Man Vs Machine: How Each Sees The Stock Market Part 2

Tyler Durden's picture

Two weeks ago we shared a post on the topic of variant perception, specifically how the two distinct classes of market participants, humans and machines, view their natural habitat. Judging by the interest in the article, this approach to breaking cognitive dissonance was quite welcome, which is why courtesy of Nanex, we bring you part two.

This is what you see:

This is what HFT-bot (which according to the SEC provides liquidity by lifting limit offers) sees:

The actual move up took just 275 milliseconds:

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AldousHuxley's picture

From RedditI work in Wall Street and work in hedge fund analysis. I’m the only person in my office who supports OWS

It’s important to know how exactly the hedge funds, along with the financial markets are destroying the 99%.

Hedge funds. These guys are basically the vehicles of choice for ultra-rich people to get into the financial markets, besides family offices and private wealth managers. What are hedge funds? They are funds that have a 1-5 million deposit minimum, cater to the mega-rich, and can invest in anything without regulatory restrictions, use leverage to pump up their exposure by 15x, and pretty much eat up a vast majority of the industry’s profits.

These guys invest in EVERYTHING. Instruments you’ve heard of – stocks, bonds, forwards, futures, currencies, and instruments that you, me, or anyone else have never even heard of, much less know anything about: commodity future swaptions, FRA/OIS swaps, CLOs, exotic future options, p-notes, index/commodity/equity exposures, and a huge array of OTC (over-the-counter) instruments that no regular investor would ever have access to.

Why I bring this up: the financial markets are rigged. 99% of the investing public has access to services such as basic brokerages, 401k/IRA’s, mutual funds, pension plans, etc. Some of these services, especially pension funds, will invest into hedge funds, who take an additional 2 and 20 (meaning 2% of assets plus 20% of capital gains).

What this means is that if you go any of the traditional retail routes, you are utterly screwed facing off against the hedge funds.

First, you are paying exorbitant fees. Commissions on every stock trade. Mutual fund managers taking a cut – an annual % cut, as well as a % per profit cut. If these managers (i.e. pension plans) invest in another fund, that fund is also taking another % cut. You’re down 2% the minute you invest your money.

Next, if you’re doing the investing yourself, you’re paying ridiculous spreads. The bid/ask spread of a stock will cause you to be down another 2-3% the minute you buy the stock. For example, if you’re buying a share of company at $4.25, you can sell back at only $4.15.

Furthermore, you have absolutely no chance in terms of access to the best services. Hedge funds have a direct line to investment bank’s institutional brokerage teams – these are the guys that spend day and night sucking up to hedge funds, trying to get them the best deals at the cheapest rates. This means that while you’re buying stocks and bonds, hedge funds are getting special rights, warrants, sweetheart deals, private placement deals, options, bigger discounts on bonds, and much better bulk commission rates and lower spreads on stocks. If you’re paying 4.25$ for a 4.15$ stock, they are paying something like 4.16$. And they are eating alive your profits because when the stock goes up to $4.30, they can activate another warrant to purchase 20m shares at $4.25, diluting the value of your shares.

Next, you lack information and exposure. You have no idea what is going on in the market besides what you see on the news – while hedge funds have analysts working around the clock and a bunch of service providers who give minute-by-minute analysis of their portfolio opportunities and weaknesses in all markets with exposures to nearly everything. Meaning, if there is an opportunity in the real estate market (i.e. legislation), it might take you weeks to get in – hedge funds will have gotten in the minute the legislation was passed. Furthermore, when IPOs come out for companies, hedge funds get top billing on the primary market shares – which means investment banks are selling directly to them. Once the secondary market becomes available, hedge funds are up 15-20% on these investments, sometimes within hours.

Finally, you have no capital compared to these hedge funds. The people who invest in these hedge funds are not just the 1%, they are the 0.1%. These are the guys with 500million dollar bank accounts and the ability to do whatever the fuck they want. Hedge funds know this, and they invest without having to care about whether their clients can pay the rent or send their kids to college. All of that is irrelevant. Their sole purpose is to earn money, not to mitigate risk.

