Slashdot Mirror
Adaptation From Flash Boys Offers Inside Look at High-Frequency Trading
Lasrick (2629253) writes "This NYT adaptation from the book provides an in-depth and infuriating look at how the stock market is rigged. Brad Katsuyama of the Royal Bank of Canada couldn't understand why stock he was trying to buy would suddenly vanish: 'Before RBC acquired this supposed state-of-the-art electronic-trading firm, Katsuyama's computers worked as he expected them to. Suddenly they didn't. It used to be that when his trading screens showed 10,000 shares of Intel offered at $22 a share, it meant that he could buy 10,000 shares of Intel for $22 a share. He had only to push a button. By the spring of 2007, however, when he pushed the button to complete a trade, the offers would vanish.' The ensuing investigation by Katsuyama led him to design a program that actually slowed down the trades. But Katsuyama's investigation revealed so much about how the system is rigged."
Honestly, anyone in any position who remains there long enough, starts working the system to their advantage. It's pretty much theft by feat.
Does something need to be done about it? Absolutely!
Will anything be done about it? Yes, furious sweeping of fact beneath the carpet and a complete astroturfing by those who have a vested interest in the status quo.
We'll look into it, Congress. There's nothing to see here. Move along.
A feeling of having made the same mistake before: Deja Foobar
"Here, instead of this piece of Real Estate, we in management are following the advice of our financial officer, and matching funds for a trip to Vegas!"
Capitalism, at its finest.
"Flyin' in just a sweet place,
Never been known to fail..."
Official day of typos / bad grammar
I think corps are fucking us by harping on government debt, which has never mattered and is not the crisis they cynically claim it is, when in private they laugh and tell each other "Reagan proved deficits don't matter" and wait till their party gets in so they can run up the debt to new record levels. Because they know it doesn't matter.
how exactly is this rigged for the longer term investor?
hedge funds have always been about finding some unknown niche with tiny profit potential and making it up on volume with borrowed money
Last August the ACM had a whole issue on detailed technical aspects of all parts of trading. I dont recall talk a part on front-trading. But how to shave off yet another few microseconds. Fascinating.
HFT should be banned, there is nothing these robo-traders contribute to society except for profit for themselves. The argument that they provide for liquidity of the market, or whatever, would not change if everyone would be trading at second scale instead of microsecond scale. My proposal (as someone how knows nothing about stock markets): make it a level playing field and only allow trading at say exact 30 second intervals or so, which should be synced world-wide. In this way, the big firms would only have an advantage over the small guy when new information becomes available in the last half second before the deadline, instead of on every instance of new information. After everyone has placed their orders for the current round, the stock market then takes a few seconds to update all stock prizes, after which everyone has 'infinite time' to compute his action for the next round.
karma police: arrest this man, he talks in maths; he buzzes like a fridge, he's like a detuned radio. [radiohead]
you missed the article
these aren't the old guard doing HFT, but the younger people starting up their own hedge funds and taking the stock purchases away from the bigger banks
You can opt out of the beta by hitting the Slashdot Classic link in the footer. Or click this: http://slashdot.org/?nobeta=1
"Here, instead of this piece of Real Estate, we in management are following the advice of our financial officer, and matching funds for a trip to Vegas!"
Capitalism, at its finest.
Capitalism it ain't. Look at the revolving door between Wall Street and Washington. At best it's form of crony capitalism or weak fascism.
First, there is already a mechanism built into the ACA that requires the government to bail out participating insurance companies. So this premise is a given considering that quite a few of the uninsured could already afford some sort of insurance but chose to spend the money elsewhere and such a low penalty doesn't provide a significant incentive to change thst.
Second, a little debt on the national level is good. It is a primary function of bonds and how the government funds certain aspects of itself in emergencies.
I do not think there is a clear rule to how much is too much. Currently, the interest paid on the debt alone will be a significant amount of the federal budget. This means either cutting programs, significantly raising taxes, going further into debt, or a combination of that. This is where debt becomes a clear problem. When the majority of the budget is tied up paying interest, the debt can easily run out of control or massive cuts wil be had like in greece where the ability to even pay on the debt and have a functioning government came into question and the amount of lenders dried up drastically.
