Seeing a trade and beating it to the trade floor is impossible. Firstly because there isn't a trade floor. The exchanges are all electronic now. But even if you mean at the exchange, the broker or trader has a direct link to the exchange. The exchange does the matching in strict price time priority. HFT is just another trader submitting orders to the exchange. There isn't anyone in between the trader and the exchange.
It's an interesting article. Based on the facts published in the article, and what little I remember of that incident, I have a few comments. To give you an idea of the size of the sale, the emini currently trades around $1750. Selling 75, 000 of these is a pretty big deal and will cause a price drop. Since eminis are directly tied the everything on the S&P500, price changes in the emini cause price changes across the S&P. From the article it looks like Waddell and Reed were doing their best to minimize the impact. Apart from anything, selling this way maximizes the prices you get for the stock. Now, some traders who had a sizeable position in emini were taking a loss as the S&P dropped. It's not clear who, or the details, but there are always stop loss orders sitting out there that automatically sell once the price drops below a preset value. Brokers offer these products as a way for investors to lock in earnings or prevent losses. HFT companies keep their positions hedged, so it's rather unlikely that an HFT company suddenly had to offload 2000 contracts, especially as the price was falling. From my perspective it looks like the slow sale of 75, 000 contracts caused a gradual decline in the price of the emini and related instruments, and once a threshold was reached a whole bunch of automated orders were triggered. Stop loss would be my best guess. Wherever the orders came from, they were reponsible for the sudden decline and lack of liquidity. We now have circuit breakers and related regulations to prevent this. I don't like stop loss orders at all. They add momentum to a price movement as the worst possible time. Bottom line is, I'm not sure the whole blame can be put on Waddell and Reed. I don't think the majority of the blame can be put on HFT either.
No, that seems to be a common misperception. There are traders and exchanges. Suppose investors Andy and Bob respectively want to buy and sell at particular prices. They submit limit orders to the exchange. If their prices match, or cross, the exchange will match them and send trades to each party. There isn't any way a market maker can get in the middle.
When market makers do get involved is as follows: more commonly Andy and Bod submit matket orders. In this case the buy matches the best ask and the sell matches the best bid. The best bid and ask are usually the market maker's orders, because they have the best prices. Hence a market order will normally never be more than 1c from the actual value, and will get filled quickly. A limit order may never get filled, or may fill at a worse price - so it can actually be more risky.
Does that help?
Flesh and blood market makers can't react fast enough in modern markets to stay in business from penny spreads. The reason is this: they are required to have passive orders sitting on th book. As such, they are ripe for the picking when a pricing disparity occurs. An arbitrage trader will capture the pricing difference by buying on one exchange and selling on the other (maybe different instruments). To do this they submit large sweep orders deep into the book. These orders match many market makers' orders totalling a large volume. This results in a big loss to the market makers. To stay in business the small profits from the spread must outweigh the losses from being swept. A fast market maker can try to update their orders ahead of the sweep, and various other things. So there is a simple relationship between speed and spreads. Slower means wider means higher cost and higher risk to investors.
Notice that they didn't actually present any evidence to the contrary? It's typical sensationalist anti-HFT crap. I've seen this kind of thing first hand: e.g. a huge put option on SPY is bought from a market maker. This triggers a large number of orders in other markets, like equities and futures to hedge that position. These cause other hedging orders. The risk is naturally mitigated across the markets - but each trade has an effect. The problem isn't the risk mitigation algos, it's the amount of leverage and the size in that original put option. That's not to say no HFT strategy has ever caused harm. I can only speak about those that I know from personal experience. The HFT companies I've worked for have big compliance departments to catch mistakes and problems before they occur and to consult in unclear situations.
You have it backwards. HFT resists unnecessary swings, partly because it stongly ties prices to many other prices in disparate markets. These markets are so diverse that it stabilizes prices. It strongly aids price discovery. I say unnecessary because nothing can prevent prices dropping if an instrument truly becomes valueless.
HFT actually provides many services. Market makers, for example, keep spreads low reducing costs and risk to everyone. For this they earn a little money. In fact, most can't react fast enough to avoid losing money to arbitrage sweep orders. Market making is hard and risky. And it provides a service. To see this, not that investors don't need to submit market orders and trade with the market maker, they can instead submit limit orders and join the bid or ask and hopefully avoid paying the spread. Given this, why do you suppose any investors do submit market orders?
HFT shops didn't get bailed out and they weren't involved in the cause.
HFT is risky. See, f.e., Knight who lost nearly a half billion dollars. And didn't get a cent in bailout money.
Get your facts straight.
A minimum hold time on market makers would necessarily increase spreads and increase the cost and risk of trading. I doubt that's your intention. What exactly IS your intention? The market makers that you call "middlemen" provide a benefit. Why else do you suppose people submit market orders that get matched to market makers (usually) as opposed to limit orders, joining the bid or ask, and hopefully avoiding paying the spread?
