
Hype Alert's picture

They do that frequently too on these big ramp days.  Like magic levitation.  Almost machine like.

 

Oh, and I'm still waiting for buyers remorse, but I don't think machines have that so the price just hovers.

Fri, 08/03/2012 - 16:01 | 2676690 SIOP
SIOP's picture

Dr. Engali wrote: "It amazes me how they can ramp this market up 230 points and then keep it within a few points all day."

+1 !!

I thought I was the only one who wondered that!  Pumping it up is one thing, but holding it up there, I dont understand how they can do that. I find it very interesting.

Fri, 08/03/2012 - 17:59 | 2676968 Clowns on Acid
Clowns on Acid's picture

Amazing what a printing press can do....

Fri, 08/03/2012 - 16:45 | 2676806 emersonreturn
emersonreturn's picture

perhaps the charts are an extention of fiat, fantasy? cartoons?

Fri, 08/03/2012 - 16:47 | 2676811 resurger
resurger's picture

it's just fucking crazy

Fri, 08/03/2012 - 14:13 | 2676355 LawsofPhysics
LawsofPhysics's picture

This is an unintentional threadjack, only because a question/concern I posed was not answered on another thread.  The Bundesbank TARGET II claims are looking a lot like the "other assets" of the Fed?  Both are going exponential big time.  This cannot be good, can it?  Do TPTB really believe that that "wealth" really exists?  Seems to me that if these balance sheets are released (or claims on that wealth) into the real eCONomy, game fucking over for all fiat.

What the hell am I missing and why isn't anyone in the financial "services" sector talking about this?  here is the Fed's chart, don't have a link for the TARGET II chart.

 

http://research.stlouisfed.org/fred2/series/WOTHAST/

 

Fri, 08/03/2012 - 15:36 | 2676602 trebuchet
trebuchet's picture

if you search past ZH threads using Target II you will find a lot of info; 

 

in a nutshell, yes if target II gets marked to market and/or settlement occurs its game over

Fri, 08/03/2012 - 14:06 | 2676360 Neethgie
Neethgie's picture

what amazed me was how hardcore they defended the 20.00 level on fb then ramped it another 2$

Fri, 08/03/2012 - 14:08 | 2676367 slaughterer
slaughterer's picture

They will need to ramp FB before the expiration of the lock-up date in a few weeks so that insiders can dump at only a 40% loss. 

Fri, 08/03/2012 - 16:47 | 2676809 resurger
resurger's picture

 they sure want to do that ...

Fri, 08/03/2012 - 14:13 | 2676374 Hype Alert
Hype Alert's picture

They must be hitting the index and ETF's (SPY) today because I'm not seeing much volume at all on most individual stocks.

Fri, 08/03/2012 - 14:16 | 2676378 LawsofPhysics
LawsofPhysics's picture

If that is the case, the majority of ETF's are bought and sold into the close, at the end of the trading day.  Most institutional players (pension funds) are forced to play the game this way, so I don't think this is it.  Something else, potentially more sinister.

Fri, 08/03/2012 - 14:40 | 2676454 DavidC
DavidC's picture

LawsofPhysics,
I think you've made a great point there, institutionals are forced to be in the game. If they have limits of, say 10% before getting out of positions, they're going to be taken out a lot more often with the likes of HFTs just gaming price moves.

DavidC

Fri, 08/03/2012 - 14:46 | 2676468 Hype Alert
Hype Alert's picture

Are institutionals not playing in the dark pools?  According to the article Themis found only 30% of trades are on visible exchanges leaving 70% dark.  It seems like with only 30% visible, I'm assuming mostly retail, they (we) are sitting ducks for the HFT's.

Fri, 08/03/2012 - 15:00 | 2676509 LawsofPhysics
LawsofPhysics's picture

No, that's a very private pool my friend.  Especially since institutional investors are actually subject to accountability laws and such.  Think about it, if they were allowed to play in the dark pools, do you really think that Larry Summers would have lost as much money for Harvard University?

Fri, 08/03/2012 - 16:52 | 2676821 MsCreant
MsCreant's picture

Like any gambling casino, there is the action out front, and then there are "private games."

Fri, 08/03/2012 - 14:14 | 2676375 asteroids
asteroids's picture

Bottom line is that the current stock market is an engine designed to fleece the muppets. It's THEFT! There is no moral shame in doing so. That's the real problem.

