No. of Recommendations: 62
There was a recent METAR thread entitled: Mysterious Algorithm Was 4% of Trading Activity. [1] LorenCobb commented : For many reasons, we need to reign in the high-frequency traders soon... or all Hell will break loose.

In reading the posts and comments, one thought struck me. METARites and other US investors do NOT realize that they are married to High Frequency Trading. Investors took the marriage vows: for better for worse, for richer for poorer, in sickness and in health. . . till death do us part.

Investors might not recall the wedding ceremony, but it occurred many years ago. It was performed by a legal authority and properly recorded with the county clerk. This marriage is a little different from most US marriages, it can NOT result in a divorce. Annulment is also out of the question. As a practical matter, investors have no choice but to make the best of the marriage. A few points:

1) NYSE specialists are EXTINCT and Jurassic Park is closed. In the “old days” all orders for NYSE stocks ended up at a specialist post on the NYSE trading floor. The specialist was tasked with maintaining an “orderly market” for each stock. The specialist matched up buyers and sellers. The specialist was also the buyer and seller of last resort. So if no buyers had open bids, the specialist would step in and buy the stock for “his book.”

Buyers and sellers paid a price for this service in addition to brokerage commissions. The price was the “bid-ask spread” and was typically in the range of 1/8th (12.5 cents) up to ½ (50 cents). The spread depended on several items, but in the end, the customer would end up paying TWO spreads in order to buy and sell an issue. The specialist business was lucrative. Specialists would tell you that they lost money about 2 to 3 days per year. They made money on the other ~ 237 trading days. Not a bad business model.

There were 35 different specialist firms on the NYSE in 2000. Today there are 3.1. The 0.1 firm is Knight Capital that recently blew themselves up with an errant trading program. Specialists are now called “designated market makers” aka DMM. The largest DMM is a Chicago based company named GETCO. GETCO is also one of the largest if not the largest High Frequency Traders. The other two specialist firms are Goldman Sachs and Barclays.

In the case of GETCO, they now have the official NYSE responsibility of maintaining an orderly market while at the same time trading for their own accounts with their HFT.

IF HFT WAS SOMEHOW BANISHED TODAY, THERE ARE LITERALLY NO HUMAN SPECIALISTS READY, WILLING AND ABLE TO RESUME THEIR OLD ROLE.

Small investors have benefitted from the transition from specialists to DMM. Spreads have shrunk dramatically over time. It is common to find actively traded issues with 1 and 2 cent spreads compared to the 1/8th to 1/2ths that used to exist. Granted, the spread is NOT an issue to the few long term buy and hold investors left.

2) Exchanges EXIST for HFT’s not small retail investors. The NYSE trading floor at Broad and Wall in New York City has become a stage prop. Its main value is for photo ops. The actual NYSE trading floor is in Mahwah, New Jersey. It is a large building, with Fort Knox level security that is home to the NYSE computers PLUS the “co-located” computers used by the DMM’ and HFT’s.

Do you think the NYSE said: “We need to build a new state of the art facility with ~ zero humans present to improve trading for the small investor?” NOT A CHANCE.

The exchanges have added many different “order types “strictly for the benefit of HFT’s.[2] The small investor does NOT use any of these. My broad opinion is that these order types are for the benefit of HFT to the detriment of the small investor. Rimpy will correctly point out that I have NO proof that these are to the detriment of the small investor. Rimpy also has NO proof that these order types are NOT specifically to get an advantage for HFT’s.


IF HFT WAS SOMEHOW BANISHED TODAY, THE NYSE AND OTHER EXCHANGES WOULD SEE AN IMMEDIATE DROP IN SALES VOLUMES AND PROFITS. THEY ARE NOT GOING TO WILLINGLY CUT THEIR VOLUMES AND PROFITS.

3) Congress stands ZERO chance of making meaningful changes to the law that would reign in HFT. On September 20, 2012 the Senate Committee on Banking, Housing and Urban Affairs held a hearing Computerized Trading: What Should the Rules of the Road Be? [3] They called four industry experts to testify. You can download and read the prepared testimony of all four. I read them all.

I did NOT post anything on METAR at the time, because my main point was simple:

HFT’s are from Venus and Senators are from Mars. There is no way on God’s green earth that these Senators could understand HFT’s and/or implement meaningful reform. I don’t care how smart the Senators are in their own field, but NOBODY can take a 1 hour short course on HFT’s and make meaningful and CORRECT reforms.

Matters of fact, IF Congress were to tackle HFT reform, chances are good, they would make the situation worse instead of better. I WOULD NOT COUNT ON CONGRESS SAVING THE DAY ON HFT REFORM.

I could write a short story on this Congressional hearing but don’t think it is worthwhile



4) SEC. . . is CLUELESS regarding HFT. I posted recently about the importance of “knowing what you don’t know.” Unfortunately, Mary Schapiro and the SEC staff must have missed that post. Many of us have been in situations where we said to ourselves: “I am the dumbest person in the room and I need help understanding this topic.” When you find yourself in that situation, there are several possible responses:

a) Ostrich- Stick your head in the sand and hope the problem solves itself.

b) Volunteers- Ask your internal team who would like to volunteer to become the expert on this topic and lead the effort.

c) White flag- Raise the white flag and hire the absolute, best, most qualified people OUTSIDE your organization to get you up to speed.

The SEC’s original response was the Ostrich plan. It worked OK from 2000 through 2010 until the Flash Crash in May. Then the SEC went out and hired on a contract basis Gregg Berman who has worked in the HFT industry and has a physics PHD from Princeton. Clearly a very bright fellow. The SEC published a report on the Flash Crash. [5] I posted a critique of it entitled SEC Lays an Egg on Flash Crash. [6] Short summary is that I thought the SEC was way off base in their analysis.

The SEC also had the brilliant idea of building a multibillion $ computer system from scratch to log every piece of market information from every exchange, dark pool, etc. Luckily they dropped that idea and signed a contract with an existing HFT company, Tradworx, to build the system for them.[7] They announced the contract on July 20, 2012, a few billion $’s short and a decade too late.

On October 1st, 2012 the SEC hired Gregg Berman as a fulltime employee to START a new Office of Analytics and Research. This is progress, once again it is 2 or 5 or 10 years TOO LATE.

The problem with all of this is that the SEC has TOTALLY IGNORED the outside team that could help them TODAY. That firm is the “garage shop” Nanex. It literally is a few guys, a small office and some serious computing hardware and software.

