Australia May 'Pause' Trades To Tackle High-Frequency Trading

angry tapir (1463043) writes "The Australian Securities and Investment Commission (ASIC), a government financial watchdog, is reportedly contemplating the idea of implementing a 500 millisecond delay on trades in an effort to put the brakes on high-frequency trading. ASIC last year knocked back the idea and stated that fears about HFT were overblown. However, in a government inquiry today representatives of the organization said the idea of a 'pause' is still on the table."

Comments

Won't work

[EmagGeek]

If you simply change everyone's temporal frame of reference by the exact same amount, you have done nothing, really. Everyone will simply account for the 500ms delay, and trades will still execute in the same order.

Re:Won't work

[captainpanic]

The way I understand it is that traders (computers) have to hold on to shares for a minimum of 500 ms, which means that whatever the market does in those milliseconds cannot be acted upon. However, others can act in the meantime.

Personally, I think that it should be law that if you buy shares in any company (or fund or whatever), you have to hold on to them for a minimum of a week or a month. Shares represent actual physical companies which own factories and employ real people. Those things don't change in 500 ms. They change over a much larger amount of time. And I believe that the stock market would be healthier if this was reflected in its trading. Obviously, when new information comes out (press release: "The factory of company X has just gone up in flames"), everybody's counter should be set to zero, but shares sold in such a case cannot be bought back a fraction of a second later (because whoever just bought them has to hold on to them for a week/month).

I don't pretend that this plan is waterproof. I'm sure someone will shoot a big hole in it in the replies below... I just wish that the stock market would represent what it's supposed to represent: a place where people can invest in our real economy.

Re:Won't work

[operagost]

Obviously, when new information comes out (press release: "The factory of company X has just gone up in flames"), everybody's counter should be set to zero

This is enough to show why your idea won't work... unless you plan is really to collapse the economy. What information is major enough to allow immediate sales of stock, and who gets to choose?

Re:Won't work

[JoeyRox]

It will work. The majority of HFT's illicit profits accrue from speed arbitrage *between* the exchanges, not from a speed advantage at any particular exchange. A co-located HFT server at an exchange sees an order, and, in anticipation of that order representing a larger order that can't be filled in full at that same inside "best" price at that exchange, trades ahead of the order by sending a buy/sell order to other exchanges faster than the original buyer/seller can, resulting in a riskless vig for the HFT trader. By delaying orders on all exchanges by 500ms, the benefit of early-access to incoming orders on any particular exchange is eliminated because all the exchanges will have 500ms of order price discovery incorporated into their SIP, the consolidated price representing the aggregate of the best prices for all the exchanges.

Re:Won't work

[OzPeter]

I just wish that the stock market would represent what it's supposed to represent: a place where people can invest in our real economy.

I purpose the the stock market should really go back to its roots, and that every share should be attached to a genuine item of stock - be that cow, pig or chicken. And that you are responsible for housing and feeding all the stock that you own.

This would also have the interesting effect of changing our perception of Bull and Bear markets.

Re:Won't work

[gurps_npc]

Incorrect. One of the major issues is that HFT look at multiple markets. They see a trade go down in market a, than instantly - in less than 100 ms, change their own order in market b.

By putting in a delay of 500 ms, you prevent this kind of behavior.

Why is that behavior bad? Because for high volume traders they have to split a single order over multiple markets - mainly because others are ALSO splitting among multiple markets.

That is, say I have 500,000 shares to sell. Currently 5 different markets all show a price of 35.2, at 100,000 shares being offered

Moreover, all 5 markets offers are from you, as you are the main guy buying right now.

It is NOT fair for you to take 100,000 of my order at 35.2, then instantly cancel your four other 100,000 orders and replace them at 35.4

You offered to buy all 500,000 at 35.2, not just that 100,000 and should not be allowed to cheat me by raising your price for the remaining 400,000.

A delay of 500 ms means you can't see that your first order is executed until after all your other orders are ALSO executed.

This is one simple example of how HFT try to unethically game the system.

Re:Won't work

[KingOfBLASH]

Well let's say you want to buy a share, who do you buy it from? Or let's say you want to sell a share, who do you sell it to?

It used to be you'd actually have to find someone to step in and take the contra side of your transaction. That's a pain in the ass, will cost you time and money, and in the event you need to sell and everyone else wants to sell you're screwed. All of this would mean that unless you had lots of money to invest, the stock market was not for you.