So the harm is being put into a ditustion where government basically collapses due to needing to borrow and no one to borrow from.
The stock market long ago ceased being about owning pieces companies with companies paying out dividends. It's the same bet that prices are going up that it was in 1929, the HFT's have just figured out how to micro-jack the prices. There is a simple simple fix. Stocks are made non-fungible and you must own for 24 hours before you can trade. This puts pricing back onto a time scale over which the actual productivity or fickle fortunes of a company can change. The economic production of a real company doesn't change on the millisecond time scale.
wait till their party gets in
Which party is that? The one one with the richest congressmen or the one with the wealthiest districts?
I sure am proud that our country's best and brightest are focusing their efforts on optimization of moving around virtual little green pieces of paper.
It's not like we have real problems that need to be addressed.
the preceding comment is my own and in no way reflects the opinion of the Joint Chiefs of Staff
Ha.. up date:: face down in a ditch. Hands and feet duct taped behind him. The investigating officer say it is an appearant suicide.
Nobody trades like this, and nobody traded like this in the early 2000s. That trading style has been obsolete for 20 years, and predates HFT. You don't see something, decide you want that, and then hit Enter or click your mouse button.
In this example, you decide the maximum price you want to pay in advance, and you enter a limit order. If you're selling you decide upon your minimum selling price, and in the same way you enter a limit order. You've locked in your profit, regardless of timing.
If you're setting up some sort of combination, you enter the triggering parameters in advance, and you don't even need to see what was being done on screen.
People say that computers are trading with each other. That is false. That's like saying that Microsoft Word writes documents. Trading companies, their traders, and their programmers write trading software and adjust parameters. 30 years ago, the "software" was held in the traders' minds, and the execution was done via outcry. The underlying mathematics is the same, and traders don't have to hold these calculations in their minds.
The problem here is this. Extremely rich companies can have the fastest links to the exchanges, but this is no different from the olden days where the oldest and richest companies had the smartest and most well-connected traders. The tools of the trade are slightly different, but rich and successful companies will leverage their money to be the most successful, or else they will be replaced by somebody else.
My own background is that I wrote a derivative trading system between 1999-2006 for a tiny company that ultimately didn't make it because we couldn't compete against the big boys. This angst about HFT is largely technophobia. The traders trade, they learn the software, and they often don't understand how it works. To programmers like me, the algorithms are a black box, but the traders do understand the mathematics pretty well. When you have traders coming out against HFT, you have traders who couldn't understand the software or were burned because their companies weren't rich enough.
People who have never worked in this field who are against HFT really don't understand computer-based trading very well, from either a programmer's perspective or a trader's perspective. Keep in mind that the job of a computer is to make mundane things happen more quickly, so we can focus on more human things. You want your 401K to execute as accurately-priced trades as possible. HFT ensures that both styles of trading benefit.
If debt and deficits don't matter, then the government should send out a million dollars to every citizen. This would ensure there reelection. Why would they not do this since debt does not matter? If the government did this it would cause massive inflation and all saving would be wiped out. Debt and deficits matter quite significantly, but the real question is how much debt is sustainable. At some point your currency is devalued and you wind up speeding a billion dollars to buy a loaf of bread (a la Zimbabwe).
Before you post an anti-HFT screed to Slashdot, ponder the question: Does the speed or frequency of the trading affect whether or not somebody is front running you? If the problem is that someone saw your order and acted on it before it went to execution, then the issue is with the absolute ordering of the events and not with the speed or frequency. There were front runners in the market long before electronic HFT trading came along.
A better term for what you're probably outraged about is flash trading.
Regarding Ronan Ryan in the story, I do not understand how you can be considered an "expert at moving financial data from one place to another" the say something like "What the hell is a millisecond?".
maybe only send the money to people that know the difference between "there" and "their".
you know, FOR THE CHILDREN
In IT, of course...
And one thing I've learned is that financial firms generally speaking, don't beat the market. If you look at the S&P 500 as a baseline index for the health of the economy (and it might not be perfect, but it's a good measure), 80% of firms CANNOT beat the S&P in the same timeframe. If the S&P loses, those private firms lose too.