Fri, 08/03/2012 - 14:18 | 2676383 Atlantis Consigliore
Atlantis Consigliore's picture

Buy gold futures min margins;   take delivery, buy physical take delivery :  avoid the scam markets...Fraudstreet.

Fri, 08/03/2012 - 14:29 | 2676422 Godisanhftbot
Godisanhftbot's picture

I like to call it a giant skimming operation

Fri, 08/03/2012 - 14:18 | 2676385 fonzannoon
fonzannoon's picture

Is this AIG buying back 3.5 bil in shares from the treasury and the news of the fed's repo operation today related?

Fri, 08/03/2012 - 14:23 | 2676399 cougar_w
cougar_w's picture

I was explaining HFT two years ago:

http://madscienceunlimited.com/fiction/theexchange.html

Except my algo has a nice rack, a sweet smile, and will set your ass on fire and I do not mean in a nice way. Meet Fortran, who can totally answer the question: what use does a girl have for 4 trillion computational units?

Fri, 08/03/2012 - 14:27 | 2676414 PicassoInActions
PicassoInActions's picture

we need to have a like 1 day holiday where every1 human stay out of trading and let the algos fight.

Fri, 08/03/2012 - 15:08 | 2676534 viahj
viahj's picture

It looks like they're on to you already and infiltrated your post as you submitted it and added extra words and numbers to your bid.

Fri, 08/03/2012 - 14:28 | 2676420 Godisanhftbot
Godisanhftbot's picture

 I you didnt figure 90% of this out 5 years ago, you're kinda slow.

Fri, 08/03/2012 - 14:28 | 2676421 francis_sawyer
francis_sawyer's picture

I'm sure Prechter & Neely are putting wave counts on those millisecond moves in real time...

It must suck to be an Eliott Waver in a HFT algo driven universe... But I'm sure you'll all still let us know when P3 is coming right???... Last time I checked it was coming in 5...4...3...2...

Fri, 08/03/2012 - 14:29 | 2676423 New American Re...
New American Revolution's picture

Bullshit.   It's an illegal form of insider trading and has destroyed liquidity in the markets.  I've heard all the bullshit that it provides liquidity, sure it does, but not as much as when the markets functioned without them and definitely not when it is needed, because their algo's shut down when things get crazy.  Further, it feeds into the entire concept of market manipulation instead of markets made by fundemental analysis.  But back to the main point, it's an illegal form of insider trading.   Is that so hard for anyone to understand?  It should absolutely be removed from trading and ended.   If anyone persists, they should be thrown into jail on Federal Felony charges that carry mandatory sentences to be served.

Fri, 08/03/2012 - 15:17 | 2676433 Mercury
Mercury's picture

GARRETT: I do want to add one more thing: talking to you about this actually hurts my trading system in the long run, but truthfully, my strategy of exploiting dislocations shouldn’t exist. For all I know, I’m taking money from my parents’ retirement fund because their financial advisor doesn’t understand what he’s doing. I want my kid to be able to invest legitimately when he’s older. Pillaging unsophisticated investors is bad for everyone in the long run, so I want this information out in the open.

Hey, there's no shame in fleecing dumb money.  But what I think (hope) he's trying to say here is that the marketplace should be simple, robust, and transparent enough so that some market participants aren’t able to manipulate the market by overwhelming the mechanics of market structure and/or the market itself. 

This (situation we have now) is actually worse than when insiders trade on privileged information which is at least something that other market participants and potential market participants can understand –even expect to some degree- and have a reasonable expectation of being lawfully kept in check.

 Everyone knows that the levers and gears behind carnival games are rigged against them. Sometimes they play for fun anyway with short money but it’s a sideshow.  If the US capital markets travel all the way from the widest and deepest pools of market liquidity the world has ever known…to a sideshow it won’t be good for anybody. Sure the carneys will still make some money. But they’ll be fucking carneys.

 

Fri, 08/03/2012 - 14:36 | 2676443 DavidC
DavidC's picture

"I’ve seen this many times: prices drop 2-4%, clear out stop-losses".

So, let's see, if we applied this to the indices, for the sake of argument, that would require a stop loss of between 260 and 520 points on the Dow and 28 and 56 points on the S&P.

