6 ms·

One Way to Unrig Stock Trading

20 points by henrik_w 11y ago

codeismightier 11y ago
This NYT piece is heavy on moralizing rhetoric and light on technical details. The BloombergView piece by Matt Levine [1] is much better: "It's important to realize that slowing everyone down by 350 microseconds can't possibly help anyone. As Hudson River Trading said in its comment letter: "Similar to a 100-meter sprint, if you simply add 350 microseconds to each participant’s time, neither the order in which they finish nor their time differentials will change."" It would indeed be pointless if everything was slowed down by 350μs, which is why that is not the case. IEX lets its own "pegged orders" and "routable orders" cut the line, picking off liquidity at the other exchanges. If IEX is approved, there will be an arms race, with other exchanges inserting their own similar delays. Even worse, because of Reg NMS you can't legally avoid trading on IEX even if you wanted to. If the price of a stock is falling rapidly and you wanted to sell, IEX will always have the best price since it is stale by 350μs. Everyone will be forced to send their orders to IEX, even if everyone knows that the bid there is illusory. The Matt Levine piece is very good. Do please read the whole thing. [1] http://www.bloombergview.com/articles/2015-12-22/the-flash-boys-exchange-is-still-controversial http://www.bloombergview.com/articles/2015-12-22/the-flash-b...
- vonklaus 11y ago
  edit: levine article provides some good info.
- amelius 11y ago
  Of course the biggest problem is not coming up with a better (mathematically verified) scheme to run stock markets, but instead it is getting it accepted and implemented. Given the interests, I suspect this problem could be, for example, of the same level of difficulty as reforming gun laws in the US.
- msellout 11y ago
  A delay of 350 microseconds may very well make the market less turbulent and reduce the prevalence of "flash" crashes. Though the method of implementing the delay might not succeed, a forced delay would alleviate the arms race to lower latency algorithms. Lower latency means fewer computations and less memory, which means the strategy space is smaller. With enough players crowded into a small strategy space, the market becomes more frothy as periodically too many players collide on the same strategy. Placing a lower limit on latency allows a better balance between algorithmic complexity and latency. The strategy space will be larger and hopefully will be large enough that there's room for most everyone to try different strategies, making the market calmer. To get a sense for the mechanism of this phenomenon, check out the El Farol Bar Problem (https://en.wikipedia.org/wiki/El_Farol_Bar_problem https://en.wikipedia.org/wiki/El_Farol_Bar_problem). Unfortunately, IEX's proposed implementation of a delay is probably not as good as simply changing the precision of the exchange's clocks. If the exchange decided it would measure time only to the nearest second and orders occurring at the same second would be processed in random order, I expect that would be a better solution. Adding some randomness to the processing order at the 100s of milliseconds scale would go a long way to reducing front-running and overly simplistic momentum strategies. The latter are the main cause of market turbulence.
  - yummyfajitas 11y ago
    Why would adding delays make the market less turbulent? The standard dynamical systems intuition says that adding delays creates instability. Think about how many stable ODEs have wildly unstable numerical solvers, at least when the step sizes are too high. Or in terms of project planning, if you have 2 day sprints, you can course correct every 2 days and rapidly approach a usable product. If you have 3 month sprints, you might spend 2.9 months building something totally wrong. 2.9 months of moving the wrong way will get you a LOT further off course than a badly planned 2 day sprint.
    - msellout 11y ago
      Enforcing a delay may reduce the incentive to increase speed at the cost of strategic complexity. If the turbulence is caused by the interactions of overly-simplistic momentum agents, then increasing the complexity of the agents will stabilize the market. This should hold to the extend that increased strategy complexity also increases the variety of strategies in the market. Think of the market as a liquid near boiling point. If the energy of the system increases too much, it makes a phase transition. To raise the boiling point, add impurities. This is a flawed metaphor in many ways, but it might offer a new intuition for you. Unfortunately, in the case of the market (and many systems) efficiency is the enemy of stability. If you prefer a project-planning metaphor: BigCo executives have caught Agile fever. They see that 2-month sprints are more effective than 2-year project plans and they've heard their competitors are finding great benefit from 2-week sprints. BigCo decides to leapfrog the competition and goes straight to 2-minute sprints. They've tested their engineers and found that 2-minutes seems to be a lower bound on writing a chunk of useful code. The executives declare that all engineers must report accomplishments and re-plan their next activities every 2 minutes in accordance with proper Agile workflow. Obviously, extreme speed is disastrous. I'm not saying to slow down the market to making an order once monthly. Just slow down from nanoseconds. If in doubt, build a small simulation. Simple agent-based models can produce very interesting phenomena.