Fast forward to today. We have people willing to take a position, any position. They provide "liquidity" for the market by buying the share you wanted to sell, in the hopes that they can turn around and sell it for a fraction of a cent more when someone comes along with a buy order. They actively manage their inventory of shares (yes that's a thing), and adjust prices in the event information comes out causing a large price change in the shares.

This is a service that needs to continue if you want modern markets to maintain their efficiency.

Now here's the problem. Back when the "marketmakers" were actual human beings buying and yelling at each other in trading pits one would not be substantially faster than another. But, using computers, there's an arms race for speed. If you can get a few miliseconds (or even nanoseconds) faster than your competition, you can take all of the profitable orders. This means if you plough enough money into speed, you can just own the market. In addition, because computers are so fast, your computer can make many millions of silly trades before a human trader can push the big red stop button.

Now a solution needs to come about. But, because of the need for market makers speed can't really be limited to holding onto shares for months. (Sorry). 500 ms basically breaks the arms race since it's a very easy speed to obtain. So, you can't just plough money into being the fastest kid on the block.

Re:Won't work

[ysth]

There's no need to set a minimum time; what is needed is a minimum tax or fee. It could be .01% and still completely put a stop to abusive trading.

Re:Won't work

[L4t3r4lu5]

It's front-running by machine. If a person-trader did this, they'd be in jail.

"... the illegal practice of a stockbroker executing orders on a security for its own account while taking advantage of advance knowledge of pending orders from its customers."

Re:Won't work

[Gr8Apes]

It would be better to have random delays introduced from 0-30s, which causes out of order sequencing on trades, making HFT relatively unreliable and unusable, since the high speed links currently used to facilitate those ms advantages will be entirely negated.

Re:Won't work

[squiggleslash]

Nope. That's not relevant to preventing HFT.

Quick explanation of HFT, at least, the form that hit the headlines recently. Suppose you have two exchanges, let's call them VAMPIRES and ANGELS (to pick names at random, I mean, if I've accidentally used names reminiscent of a real exchange I apologize as that's not my intention...)

A legitimate trader wants to buy 1000 shares of X at $10. It sees 500 on VAMPIRES, and 500 on ANGELS. So it immediately, simultaneously, places both orders.

Well, it turns out VAMPIRES is kinda rigged. They've made sure their connections to every trader are the fastest possible, whereas ANGELS just uses regular telco connections. They advertise this as a feature, and everyone believes them, but it turns out the founders of VAMPIRES have a hidden agenda. They've made sure they have a fast connection to VAMPIRES, and arranged with the phone company to have an equally fast connection to ANGELS. After "resigning" from VAMPIRES to give the appearance of being uninvolved, they monitor all transactions on VAMPIRES. As soon as they see all shares for X have been told at $10, they immediately place an order for all shares of X at $10 on ANGELS, correctly deducing that the only reason someone would buy ALL the shares of X on VAMPIRES is because they're buying ALL the shares on ALL exchanges for X for $10.

Because they have a fast connection to both exchanges, the HFT traders can see the trade that just happened on VAMPIRES and successfully transmit their trade to ANGELS in less time than it takes the legitimate trader's trade to be transmitted to ANGELS.

So what does the 500ms delay do? Answer: it makes it impossible to see the trade that occurred on VAMPIRES before the accompanying trade has been received by ANGELS too. The founders of VAMPIRES sees the trade 500ms+latency after it was sent by the legitimate trader. They can place the order on ANGELS anyway, but their trade will arrive 500ms+theirlatency-legittrader'slatency on ANGELS so it'll arrive afterwards and the legitimate trader will get their shares unmolested.

An alternative, but it's not terribly reliable, is for the legitimate trader to determine the latencies to each exchange and then send each order with an appropriate delay to make sure they arrive at about the same time at each exchange. It's not 100% fool proof, but RBC was able to get around HFT traders using the technique.

Re:Won't work

[TheRaven64]

The important issue is the ratio between investors and speculators. You need speculators in the market to provide liquidity, but you don't want too many because liquidity is the positive spin on volatility. If you have too high a ratio of speculation to investment then the market becomes completely decoupled from the thing it's trying to represent and it becomes a dangerous place for investors (and companies) because they can lose all of their money as a result of something completely unrelated to the actual profitability of the company. If you have too few speculators, then it becomes difficult to buy and sell shares.

The problem with HFT is not really HFT itself, it's that it magnifies the effects of speculators on the market, meaning that you need far fewer speculators with far less capital to have a disproportionate effect on the functioning of the market.