And even if they did... maybe 1-2% over? Which you won't get, because that's what they charge in FEES to manage their funds.
So basically HFT exists, because people still have the idea that investing with Morgan Stanley or somebody is a great idea, and so MS have a huge amount of equity to derive ridiculous profits on for who else -- themselves. Add to that the fees they charge to manage the funds they offer, and the marginal rates of return that investors get well... you know how it goes.
Hopefully my job interviews pending will pan out and I'll get out of finance for good; but sadly the money is what has kept me there, especially with the student loans... yet another benefit from our wonderful financial industry.
The price is always right if someone else is paying.
Best article on HFT that I've ever read. Explains in fine detail how institutional players get fleeced by high frequency traders. Took a while to read the whole thing, but well worth the time.
One thing to note to all of us retail investors, though... our tiny orders aren't really getting fleeced, and with spreads on most stocks of only $0.01 our trading overheads are miniscule compared to 20 years ago. Standard brokerage fees trump (by several orders of magnitude) HFT losses for people like us.
-Matt
The interest on bonds bought by the Fed is returned to the Treasury. So let the Fed buy T-bills, and fund the government at zero cost.
The word we are looking for is: front-running.
When HFT firms get a look at the order book prior to the orders being executed and then go out and buy the order book only to turn around and sell it to the original buyer for a penny more......that's front-running. The technology and algorithms are incidental. It's been going on as long as there have been brokers and people buying/selling stock on behalf of other people. The difference this time is that this shit is being encouraged instead of discouraged. It hides behind opaque language and scary computers to dazzle and wow you into not noticing.
HFT should be banned, there is nothing these robo-traders contribute to society except for profit for themselves.
Exactly! But instead of banning, it should just be taxed. They are basically imposing a tax on society that makes them filthy rich while providing no benefit to society. Yet these are the same people who scream bloody murder whenever someone proposes a bona fide tax on stock transactions. If they insist on acting like spoiled young brats then we need to treat them as such.
At its heart, this corruption is similar to the *IAA corruption. In both cases technological advances that should have made the middle-men obsolete are flipped around to provide a disservice to society while enriching the unscrupulous.
We don't see the world as it is, we see it as we are.
-- Anais Nin
It used to be that when his trading screens showed 10,000 shares of Intel offered at $22 a share, it meant that he could buy 10,000 shares of Intel for $22 a share. He had only to push a button. By the spring of 2007, however, when he pushed the button to complete a trade, the offers would vanish.
I have traded bitcoin and other cryptocurrencies, and this makes perfect sense to me. Between the time you see the price and the time your order goes through, someone else may have already bought what was for sale. I don't see what the big deal is. This is exactly the way it should work. Maybe there's more in the article.
Secession is the right of all sentient beings.
Magical unicorn moneys! It's a new paradigm. We can do it forever!
That will slow down the trading and encourage long-term investment....
In Zimbabwe, as in Venezuela now, they are exchanging their currency for US dollars, because US dollars are the new gold. The demand for dollars far outweighs the supply, so "massive inflation" is not an issue.
Inflation is psychological, not physical. Just because there is more money, why do you have to raise your prices? It is a choice, and a sociopathic one. It is like the head of Carlin Financial, quoted in the article: “It’s not just enough to fly in first class; I have to know my friends are flying in coach.” Or Colbert saying "Everyone knows you can only appreciate what you have by seeing other people that can't have it. That's why I had my wedding banquet in a soup kitchen. Those people across the room eating the thin gruel just made my Rosemary chicken that much more delicious."
One way to deal with inflation is with indexing. Make it seamless, automated, so that it becomes transparent to people.
In a case like that, the inflation would help the average citizen and only really hurt the top earners. The money supply would expand by ~350 trillion, but the distribution of that expansion would be very flat, which means the people at the bottom would on average be in better shape then they were.
Only works if inflation is under control and isn't negative (which is touted as an "advantage" of bitcoin, price deflation, which it ultimately is extremely undesirable.)
In Fiat currency, one must make sure that the inflation rate keeps pace with the interest rate of the government debt, otherwise you can't inflate your way out of debt.
The article itself however is about how HFT front-runs for big investment banks. Basically everyone involved in US stock trading was gaming the system.