ikeboy 11y ago
Most orders are cancelled: http://www.bloombergview.com/articles/2015-10-08/why-do-high-frequency-traders-cancel-so-many-orders- http://www.bloombergview.com/articles/2015-10-08/why-do-high... >Exchanges advance the interests of traders by sponsoring esoteric order types, which for hard-to-understand reasons receive the approval of the S.E.C. An example is the New York Stock Exchange Day Intermarket Sweep Add Liquidity Only Order. Regular investors have no idea such an order type exists or what it means. Then they have no need to use it. Does anyone think we should cut out little used parts of programming languages, because "regular programmers" have little need for them? When did "it's complicated, therefore it's unethical" become a valid argument?
deleted 11y ago
[deleted]
yummyfajitas 11y ago
This article is pretty terrible. First it talks about high cancel rates (95-97%), as if this is somehow evidence of bad behavior. It isn't. Matt Levine has a nice article with simple math showing that a 95% cancel rate is unavoidable. http://www.bloombergview.com/articles/2015-10-08/why-do-high-frequency-traders-cancel-so-many-orders- http://www.bloombergview.com/articles/2015-10-08/why-do-high... Then it talks about selling order flow to HFTs as if this somehow harms the little guy. It doesn't - it lets HFTs offer liquidity (potentially at better prices, and never at worse prices) to the little guy that they would be too scared to offer to big guys. https://www.chrisstucchio.com/blog/2014/fervent_defense_of_frontrunning_hfts.html https://www.chrisstucchio.com/blog/2014/fervent_defense_of_f... Following all this FUD is a bit of shilling for IEX. Why is this nonsense here?
- blazespin 11y ago
  Basically, it's just another person who doesn't want AI meddling in the stock markets. Sorry folks, that ship sailed a very very long time ago. Short term, all of our markets now belong to AI consuming alternative data (think weather, satellite pictures of parking lots, etc), economic releases, etc. If you want to trade the markets and not program AI, your best bet it is to make longer term bets where AI doesn't perform so well.
- codeismightier 11y ago
  I'm not a fan of payment for order flow. The problem is that it lets HFTs pick off the uninformed orders, leaving the orders that actually reach the exchange more "toxic". This lowers the incentive for others to rest orders on the Central Limit Order Book, harming price discovery. So while in the short term no one is harmed, the long-run consequences could be bad. With that said, yeah, the NYT piece is terrible.
  - crzwdjk 11y ago
    If the HFTs pick off uninformed orders, wouldn't that mean that the remaining orders are more informed? That does seem like it would make trading on the exchange itself would get more expensive, though, because this is all basically a mechanism for the HFTs to price-discriminate. But the market did somehow work back in the bad old days of odd-eights and such.
alkonaut 11y ago
Assuming that extreme HFT and massive amounts of cancelled orders are BAD (there are people who argue that market liquidity etc. outweighs the drawbacks of short-term focus and billions spent on making algoritms ever faster and moving datacenters ever closer to markets. Let's assume they are wrong). How does one change the rules to promote longer term investment and promote quality in trading algos over speed? How do we putting data centers where it's cost effective rather than across the street from the market? Adding a random delay to orders which will execute it some time in the next few minutes is one alternative. Having a mandated minimum transaction fee/tax is another. What if it's 1% (and a nonzero amount for cancelled orders)? Changing the tax structure so that profits from instruments held for less than say a few hours or days are taxed at nearly 100% and then slopes down to a much lower floor for longer term investments (months or years). Obviously any measure has to have wide international support, no market wants to scare the money across the border.
- yummyfajitas 11y ago
  Canada tried the transaction tax - it was a loser, and resulted in retail investors paying 9% more to trade. http://qed.econ.queensu.ca/pub/faculty/milne/322/IIROC_FeeChange_submission_KM_AP3.pdf http://qed.econ.queensu.ca/pub/faculty/milne/322/IIROC_FeeCh... Most of your other suggestions would probably have the same effect.
paulpauper 11y ago