Re:Won't work

[KingOfBLASH]

Utter rubbish.

I used to work for a high frequency firm, and I can tell you the downwards strategy is as important as the upward strategy. While in theory it is true that potential gains on the upside are unlimited and potential gains on the downside are limited to the share price this presupposes that a stock price can go to infinity. Realistically, this is not true, and realistically barring a catastrophe a stock does not go to zero. Even then a stock does not go to zero immediately when becoming worthless (see Dead Cat Bounce)

HFT is focused in on short term moves. On a short period of time, say the order of seconds, it will dominate. On a longer period of time, say hours, days, or weeks, investor sentiment will dominate. Even when HFT goes completely wonky and accidentally manipulates the market, over a period of days investor sentiment will still dominate.

Additionally, stock ownership represents ownership in an underlying company, that on average will experience growth. As profits grow, the value of the shares grow. Therefore growth in the present value of stocks is the natural state. Additionally, while you might take the counter argument that not all stocks should grow, most indices will cut out underperforming stocks. Therefore, an index is a bad indicator for the stock market at large because you are artificially selecting for winners and losers.

Re:Won't work

[Darinbob]

This "liquidity" is a vague term used by high speed traders to justify their poaching of legitimate trades. What they really mean is that they increase VOLUME of trades. What they are doing is intercepting a trade and getting in a buy or sell first. So they double the number of transactions. However the individual investor holding onto a stock that wants to be able to sell it does not gain any extra ability to sell (liquidity) because of these extra traders, and is very likely to be gaining less money because of them.

This is not a service that improves the system, it is more like a parasite that feeds off of the system.

Re:Won't work

[Citizen of Earth]

The way I see it, you can eliminate the advantages of HFT while keeping the markets highly responsive by imposing a "clocking" scheme on exchanges. When an order is received by an exchange, it is not executed immediately but stored in a queue to wait for the next clock tick. When that comes, the order queue is shuffled into random order and then executed sequentially. Make the clock ticks wait a random period between 40ms and 50ms and any timing advantage of HFT or geography is nullified. The exchanges are still highly responsive; they just do randomized batch processing. All of the requests they receive in the previous clock period ought to be processed within the new clock period (with perhaps some occasional spill-over, in which case the new clock tick is stretched).

How does this simply not move the goalposts?

[Junta]

If the whole point is to be x microseconds ahead of the other guys wouldn't a 500 ms delay simply mean the exact same game would become 'after 500 ms, still be a few microseconds ahead of the other guys'.

I would imagine a more effective approach would be to process trades 4 times per second. A request for a trade always gets processed in the slot after the next slot (meaning no less than a 250 ms delay, but no more than 500 ms delay). Within a given slot of trading activity, randomly shuffle the requests so that someone beating someone else by less than 250 ms doesn't actually affect things.

Re:How does this simply not move the goalposts?

[Junta]

In this case, the question is 'what's the downside?' If HFT isn't really a problem, then what harm would it be to level the playing field to 250 ms or whatever quantums? If HFT is a big deal, then this would fix it. If it is not, then it wouldn't change things much.

Certainly some financial institutions are heavily investing in HFT relevant schemes, so they at least believe that HFT impact can be significant.

Better article

[homb]

There's a gripping article over at the NY Times (adapted from a just released book) that explains very well the pitfalls of HFT, where the problems are mostly due to the haves and have-nots, just like in most things. The article is at http://www.nytimes.com/2014/04...

Not having a level playing deck in an exchange is a major problem for the correct functioning of said exchange.

Article is not very clear.

[140Mandak262Jamuna]

The Australian Financial Review today reported that ASIC had told the inquiry into Australia's financial system chaired by David Murray the regulator would consider introducing a half-second clamp on trades to remove HFT's speed advantage.

HFT work by seeing the order in one exchange at one price, and the same thing is available in another exchange for a slightly different price, simultaneously buy in one, sell in another and pocket the difference. Plain arbitrage, something Commander Vanderbuilt apparently did back in the days when news traveled on horseback during the day time. And he traveled at night in his sailing ship and raced ahead of the news, dumping bonds from bankrupt New York corporations.

These exchanges communicate the prices between themselves and take slightly longer than 350 milliseconds for the news to travel between exchanges. These big trading companies have faster access to both exchanges and are able to act on them. Would it be enough to delay all orders by 0.5 sec? Even if one trading firm sees the price difference, before it could act on it, the news would have traveled and it could no play micro second arbitrage.