You can't wait that long for your next trade, man. What are you talking about 120 second trading? You have to do it at least every 60 seconds. You can't even break a sweat trading at 120 second intervals!!!!!!!! (not quite as funny as 6 minute abs).
I finally updated my sig, but now it's lame.
Ultimately undesirable, perhaps, but I get the impression it's more that economists don't understand some basic laws of reality given how hard they want to push a particular economic model which clearly isn't all they make it out to be.
80% of firms CANNOT beat the S&P in the same timeframe.
Long-term, it's unsustainable for any company to beat the stock market as a whole. I wish I could find the Warren Buffet quote on this matter.
"Screw Sun, cross-platform will never work. Let's move on and steal the Java language." - Visual J++ Product Manager
I'm bit suprised at bad reputation HFT has at Slashdot. In many ways, it is very interesting subject for geeks - how often do you have to care about speed of light and benefits of straight-line microwave link over curvature-of-earth fiber... but most importantly, without HFT, you were able to win the market by either social networking (moving at the border of legalities regarding front running, insider trading etc), sheer amount of money or dumb luck. With HFT, you can win because you have best programmers.
I personally enjoy battle of programmers throwing algorithms against each other a lot more than shady agreements done by cabal of elitist traders agreeing over the phone whom to s***w over today. Maybe because I'm a programmer and I haven't managed to get into cabal of elite traders. I would expect most of Slashdot crowd to be on same side?
Or is it because somebody here had this wrong idea that before HFT a random person actually meant something on the market and was not being abused by Powers and that only after advent of HFT, poor private investors lost possibility to game the market? That 'technical analysis' actually meant more than 'how to win the lottery' systems?
This is war. Computers are rifles. Enemies are other big banks/hedges funds. Money is gunpowder. Stocks are bullets. And people... people are empty cases which get discarded from side of your rifle. And yes, HFT means that machine guns are now in play instead of bolt action rifles, but does it really matter matter to ejected cartridge...
Except that even this best case scenario isn't true...
Think about this: What sets prices? The fact that there is (for example) only 1 hamburger per person created in the US per day. Currently, everyone has $1, and needs 1 hamburger. So the price is $1/hamburger. There is this rich guy, who has $1T, but he still only east 2 hamburgers.
OK, so now every has $1M. The rich guy is still fine, and he still buys his 2 hamburgers. But how many hamburgers can everyone else buy? Hm... there's still only one hamburger per person. So each normal person can still only buy one hamburger! So what is the price of a hamburger? $1M per hamburger!
OK, so you then say "well, there must be a huge incentive now to create more hamburgers, since people will pay $1M/hamburger." But here's the thing, at the end of the day, no one wants $1M, they want an extra hamburger. So since the number of "hamburger equivalents" you will pay per hamburger has not changed, there is not extra incentive. So nothing has changed, except that we just had massive inflation.
Poor people do not compete with rich people for goods, in general. Poor people compete with poor people for goods. Giving all the poor people $1M does not make them any better off, and it doesn't make the rich any worse off, it only destroys those that were on the cusp of breaking out of poverty.
while (sig==sig) sig=!sig;
Except that "the rich" tend to have more of their wealth held in hard assets which will inflate in value along with the money supply. It's grandma's life savings that get wiped out when inflation hits.
When you have more dollars chasing the same limited supply of goods, prices will rise. This isn't "sociopathic", this is fundamental supply and demand. Lets take a town of 1000 people who all just recived their cheque for $1M, they all decide to go and buy one of the 10 available $100k Telsa's in town. Since there are only supply does not meet demand, prices will rise, even if it's people offering $200k, or $300k or $1M to purchase one of the limited vehicles.
Horse shit. This is not your libertarian little startup sticks it to the big entrenched old banks fantasy.
This article is absolutely about the large firms. The first part was about the start ups and the history of HFT in general. The big firms adopted the small firms practices years ago. This article is about forcing the big firms that use HFT practices and dark pools to play fair.
Capitalism it ain't. Look at the revolving door between Wall Street and Washington.
Yes, that's how capitalism functions. Everything goes to the highest bidder.