The Nanex analysis of the flash crash was INFINITELY better IMO than the SEC’s analysis. One of the root causes that Nanex identified was two exchanges that got out of time sequence. One exchange thought it was time zero. Another exchange thought it was time zero plus 1 second. You can NOT mix prices from different times otherwise all Hades breaks loose like occurred during the flash crash. (Obviously I have simplified this explanation. See Nanex.net for infinitely more detail.)

At a minimum, the SEC should have contacted Nanex to hear their view of what occurred. Did the SEC contact them: NO. Has the SEC contacted them subsequently: NO. Matter of fact, the internal story is that the SEC strongly dislikes Nanex because it made the SEC look like a bunch of fools. The SEC should have admitted that Nanex was light years ahead and sought their help. Unfortunately, the SEC was too prideful to admit how far behind they were and decided to re-invent the wheel. BIG MISTAKE.

Bottom line on the SEC is that I would not look for them to make any meaningful reforms to HFT. The flash crash occurred on May 6, 2010. Can you name any and all of the reforms the SEC has implemented since then? The main changes were a new rule that allowed trades greater than 30% from the market to be “busted.” 29.99% trades are OK. The other changes are adding “speed bumps” which are somewhat after the fact. ZERO has been done to proactively PREVENT another flash crash type event.

BTW, did I mention that the large HFT firm GETCO has hired several high level SEC staffers in the last few years. They hired Elizabeth King on June 11, 2010 about one month after the flash crash. [8] I am sure the timing was coincidental. King was associate director of the SEC's trading and markets division, which is responsible for supervising exchanges, brokers and credit rating agencies.

5. “Perfect” changes to HFT are NOT obvious. It would take another short story, but in simple terms, there is near unanimous agreement that all of the proposed HFT solutions will cause other problems. Stated differently, we aren’t in Kansas anymore and we don’t have the red slippers to click three times on. There is also increasing agreement INSIDE the HFT industry that the situation is precarious and the system is marginally stable.

6. How and when will HFT change? Most likely Congress will get involved AFTER we have another flash crash type meltdown or worse. Let’s assume they have a timely response like they did to the 2008 Credit Crisis. Here it is 2012 and their response was Dodd-Frank, which did ZERO to permanently solve the TBTF banks. Need I say more? Probably a few years AFTER the next major event, some new law will be enacted that addresses the wrong problem with a wrong solution.


BOTTOM LINE: is that all US investors are married to HFT for better or for worse. Better get used to the marriage, because NOTHING is going to change any time soon.


Thanks,

Yodaorange










[1] Desertdaveatol post: Mysterious Algorithm Was 4% of Trading Activity
http://boards.fool.com/mysterious-algorithm-was-4-of-trading...

[2] Wall Street Journal article: “For Superfast Stock Traders, a Way to Jump Ahead in Line”
http://online.wsj.com/article/SB1000087239639044398920457759...

[3] Senate Committee hearing on HFT
http://banking.senate.gov/public/index.cfm?FuseAction=Hearin...

[4] SEC contracts with Gregg Berman to issue report on the May 2010 Flash Crash
http://us.mg4.mail.yahoo.com/neo/launch?.rand=4tl90b3rioq9s#...

[5] SEC report on Flash Crash
http://sec.gov/news/studies/2010/marketevents-report.pdf

[6] Yodaorange post: SEC lays an Egg on Flash Crash
http://boards.fool.com/sec-lays-an-egg-on-flash-crash-287997...

[7] SEC contracts with HFT firm Tradeworx
http://www.tradersmagazine.com/issues/25_342/sec-trading-dat...

[7] SEC Hires Gregg Berman to start Office of Analytics and Research.
http://www.bloomberg.com/news/2012-10-01/sec-leads-from-behi...

[8] GETCO hires SEC administrator Elizabeth King
http://www.reuters.com/article/2010/06/11/us-sec-getco-idUST...
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Yoda

I tried but failed to understand how a fractional cent or percent tariff/tax/fee applied to every trade is going to make it impossible for the algorithmic trading to continue.

It WILL make certain algorithms unprofitable, and the class of algorithms it "breaks" seems to me to be the ones we'd want broken.

This is not about going "back to humans" in the exchanges. I have nothing against algorithms.

It is merely a matter of bringing speed-of-light arbitrage back under control and the reasons for trading back into the realm of economics, rather than electronic delays and advantages.

Impedance.

ciao
BJ
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As I pointed out on another thread: years ago when NYC threatened a fractional cent tax on trades the NYSE reacted by declaring they'd flee the state if such a thing happened, even going so far as to buy land (in Connecticut IIRC) to prove they weren't bluffing.

I doubt any tariff/tax/fee that doesn't go directly to the NYSE will ever happen.
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A Federal law requiring some charge per trade would make it happen though.

Doesn't matter where the money GOES as long as it doesn't go back to the trader.

It isn't impossible, just unlikely.
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A few replies to BJChip's questions and comments. I am changing the order of the questions.

BJ: It is merely a matter of bringing speed-of-light arbitrage back under control and the reasons for trading back into the realm of economics, rather than electronic delays and advantages. .

We have moved light years from the supposed overall goal of Wall Street which is to efficiently allocate capital to its most productive uses. The average non-METARite does NOT understand that all of the stock trading does NOT directly benefit the issuing company. Once Wall Street orchestrates an IPO or secondary offering, the company has the money from the investors. All of the churning after that instant does ~ NOTHING for the company. Some forms of HFT are just an absurd extreme form of having ZERO incremental benefit in the proper allocation of capital.

Many Wall Street products or services do NOT pass the following test:

Prove in advance that this new XYZ product/service WILL improve the efficient allocation of capital, otherwise it cannot be offered.

So it is hard for me to seriously consider that some forms of HFT have any positive economic impact. Note that one form of HFT is the specialist replacement Designated Market Maker algorithm. Clearly this form of HFT is essential for a properly functioning market.

BJ: This is not about going "back to humans" in the exchanges. I have nothing against algorithms. It WILL make certain algorithms unprofitable, and the class of algorithms it "breaks" seems to me to be the ones we'd want broken. .

The challenge is to separate the different types of HFT algorithms. It becomes very gray, very quickly. One man’s undesirable HFT is another man’s greatest thing since sliced bread. Very similar to the debate about hedging versus proprietary trading for the TBTF.

BJ: I tried but failed to understand how a fractional cent or percent tariff/tax/fee applied to every trade is going to make it impossible for the algorithmic trading to continue.

