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SEC Chair On HFT: 'The Markets Are Not Rigged'
Hugh Pickens DOT Com writes "Reuters reports that U.S. Securities and Exchange Commission Chair Mary Jo White told a U.S. House of Representatives panel that she flatly rejected claims that retail investors are being fleeced by high-frequency traders who can use their speed to jump ahead with buy and sell orders that fetch better prices. 'The markets are not rigged,' says White. 'The U.S. markets are the strongest and most reliable in the world.' White's comments to the House Financial Services Committee mark the first time she has directly responded to allegations in Michael Lewis' new book Flash Boys: A Wall Street Revolt. The book alleges that high-speed traders are engaged in a form of front-running, in which the firms are able to quickly identify an investor's desire to buy a stock, rush to buy it first and then sell it back at a higher price. The SEC has been reviewing equity market structure issues, particularly following the May 6, 2010 flash crash incident when the Dow Jones Industrial Average sharply plunged before quickly rebounding. Although staff at SEC are considering whether to launch some pilot studies to test different regulatory proposals, there are no immediate plans to issue rules to crack down on high-speed trading or trading in unlit markets. 'I want to be very clear that the market metrics suggest that the retail investor is very well-served by the current market structure.'"
Looks like she's bought and paid for.
It's insanity, we are watching real life crazy people.
This is my sig. There are many like it, but this one is mine.
Of course the markets are rigged. It has always been that way all the way back to the 1920s. Most often the regulators where former insiders themselves, in which case they were complicit in the buddy-buddy world of Wall Street. This woman, however, just seems to be an imbecile. [I'm a 30 year veteran of Wall St and have worked on the trading floors in most of the major firms.]
I highly recommend reading Flash Boys , mentioned in the Slashdot summary here. While advocates of HFT have always claimed that it provides liquidity, and it did fulfill that role usefully for a long time, we've passed a point where the gains of liquidity are overcome by the overall detriment to the economy: transactions that would have occurred anyway are penalized with what is essentially an extra tax because they came a few seconds later, and people with arcane and specialized equipment jumped the gun.
Yea, somehow banks are using HFT to magically pull money out of thin air, definitely not at the expense of traders, because traders are being so well served.
That definitely makes sense and doesn't sound like complete bullshit at all.
while(1) attack(People.Sandy);
She has a point – a weak one but still a point. I have read the book and it seems to me that the system is not gammed for small retail orders – those are harder to front run. And even if the HFT trades scalp a penny or three per share that is still better than the $.125 spread 20 years ago. Not saying that the system can’t be improved – Flash Boys did change my mind on that – but let’s realize the magnitude and who it affects.
Nothing to see here, people. Move along. And could you put that Social Security Trust Fund money here before you go?
Either people are being front run, or they are not being front run. Can't the SEC grow a pair and actually say definitively whether people are being front run or not? I don't think the concept of front running is an obscure concept that is up for debate. Come on SEC, investigate and pass judgement. Don't give us these weasel words.
I'm largely of the opinion that HFT is a chance for the banks and trading houses to skim off the top of the stock market, at the expense of the 'normal' investors, and using information and access we couldn't possibly have.
I don't believe at all that the "retail investor is very well-served by the current market structure". In fact, I believe the retail investor gets fleeced by these trading programs.
And since there are several well known examples, including the one in the summary, in which these trading programs themselves distort the market and significantly changes the valuations of the stocks.
HFT is the large trading houses using the money of investors (their own and everyone else in the market) like a Vegas casino slot machine.
Basically, HFT is vigorish.
Lost at C:>. Found at C.
Simply tax profits on all equities held for less than 5 minutes at 100%. Problem solved.
[Insert pithy quote here]
HFT is another sound argument for Network Neutrality. Fair open markets can not exist on top of a network where superior bandwidth and latency decide market winners instead of legitimate market forces.
If a nation expects to be ignorant and free, in a state of civilization, it expects what never was and never will be-T J
So, if the market's not rigged and HFT is a feature, what's wrong with introducing random delays of tens of milliseconds into their data streams? Robustness testing, don't ya know. Since there's no way to guarantee flawless links you need to stress the system to locate problems.