People lose money in the market because of bad timing (buying high selling low) and poor strategy (buying energy stocks in 2014, for eample), not because of dark polls and stuff like that.
randomname2 11y ago
Just out of interest, why all the negativity towards IEX here on HN? Wouldn't it be a good thing for them to compete with the other exchanges?
- kasey_junk 11y ago
  I won't speak for all of HN, but what bugs me about them is that they are using scare tactics & misleading story telling to position themselves as the "good guys" in a fight with the "bad" HFT. In reality their business model is to drive uninformed order flow to highly sophisticated hedge funds & to let those hedge funds deny the rest of us price discovery. That said, I don't mind that they exist, I just wish they'd stop acting like they are doing it for the good of the "average" investor (whatever that is).
radikalus 11y ago
There's so many small sub-problems here that it's hopelessly naive to think there's a silver bullet. There are however lots of GOOD ideas. (See CME price band style mini auctions aka restricting dPrice/dt -- I forget what they call them) I'll not so briefly add: - Stochastic delays have many externalities; people consuming liquidity will simply send many orders hoping to "win the dice roll" on your stochastic time noise system - Stochastic delays plus limiting orders per day etc doesn't "easily" work because enforcement is tough when people trade on your exchange as multiple entities, multiple trading desks/groups etc (Huge pita for everyone involved) - Stochastic delays plus pay per order doesn't consistently work well as value of orders is highly variant and there's no single magic # to make this economically optimal - Fixed delays are pretty similar to the geo location of the exchange just moving. It effects the external RV situations but I don't feel does much internally except poison market data with more "not-really-there" stuff. (Because MD state is increasingly out of state with in-flight orders) Recognize that stale MD compounds issues as more people send orders at opportunities not really there and this is largely what leads to MD delay spikes etc and is generally destabilizing. - Selling order flow is 100% bullshit. I wish all that crap was illegal -- this is where retail gets their faces most ripped off and how lots of chumps get to make hundreds of millions for no reason. Building models that tell you which customers in your captive flow to piggyback in which products is super disgusting to me. Anyone who trades with their flows exposed is surrendering alpha to parasites.
mschuster91 11y ago
How about imposing a minimum holding time for a stock? Like, a year? Or putting dividends, sale profits, bonuses and manager payments on hold for this time? At the moment, the stock system massively rewards short-term speculation and companies only focus on quarter gains instead of long-term profitability/the company future. For example, reducing head count might improve this quarters' bottom line, but one year in the future the lack of heads will be problematic because the company is unable to keep innovating. But investors (and managers alike) don't care about the future because they already realized and pocketed the profit and move to the next company.
tptacek 11y ago
Individual investors, trading through brokers like Charles Schwab, E-Trade and TD Ameritrade, suffer first as the brokers profit by hundreds of millions of dollars from selling their retail orders to high-frequency traders and again as those traders take advantage of the orders they bought. What's the argument here? Retail order flow is sold to HFT shops because it's assumed all around that retail flow is uninformed. HFT shops are incentivized to compete for those orders, because no matter who gets them, they're assumed to be lucrative to trade against. Things wouldn't be any better for retail investors if their orders made it all the way to "the exchange".
consz 11y ago
>Its exchange competitors, which include the New York Stock Exchange, Nasdaq and BATS, cater to the interests of high-frequency traders, which typically provide more than 50 percent of all trading volume. This is true for IEX -- the top volume participants there are all HFT firms. Also, I don't see how IEX's claim of improving price discovery meshes with their 350us delay. Are they not locking the NBBO on basically every single price flip because they are delaying updating their quotes? In what world is this more fair? >An example is the New York Stock Exchange Day Intermarket Sweep Add Liquidity Only Order. This isn't even a thing -- what would an ALO ISO even mean? >High-frequency traders pay to locate their computer servers inside of exchanges’ order execution centers, where they get early access to trade information that they use to jump in front of — front run — other clients. Okay now he's just either misinformed or lying. Who wrote this article?
- ikeboy 11y ago
  https://www.nyse.com/publicdocs/nyse/markets/nyse/ALO_Customer_Notice_Final.pdf https://www.nyse.com/publicdocs/nyse/markets/nyse/ALO_Custom... mentions that order type.