The consensus from sophisticated investors that have NO vested interest is that adding a Tobin Tax will not work. Jason Zweig who is certainly not an apologist for the HFT industry wrote a column that says it will NOT work.

http://blogs.wsj.com/totalreturn/2011/12/13/why-a-financial-...

Yoda’s take is:

1) It will NOT happen because the exchanges have too much power with Congress and the SEC. So as a practical matter it is dead.

2) In one sense, it is very misguided. Investors used to pay say a ¼ (25 cent) spread every time they bought or sold a stock. Nobody ever complained about how bad and unfair it was. It was a fact of life the people accepted. Even if we assume that HFT’s are unfairly taking one or two cents from investors through dubious means, aren’t investors still better off? Doesn’t mean it is right, just that small investors will always be stuck paying the vigorish.

3) In the unlikely event that Congress and the SEC approved a Tobin tax and the exchanges remained on-shore, I am highly confident the extra money will come out of the investor pockets NOT the HFT firms. They would likely just widen the spreads and make investors pay more. Net loser would be the investors.

For the few remaining long term, buy and hold investors, HFT’s have minimal impact.

I don’t necessarily agree with what and how the HFT’s perform. I am just attempting to describe what I view as the most likely scenario going forward. In that context, I don’t see an effective US Tobin tax going forward.

Thanks,

Yoda
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Thanks Yoda

I read Jason's commentary and my comments are

1. The notion that it would discourage "speculation" is not reasoned out very well. I don't expect it to do so.

2. There are currently 11 countries in Europe who would like to apply some form of Tobin tax. US participation would essentially drag the rest of the world into line.

3. Offshore companies are just that. US companies are something else again. Moving offshore IS a possible consequence... but I think that we can deal with it. Not sure about that one... but I suggest that trading in the USA is important to most of them.

4. I don't think, given the level of trading extant already, that trading MORE is going to be something that will prove financially attractive. The number of trades as a multiplier, is extreme. The fee/tax/whatever can be quite small.

5. I think you're dead right about the last bit.

It will NOT happen because the exchanges have too much power with Congress and the SEC. So as a practical matter it is dead.
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If it was actually a genuine problem, we would be reading about it in the Political section of Rolling Stone. That's your go to source for ground breaking economic journalism.

What is it that makes elaborate conspiracy theories so attractive?

Remember Y2K?

Who killed Kennedy?
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Yoda, Beej,

Can you guys explain something to me please?

Long term investors, and those who believe in fundamentalism... they play unprotected & don't use market stops because they have faith in reported "value" right?

What do they care about HFT and the potential for a computer to periodical sheer an axle & pull pricing out of whack for a few seconds, a few days, or even a month? They're theoretically immune to surface price swings, they're "in it for the value" right?

So, what's the big hairy deal? Their faith tells them that the underlying fundamentals matter more than the market responsiveness, right?

I don't get it... help me, Mr. Wizard!

Curiously,
Dave
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"Rimpy will correctly point out that I have NO proof that these are to the detriment of the small investor. Rimpy also has NO proof that these order types are NOT specifically to get an advantage for HFT’s."

And you have no proof that they are not specifically to comply with the religious laws of our secret alien overlords. Or that they are not just designed to profit my own personal account at everybody else's expense.

The burden of proof is on the one who is asserting a positive claim, in this case you. You don't just get to make a claim and put the burden of proof on somebody else to prove it false.
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It would actually be easy to reign in.

A super-short term capital gains tax of fifty percent for gains that occur within one day for the sale or purchase of securities or options.

That would hurt daytraders? Fine...then make the supershort tax rate hit for trades that occur within an hour.

Easy.
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Yoda, I wish I had more time to reply to your post in detail. Maybe I can find some time over the weekend. But I do have to make one quick reply to this comment of yours:

YodaOrange wrote:
The flash crash occurred on May 6, 2010. Can you name any and all of the reforms the SEC has implemented since then? [...] ZERO has been done to proactively PREVENT another flash crash type event.

That's not true. Consider all of these things that were implemented (or will be implemented in the near future) to prevent another flash crash:

1. Single stock volatility trading pauses

2. Stricter rules on stub quotes

3. Tighter market-wide circuit breakers based on S&P 500

4. Limit up, limit down

5. Kill switches

Rimpy
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A Federal law requiring some charge per trade would make it happen though.

Even this is not definite. What if Cayman Islands sets up an exchange without such a fee?
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Even this is not definite. What if Cayman Islands sets up an exchange without such a fee?

Remember what I said about the companies wanting to trade in the USA? I am pretty sure that some restrictions on people and the exchange attempting to escape that trade, particularly when it is clearly and solely in order to continue to leverage nothing into profits, would in some way expose them to other sorts of sanctions far more onerous.

Then there are the communications.

The Hamptons are unfortunately inconvenient to the Caymans, and there are other communications arrangements that are rather difficult to secure.

The short answer is that I don't know what is reasonable/legal but I AM pretty sure that if someone tries to list/trade on foreign exchanges but lives or sells goods or produces goods in the USA, some 3 letter agency can find a way to make their lives entirely miserable.

In other words, I am not a kind person. When someone attempts to circumvent the law and take advantage of loopholes, I am perfectly happy if he is punished... as severely as possible.

+++++++++++++++++++++++++++++++

A more interesting question was asked though, which was rather in the line of "what difference does this make". Simply stated, it is wasted work, wasted energy and a tax laid on all of us for the benefit of a few and NO benefit to the society. Which is really the point for me.

Trading in stocks according to economic evaluations and belief in the health and prospects and value of the underlying companies is a form of arbitrage that has value. It makes it possible for companies to raise money and ownership to be distributed broadly. The society benefits in ways we mostly accept. Brokers and dealers enable this. They get paid for their efforts. It seems fair at that level.

Now if brokers skimmed before as a means of getting extra, and I believe that this was true then though not as much as now, it was theft.

They've always been at the top of the food chain.. but let us examine how they fare relative to everyone else. Twenty to fifty room mansions in the Hamptons, Porsches, Mercedes and Ferraris, private jets, private yachts, early retirements and political influence.... this hasn't been exactly hard times.

Times are not ever hard for them except when the market crashes... not that they do not work hard at their skimming. They sweat blood to create the most efficient algorithms... but to accomplish what?

The LIBOR business was just a piece of this. The HFT is another piece and I don't have any sympathy for the people involved. They are immoral/amoral sociopathic and talented thieves.