Ludicrous.

DavidC

Fri, 08/03/2012 - 14:50 | 2676478 MrBoompi
MrBoompi's picture

 "The SEC already has rules against placing orders not intended to be filled. Obviously, it doesn’t enforce them very well."

The people who do this should pay a fee, or tax, for doing this, whether it's a "sorry excuse for raising revenue" or not.

 

 

Fri, 08/03/2012 - 15:37 | 2676606 FRBNYrCROOKS
FRBNYrCROOKS's picture

There ought to be a tax for not executing an order. If you cancel and order you pay a penny. That would slow them down and real investors wouldn't care about a penny. 4800 pennies a second per HFT program is a different story.

Fri, 08/03/2012 - 14:58 | 2676504 Yen Cross
Yen Cross's picture

 Excellent read Tyler.

Fri, 08/03/2012 - 14:58 | 2676506 km4
km4's picture

TCR: Good to know. What long-term effects do you see as a result of HFT?

GARRETT: I think the biggest issue is the erosion of trust. The markets are becoming so difficult to understand, and there are so many predators, that I think people will start to withdraw and place their money elsewhere.

Bingo !
Fri, 08/03/2012 - 15:19 | 2676507 Kaiser Sousa
Kaiser Sousa's picture

"Buy more stocks...." why anyone continues to play in the rigged Casino thats just a derivative of the debt coupon dollar is fucking beyond credulity... FUCK WALL STREET AND ALL BANKERS... It's Silver and Gold til the casket drops BIATCHEZ.......

Fri, 08/03/2012 - 17:06 | 2676854 walküre
walküre's picture

All and any extra cash is converted in my house. Kids getting oz bars for birthdays and Christmas. They'll thank me later.

Little cash in banks for daily personal and company expenses. Rest is in metals only.

The day of reckoning will come.

Fri, 08/03/2012 - 15:18 | 2676530 Gadfly
Gadfly's picture

No wonder we're all fucked.  Is this part of "free market capitalism?"  What are they making?  Nothing.  They're not -- they're taking.  Maybe stealing is a better word.  And don't talk to me about increasing market efficiency either.  This should be outlawed.  But of course no one has the moral courage or conviction anymore to take a stand against any kind of "profits" or "making money" since that is our current God.  So we stand by and watch while the greedy vultures pick our bones clean.

Fri, 08/03/2012 - 17:08 | 2676857 walküre
walküre's picture

Useless and mostly godless parasites who add nothing of value. Have no talents to speak of and create their wealth out of thin air.

Then they use their ficticious wealth to enslave and oppress the rest of the population.

After all, they make sure we have to accept their ficticious worthless money.

Nice gig!

Fri, 08/03/2012 - 15:18 | 2676565 Dareconomics
Dareconomics's picture

Every investor should read this article. It makes some good points.

  1. High Frequency Traders (HFT) have the edge because of their superior speed in placing trades.
  2. HFT use fake orders to gauge a market, then quickly place real orders to take advantage of what they learned. While these actions are prima facie market manipulation, the regulators have neither the time, energy or brains to deal with these violations.
  3. A regular investor should never use market orders, only limit orders.
  4. Eventually, a stock price is tied to the fundamentals. Find a good company and invest in it for the long haul, just like you learned back in the day. 

http://dareconomics.wordpress.com/

Fri, 08/03/2012 - 15:26 | 2676583 Meesohaawnee
Meesohaawnee's picture

investor? you mean to tell me there are some out there? noooo.

Fri, 08/03/2012 - 17:05 | 2676850 MsCreant
MsCreant's picture

I'd love to find a good company and invest in it. Learn about it. Feel like part of the team because my money is with them. I know that sounds silly...

Fri, 08/03/2012 - 17:09 | 2676861 walküre
walküre's picture

I'm invested in a couple private businesses. They produce something I understand and consume anyway.

All profits get converted into metalsor reinvested.

Never ever participate in a public offerings.

Fri, 08/03/2012 - 15:31 | 2676590 salami_tsunami
salami_tsunami's picture

"That said, it can create problems. Awhile back, there was an errant news release about Boeing going bankrupt, and the HFTs started selling because they saw the keywords “bankruptcy” and “Boeing.” The story turned out to be an error."