When the interest on the debt is approaching 50% of the non-defense budget funded from income tax (excluding SS, funded through separate taxes), then I think it is a problem. At some point, it'll be impossible to fund the debt service. Is that the point at which it woul dmatter?
Learn to love Alaska
Lets say I bought a bar of gold in 1950.
I sell said bar today. Holy smokes I made a ton of money.
Or did I? I turn around and decide 'hey I really want my gold bar back'. Guess what now I can not do that. Whu you say? I have to pay the gov ~30% of my profit. So the value of my gold bar increase because of inflation. But because of instant tax inflation I can not buy my gold bar back.
think corps are fucking us by harping on government debt, which has never mattered
Ah but it does mater long term. Short term it does not matter much.
Look to who is making money. Follow the money. You will see who stands to gain from the amount of inflation we have. (hint it is not our gov or us, but the federal reserve and the 'banks' that own it).
The value of the united states is being systematically removed thru taxes, inflation, and loans.
http://steshaw.org/economics-in-one-lesson/chap23p1.html
http://steshaw.org/economics-in-one-lesson/chap24p1.html
http://steshaw.org/economics-in-one-lesson/chap04p1.html
Easiest way to become 'rich' in the united states compared to your fellow man? Do not take out loans.
And for exactly how long will this remain an option? (Hint: with the given direction Beta is going, perpituity is the only answer which will keep most of us here.)
USA is the only country where commies and Wall Street hold hands and dance together.
Old news
But they aren't the only ones
It's like shopping memory from the dealers. One day there are over fifteen hundred memory sticks available, the next nothing, the week after that the product is discontinued. Commodities market is there as well.
You can opt out of the beta by hitting the Slashdot Classic link in the footer. Or click this: http://slashdot.org/?nobeta=1
That wasn't working this weekend. I'd visit a story and be forced into beta and the header indicated I was logged out. I'd hit that no beta link and I'd be back at the main page, logged in. I'd click a link to the story and be back in beta and logged out. Repeat several times, since obviously if it didn't work the first time it's going to work the 3rd time. No script blockers or cookie blocking on my end since it breaks too much crap.
Have the servers record all trading requests for the last 1000ms in encrypted form, then do all the trades at once. There are almost no real-world economic factors (ie sales, storms, new patents, employees hired/fired, etc.) that happen even this fast, so the only people who would complain are those who make money specifically from high speed trading games.
There once was a tribe of south sea islanders who used ricks as currency. As in there weren't any locally, the nearest available stock was ten miles away on another island, a hazardous journey by canoe. The ricks so gathered could be traded for goods. The current HFC state-of-the-art electronic-trading platforms function much the same. Moving worthless ones-and-noughts from one place to the other.
Some people are being clever, and using technology to their advantage to make money.
Why is it stealing?
I think various things done to cause the recession were bad (banks selling mortgage-based assets as good investments while simultaneously betting against them, AND mortgage borrowers getting fraudulent mortgages they couldn't afford/didn't understand).
In the interview I heard (maybe it was the podcast from yesterday's 60 minutes), some companies were fighting back against this with their own technology.. Great.
A few things change. People who have long-term contracts to deliver goods or services at pre-agreed prices (labor contratcs, commodities futures) get screwed as well. Also, the value of debt and savings balances will decrease rapidly. Inflation transfers wealth from lenders to borrowers.
An interesting anagram of "BANACH TARSKI" is "BANACH TARSKI BANACH TARSKI"
I'd be fine with HFT's if the ones who used them, also had to suffer the consequences when they fuck up. But no the exchanges are happy to just roll back all trades when an HFT goes bad and crashes the market. If there was an actual risk when using them, perhaps they wouldn't be used as they are.
One of the notable things was that this group went from a mysterious and frustrating problem (getting sniped by HFT traders because they didn't understand the new changes) to a fix in two years (the Thor program) to a permanent fix for most HFT (the 350 microsecond delay of the IEX exchange) in four years. This is very fast innovation and its not unique in the financial world.
This is one of the reasons I support HFT. Because it's a source of innovation that will benefit the world. When one figures out how to move electronic money around really fast and make extremely fast decisions, those technologies can be applied to other things - say disaster management in the few seconds between detection of an earthquake and when it actually hits populated areas.