That this is accepted by many in the USA is a part of the reason I no longer felt comfortable in the USA. I still believe in working for a living. Producing something of value and being paid for it.

I do not believe in being paid for finding ways to skim a percentage off a trade in addition to my fee for making that trade. I do NOT believe in being paid for finding ways to skim a percentage off a million trades that I manage through electronic algorithms, using money which is not mine.

I do not believe in the free lunch these people are enjoying. I look at their advantages and their lack of production and I recognize at least part of the reason why the the USA has turned into a kleptocracy. I see the people who are paying for the free lunch these folks are getting.

Which is why I reckon it is wrong.

There is nothing wrong with electronic trading. I have no problem with paying a specialist to facilitate trading in stocks and bonds because buying stock isn't like buying a loaf of bread. That's fine.

Making it the same as buying stuff in World of Warcraft with someone else's gold is however, not fine. It crosses several lines, including that it is actually illegal in World of Warcraft. It is "fake" economic activity.

At present I don't know how to define "fake" and "real" activity in a formal way. I don't usually think about this stuff long enough for it to come up.. no skin to speak of in the game. I DO know that I don't like the people who make money off of HFT and I don't like the people who gave us the Libor scam...
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Answers to Dave and VU:

DWDonhoff said: What do they care about HFT and the potential for a computer to periodical sheer an axle & pull pricing out of whack for a few seconds, a few days, or even a month? They're theoretically immune to surface price swings, they're "in it for the value" right?

Dave, a TRUE long term investor does not care about all of the HFT issues. Maybe they pay one or two cents too much and 20 years later they sell for one or two cents too little. Not a big deal. IF and it is a big IF, we have another flash crash type event and the LONG term investor happens to buy/sell at 30% off the correct price, it IS a big deal. I think that is so unlikely that I would not consider it. IF a supposed long term investor panicked and bought/sold during another flash crash, obviously they could be hurt by HFT’s.

VUCommodore said:

And you have no proof that they are not specifically to comply with the religious laws of our secret alien overlords. Or that they are not just designed to profit my own personal account at everybody else's expense.

The burden of proof is on the one who is asserting a positive claim, in this case you. You don't just get to make a claim and put the burden of proof on somebody else to prove it false.


VU, you are correct. My apologies for not including more detail. I cut it out for the sake of brevity and that was a mistake.

The SEC/FINRA have issued fines regarding exchanges, dark pools, broker/dealers for providing benefits to certain large customers at the expense of small customers. These comments are verbatim from the SEC and FINRA:

Here are they in order from most recent:


1) Washington, D.C., Oct. 3, 2012 — The Securities and Exchange Commission today charged Boston-based dark pool operator eBX LLC with failing to protect the confidential trading information of its subscribers and failing to disclose to all subscribers that it allowed an outside firm to use their confidential trading information.

The outside firm’s separate order routing business therefore received an information advantage over other LeveL subscribers because it was able to use its knowledge of their orders to make routing decisions for its own customers’ orders and increase its execution rate. [1]


2) Washington, D.C., Sept. 14, 2012 — The Securities and Exchange Commission today brought first-of-its-kind charges against the New York Stock Exchange for compliance failures that gave certain customers an improper head start on trading information

An internal NYSE system architecture gave one of the data feeds a faster path to customers than the path used to send data to the consolidated feed. Also there was a software issue in the internal NYSE system that sent data to the consolidated feed. The disparities in data release times ranged from single-digit milliseconds to multiple seconds.

3) Washington, D.C., Sept. 25, 2012 — The Securities and Exchange Commission today charged a New York-based brokerage firm and three executives for allowing traders outside the U.S. to access the markets and conduct manipulative trading through accounts the firm controlled.

The SEC’s investigation found that Hold Brothers On-Line Investment Services ignored red flags indicating that overseas traders were accessing the markets through the firm’s customer accounts and repeatedly manipulating publicly-traded stocks through an illegal practice known as “layering” or “spoofing.” In layering, the trader places orders with no intention of having them executed but rather to trick others into buying or selling a stock at an artificial price driven by the orders that the trader later cancels


4) Washington, D.C., April 12, 2012 — The Securities and Exchange Commission today charged that Goldman, Sachs & Co. lacked adequate policies and procedures to address the risk that during weekly “huddles,” the firm’s analysts could share material, nonpublic information about upcoming research changes. Huddles were a practice where Goldman’s stock research analysts met to provide their best trading ideas to firm traders and later passed them on to a select group of top clients.

According to the SEC’s order, the programs created a serious risk that Goldman’s analysts could share material, nonpublic information about upcoming changes to their published research with ASI clients and the firm’s traders.


5) Washington, D.C., Oct. 24, 2011 – The Securities and Exchange Commission today charged Pipeline Trading Systems LLC and two of its top executives with failing to disclose to customers of Pipeline’s “dark pool” trading platform that the vast majority of orders were filled by a trading operation affiliated with Pipeline.

The SEC’s order also found that, although Pipeline represented that all users were treated the same, it provided Milstream with certain advantages over other users, including special access to certain information about the operations of the dark pool and to data connections that made it easier for Milstream to track history and activity in the dark pool.


6) WASHINGTON — The Financial Industry Regulatory Authority (FINRA) today announced that it has censured and fined New York-based Trillium Brokerage Services, LLC, $1 million for using an illicit high frequency trading strategy and related supervisory failures. Trillium, through nine proprietary traders, entered numerous layered, non-bona fide market moving orders to generate selling or buying interest in specific stocks. By entering the non-bona fide orders, often in substantial size relative to a stock's overall legitimate pending order volume, Trillium traders created a false appearance of buy- or sell-side pressure.

This trading strategy induced other market participants to enter orders to execute against limit orders previously entered by the Trillium traders. Once their orders were filled, the Trillium traders would then immediately cancel orders that had only been designed to create the false appearance of market activity. As a result of this improper high frequency trading strategy, Trillium's traders obtained advantageous prices that otherwise would not have been available to them on 46,000 occasions. Other market participants were unaware that they were acting on the layered, illegitimate orders entered by Trillium traders



The picture I am attempting to paint with these disparate examples is that US trading Firms, broker/dealers, exchanges, dark pools, etc have a habit of giving advantages to large customers over small customers. The obvious goal is to extract more money from the small customers to benefit large customers using ILLEGAL methods.

These examples do NOT prove that any HFT trading is done illegally. My bias is that some illegal “front running” likely occurs and that the SEC has ZERO chance of detecting it. IMO some firms that can front run without being caught will do exactly that.

