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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."
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
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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.
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
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.
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.
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
Will there be poniez?
No, but there will be plenty of Ponzis.
We don't see the world as it is, we see it as we are.
-- Anais Nin
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.
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...
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"
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.
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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."