What does this all mean? It means the hedge fund industry is making a gigantic proportion of the profits. The top .1% is earning nearly half of the profits in the industry, through not just hedge funds, but other similar vehicles.

The finance industry is a complete scam, designed to funnel money from the 99% investing public into the hands of the top .1%. Sure, some of you will make good money, but stastically, the rest of us will lose, and who is feeding off us? Hedge funds, and the .1%. You have better odds going to a casino and playing slots, the worst-paying game in the house, but still better than the stock market.

Also, the government is in bed with the financial industry. Tax loopholes give hedge funds and other top players the ability to write off losses and not pay taxes on gains for years at a time. For income they derive from the hedge fund (profits), they pay only 15%, rather than the 35% income tax charged to most people earning 80k and above. Meanwhile, you have to pay taxes for not just your own income but also capital gains.

The worst part by far is that the government “encourages” you to put your money into your 401k through ‘tax exemptions’, which basically puts your money with the lowest tier of the financial industry – pension funds, retail wealth managers, and retail asset managers. These guys have shit strategies like long-only or domestic equity (which means they only invest in American stocks), and have nowhere near the capability and reach of hedge funds. These guys are even more likely to lose your money than you are, and even worse is they will take a 2.35% cut while doing so. And you get penalized when you try to take your money out early. How f***ed up is that.

In other words, if you aren’t in the .1%, you have no access to the derivatives markets, you have no access to the special deals that hedge funds and other wealthy investors get, and you have no access to the resources, information, strategic services, tax exemptions, and capital that the top .1% is getting.

If you have any questions about what some of the concepts above mean, ask and I will try my best to answer. I’m a first-year analyst on wall street, and based on what I see day in and day out, I support the OWS movement 100%.

tl;dr: The finance industry funnels money from the masses to the ultra rich, through vehicles like hedge funds which dominate all of the financial markets.

Element's picture

But they say that like it's a bad thing!                     /s

SteinRobyn17's picture

Man Always wins but some time machine .. hoist ring

killallthefiat's picture

ZH commenters now sound like a bunch of po' folk that are embittered that they are not eligible to be part of a hedge fund.


"The poor you will always have with you." JC

AldousHuxley's picture

there is no poor vs rich. It is capital vs. labor.

If you have wage income then you are poor in the world of family offices. (Obama has presidential wage income, but he still gotta show up for work in the white house kissing ugly babies for photo ops and such)

If you own assets have capital gains then you are eligible. (ie. Romney reported $0 wage income on this tax returns; he's got the FU money)




Clamdigger's picture

-1 the reddit tho.

Wait, what? Clearly, you have not visited reddit/r/ginger.

lewy14's picture

Capital views Labor as the internet views censorship: it's damage, and it routes around it.

Capital has wanted to do this for milenia. With the help of technology, over the last decade, it's realized the dream.

Labor's only remaining option is to capture the State. Hence the intensity of the current political polarization.

But be assured, "Labor" is not identical with working people. This is really just a fight over which gang runs the prison, so color me unimpressed with the "principles" and "ideals" that any party brings to this fight.

MeelionDollerBogus's picture

That's absurd. Labor is just another form of capital and other kinds of capital seek to be traded at minimal entropy - be it intellect, muscle, dollars, gold or arbitrage of a loan vs expected ROI for how that loan is used.

Man, you sound almost socialist or stuck in a commies-vs-capitalists dogma. It just ain't that way.


WmMcK's picture

"Go invest in something real and tangible.
Create something of value."

Don't fight the algos and HFT.

candyman's picture

So i was wrong for buying apple at 120. Man I'm fucked

illyia's picture

Thank you AH. Very useful.

Wotnext's picture

So well a way that a mere lurker such as myself can appreciate.  It is tempting to side with the OWS movement and lend them support, but there are legit questions surrounding who is actually funding this movement and what the ultimate purpose may be.  Being a faithful reader of Zerohedge makes one want to question just about everything.