Your are welcome to make the case that Wall Street and other HFT firms absolutely, positively, would NEVER, EVER front run or illegally take advantage of small customers. I might suggest you start with Goldman Sachs $550 million fine they paid on the Abacus mortgage case. [7] Maybe you can use that case to prove they have proper morals and internal controls to NEVER, EVER illegally trade against small customers. As you know, they are one of the four remaining Designated Market Makers on the NYSE, plus they have their own Dark Pool, plus they do proprietary trading for their own account.

Thanks,

Yoda



[1] SEC Charges Boston-Based Dark Pool Operator
http://www.sec.gov/news/press/2012/2012-204.htm

[2] SEC Charges New York Stock Exchange for Improper Distribution of Market Data
http://www.sec.gov/news/press/2012/2012-189.htm

[3] SEC Charges N.Y.-Based Brokerage Firm with Layering
http://www.sec.gov/news/digest/2012/dig092512.htm

[4] SEC Charges Goldman, Sachs & Co. Lacked Adequate Policies and Procedures for Research “Huddles
http://www.sec.gov/news/press/2012/2012-61.htm

[5] Alternative Trading System Agrees to Settle Charges That It Failed to Disclose Trading by an Affiliate
http://www.sec.gov/news/press/2011/2011-220.htm

[6] FINRA Sanctions Trillium Brokerage Services, LLC, Director of Trading, Chief Compliance Officer, and Nine Traders $2.26 Million for Illicit Equities Trading Strategy
http://www.finra.org/Newsroom/%20NewsReleases/2010/P121951

[7] Goldman Sachs to Pay Record $550 Million to Settle SEC Charges Related to Subprime Mortgage CDO
http://www.sec.gov/news/press/2010/2010-123.htm
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Rimpy said: That's not true. Consider all of these things that were implemented (or will be implemented in the near future) to prevent another flash crash:

1. Single stock volatility trading pauses

2. Stricter rules on stub quotes

3. Tighter market-wide circuit breakers based on S&P 500

4. Limit up, limit down

5. Kill switches



Rimpy, I stand by my statement that nothing has been done to PREVENT another flash crash. You listed 5 items that are intended to mute or slow down a flash crash AFTER IT STARTS. None of these items addresses the root cause of what started the problem in the first place. In our parlance, I was talking about changes in the market microstucture.

Using a fire analogy, these are 5 different types of fire extinguishers to use AFTER the fire is started. I am looking for Smokey the Bear solutions!

Thanks,
Yoda
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IF a supposed long term investor panicked and bought/sold during another flash crash, obviously they could be hurt by HFT’s.
And other LT investors might get lucky & have at-market buy orders executed at the split-second lows... the odds are roughly equal.

I still don't see the big deal.

OK, that's not true... I actually *do* understand the complaint of HFT.... but I see it as entirely emotional & irrational. It truly takes absolutely nothing away from anyone operating at a different timeframe, and HFT operations are at exactly equal risk of loss than as of gain (due to natural competitive pressures at their own levels.)

The whine ends up just sounding like all the more wealth envy (except its misplaced envy, because the HFT players don't really have it any better, on net, than anyone else.)

Dave
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K, that's not true... I actually *do* understand the complaint of HFT.... but I see it as entirely emotional & irrational. It truly takes absolutely nothing away from anyone operating at a different timeframe, and HFT operations are at exactly equal risk of loss than as of gain (due to natural competitive pressures at their own levels.)


That is wrong, unfortunately.

HF-Traders have privileged access and enjoy artificial advantages over investors. For example, they can (or could) trade in penny fractions and put an order above yours by 0.01 cent.
Then there's "flashed orders" where the HF traders would to see incoming orders 30 ms before everyone else (that practice seems to be gone, mostly).

Using unfair advantages such as these HFT extract what is essentially a transaction tax from other market participants who don't have them.
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Hi AD,

That is wrong, unfortunately.
Nope, it's correct... and you're making my point.

HF-Traders have privileged access and enjoy artificial advantages over investors. For example, they can (or could) trade in penny fractions and put an order above yours by 0.01 cent.
Ahhh... so they can begin losing money earlier than you on a wrong direction, right? And they can do it FASTER.

Then there's "flashed orders" where the HF traders would to see incoming orders 30 ms before everyone else (that practice seems to be gone, mostly).
Again, equal opportunity to fail, but quicker than slower traders.

Using unfair advantages such as these HFT extract what is essentially a transaction tax from other market participants who don't have them.
Equal access to success *AND* failure as everyone else, in strict competition with others using the same "advantages" is the dictionary definition of 'fair.'

Merely being faster at milliseconds is no more an advantage than daytraders have over long term holders. You still have to time & choose direction accurately, and HFT does nothing for that.

*If* you already understood that... then your complaint *appears* as mere success envy... and wrongly placed, at that.

Dave
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Ahhh... so they can begin losing money earlier than you on a wrong direction, right? And they can do it FASTER.

No. They get better execution than you do. You are always executed after them, OR you have to pay 1 Cent more. On average, this costs you money.

Then there's "flashed orders" where the HF traders would to see incoming orders 30 ms before everyone else (that practice seems to be gone, mostly).
Again, equal opportunity to fail, but quicker than slower traders.


No. An INFORMATION advantage. The HF trader sees the order before others, and gets to decide whether he wants to act on it (by filling it, for example). So the "slower" traders (those not granted privileged access by the exchange) will never even get to see or to act on the order in many cases.

Don't get me wrong - I have no problem with traders extracting money from the market (from investors) through short-term trading strategies, but I *despise* a rigged system, where unfair, artificial advantages are created for a group of market participants which then exploit those advantages to levy what is essentially a transaction tax on everyone else.

Does all of this matter to a long-term investor? Yes, it does, because even if the financial impact of this kind of thing is small, you really, really don't want the stock market to be rigged and you have to fight such graft wherever possible.
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Hi AD,

No. An INFORMATION advantage. The HF trader sees the order before others, and gets to decide whether he wants to act on it (by filling it, for example). So the "slower" traders (those not granted privileged access by the exchange) will never even get to see or to act on the order in many cases.
You're still not understanding; Even split-second knowledge of directional bets is no advantage *EXCEPT* if you are competing at the high speed level... and even then it only gets you on the field, not in the black.

Everyone trading at longer periods are at a neutral effect from HFT traders...