 

Well, time to become a journalist, then.

 

Let's just say if you see any stories about Apple losing 300 billion dollars on a vacation in russia, it's time to invest...

Fri, 08/03/2012 - 15:31 | 2676594 FRBNYrCROOKS
FRBNYrCROOKS's picture

That's it for me. I will find another avenue for investing. Maybe the gold bugs aren't so crazy after all!

HFT will bloww the whole market up eventually. You would be crazy to try and compete against HFT.

I am sure programming to exploit the exploiters will be very profitable. When Goldman-Sachs reads this piece Garret will be a wanted man! How dare he exploit the exploiters!!!! The nerve!!!! Only those at the Temple are allowed to steal!

Fri, 08/03/2012 - 16:03 | 2676703 dark pools of soros
dark pools of soros's picture

he did drop a good tip with lendingclub... p2p lending is a good answer to this mess.

 

 

Fri, 08/03/2012 - 16:20 | 2676759 FRBNYrCROOKS
FRBNYrCROOKS's picture

I printed their prospectus and will read over it this weekend. Might be a good avenue to put some money.

Fri, 08/03/2012 - 17:15 | 2676877 dark pools of soros
dark pools of soros's picture

I actually took out a loan from there a few years back to pay off all the evil credit cards...  they people who invest in you can and will ask you questions but you see how a hundred or so people pitch in to grant you the loan..

If it gets popular you would think a big smear campaign would come from TPTB and dirty tricks to make it look bad..  it should be resilient since it is a slow process to get a loan and should vet out foul play for the most part

 

 

Fri, 08/03/2012 - 15:37 | 2676607 FRBNYrCROOKS
FRBNYrCROOKS's picture

There ought to be a tax for not executing an order. If you cancel and order you pay a penny. That would slow them down and real investors wouldn't care about a penny. 4800 pennies a second per HFT program is a different story.

Fri, 08/03/2012 - 15:42 | 2676615 Gadfly
Gadfly's picture

GARRETT: "I do want to add one more thing: talking to you about this actually hurts my trading system in the long run, but truthfully, my strategy of exploiting dislocations shouldn’t exist. For all I know, I’m taking money from my parents’ retirement fund because their financial advisor doesn’t understand what he’s doing. I want my kid to be able to invest legitimately when he’s older. Pillaging unsophisticated investors is bad for everyone in the long run, so I want this information out in the open."

Spoken like a true sociopath.  What he's really saying is "I'm going to make as much as I can, while I can, and I don't give a shit who I fuck over, including my parents and their retirement."  The rest is so much cheap rationalization, to make him feel good about what he's really doing.  Only a capitalist without a conscience (of which there are many) would claim he's doing good by raping and robbing honest people.  That's like saying, "I'm raping and robbing until someone stops me, and I'm doing it to bring attention to the problem so someone stops it."

Beautiful.  Only a human being can rationalize like that.

Fri, 08/03/2012 - 15:54 | 2676659 dark pools of soros
dark pools of soros's picture

dont hate the playa, hate the game

Fri, 08/03/2012 - 16:41 | 2676780 Gadfly
Gadfly's picture

I don't hate anyone.  But I may take issue with the way someone thinks or acts, or rationalizes their actions.  Games are neutral.  It's people who play the game, and they either play by the rules, or they don't.  And it's people who cheat or take advantage of the game.  Ultimately, if the people in any given system don't have a conscience, an internal sytem for knowing what is right and doing it, there are not enough laws or rules on the books for policing that system, or any system for that matter.  Once the number of people taking advantage of any given system (or game) reaches a certain point, the system (or game) will no longer function properly, because it requires the cooperation of everyone playing the game (and putting their money into it) to work properly.  Which is exactly what we have right now on Wall Street and the world's financial system.  A market system with so many people manipulating the system, and cheating it and blantantly breaking the rules, the system is on the verge of collapse.  It's easy to sit around and blame the "game" or someone else, but it's human beings who play these games, and it's humans who are doing all the skimming and cheating and stealing.

Fri, 08/03/2012 - 17:18 | 2676879 MsCreant
MsCreant's picture

All of us inherit our places in social space. We are born, socialized, and driven to do what we do based on that. There comes a point in life (I think middle age is about right, some are lucky to get there earlier) where many folks "wake up" and realize they are enacting scripts that really, are not required. Once you realize this, and you find yourself trapped in a job you can't stand because you were trying to get your father's approval, or your mother was poor and you wanted to save her, or, or, or...you have to look at where you are at and what you have and decide if you are going to change it or not. 