StychoKiller's picture

About the ONLY Truth I know is my wife and family...

ihedgemyhedges's picture

I've been married 18 years.  Wife = truth????????  BS.  Wife = piece of paper at the courthouse.  My two baby girls are the only truth I know.  They may break my heart with bad decisions, but they can't have an AFFAIR on me......

NEVER trust a piece of paper at the ain't blood................

MeelionDollerBogus's picture

Generally the OWS people are not funded. There's a few web sites collecting donations to try to get ustream equipment after police stomp all over it or smash it with batons, or food to protesters and camping equipment but some of that's changing. Cities are cracking down hard on the tents so now it's foreclosure-reversals - take over a home in foreclosure, put a homeless family back into it. It's time & effort. They're pissed enough they have nothing else to do or lose.

Yorick7's picture

I totally disagree with most of what was said in this post.  The retail investor has unprecedented access to most markets now and pays market spreads for most things these days if they are clever and trade on the right platform and u can get the same leverage as most HF.  By the way most HF lose money, they may do well for a year or two and then implode on themselves.

I agree that it's difficult to compete with HFT but once you realise that you can change your game plan.

I would find another job if you are a first year analyst on Wall Street and think the game is so rigged, if you think it's rigged then figure out how it is and take advantage of that.

t0mmyBerg's picture

I too support OWS, not their goals - to the extent they have any - but the fact they are pissed off that something bad is going on (the Fed and what the government has done for Banks and the general crony environment that has taken root, but they do not know that).  I also run money (call it a hedge fund if you wish).  Frankly, given the violently poor nature of the reasoning in this comment, I am surprised you have a job on Wall Street.  Dont get me wrong, there is plenty of sheisterism out there, and very occasionally someone goes to jail (Raj Rajaratnam (sp?) for instance on insider trading I think).  But the crap you complain about in this rant really isnt the problem.  Is there something inherently wrong with sophisticated investors trading esoteric instruments that retail people would not trade?  I do not think so.  Bid/ask spread a problem?  Put in a limit order and you are in the book just like anybody else (probably are some issues with off-exchange trades and you will likely not get filled until the market goes through your price, I am sure there are some issues here but that is not a matter of the hedge funds but of exchange rules and regulatory oversight by idiots that do not even understand such basic ideas as what liquidity is - that is the quality of individual you typically get in government service). 

The hedgies have analysts working to give them an informational edge.  Well yeah, thats the way it is.  Wouldnt you?  Our fund is small.  Guess what, I work 15 hours a day to keep up.  I pay several services to do research for me.  I soak it all in and make decisions.  Now I get to do this all day so yeah I have an edge I guess over someone who is obligated to work and collact wages/salary in some other manner.  Oh well, is there something wrong or immoral about it?  I do not think so.  The Hedgies have all the capital.  Well duh.  And?  Basically this is just a rant that rich people suck.  Well, some do and some do not.

Later on you rant about labor versus capital.  And there is a problem in that the share of national output going to labor is at a nadir.  How do you propose to change that?  Appropriate the capital of those that have it?  Spend it on Solyndra?  That is just shuffling pockets using the threat of violence by the state and actually results in capital misallocation which on the scale it is happening currently will impverish everybody in the aggregate, including the 99% (of which I am a member aspiring to get to the 1%).  A form of thuggery.  Why do you suppose the calculus on the part of business people has shifted to favor automation or outsourcing so much?  Well let me give you a hint.  It isnt because those mean old capitalists are out to screw labor for fun.  It is because politicians have made the ancillary costs of hiring actual human beings to do anything so freakishly outrageous (never mind such potential liabilities as litigation risk under whatever ridiculous theory an enterprising thief, i mean lawyer - and I am one - can cook up) that you would be mad to hire domestically rather than hire outside the jurisdiction of the US or Europe or replace people with hardware or software wherever possible.  Is there something wrong with that?  No there is not, though the result sucks.  Again your bitch should be not with the Hedgies or the current holders of capital, but with the morons who craft the legal landscape such that is makes automation and outsourcing more cost effective than hiring actual local people.