Consider: Hourly scalpers win & lose, as an aggregate, billions during a single annually adjusted trader's positions season. Is the long-term trader "losing" anything to the scalpers? Nope. Not on net balance... the long-term trader reaps portions of the trend the scalpers miss, and avoids losses & expenses the scalpers incur.

Same for HFT.

Don't get me wrong - I have no problem with traders extracting money from the market (from investors) through short-term trading strategies, but I *despise* a rigged system, where unfair, artificial advantages are created for a group of market participants which then exploit those advantages to levy what is essentially a transaction tax on everyone else.
I agree... but HFT traders have no unfair advantages. They gain and bleed faster, is all.

Does all of this matter to a long-term investor? Yes, it does, because even if the financial impact of this kind of thing is small, you really, really don't want the stock market to be rigged and you have to fight such graft wherever possible.
Oh, it *IS* rigged... but not in the issue of access to speed.

Consider;
HFT is available to anyone & everyone who wants to pay the costs of access.
*LOTS* of brilliant investors *COULD* afford to buy into HFT systems... but they don't.

If HFT offered an unfair advantage, why wouldn't everyone who can afford to exploit it do so?

(Answer; It doesn't offer any advantages.)
Dave
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I’m a little late with my reply and I’m sure the board’s attention has moved on, but for anybody interested in this subject, I would like to add a few more comments.

YodaOrange wrote:
Rimpy, I stand by my statement that nothing has been done to PREVENT another flash crash. You listed 5 items that are intended to mute or slow down a flash crash AFTER IT STARTS.

I'm really not sure what you mean. Recall that the origins of the flash crash in May 2010 was a good old fashioned selling panic. It's not as if everything in the world was peachy and all of a sudden, computers started dumping shares all by themselves for no reason. Investors got spooked and starting dumping shares, via computers.

There are many occasions in the history of the markets when sellers overwhelmed buyers and the only people buying shares were doing so with ridiculously low bids. This is what John Kenneth Galbraith had to say about a similar episode in his book, “The Great Crash”:

Of all the mysteries of the stock exchange there is none so impenetrable as why there should be a buyer for everyone who seeks to sell. October 24, 1929 showed that what is mysterious is not inevitable. Often there were no buyers, and only after wide vertical declines could anyone be induced to bid ... Repeatedly and in many issues there was a plethora of selling orders and no buyers at all. The stock of White Sewing Machine Company, which had reached a high of 48 in the months preceding, had closed at 11 on the night before. During the day someone had the happy idea of entering a bid for a block of stock at a dollar a share. In the absence of any other bid he got it.

That’s exactly what happened during the flash crash: sellers overwhelmed buyers. Computers put in absurdly low bids (i.e. “stub quotes”) and in the absence of any other bid, they were executed.

The selling panic was not unprecedented; the speed of the selling however was unprecedented. And that’s what we need to do to prevent another “flash crash”: slow down the speed of the selling. You can’t prevent a crash before the fact. To prevent a crash, you are essentially asking how can we can prevent panics? And if you can answer that question, you have solved one of the great mysteries of herd psychology. The best we can do is to try to slow down the herd once it has been spooked.

YodaOrange wrote:
None of these items addresses the root cause of what started the problem in the first place. In our parlance, I was talking about changes in the market microstucture.

They don’t address the root cause of the “crash” because that’s due to herd mentality more than anything else, as I described above. They do however address the root causes of the “flash” part of the “crash”.

One of the issues that exacerbated the crash that day was the fact that the exchanges react differently to the events. NYSE in particular halted trading in some shares because they triggered a “Liquidity Replenishment Point” (LRP). This has the effect of halting trading on one exchange, so then all of the sellers moved on the other exchanges, which did not have the liquidity to handle all of the new sellers. By creating uniform rules regarding halting trading and holding an auction on the listing exchange before trading can reopen, this sort of scenario won’t happen again. That’s what the “single stock volatility circuit breaker” does, and it’s what the even more effective “limit up, limit down” rule will do in the near future. In addition, tighter regulations on the use of stub quotes will also help ensure that trades do not take place at absurdly low prices even in the midst of a panic.

YodaOrange wrote:
Using a fire analogy, these are 5 different types of fire extinguishers to use AFTER the fire is started. I am looking for Smokey the Bear solutions!

That's all you really can do: keep fire extinguishers maintained and ready to use after the fire has started. Beyond that, what changes to market structures would you (or anybody else) propose that would prevent fires before they start?

As Smokey says, only YOU can prevent panics! Not the SEC, not the exchanges.

Rimpy
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Everyone trading at longer periods are at a neutral effect from HFT traders...

Consider: Hourly scalpers win & lose, as an aggregate, billions during a single annually adjusted trader's positions season. Is the long-term trader "losing" anything to the scalpers? Nope. Not on net balance... the long-term trader reaps portions of the trend the scalpers miss, and avoids losses & expenses the scalpers incur.

Same for HFT.


Ok, let me give you a practical example. You have a buy limit order at $10.00. A bunch of HFTers have buy orders at $10.001.
The stock price drops to $10.001 and your order isn't executed, because of the buy limit orders at $10.001. The price then rises again to $11.00.

Due to the ability of HFTers to use penny fractions, you missed out on a $1.00 gain per share.

Make no mistake - the ability to order at penny fractions is an advantage that gives profits to market participants who have it at the expense of those who don't have it.
If it wasn't so, they wouldn't be using it.
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Consider;
HFT is available to anyone & everyone who wants to pay the costs of access.
*LOTS* of brilliant investors *COULD* afford to buy into HFT systems... but they don't.


HFTing requires signifiant resources of the financial as well as the human kind and it comes with certain risks. It may not even be a very profitable use of capital.

But that is inconsequential to my argument, because even if HFTing was an unprofitable venture on average, and the people engaging in it were all idiots, HFTers should STILL not have the ability to use unfair advantages to gain unfair profits.

Aside from the "unfairness", it leads to an inefficient use of resources from a macroeconomic perspective.
If HFT is subsidized by granting HFTers unfair advantages to essentially "tax" other investors, then more resources are going to be used on HFT then are macroeconomically efficient (and that's postulating that HFT has any kind of macroeconomic utility in the first place, which I doubt).
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AD,

You're *STILL* missing the forest *AND* the trees.

Watch;
Ok, let me give you a practical example. You have a buy limit order at $10.00. A bunch of HFTers have buy orders at $10.001.
The stock price drops to $10.001 and your order isn't executed, because of the buy limit orders at $10.001.