20 points by henrik_w 11y ago

This NYT piece is heavy on moralizing rhetoric and light on technical details. The BloombergView piece by Matt Levine [1] is much better: "It's important to realize that slowing everyone down by 350 microseconds can't possibly help anyone. As Hudson River Trading said in its comment letter: "Similar to a 100-meter sprint, if you simply add 350 microseconds to each participant’s time, neither the order in which they finish nor their time differentials will change."" It would indeed be pointless if everything was slowed down by 350μs, which is why that is not the case. IEX lets its own "pegged orders" and "routable orders" cut the line, picking off liquidity at the other exchanges. If IEX is approved, there will be an arms race, with other exchanges inserting their own similar delays. Even worse, because of Reg NMS you can't legally avoid trading on IEX even if you wanted to. If the price of a stock is falling rapidly and you wanted to sell, IEX will always have the best price since it is stale by 350μs. Everyone will be forced to send their orders to IEX, even if everyone knows that the bid there is illusory. The Matt Levine piece is very good. Do please read the whole thing. [1] http://www.bloombergview.com/articles/2015-12-22/the-flash-boys-exchange-is-still-controversial http://www.bloombergview.com/articles/2015-12-22/the-flash-b...

vonklaus 11y ago
edit: levine article provides some good info.
amelius 11y ago
Of course the biggest problem is not coming up with a better (mathematically verified) scheme to run stock markets, but instead it is getting it accepted and implemented. Given the interests, I suspect this problem could be, for example, of the same level of difficulty as reforming gun laws in the US.
msellout 11y ago
A delay of 350 microseconds may very well make the market less turbulent and reduce the prevalence of "flash" crashes. Though the method of implementing the delay might not succeed, a forced delay would alleviate the arms race to lower latency algorithms. Lower latency means fewer computations and less memory, which means the strategy space is smaller. With enough players crowded into a small strategy space, the market becomes more frothy as periodically too many players collide on the same strategy. Placing a lower limit on latency allows a better balance between algorithmic complexity and latency. The strategy space will be larger and hopefully will be large enough that there's room for most everyone to try different strategies, making the market calmer. To get a sense for the mechanism of this phenomenon, check out the El Farol Bar Problem (https://en.wikipedia.org/wiki/El_Farol_Bar_problem https://en.wikipedia.org/wiki/El_Farol_Bar_problem). Unfortunately, IEX's proposed implementation of a delay is probably not as good as simply changing the precision of the exchange's clocks. If the exchange decided it would measure time only to the nearest second and orders occurring at the same second would be processed in random order, I expect that would be a better solution. Adding some randomness to the processing order at the 100s of milliseconds scale would go a long way to reducing front-running and overly simplistic momentum strategies. The latter are the main cause of market turbulence.
- yummyfajitas 11y ago
  Why would adding delays make the market less turbulent? The standard dynamical systems intuition says that adding delays creates instability. Think about how many stable ODEs have wildly unstable numerical solvers, at least when the step sizes are too high. Or in terms of project planning, if you have 2 day sprints, you can course correct every 2 days and rapidly approach a usable product. If you have 3 month sprints, you might spend 2.9 months building something totally wrong. 2.9 months of moving the wrong way will get you a LOT further off course than a badly planned 2 day sprint.
  - msellout 11y ago
    Enforcing a delay may reduce the incentive to increase speed at the cost of strategic complexity. If the turbulence is caused by the interactions of overly-simplistic momentum agents, then increasing the complexity of the agents will stabilize the market. This should hold to the extend that increased strategy complexity also increases the variety of strategies in the market. Think of the market as a liquid near boiling point. If the energy of the system increases too much, it makes a phase transition. To raise the boiling point, add impurities. This is a flawed metaphor in many ways, but it might offer a new intuition for you. Unfortunately, in the case of the market (and many systems) efficiency is the enemy of stability. If you prefer a project-planning metaphor: BigCo executives have caught Agile fever. They see that 2-month sprints are more effective than 2-year project plans and they've heard their competitors are finding great benefit from 2-week sprints. BigCo decides to leapfrog the competition and goes straight to 2-minute sprints. They've tested their engineers and found that 2-minutes seems to be a lower bound on writing a chunk of useful code. The executives declare that all engineers must report accomplishments and re-plan their next activities every 2 minutes in accordance with proper Agile workflow. Obviously, extreme speed is disastrous. I'm not saying to slow down the market to making an order once monthly. Just slow down from nanoseconds. If in doubt, build a small simulation. Simple agent-based models can produce very interesting phenomena.