All of us are in this trap, one way or another. ALL OF US. Particularly in this culture. All of us have, at one time or another, tried to be "smart" and get something for nothing. That is what is driving what is left of the economy right now. When we try to fleece a sheep, get a good deal, take advantage, we have to admit it, that is what is up. 

I have to make room for redemption. I have needed to redeem myself. I have needed to make ammends. All of us are human. All of us are asleep until we wake up. I am glad someone like this steps up to bat. Don't we yell and scream that we want whistle blowers to step forward? If we judge them too harshly, they will not.

I kinda think this is ZH's entire project.

Sat, 08/04/2012 - 11:11 | 2677928 Gadfly
Gadfly's picture

Well said, and I agree completely.

Sat, 08/04/2012 - 11:44 | 2677994 emersonreturn
emersonreturn's picture

well said, miscreant.

Sat, 08/04/2012 - 15:24 | 2678365 Centurion9.41
Centurion9.41's picture

"We are born, socialized, and driven to do what we do based on that."

What utter BS.  The vast majority of the "under-dogs" spent most of junior-high and high school NOT working and telling everyone older than them they didnt know what they were talking about.  Then they went and hung out in a supermarket or mall parking lot, or by some pond or old mine pit and drank beer and acted like they were going to take over the world from all the miscreants.

Gues what.  The adults were right and you were wrong.  Now, just like you were told, it is a LOT harder to climb that hill.

Considering all of us elder folks paid the bill so you could have the opportunity to take advantage what you were given, go take crazy, ignorant and selfish socialism elsewhere.

Sat, 08/04/2012 - 19:13 | 2678663 Lednbrass
Lednbrass's picture

Errmm...

As a point of reality you didn't pay the bill, thats the problem. You put it on the bar tab and left it for the kids. You awarded yourselves goodies to be paid for at a later date by people not yet born and went so far as to claim accomplishments for funding the nation and economy with paycheck loans against the future earnings of those not yet conceived.

Read the Treasury reports and get back to me on what you "paid" for.

Sat, 08/04/2012 - 19:48 | 2678707 MsCreant
MsCreant's picture

I don't see how you got all of that out of my post.

Fri, 08/03/2012 - 16:16 | 2676749 fuu
fuu's picture

Glad I wasn't the only one who thought that.

Fri, 08/03/2012 - 19:30 | 2677187 CalibratedConfidence
CalibratedConfidence's picture

I don't run an automated strategy. I trade on oil events and Eco news that result in thin order books then I place orders outside markets to get hit. Usual some dumb auto program fills me and I ride the run up. 0.35% per week for 45 weeks my strategy. I make all decisions and place all orders. I'm not a sociopath because I care to stand out saying that this behavior has gotten so out of control that one can place a legit strategy in place.

So yeah, the market before wasn't perfect but agos also didn't have my account number being sold to the highest bidder through my broker so they could monitor my trades. They also didnt sub penny me. I'm on your side. I did this to help us clean this fucked up and broken market up. But to do it first, we need more informed voters and players.

I have a feeling there are too many readers getting the wrong impression of the type of trader I am. I'm here to help you duck the HFt, learn market plumbing, and have money to invest in real companies, no facebooks, so we can take this country back to its glory. God dammit it, this isn't about the money. What's with you Americans? It's about prosperity and maintaining economic dominance

Sun, 08/05/2012 - 16:59 | 2680147 CalibratedConfidence
CalibratedConfidence's picture

What I was really saying was what I said.

Fri, 08/03/2012 - 15:42 | 2676616 Perpetual Burn
Perpetual Burn's picture

"B.S. in finance from Niagara University"  HAHAHAHA

Fri, 08/03/2012 - 15:44 | 2676622 dirtbagger
dirtbagger's picture

HFT reminds me of the Coffee, Sugar, Cocoa exchange of 30 years ago.   Traders would skulk around the pit like vultures  -waiting for incoming orders.    Exchange volume was so low it was not that difficult for the pit traders to ramp prices up and down to create an unfavorable buy/sell price or to pick stops.