The price then *DROPS* again to $9.00.


How'd that "unfair advantage" work out for them???
Who lost more, you, or them?

Merely having a faster execution is *NO* advantage without a timing & directional edge. HFT doesn't do anything favorable in that aspect. It merely provides more, faster... more gains, and more losses... faster.

Its precisely perfectly "fair."

Dave
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Ok, let me give you a practical example. You have a buy limit order at $10.00. A bunch of HFTers have buy orders at $10.001.
The stock price drops to $10.001 and your order isn't executed, because of the buy limit orders at $10.001.
The price then *DROPS* again to $9.00.

How'd that "unfair advantage" work out for them???
Who lost more, you, or them?


Dave, if the price drops to $9.00, your buy order will have been executed and you will be along for the ride.
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Merely having a faster execution is *NO* advantage without a timing & directional edge. HFT doesn't do anything favorable in that aspect. It merely provides more, faster... more gains, and more losses... faster.

Its precisely perfectly "fair."


No. If you buy via below-market limit orders, on average, you are going to pay more for shares if you can't use penny fractions.

An example:

You want to accumulate 100,000 shares of a stock via buy limit orders.
Another trader has the same plan, only he can use penny fractions and you can't.

Each day, 1000 shares are sold in the market via market orders.

Today, the other trader puts in limit orders at $10.001. If you want to buy, you will have to pay $10.01, 0.9 Cents more than the other trader would have to pay for the shares.
The next day the trader puts in a limit order at $9.001. If you want to buy, you will to pay $9.01, 0.9 Cents more than the other trader.
If you both accumulate 100,000 shares over a period of time, and if neither of you has a directional or timing edge, you will have paid 900 dollars more for your shares.
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AdvocatusDiaboli wrote:
Ok, let me give you a practical example. You have a buy limit order at $10.00. A bunch of HFTers have buy orders at $10.001.
The stock price drops to $10.001 and your order isn't executed, because of the buy limit orders at $10.001.


The one huge gaping flaw in your theory is that HFTs can't display orders in subpenny increments for stocks above $1. See Rule 612 of Reg NMS. So the scenario you describe above is simply not possible.

If you see trades in subpenny increments like $10.001, they took place in a dark pool and the trade is just being reported via an exchange, as required. Dark pools are another subject, but basically they are the domain of institutional investors and internalized order flow and not HFT.

One exception to the subpenny rule is midpoint pricing, where trades can occur (but orders can't be displayed) in 1/2 penny increments. This is a bit complex to explain, but it's not an advantage to HFT.

One other relatively new exception to the subpenny rule is the Retail Price Improvement program, which has been in place for about 2 months at NYSE. But as the name implies, this allows for subpenny improvements in pricing for retail investors only, so again, no benefit to HFTs.

Rimpy
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The one huge gaping flaw in your theory is that HFTs can't display orders in subpenny increments for stocks above $1. See Rule 612 of Reg NMS. So the scenario you describe above is simply not possible.

If you see trades in subpenny increments like $10.001, they took place in a dark pool and the trade is just being reported via an exchange, as required. Dark pools are another subject, but basically they are the domain of institutional investors and internalized order flow and not HFT.


Thank you for the information. Trying to read up on the finer points of trading regulation and HFT has proven to be quite frustrating, as I tend to find only very fragmentary of information.
In your view, do the HFTs today enjoy any advantages which could be considered "unfair", or was that done away with (Flashed orders etc.)?
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AdvocatusDiaboli wrote:
Thank you for the information. Trying to read up on the finer points of trading regulation and HFT has proven to be quite frustrating, as I tend to find only very fragmentary of information.

There are a lot of myths about HFT out there. The myth that HFT firms can quote in subpenny increments while retail investors cannot is one of the most common. Nobody can display orders in subpenny increments on an exchange.

If you ever see a trade that looks suspicious, tell me about and I will try to explain what was going on. I've done that before for YodaOrange. But, in short, if you ever see a trade in any increment other than 0.01 or 0.005, it probably took place on a dark pool. And even in that case, the dark pool was most likely consolidating several trades into a single trade report, which resulted in fractional pennies.

In your view, do the HFTs today enjoy any advantages which could be considered "unfair", or was that done away with (Flashed orders etc.)?

Any advantages that I consider "unfair"? Honestly, no. HFT firms have no special privileges or secret order types that aren't available to all investors. Exchanges make no distinction between HFT and retail investors, except to the advantage of retail investors.

Do the HFTs have any advantages? Yes, of course, they have many. They have more money and talent, and a much better understanding of market structures than the average investor. If having more money, talent, and knowledge is "unfair", then HFTs are just one of a long list of things that are unfair in a competitive, free market economy.

If Alex Rodriguez were to show up as a member of the opposing team at the next game of your recreational softball league, then that would be "unfair" because you simply don't expect a player of his caliber to play in a recreational league. However, you can't apply that same standard to the stock market. Everybody plays in the same league. There is no recreational league where only the amateurs play. You've got to be ready to take a pitch from a guy that's been playing the game for 20 years and makes $15 million a year.

All of these complaints about HFT really come down to "These guys know to how to play the game so much better than me. They get to spend more on equipment than I make in a year. How will I ever compete with them?" The answer is: don't. Stick to limit orders where nobody in the world can make you pay a penny more than what you said you were willing to pay. Stick to long term trading where subpennies don't matter. Stick to directional day trading where milliseconds don't matter. But if you are growing anxious over subpennies and milliseconds, you are playing a game that you will lose to people with a lot more money, talent, and understanding of market structures than you will ever have.

Rimpy
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Ok, let me give you a practical example. You have a buy limit order at $10.00. A bunch of HFTers have buy orders at $10.001.
The stock price drops to $10.001 and your order isn't executed, because of the buy limit orders at $10.001. The price then rises again to $11.00.

Due to the ability of HFTers to use penny fractions, you missed out on a $1.00 gain per share.

Make no mistake - the ability to order at penny fractions is an advantage that gives profits to market participants who have it at the expense of those who don't have it.
If it wasn't so, they wouldn't be using it.