ikeboy 11y ago

Most orders are cancelled: http://www.bloombergview.com/articles/2015-10-08/why-do-high-frequency-traders-cancel-so-many-orders- http://www.bloombergview.com/articles/2015-10-08/why-do-high... >Exchanges advance the interests of traders by sponsoring esoteric order types, which for hard-to-understand reasons receive the approval of the S.E.C. An example is the New York Stock Exchange Day Intermarket Sweep Add Liquidity Only Order. Regular investors have no idea such an order type exists or what it means. Then they have no need to use it. Does anyone think we should cut out little used parts of programming languages, because "regular programmers" have little need for them? When did "it's complicated, therefore it's unethical" become a valid argument?

deleted 11y ago

[deleted]

yummyfajitas 11y ago

This article is pretty terrible. First it talks about high cancel rates (95-97%), as if this is somehow evidence of bad behavior. It isn't. Matt Levine has a nice article with simple math showing that a 95% cancel rate is unavoidable. http://www.bloombergview.com/articles/2015-10-08/why-do-high-frequency-traders-cancel-so-many-orders- http://www.bloombergview.com/articles/2015-10-08/why-do-high... Then it talks about selling order flow to HFTs as if this somehow harms the little guy. It doesn't - it lets HFTs offer liquidity (potentially at better prices, and never at worse prices) to the little guy that they would be too scared to offer to big guys. https://www.chrisstucchio.com/blog/2014/fervent_defense_of_frontrunning_hfts.html https://www.chrisstucchio.com/blog/2014/fervent_defense_of_f... Following all this FUD is a bit of shilling for IEX. Why is this nonsense here?

blazespin 11y ago
Basically, it's just another person who doesn't want AI meddling in the stock markets. Sorry folks, that ship sailed a very very long time ago. Short term, all of our markets now belong to AI consuming alternative data (think weather, satellite pictures of parking lots, etc), economic releases, etc. If you want to trade the markets and not program AI, your best bet it is to make longer term bets where AI doesn't perform so well.
codeismightier 11y ago
I'm not a fan of payment for order flow. The problem is that it lets HFTs pick off the uninformed orders, leaving the orders that actually reach the exchange more "toxic". This lowers the incentive for others to rest orders on the Central Limit Order Book, harming price discovery. So while in the short term no one is harmed, the long-run consequences could be bad. With that said, yeah, the NYT piece is terrible.
- crzwdjk 11y ago
  If the HFTs pick off uninformed orders, wouldn't that mean that the remaining orders are more informed? That does seem like it would make trading on the exchange itself would get more expensive, though, because this is all basically a mechanism for the HFTs to price-discriminate. But the market did somehow work back in the bad old days of odd-eights and such.

alkonaut 11y ago

Assuming that extreme HFT and massive amounts of cancelled orders are BAD (there are people who argue that market liquidity etc. outweighs the drawbacks of short-term focus and billions spent on making algoritms ever faster and moving datacenters ever closer to markets. Let's assume they are wrong). How does one change the rules to promote longer term investment and promote quality in trading algos over speed? How do we putting data centers where it's cost effective rather than across the street from the market? Adding a random delay to orders which will execute it some time in the next few minutes is one alternative. Having a mandated minimum transaction fee/tax is another. What if it's 1% (and a nonzero amount for cancelled orders)? Changing the tax structure so that profits from instruments held for less than say a few hours or days are taxed at nearly 100% and then slopes down to a much lower floor for longer term investments (months or years). Obviously any measure has to have wide international support, no market wants to scare the money across the border.

yummyfajitas 11y ago
Canada tried the transaction tax - it was a loser, and resulted in retail investors paying 9% more to trade. http://qed.econ.queensu.ca/pub/faculty/milne/322/IIROC_FeeChange_submission_KM_AP3.pdf http://qed.econ.queensu.ca/pub/faculty/milne/322/IIROC_FeeCh... Most of your other suggestions would probably have the same effect.