Fri, 08/03/2012 - 15:44 | 2676624 dragoneyes74
dragoneyes74's picture

It is possible to use the HFT's "running the stops" program to your advantage.  But "that's all I have to say about that".   

Fri, 08/03/2012 - 15:57 | 2676683 Rimpinths
Rimpinths's picture

I'm sorry to say this because Garrett sounds like a nice guy, but he also sounds very inexperienced. (And kudos to him for coming ZH to respond to comments, I hope he sees this so that he can clarify some of his points.) Maybe it's just a result of doing an interview where he has to brief and talk in laymen terms, but it seems like his entire understanding of market structures and HFT comes from sensationalized blog posts. Just a few examples, many many more that I don't have time to address...

The HFT will send a bunch of quotes (offers) to NASDAQ and EDGE, trying to sell ABC stock at $1.01. Once the NASDAQ order is accepted, the HFT can simultaneously cancel the $1.01 sell order on the EDGE exchange and replace it with a buy order at the original price of $1.00. EDGE immediately accepts that $1.00 order, because its system has not caught up to the new price of $1.01, and the HFT’s net position becomes zero.

This example doesn't make any sense. I've read and reread this example and I still don't get what he's trying to say. I don't know if he's failing to make a mental distinction between "when an order is accepted" and "when an order is executed" because those are two very different events.  EDGE can accept a bid quote an at any price as long as it doesn't cross or lock the market, which it doesn't do in this case, so I'm not sure what cancelling an offer at $1.01 has to do with anything. Of course the HFT net position is zero because no order has been executed in this example. An HFT can have an offer for 10,000 shares and a bid for 200 shares and technically their net position is still zero.

Dark pools are arrangements between large institutions to trade blocks of shares among themselves. The problem is, these trades can only be seen by the participants – you and I can’t see them. They occur outside the market.

The trades can be seen. They are reported via the TRF (Trade Reporting Facility) by an affiliated exchange:

http://www.finra.org/Industry/Compliance/MarketTransparency/TRF/

Yes, but I also think it’s possible that companies like PIMCO and BlackRock create their own exchanges and compete to make things fairer for their clients. That would be a viable alternative to our national exchanges, which are losing credibility fast.

What does he think dark pools are, if not what he is suggesting? So does he like them or not?

If you place an order and see the price is $15.60 on your screen, your order can be rerouted, filled on a different exchange for, say, $15.65, and you just donated 5 cents a share to an HFT.

It's worth noting that the whole point of the NBBO and its associated regulations is to guarantee that an order is executed at the best offer price at the time. If it was routed to another exchange for $15.65, then that was the best price available. If someone else bought the $15.60 offer first, well that's eBay 101 stuff. Sorry you didn't get to it first. The early bird gets the nickel. Use limit orders if you didn't want to buy it at $15.65.

SEC rules say traders can quote up to 8% from what the National Best Bid and Offer is, and they’re allowed to “drift” another 1.5%. So legally, traders can trade 9.5% above or below the NBBO.

No, they can't "trade" above or below the NBBO. They can make offers and bids all they want above or below the NBBO, but they can't "trade" at those prices unless the NBBO moves. And then they wouldn't be above or below it. Again, he seems to be confused about some very basic concepts.

Also, HFTs love to manipulate ETFs, much more so than individual stocks. So that’s something to keep in mind.

ETFs represent the best opportunities for price arbritrage versus the basket of the underlying securities. That's why a lot of HFTs buy and sell ETFs...not because they are easier to "manipulate". It's because of HFTs that there's has been an explosion of ETF choices for the past few years (a good thing for both traders and long term investors) and it's a reason that their cost-basis is low and that they are accurately priced.

Fri, 08/03/2012 - 16:12 | 2676726 CalibratedConfidence
CalibratedConfidence's picture

Please email me at PaulRevere@CalibratedConfidence.com.  from there we can exchange phone numbers and get in touch.  This would be too complicated for us to cover on a ZH forum due to various questions that will certainly arise.  I greatly appreciate your kind words and also your willingness to reach out and discuss a topic in an area of civil discourse)

 

thank you kind Sir.

Sat, 08/04/2012 - 03:28 | 2677598 Lednbrass
Lednbrass's picture

First, off I would like to say that I found it to be an interesting article.