Actually, HFT generally makes money from volatility, reducing it in the process. That's aside from the occasional fuckup, like e.g. Knight. But that's what the regulations are for. We now have circuit breakers to prevent that.
Most algos just remove all orders and swith off during a crisis. It's a matter of risk. Selling during enormous volatility is a recipe for disaster. Many times many trades end up broken, leaving the company with unhedged positions which are dangerous. And after a flash crash prices tend to recover quickly, meaning the algo would have sold near the bottom. When current prices are uncertain, buying and selling is dangerous. It's during these times that a seasoned click trader with a steady hand and balls of steel can make a killing.
HFT strategies weren't restricted during that period. And yes, the same basic strategies were used even before computers. And how has HFT directly impacted you? Do you have some story to tell us how you lost money on a stock because of HFT?
Er, you mean other than better prices? You did, afterall point out that market making reduces the sell price and increases the buy price, which is better for everyone (except the market maker, who makes more from wider spreads).
Market makers are not "inside".
Trading based on inside information is very illegal.
And what is it you are trying to fix with your bundle idea? Aside from the unintended consequences that would hurt the market overall, I see no benefit.
Has HFT personally directly hurt you somehow? Do you have some juicy story of woe for us?
Or is this pure speculation?
This one.
You have to understand who the SEC answers to. Most of congress and all the top companies have a great deal of their money tied up in stocks.
If one little company decides to manipulate prices (or volumes or volatility, etc) to cheat money from the marketplace, that hurts all the SEC's overlords to potentially millions or billions.
No, the SEC will NOT put up with that.
A big investment bank giving bad advice to their customers to get rid of toxic instruments on the other hand... they seem to be finr with that.
Bingo.
This looks promising but GHCQ does the NSAs dirty work and vice versa.
And nothing except US limiting the NSA will stop the NSA from using exploits to get the data anyway.
You are completely wrong. Arbitrage doesn't add liquidity, it removes it. Market making adds liquidity.
Arbitrage does not add to instability or volatility. In actual fact, arbitrage and market both make money from volatility, reducing it as a byproduct.
You have these uninformed opinions, so tell me, has HFT directly impacted you? Do you have a nice juicy story of how HFT swindled you out of some cash? I bet not.
Slashdot Mirror
Not true. Some companies pull out, but registered market makers have a legal obligation to keep orders out there.
Oh, and arbitrage cannot be "fixed".
Seeing a trade and beating it to the trade floor is impossible. Firstly because there isn't a trade floor. The exchanges are all electronic now. But even if you mean at the exchange, the broker or trader has a direct link to the exchange. The exchange does the matching in strict price time priority. HFT is just another trader submitting orders to the exchange. There isn't anyone in between the trader and the exchange.
It's an interesting article. Based on the facts published in the article, and what little I remember of that incident, I have a few comments. To give you an idea of the size of the sale, the emini currently trades around $1750. Selling 75, 000 of these is a pretty big deal and will cause a price drop. Since eminis are directly tied the everything on the S&P500, price changes in the emini cause price changes across the S&P. From the article it looks like Waddell and Reed were doing their best to minimize the impact. Apart from anything, selling this way maximizes the prices you get for the stock. Now, some traders who had a sizeable position in emini were taking a loss as the S&P dropped. It's not clear who, or the details, but there are always stop loss orders sitting out there that automatically sell once the price drops below a preset value. Brokers offer these products as a way for investors to lock in earnings or prevent losses. HFT companies keep their positions hedged, so it's rather unlikely that an HFT company suddenly had to offload 2000 contracts, especially as the price was falling. From my perspective it looks like the slow sale of 75, 000 contracts caused a gradual decline in the price of the emini and related instruments, and once a threshold was reached a whole bunch of automated orders were triggered. Stop loss would be my best guess. Wherever the orders came from, they were reponsible for the sudden decline and lack of liquidity. We now have circuit breakers and related regulations to prevent this. I don't like stop loss orders at all. They add momentum to a price movement as the worst possible time. Bottom line is, I'm not sure the whole blame can be put on Waddell and Reed. I don't think the majority of the blame can be put on HFT either.
Mod me down and I shall become more powerful than you can possibly imagine!
No, that seems to be a common misperception. There are traders and exchanges. Suppose investors Andy and Bob respectively want to buy and sell at particular prices. They submit limit orders to the exchange. If their prices match, or cross, the exchange will match them and send trades to each party. There isn't any way a market maker can get in the middle. When market makers do get involved is as follows: more commonly Andy and Bod submit matket orders. In this case the buy matches the best ask and the sell matches the best bid. The best bid and ask are usually the market maker's orders, because they have the best prices. Hence a market order will normally never be more than 1c from the actual value, and will get filled quickly. A limit order may never get filled, or may fill at a worse price - so it can actually be more risky. Does that help?