paulpauper 11y ago

People lose money in the market because of bad timing (buying high selling low) and poor strategy (buying energy stocks in 2014, for eample), not because of dark polls and stuff like that.

randomname2 11y ago

Just out of interest, why all the negativity towards IEX here on HN? Wouldn't it be a good thing for them to compete with the other exchanges?

kasey_junk 11y ago
I won't speak for all of HN, but what bugs me about them is that they are using scare tactics & misleading story telling to position themselves as the "good guys" in a fight with the "bad" HFT. In reality their business model is to drive uninformed order flow to highly sophisticated hedge funds & to let those hedge funds deny the rest of us price discovery. That said, I don't mind that they exist, I just wish they'd stop acting like they are doing it for the good of the "average" investor (whatever that is).

radikalus 11y ago

There's so many small sub-problems here that it's hopelessly naive to think there's a silver bullet. There are however lots of GOOD ideas. (See CME price band style mini auctions aka restricting dPrice/dt -- I forget what they call them) I'll not so briefly add: - Stochastic delays have many externalities; people consuming liquidity will simply send many orders hoping to "win the dice roll" on your stochastic time noise system - Stochastic delays plus limiting orders per day etc doesn't "easily" work because enforcement is tough when people trade on your exchange as multiple entities, multiple trading desks/groups etc (Huge pita for everyone involved) - Stochastic delays plus pay per order doesn't consistently work well as value of orders is highly variant and there's no single magic # to make this economically optimal - Fixed delays are pretty similar to the geo location of the exchange just moving. It effects the external RV situations but I don't feel does much internally except poison market data with more "not-really-there" stuff. (Because MD state is increasingly out of state with in-flight orders) Recognize that stale MD compounds issues as more people send orders at opportunities not really there and this is largely what leads to MD delay spikes etc and is generally destabilizing. - Selling order flow is 100% bullshit. I wish all that crap was illegal -- this is where retail gets their faces most ripped off and how lots of chumps get to make hundreds of millions for no reason. Building models that tell you which customers in your captive flow to piggyback in which products is super disgusting to me. Anyone who trades with their flows exposed is surrendering alpha to parasites.

mschuster91 11y ago

How about imposing a minimum holding time for a stock? Like, a year? Or putting dividends, sale profits, bonuses and manager payments on hold for this time? At the moment, the stock system massively rewards short-term speculation and companies only focus on quarter gains instead of long-term profitability/the company future. For example, reducing head count might improve this quarters' bottom line, but one year in the future the lack of heads will be problematic because the company is unable to keep innovating. But investors (and managers alike) don't care about the future because they already realized and pocketed the profit and move to the next company.

tptacek 11y ago

Individual investors, trading through brokers like Charles Schwab, E-Trade and TD Ameritrade, suffer first as the brokers profit by hundreds of millions of dollars from selling their retail orders to high-frequency traders and again as those traders take advantage of the orders they bought. What's the argument here? Retail order flow is sold to HFT shops because it's assumed all around that retail flow is uninformed. HFT shops are incentivized to compete for those orders, because no matter who gets them, they're assumed to be lucrative to trade against. Things wouldn't be any better for retail investors if their orders made it all the way to "the exchange".

consz 11y ago

>Its exchange competitors, which include the New York Stock Exchange, Nasdaq and BATS, cater to the interests of high-frequency traders, which typically provide more than 50 percent of all trading volume. This is true for IEX -- the top volume participants there are all HFT firms. Also, I don't see how IEX's claim of improving price discovery meshes with their 350us delay. Are they not locking the NBBO on basically every single price flip because they are delaying updating their quotes? In what world is this more fair? >An example is the New York Stock Exchange Day Intermarket Sweep Add Liquidity Only Order. This isn't even a thing -- what would an ALO ISO even mean? >High-frequency traders pay to locate their computer servers inside of exchanges’ order execution centers, where they get early access to trade information that they use to jump in front of — front run — other clients. Okay now he's just either misinformed or lying. Who wrote this article?

ikeboy 11y ago
https://www.nyse.com/publicdocs/nyse/markets/nyse/ALO_Customer_Notice_Final.pdf https://www.nyse.com/publicdocs/nyse/markets/nyse/ALO_Custom... mentions that order type.