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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

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