The likely outcome would be that the markets would continue to perform as expected while a number of HFT firms would go belly up. Who would miss them?
the book actually talks about large investors getting screwed. Not the casual wanna be day traders, but hedge fund managers who have to take massive losses on those couple of pennies as they are buying many shares at a time.
Even if you check the bid/ask price, without HFT there's a conceivable chance for your buy order to be filled for less than your limit, but with HFT the cheaper stock is exhausted and your order filled at the buy price.
Sounds silly, but pennies matter to these people due to volume and that's what's occurring.
Perhaps you don't understand "front running".
The actual buy/sell price of a transaction isn't the number either part put in, but is a dynamic number based on the market, within the constraints of the buy/sell orders. So if you say "buy at up to 8" for a stock selling at 7, you'll end up paying somewhere below 8 depending on available sell orders.
What is happening is that a company has tapped into the front-line routers to the trading systems with extremely high performance systems that can see and execute and deliver an incoming buy/sell order faster than the real buy/sell orders so they execute first, and injecting their own order AHEAD of your order. This requires their hardware being tapped into the network, and having extremely high performance systems and networking, so it's an option only open to an extremely small number of companies. So if the stock is selling at 7, you say you'll buy at 8, and the third part injects an order to buy at 8 that executes before your buy order, to you end up buying at 8 instead of at 7. The actual differences are smaller, of course, but the volume is infinite, so it generates plenty of cash. Because it requires specialized gear running inside the exchange's network, it's an option only available to a very small number of well-connected companies (one that's been reported), and the collusion of the exchange to arrange for the trader to have better access to the exchange's data feeds than the exchange itself. Other than being highly profitable, I can't see how this can possibly be legal, since it's a clear corruption of the exchange giving one party an unfair advantage.
The is different from high frequency trading, which is programmed trading of rapid transactions, which can be done from anywhere - that doesn't require special network access, etc., just huge piles of cash and an algorithm.
Enable 3D printed prosthetics!
are trading houses spending hundreds of millions of dollars on high speed, fiber optic, trunk lines, in an effort to cut milliseconds from their transaction times? Give me a break puddin cake!
The USA is only 4X older than me...perspective
When put this way, the only events that qualify are explosions and lightning. Even an earthquake takes seconds to minutes to "change value". Tornadoes take minutes and hurricanes take hours or days.
HFT is totally removed from real world phenomena. It is a completely fictional construct. Is it any surprise that it is used to fleece the suckers? It has no legitimate purpose because it is not a real world measure of anything.
Why is Snark Required?
You don't understand the issue or you are making money from the technique and have fully disconnected yourself from the ethical implications of HFT scamming.
I'll use plain english terms to describe it since I'm not in that industry and never remember the fancy facade of names used to obfuscate investing practices and technical points from non-industry people.
You can check the bid/ask prices, the type of HFT process that screws you happens entirely AFTER you press the buy button, they see your buy at one data exchange location and literally outrun your network packets to remaining exchange points to buy up what you just clicked 'buy' on. You end up with a portion of what your lowest bid was, but suddenly the other locations that have the product to fill the order are all priced higher from the HFT gamer. This requires special high speed access and high speed API access to the data exchange points.
It's rigging the system. It's a great hack if you are making money for yourself but it's more than just unethical, it utterly destroys any usefulness of financial investment markets, and also leads to caustic disruption of real world economic data.
Cheers.
This is my sig. There are many like it, but this one is mine.
U.S. Securities and Exchange Commission Chair Mary Jo White told a U.S. House of Representatives panel that she flatly rejected claims that retail investors are being fleeced by high-frequency traders
I'd make a bet with anyone that someone is going to be "shocked and surprised" one day that there was rigging going on just like Allan Greenspan. And just like Allan Greenspan, a certain SEC Chair is going to be miraculously a very wealthy bitch when she retires from a government oversight job.
Of course, I feel compelled to let you know that the betting process is rigged in my favor.
>>"ad space available -- low rates!!!"
Someone did a study on this and proved it. I think the study showed that if the bid/ask is $1.00/$1.01 and you offer $1.01, all of a sudden the bid ask goes to $1.01/$1.02.
I've seen this myself. Just watching the stock price go up a penny every time I put an order in. The study showed that HFT can step in before my order is filled and get the transaction that I wanted.