I dislike HFT because of potential abuses like phantom orders done solely for price discovery, and front-running normal trades.
But, I don't think the ability to use penny fractions is an advantage. In your example, if the stock price had kept falling to $10 then $9 and so on, you would WIN by paying lower than the HFTers.
If you place an order for a lot of 1000, it is equivalent to you putting in $10,000 and HFTers putting in $10,001. They have a higher bid, so they get filled first. If you want to beat them, limit to $10.01.
(In fact, following mungofitch's suggestion, this is exactly what I do when placing limit buy orders - bid $10.01 or $20.03 in place of $10 or $20 that many people would bid - if I definitely want the stock. Also, because of HFT and flash crash and so on, I will NEVER place a market order.)
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Thanks for that Rimpy, but there is one other question that needs to be considered... and that is

How do these guys add value to the economy? I surely don't see it. I do not see a lick of additional value in terms of trading, by having HFT or algorithms that decide to push 4% of the volume of the market back and forth to no actual effect.

It is sort of like the e-mails one gets offering to make something bigger or harder. Something like half the volume of traffic on the net is valueless junk. Though I would hesitate to call the two things anything stronger than "similar".

What does this do that someone with an ordinary computer, access and algorithm cannot do?

See.. it fails the black box test, and that is critical. As someone else pointed out, if there was no MONEY in it, they wouldn't do it. You and others have made it sort of clear that there isn't any advantage, it is a LOT of work and it takes a lot of money to compete... and the firms involved DO make money.

My world has money that represents work done... it cannot just appear, even though the bankers claim that this is possible and the global economy is based on the lie. The money always actually comes from somewhere and somewhen... and I can't see where theirs is coming from.

I can't see where the money is coming from but I KNOW THEY ARE GETTING IT.

If, after a few minutes, you don't know who the sucker at the table is, its you.
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bjchip wrote:
How do these guys add value to the economy?

To be honest, that's a question I ask about 95% of the people that work in financial services. And it's also a question that could be asked about every trader and middleman for the past 300 years.

From a high level view, HFTs are exploiting inefficiencies in the system. They are making money because other people are leaving money on the table. So maybe those other people will figure that out eventually and stop leaving so much money on the table, thus making the economy more efficient.

From a low level view, HFTs have replaced market makers and they provide liquidity in the markets. They process huge amounts of data and use arbitrage to make sure that stocks, bonds, derivatives, and currencies are accurately priced. They make directional bets that help the process of price discovery.

Without a doubt, I would rather see profits go to inventors and entrepreneurs that are directly improving the quality of life of the average person. But even traders have a role to fill in the economy, although the improvements may not be as easily observed.

Rimpy
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From a high level view, HFTs are exploiting inefficiencies in the system. They are making money because other people are leaving money on the table. So maybe those other people will figure that out eventually and stop leaving so much money on the table, thus making the economy more efficient.

?

How is a buy or sell order leaving money on the table? Is it that it is off by some amount from the "real" market price?

I think I "get" that, maybe... though I still don't see why HFT is required to do it.

From a low level view, HFTs have replaced market makers and they provide liquidity in the markets. They process huge amounts of data and use arbitrage to make sure that stocks, bonds, derivatives, and currencies are accurately priced. They make directional bets that help the process of price discovery.

That is a valid use of the algorithmic trading and I understood it from the git-go but still .... don't see why HFT is required to do it.

If an algorithm places orders and cancels orders to the tune of 4% of the market volume, or engages in other similar shenanigans I have to be suspicious. I code for a living, and I deal in uSecs and nSecs in my work, and I can point to things that HAD to have that sort of timing for them to work (AVIRIS at NASA JPL for instance).

I can't see what HAS to have this level of arbitrage.

Is it that the firms that do the arbitrage are simply competing to out arbitrage each other? I can imagine a sort of evolution owing to such a competition. Employing a lot of high priced talent too... yet a massive waste of resources overall.

?

Thanks
BJ
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If you ever see a trade that looks suspicious, tell me about and I will try to explain what was going on. I've done that before for YodaOrange. But, in short, if you ever see a trade in any increment other than 0.01 or 0.005, it probably took place on a dark pool. And even in that case, the dark pool was most likely consolidating several trades into a single trade report, which resulted in fractional pennies.

I'm hardly a high-frequency trader, but if you look at my transaction histories in Quicken you'll see quite a lot of trades (particularly in mutual funds) where the price is in thousandths or even millionths of a cent.

That's because I care about getting the *number of shares* exactly right, and the *total transaction amount* exactly right, and will let the price per share do what it needs to do in order to make that happen.
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Do the HFTs have any advantages? Yes, of course, they have many. They have more money and talent, and a much better understanding of market structures than the average investor. If having more money, talent, and knowledge is "unfair", then HFTs are just one of a long list of things that are unfair in a competitive, free market economy.

I was referring to priviledged access like "flashed orders".

But if you are growing anxious over subpennies and milliseconds, you are playing a game that you will lose to people with a lot more money, talent, and understanding of market structures than you will ever have.

It's not impacting my style of investing/trading to any noteworthy degree.
This is a question of general financial market policy as well, though.
I believe that what the majority of what the financial sector does these days has no macroeconomical utility or is in fact actively harmful.
Trading activities that exploits privileged access and artificial advantages would be/were a prime example of that.

But it's in general questionable whether the arms race to shave nanoseconds off routing and execution is an intelligent use of society's resources, or whether it would be better to maybe use some kind of auction system on the exchanges (with 5 auctions a second) or use some other mechanisms to prevent this kind of waste.
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From a high level view, HFTs are exploiting inefficiencies in the system. They are making money because other people are leaving money on the table. So maybe those other people will figure that out eventually and stop leaving so much money on the table, thus making the economy more efficient.

The economy as a whole doesn't get more efficient if the spread on a particular stock goes from 3 cents to 2 cents.
Spreads are inefficiencies to be sure, but removing them has no impact on overall economic efficiency because, overall and on average, spreads are a zero-sum game and don't add to frictional costs of trading or cause a misallocation of capital (Unless we're talking about very illiquid assets). Therefore, resources spent on decreasing them are (largely) a deadweight loss to the economy.

You say HFTs supply liquidity to the market.
Do they really? Or do they mostly supply an illusion of liquidity that melts away when it is truly needed?

They process huge amounts of data and use arbitrage to make sure that stocks, bonds, derivatives, and currencies are accurately priced.

Beyond a certain point, that has no or virtually no macroeconomic utility. And I question whether that is even happening.
The HFTs are certainly arbitraging the differences between instruments, but the intraday and longer term volatility - the price noise - of financial assets hasn't actually gone down, as I would expect it to if pricing got more efficient.
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bjchip wrote:
How do these guys add value to the economy?

---

To be honest, that's a question I ask about 95% of the people that work


You could have just stopped right there.
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