Anyway spent enough time on this, but for christs sake grow up.

TMT's picture


I've tried many times to communicate some of your thoughts but have only resulted in name calling and juvenile rants. Some, and I stress some, people on here simply hate successful people. Just read through all the "eat the rich" posts on here.

Corruption is bad no doubt. But why is accumulating assets (wealth) such a bad thing?

Have a good weekend all.

diwolf's picture

If your investment horizon is long enough (trend following) this doesnt matter much. If you want to play with the sharks short term you get eaten. And the institution which funnels the most money from the middle/poor to the rich is the state. OWS (just had a look at the website) reminds me at socialist revolutions. They always ended much more badly for the masses.

Diogenes's picture

You might also mention how hedge funds profit by buying control of companies by buying a small percentage of the stock, then sucking out all the cash and dumping the stock, in effect leaving the company penniless, deep in debt and ready to blow over in a stiff wind.

This is how you get rich while destroying jobs, pension funds, and your country's manufacturing base which in turn leaves the government with huge liabilities for social services and bailouts and a shrinking tax base.

BorisTheBlade's picture

The finance industry is a complete scam, designed to funnel money from the 99% investing public into the hands of the top .1%.\

Sure, some of you will make good money, but stastically, the rest of us will lose, and who is feeding off us?

Maybe it's time to call this market for what it is - a huge freaking casino. You don't go around complaining that you lost to casino (majority does), but neither do you go gamble your life savings there. So, participate in this market if you want to gamble and go somewhere else if you want to really preserve your wealth (i.e. PMs, small credit unions).

mickeyman's picture

The squirrel in "Over the Hedge" would eat them for lunch.

rotagen's picture

I see a stacked deck.  Dealer's advantage?... Las Vegas?

illyia's picture

They want something from you. You can help them. They will not leave you alone until you help them.

Will you help them?


anynonmous's picture

Canada regulators impose tough rules on "dark" trades (sort of)

45north's picture

The new rules allow exemptions for trades that have a value of more than C$100,000 ($100,300). 


seems totally unfair

Bindar Dundat's picture

"I'm being Eaten by a Boa Constrictor"


Oh No he's got my toe  ( little investor already screwed )

Oh Fiddle he's up to my middle  ( bit bigger -- get him with the new regs )

Oh Heck , He's up to my neck  ( your next little brokers )

Oh Dread , he's over my... ( All but Goldman and JP are dead )


The market is a freakin' Boa....

Amish Hacker's picture

275 milliseconds? Damn, I missed the move again.

centerline's picture

Discounting processing time, distance and everything else electronic, 275 milliseconds alone is fast to just react to a stimulus and press a button... LOL.

buckethead's picture

In a nutshell.


Well done.

Verum's picture

I enjoy reading the Nanex posts but don't understand most of it. Wish they would elaborate in layman's terms more often.

NotApplicable's picture

Think signal to noise ratio. If you throw enough noise in the mix, the signal becomes unintelligible. But in this case, the bots are actually overwhelming the signal, replacing it with it's own fake one. On a human scale, it all happens so fast as to be invisible. Only the bots can see it in time to react, so it's bot vs. bot in the game of fleecing the handful of carbon entities still trading, as well as the slower bots who don't realize they're a few milliseconds behind.

ekm's picture

Listening to Jesse Cook's melody Cancion Triste, one thing comes to mind:

It seems to me that LTRO and HFT are the same thing.

LTRO provides liquidty to european banks achieving non-liquidity.

HFT provides liquidity to stocks achieving non-liquidity.

CURWAR2012's picture

Interesting observation, but who holds the bag? taxpayer and ?

ekm's picture


Taxpayer holds the bag until he or she can't. At this point, taxpayer is totally shitted upon and there is nothing to squeeze from. Food prices are high, gas is high, no high paying jobs, old people are retiring and not spending.

I think time is coming that 2 or 3 primary dealers load up some trucks with elephant manure and start eating. Can't squeeze more from taxpayers.

NotApplicable's picture

Anybody with a fistful of fiat.

Conman's picture

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