I do think you make a mistake above though, this is EXACTLY the sort of discussion that needs to take place here- your assumption of "too complicated" doesnt help anyone. It isn't like there is a Mensa requirement to join the financial industry, there plenty of sharp people here who could comprehend and benefit from such an exchange.

Personally I think you should consider being a contributor, and if questions arise from a post explain it in another one. ZH is a bit brutal in the comment mosh pit (not always civil discourse lol) but it does provide a large and growing means of shining some light on the subject and you seem to have some interesting things to say.

Sat, 08/04/2012 - 12:17 | 2678048 MsCreant
MsCreant's picture

Thank you Lednbrass. I thought the same thing and honestly felt a little intimidated and decided not to ask. At the same time I felt intimidated, I also felt like having a hidden conversation was a bit of a cop out.

Sun, 08/05/2012 - 17:35 | 2680197 CalibratedConfidence
CalibratedConfidence's picture

If ZH offers me a spot to write here I will.  They have seperate sections for posters but I can not access it.  I prefer to respond to people on a personal basis for sake of speed and clarity.  We're all busy enough as it is so here again is an email PaulRevere@CalibratedConfidence.com and I openly ask for inquires and ways for us to discuss this topic, organise responses to the SEC when they ask for them and share insight.  I don't have all the answers and I am very interested to hear the viewpoint of someone who trades HFT in a non-bad algo format.  We also discuss this in our TradeForProf.it room during the trading day so as to avoid the twitter bots.  You can share short insight on twitter too - @CalConfidence

Mon, 08/06/2012 - 16:17 | 2682709 MeelionDollerBogus
MeelionDollerBogus's picture

In all fairness the threaded organization is not great for finding if a person has replied "to you" without sifting through a lot of other stuff. Generally I have to go to look for my own comments & see if anyone did reply to anything for any reason, including thread-jackers. email isn't public but it sure beats wasting a lot of time seeing if a reply came on a thread or an article or lots of articles.

Fri, 08/03/2012 - 18:34 | 2677069 Centurion9.41
Centurion9.41's picture

>>I'm sorry to say this because Garrett sounds like a nice guy, but he also sounds very inexperienced.<<

I was left with the same thought, and it began with the ABC/$1.01 example you cited.

However, I'm not ready to say Garrett is just parroting blog info.  I think it may simply be imprecise/poor communication of what he means. 

re/e.g. >>>The HFT will send a bunch of quotes (offers) to NASDAQ and EDGE, trying to sell ABC stock at $1.01. Once the NASDAQ order is accepted, the HFT can simultaneously cancel the $1.01 sell order on the EDGE exchange and replace it with a buy order at the original price of $1.00. EDGE immediately accepts that $1.00 order, because its system has not caught up to the new price of $1.01, and the HFT’s net position becomes zero.<<<

Garrett notes ABC is "trading" at $1.00, but never states NBBO or size.  He mentions orders, but there's no mention of priority status [price, time, size determine priority; unless things have changed].  

Likewise, what does "accepted" mean?  Does it mean the offer order was lifted, or does it simply mean it's the NBBO #1 priority order?  How would the algo even know the latter?  Again, there may be HFT/rebate/unique # [not clear the unique number mentioned included Firm ID or Firm ID & account ID or if it included Firm ID, account ID and order # ID info]

I bring these up simply to point out how the piece may seem very informative but only to someone who knows little of how the mechanics of the market work.  Years ago, I used to work for a very large, very cutting edge/tech savvy market making desk; it is a very well known firm.  It was during the advent of Etrade, rebates for order flow, auto-execution, etc.  So I know far more than the vast majority of retail folks about the topic.  But I do not consider myself very knowledgeable about the inner workings of HFT/algos.

I'm also not against algo's per say.  Many of the arguments against them/HFT are utter garbage, especially concerning how they hurt the "little guy".  But I am against the absence of certain constraints around how these systems operate.  

 

The are no justifiable reasons why the situation flash crash occurred.  None, zero, nada.  There are multiple constraints, that wont kill the use/profitability of computer based trading but will greatly reduce the chance of flash crash events.  That such rules have not been created is for one reason alone.  Too much money flows through theses systems, it creates a situation very similar in profit motive to the LIBOR scandal.  If firms can just skim a small percentage off a huge number, every one pays them so little "no one gets hurt" but they become wealthy.  No different that the movie Office Space or getting 1/1000 of a penny every time a toilet is flushed.