You're not in the HFT-business though, even if you were doing the functional stuff where you're positioned in "finance". So you have NO IDEA what you're talking about. Being in IT, even more so!
HFT is totally different from hedge funds and managed funds. HFTs preys on your employer, on your salary and most everyone else.
Inflation transfers wealth from lenders to borrowers.
No, that's kind of my point - wealth is destroyed by contracts and savings destruction, but borrowers are not actually helped that much. In the contracts case, the supplier company goes out of business and both parties lose value. In the savers case, the saver loses all savings but the borrowers can't capitalize on the gains because the prices of everything that they care about goes up.
The people that do the best are those that are borrowers on a large asset. Their loan is devalued, so they don't have to pay as much back, true. But even then, the asset (typically a house) loses value because interest rates soar, making it difficult for future buyers to pay you for the asset.
Inflation is just generally bad for everyone. It is a global economy destroyer. Try to think of a single case where there was hyperinflation, but not economic destruction... hyperinflation is always bad, even for the guys that are supposed to be helped by it.
while (sig==sig) sig=!sig;
I agree that hyperinflation of the type that the grandparent was proposing would be really bad for everybody, not because of the first order wealth effects but because it would just cause economic chaos and ruin. I was just responding to the idea of a "clean" price increase across the board. Anything with a time lag has all sorts of second and third order effects.
In any case, within the more typical ranges we see, it really is just rolled into interest rate risk. Anybody who bet on high inflation several years ago has taken a loss and anybody who bet on low inflation is doing pretty well.
An interesting anagram of "BANACH TARSKI" is "BANACH TARSKI BANACH TARSKI"
Except that you're basically forced to participate in the US because they've rigged the tax laws so that it's very difficult to have tax deferred retirement savings in any significant amount without playing their 401K games, fees and all. If the US Government really wanted to make things fair, they would allow up to the maximum 401K contribution to be split among any number of like tax deferred plans, either personal IRA or plan offered by your employer. However, that will never happen because Wall Street always lobbies hard against anything that might allow individual savers to escape or minimize their fees.
The interest on bonds bought by the Fed is returned to the Treasury. So let the Fed buy T-bills, and fund the government at zero cost.
They have a name for that. I believe it's called hyperinflation and it's definitely not a good thing.
Very Insightful, Sir.
I have noticed an issue on slashdot is that most of the folks here do not seem to understand what defines wealth. Wealth is not money. Wealth is the goods and services that money buys.
Americans are wealthy because they enjoy more goods and services than most of the rest of the world. Europeans are wealthy because they too enjoy more goods and services than most of the rest of the world. It isnt about the quantity of dollars or euros.. its about the quantity of goods and services.
Printing up and giving out $1 million to everybody would destroy the economy because the first effect will be a lack of incentive for people to produce goods and services. So the very thing that defines how wealthy we are will immediately become short in supply, so the first effect to handing out that cool $1 million is to make us in general less wealthy.
"His name was James Damore."
The stock market has ALWAYS been rigged, it is just being expressed differently w/tech. But it's not the only form of trading which is rigged. From the Chicago commodity trading pits to recycled fibers to diamonds, trading profits are biased towards either the clever incumbents or the crooked. It's not to say one cannot make money in the market, but one must approach it with extreme cynicism. Following any current trading trend, such a high frequency trading, inevitably leads too losses unless one is within the inner-circles of Wall St. The way to make money is to be a "contrarian" investor or a value investor in the long-term. [I say this after 30 years experience working in the equities markets for firms such as Merrill Lynch and Goldman Sachs]
"We add liquidity to the market." There, now we can do any corrupt crap we want to.
"If you're not passionate about your operating system, you're married to the wrong one."
Let the HFT people watch and place all the orders they like.
Delay any cancellations 10 seconds. Or 10 minutes.
Apply a time tax to their model.
Did I finally get something right?
--
Complex systems usually operate in failure mode.
I need to learn the exact algorithms they use to front run stocks, so I can design my pump and dump scheme to trick front runners into running up the stock price. I'll win. They'll lose.
This comment is covered by the Popeye standard disclaimer.