Flesh and blood market makers can't react fast enough in modern markets to stay in business from penny spreads. The reason is this: they are required to have passive orders sitting on th book. As such, they are ripe for the picking when a pricing disparity occurs. An arbitrage trader will capture the pricing difference by buying on one exchange and selling on the other (maybe different instruments). To do this they submit large sweep orders deep into the book. These orders match many market makers' orders totalling a large volume. This results in a big loss to the market makers. To stay in business the small profits from the spread must outweigh the losses from being swept. A fast market maker can try to update their orders ahead of the sweep, and various other things. So there is a simple relationship between speed and spreads. Slower means wider means higher cost and higher risk to investors.
Notice that they didn't actually present any evidence to the contrary? It's typical sensationalist anti-HFT crap. I've seen this kind of thing first hand: e.g. a huge put option on SPY is bought from a market maker. This triggers a large number of orders in other markets, like equities and futures to hedge that position. These cause other hedging orders. The risk is naturally mitigated across the markets - but each trade has an effect. The problem isn't the risk mitigation algos, it's the amount of leverage and the size in that original put option. That's not to say no HFT strategy has ever caused harm. I can only speak about those that I know from personal experience. The HFT companies I've worked for have big compliance departments to catch mistakes and problems before they occur and to consult in unclear situations.
You have it backwards. HFT resists unnecessary swings, partly because it stongly ties prices to many other prices in disparate markets. These markets are so diverse that it stabilizes prices. It strongly aids price discovery. I say unnecessary because nothing can prevent prices dropping if an instrument truly becomes valueless.
HFT doesn't, overall, increase volatility. It generally makes money from volatility, reducing it in the process.
HFT actually provides many services. Market makers, for example, keep spreads low reducing costs and risk to everyone. For this they earn a little money. In fact, most can't react fast enough to avoid losing money to arbitrage sweep orders. Market making is hard and risky. And it provides a service. To see this, not that investors don't need to submit market orders and trade with the market maker, they can instead submit limit orders and join the bid or ask and hopefully avoid paying the spread. Given this, why do you suppose any investors do submit market orders?
HFT shops didn't get bailed out and they weren't involved in the cause. HFT is risky. See, f.e., Knight who lost nearly a half billion dollars. And didn't get a cent in bailout money. Get your facts straight.
A minimum hold time on market makers would necessarily increase spreads and increase the cost and risk of trading. I doubt that's your intention. What exactly IS your intention? The market makers that you call "middlemen" provide a benefit. Why else do you suppose people submit market orders that get matched to market makers (usually) as opposed to limit orders, joining the bid or ask, and hopefully avoiding paying the spread?
Actually, HFT generally makes money from volatility, reducing it in the process. That's aside from the occasional fuckup, like e.g. Knight. But that's what the regulations are for. We now have circuit breakers to prevent that.
Roflmao! Nicely played.
Most algos just remove all orders and swith off during a crisis. It's a matter of risk. Selling during enormous volatility is a recipe for disaster. Many times many trades end up broken, leaving the company with unhedged positions which are dangerous. And after a flash crash prices tend to recover quickly, meaning the algo would have sold near the bottom. When current prices are uncertain, buying and selling is dangerous. It's during these times that a seasoned click trader with a steady hand and balls of steel can make a killing.
HFT strategies weren't restricted during that period. And yes, the same basic strategies were used even before computers. And how has HFT directly impacted you? Do you have some story to tell us how you lost money on a stock because of HFT?
Er, you mean other than better prices? You did, afterall point out that market making reduces the sell price and increases the buy price, which is better for everyone (except the market maker, who makes more from wider spreads).
Market makers are not "inside". Trading based on inside information is very illegal. And what is it you are trying to fix with your bundle idea? Aside from the unintended consequences that would hurt the market overall, I see no benefit. Has HFT personally directly hurt you somehow? Do you have some juicy story of woe for us? Or is this pure speculation?
This one. You have to understand who the SEC answers to. Most of congress and all the top companies have a great deal of their money tied up in stocks. If one little company decides to manipulate prices (or volumes or volatility, etc) to cheat money from the marketplace, that hurts all the SEC's overlords to potentially millions or billions. No, the SEC will NOT put up with that. A big investment bank giving bad advice to their customers to get rid of toxic instruments on the other hand... they seem to be finr with that.
HFT shops are in it for the money. How has this "leech" hurt you? Were you peronally directly swindled out of some cash by HFT?
Bingo. This looks promising but GHCQ does the NSAs dirty work and vice versa. And nothing except US limiting the NSA will stop the NSA from using exploits to get the data anyway.
Exactly where did you get the idea that HFT is destorying the entire worldwide monetary system? You just completely made that up, didn't you?
I bet you can't give me an example of preferential treatment that HFT shops get.
You are completely wrong. Arbitrage doesn't add liquidity, it removes it. Market making adds liquidity. Arbitrage does not add to instability or volatility. In actual fact, arbitrage and market both make money from volatility, reducing it as a byproduct. You have these uninformed opinions, so tell me, has HFT directly impacted you? Do you have a nice juicy story of how HFT swindled you out of some cash? I bet not.