 

There is one thing I have yet seen laid out.  And that is ALL the data base fields that comprise an order placed into the markets/dark pools.  I think it should be mandatory that every firm make public the data fields which make up any and all order flow information passed between any of firm, institutional investor or hedge fund.  Im not talking the information in the data fields, but rather the data field name, structure and definition. 

 

Doing so would go a long way to explaining something I read some time ago; that HFTs can flood the market with orders and cancellations so quickly they can maintain their priority in a cue, yet not "really be there".  It didn't make sense to me, and I think it's another one of those situations where the explanation was imprecise.

 

Also things like this >>>

GARRETT: It is, which is why investors need to understand how to protect themselves. One of the most important tips I can give you is to never enter stop-losses into the market. There are algos designed to sniff out stop-losses and manipulate them against you.

I’ve seen this many times: prices drop 2-4%, clear out stop-losses, then run up for substantial profits. So the poor retail investor gets his stop-loss tripped and sells on the cheap to an HFT, whereas the HFT buys cheap and profits once the price ramps back up.

TCR: Do HFTs target smaller or illiquid stocks because their prices are easier to move?

GARRETT: Sometimes, but I wouldn’t make that generalization. Counterintuitively, [sic] many HFTs target the most liquid stocks.

<<<

It leaves me with a few questions and comments:

- The answer to TCR's "Do HFTs target smaller or illiquid stocks because their prices are easier to move?" leaves the impression Garrett is talking about "wiping the book" type hunter algos.  But the way he answers is so vague it leaves him room to deny the implication of his answer.   I'd argue the numbers of opportunities for a "2-4%" wipe comes along infrequently, and almost always in thin stocks where large limit orders are sitting fairly far away from the NBBO.  Trying to wipe a deep book or the market of limit orders is almost always a losing proposition, unless one is running ahead of a strongly moving market.  Understanding how this is done would require knowing how the order prioritization is defined and managed across multiple markets to bring together the order flow information, book depth, order priority of multiple markets that are open to arbitrage.  Not impossible.  But no understanding of how this could work is possible without first knowing a lot more about the inherent structure of orders and prioritization.

 

Hopefully we can all get more information.

 

 

Sat, 08/04/2012 - 12:56 | 2678128 emersonreturn
emersonreturn's picture

c9.41

 

thank you, +1

Sun, 08/05/2012 - 15:16 | 2679930 MeelionDollerBogus
MeelionDollerBogus's picture

"Doing so would go a long way to explaining something I read some time ago; that HFTs can flood the market with orders and cancellations so quickly they can maintain their priority in a cue, yet not "really be there ."

I think you misunderstand. The flooding crashes MANY tickers from being processed, hence the crossed order book for Facebook http://www.nanex.net/aqck2/3507.html

The prioritizing has another aspect NANEX has uncovered: certain conditional orders are FORCED to a higher priority just for being DEFINED the way they are, prior to execution, yet are conditioned just right so that they WON'T be filled. NANEX more than this article points this out.

Sun, 08/05/2012 - 15:13 | 2679923 MeelionDollerBogus
MeelionDollerBogus's picture

I understood Garrett.

"No, they can't "trade" above or below the NBBO"

Wrong. NANEX has shown CONCLUSIVELY that trades are made far away from the NBBO with charts down to 25 millisecond resolution. The trades are executed and NANEX is tracking right down to sequence numbers and other identifiers.

Mon, 08/06/2012 - 15:38 | 2682539 NaN
NaN's picture

The problem is that the mechanism for NBBO is flawed.

Fundamentally, physics tells us there is No Simultaneity in the universe, so it is not possible to have an efficient distributed system of markets that has the same level of fairness as a single market.

When a particular issue is traded in a single market, it is possible to enforce fairness with respect to the participants by serializing the transactions through a single computer.  When the US stock exchanges were changed to a federated, distributed system (NMS) in 2004, all the issues of distributed transactions, consistency, and commitment ordering were punted in favor of a trusted market maker arbitrage model.  

Some might say that markets have always been gamed by market makers, but this is no excuse for making the problem worse.  

 

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