This is my understanding. It might mean any trader must hold the instruments for 0.5 sec before trading it again. Not really sure what the article means by clamp.

Install random delay

[Whammy666]

A better system is to install a random delay of between 1 and 5 seconds. This would level the playing field completely and kill off the HFT parasites.

End the Accounting tricks

[worker17]

Instead of just playing the numbers, why don't governments stop the manipulation entirely? You buy a stock, you hold it for 3 DAYS. The market adjusts for the sales and purchases instead of being artificially stimulated. The microsecond barons have to do some REAL work instead.

Re:End the Accounting tricks

[mwvdlee]

This.
All I keep seeing is proposed delays in seconds or minutes at best.
Trading shares is effectively gaining and selling ownership of a company.
There is no valid case for wanting to own part of a company for mere seconds.
There is no benefit for most companies either, so why do they allow an exchange to permit these risks to their business?
Are there no exchanges that enforce a "minimum ownership duration" rule for the companies they list?

I'd increase that to ten seconds at a minimum

[Karmashock]

There is no earthly reason for these commodities and stocks to trade hands faster then that. What are you doing?

The primary issue here is that human beings can't keep up with it. And that's extremely dangerous. If the computer gets confused then it can smash the market before anyone can do anything about it. But if its doing its thing in ten second pulses then you can likely stop it.

The secondary issue is that the market is very unfair with high frequency trading because it gives people with a better connection a huge advantage over everyone else. Its like having a time machine. Its the insider trading of knowing what the price is going to be in .2 seconds.

Pulse the system and most of that advantage goes away. Sure, your might get your order in faster if your system placed it faster but there's less information to react to... fewer iterations of the price to buy or sell against. You buy and sell on the pulse.

The problem after this will be the dark markets... the in house trading and between house trading of stocks, bonds, futures, etc. And putting any rules on the market tends to encourage the houses to use the dark markets more and more.

Which is fine. You control that by putting laws on the houses that they can't accept certain types of money if they're doing a lot of in house trading. The money you don't let them have is the pension money. The mortgage money. The big safe pots of money that the people give to the market makers largely to keep safe and grow at some reasonable rate.

The big houses need that money or they can't make the big buys. They can't leverage it to bend markets. And that means they have to choose... do they want to go big into the dark market or have access to the pension money? Because you make it a choice and they'll mostly choose the pensions. Which means the ones that will go after the dark market will be the smaller guys... the hustlers. And whatever they might or might not do, without the liquidity of the safe money... they won't really matter.

random delay not enough...

[Junta]

Again, you have an 'average' 3 second baseline to compete against. What you really want to do is accumulate trades into a queue, have said queue stop taking new trades for some period of time, then process that queue in random order. Then there truly is no difference whatsoever between trades getting in within a quantum of the trade processing slice.

Just tax every trade

[Squidlips]

Capital Gains or some such tax. That will stop this crap....

Re:Banks deflecting attention from themselves

[OzPeter]

There is nothing illegal whatsoever, since the trades are public. It's just that the HFT optimized their routes.

Sure not illegal per se, but only a finite number of people can get that sort of access, so now the playing field isn't level.

TAX THEM!

[Anonymous Coward]

Add a 1% tax to all stock SELL orders where the seller has held the security less than a day.
Lower the tax to 1/2% for SELL orders where the seller has held the security for less than a week.
Lower to 1/4% for securities held less than a year.

This scheme would:
a) Raise a large amount of revenue
b) Constitute a 'use tax', kind of like a road toll.
c) Only affect people engaged in short term trading (e.g. wall street manipulators)
d) Act as a brake to prevent market volatility (e.g. the flash crash)
e) Be immediately shot down by Teapublicans asshats, so it won't happen.

HFT = a cost to society

[advid.net]

What really annoy me with HFT, besides not being "fair", it that it as a cost and that the society doesn't benefit from it.

Building a stock exchange with top-notch computers if fine, since there is a need fulfilled here for our society.

But building new warehouses as close as possible to stock exchange computers to house top speed fiber connected computers, just to lower the delays from 600ms down to 10ms or so, to allow HFT, is a waste of resources.
No one needs that, it's just a smart way to build a sucking vampire over information systems. And this cost is always somehow reflected to society.

One big bank of my country paid a lot to move all its crucial infrastructure abroad, in such new buildings, to be able to compete in HFT.
Who's paying for those efforts? The company, the bank, instead of doing something more useful to society (investments to improve their services, etc).