This is what these "smart" people get paid for. It's total BS and not "American"
What is happening is that a company has tapped into the front-line routers to the trading systems with extremely high performance systems that can see and execute and deliver an incoming buy/sell order faster than the real buy/sell orders so they execute first, and injecting their own order AHEAD of your order
Completely false. This does indeed describe front running, which is illegal. There is no mechanism provided by any exchange which would allow any market maker to observe orders entering the exchange and then enter an order ahead of them. When an order enter the exchange, it is matched with offers that already exist in the system and that is the first time any market participant has an opportunity to react directly to it. What the book talks about is order placed across multiple exchanges, where one party would observe heavy activity in one exchange and *guess* that it is likely to be quickly repeated on other exchanges and try to get to the *other* exchange before the original party.
This posting is provided 'AS IS' without warranty of any kind, implied or otherwise.
The whole concept of 'insider trading' is that you're using knowledge that wasn't yet available to others.
If someone told you, 'hey, we're going to sell in 5 minutes at $100/share', and you went and bought it all up so they had to buy it at a slightly higher price ... wouldn't that be trading on information before it became public knowledge?
Now, it might not be 'insider', as you're not within the company whose stock is being sold ... and they're legally allowed to release the information ... but there are so many other laws regarding stock sales (eg, 'tender offers', where a company plans to buy back shares at a higher price, and they have to leave it open for a given amount of time), that I'd be willing to argue that it *should* be illegal, even if only to improve 'investor confidence'.
(ie, why would you trade in the stock market when you're getting scammed every time you do?)
Build it, and they will come^Hplain.
The only problem with that argument is it ignores the liquidity and spread reduction produced just by having HFT in the market.
God i am sick of this BS being trotted out every time someone wants to defend HFT. Liquidity as a useful metric is *never* measured in milliseconds. It could be easily argued that measuring less than a minute is simply not understanding what liquidity even is.
If information wants to be free, why does my internet connection cost so much?
I don't buy stocks anymore because I KNOW THEY'RE RIGGED.
I used to work as a trader for a major wall street firm. Slight correction in the terminology. If you are bidding the stock you are a buyer, If you are offering the stock you are a seller, regardless if the price you want to buy/sell at is on the bid or ask. If the bid/ask is $1.00/$1.01 and you offer $1.01, you are offering to sell at $1.01, and become part of the offered volume at $1.01. I know, I know, I sound like a bit of a prick pointing out the nuances. But you'd be in for a world of trouble in a pit or on a phone order offering a ton of stock if you were a buyer.
No, the OP was right. They see the buy order placed at one data exchange and before it can get to the other exchanges, the HFTers microwave beam the information to servers located next door to the NYSE and outrun your buy, buy over your bid and then sell the shares back to you. It's straight up scalping, and the only difference between this and front running is front running requires the scalper to be your own broker. The HFTers just found another way to see your buy order before it executes.
We don't have a state-run media we have a media-run state.
There is no mechanism provided by any exchange which would allow any market maker to observe orders entering the exchange and then enter an order ahead of them.
Doesn't have to be provided by the exchange. What they do is place small (100 share) on lots of stocks and when someone buys a small amount, the HFT algorithms can interpret intent to buy and buy up that stock ahead of the rest of the order. Some exchanges even pay firms to make markets which is nuts until you realize what they really are doing. Additionally a lot of orders are not filled on open exchanges but in dark pools. Stock exchanges permit HFT firms to co-locate in the exchanges. There is NO plausible reason to do that unless some form of front running is occurring. There is NO reason for HFT firms to lay their own fiber or microwave connections unless it provides them some huge informational advantage.
Seriously, read Flash Boys. It's an interesting read and worth your time. Even if it gets parts of the story wrong, there is enough credible evidence in there which can be backed up to paint a pretty damning picture of how you are getting screwed. Maybe not big time screwed but definitely screwed.
The stock exchange is a zero-sum game, at least in the short term. Contrary to popular views, no profits of the company being sold, nor even dividents granted to shareholders, inject any money into stock exchange -- they change only the perceived valuation of shares, and the only new money comes from the Ponzi effect.
And in a zero-sum game, if someone is skimming, everyone else loses.
The creatures outside looked from Alt-Right to Antifa; but already it was impossible to say which was which.