Re:Yikes

[lorinc]

Stop the bullshit. You're not changing your mind, you're trying to gain a lot very quickly by gambling.

If you don't understand the implications of what you're doing, please go to the casino instead of messing up our global economy.

Re:Yikes

[ysth]

The concept is that the market is supposed to be for investing. Investing implies certain loss of liquidity (no idea what you mean by loss of value). That said, see my response.

Re:Or a tax.

[jythie]

Or an even simpler solution, extend the laws that make a human doing this illegal to cover automated systems too. HFT is only 'legal' because they can scream 'but it is being done by technology!', but as various court cases with file sharing have shown, assuming the judge feels like it, novel technological implementations are not a panacea against legal repercussions. Unless of course you have good lawyers, weak regulation, and an industry that is profiting from the transgression, in which case a judge might indeed magically find that the technicality is enough to get them off.

Add Delay

[randallman]

They could switch the trade system to .NET. As London discovered, delay functionality is already built in.

serious problems with networking equipment in HFT

[lkcl]

http://www.nytimes.com/2014/04...

this article explains in depth what the problem is. the SEC has now been alerted to the problem, and is investigating. the people who found the issue believed originally that this was deliberate, but it actually just turned out to be a systemic problem of the speed differentials between different routes that high-frequency trades come in at.

what they originally discovered was that they could see a price on a screen, but the moment that they put in the bid to a number of brokers, the price would DISAPPEAR. they thought that this was deliberate, that someone was scamming them: it turned out that this wasn't true, but it took a couple of years of investigation to find out. what they did was they put in *individual* bids *directly*, and found that they were accepted. they then investigated various combinations, introducing delays into the bids, and found, amazingly, that it was down to the *time of arrival at the exchange* of their bids as they were sent via numerous brokers.

so it was only when they invented a tool (which they called "Troy") that *deliberately* introduced networking delays, such that the bids would (as best they could manage) arrive within milliseconds of each other at the exchange, that they managed to trade successfully.

if however any one of those bids happened to go via a different ISP, or a different router, or any other random combination, then the bids would *FAIL*.

the problem it turns out is that these delay effects are well-known. most of the money in high-frequency trading is therefore made by seeing a slightly slower broker's prices, then putting in an undercutting bid *knowing full well* that the other broker has a slower network. and this aspect of high-frequency trading is what is currently under investigation by the SEC.

*this is why the introduction of networking delays is so absolutely important*.

the people who discovered this phenomenon basically had to set up their own independent exchange in order to solve the problem. they needed to introduce a delay of 350ms as a way to make things fair for everyone. they did this by basically putting in 38 miles of fibre-optic cable in a shoe-box in the basement of the server farm that they leased.

it turns out that once investors discovered this, they began *specifically demanding* that their trades *exclusively* be brokered through this new exchange that had this 350ms shoe-box delay. it actually caused a lot of embarrassment for a number of brokers and trading houses because the brokers were explicitly disobeying their client's instructions, because the brokers didn't understand how important this really is.

anyway: you really have to read that article (or the book) fully because it's quite complex, and it's basically an inherent flaw down to the fact that the internet (TCP/IP) is routed randomly, thus introducing gross unfairness that has become the subject of intense investigation, very recently.

so yes, *all* trading should be done with at least a 350ms delay.

Re:Yikes

[i kan reed]

The traders are the only people who gain tangible benefit from that, though. It's only their insistence that makes the spread so small, and the duration so large.

The rest of us are interested in laws that facilitate investment, you're interested in laws that let your manipulate people with less immediate knowledge of the market than you.

Re:Yikes

[guises]

There are certainly problems with that plan, but the idea that you deserve some kind of compensation for basic changes to trading or how the market works is staggeringly egocentric.

Re:Yikes

[sjames]

That's a nice sense of entitlement you've got there.

How much should we compensate muggers for outlawing mugging?

How much do you propose to pay in compensation for the damage caused by HFT?

Big Red Button

[DarthVain]

This is currently the problem. Zero liability currently. There have been a number of LARGE examples of this, where things have gone awry, and the company loses like 500 Million. The response has been to halt trading, and reverse all the trades. To me this is cheating. They may have lost, but that just means that someone else was the winner.

If people want to use these methods, then they take the risks. They don't get to call a "redo" because things didn't work out in the way they thought it should.

After a couple of big losses like this, people might think twice about using such a service, or at least account for it within their threshold of risk. They do not own a licence to make money.