14 ms·

High-Speed Firms Now Oversee Almost All Stocks at NYSE Floor

89 points by jackgavigan 11y ago

fidget 11y ago
Seems fairly obvious that market making would become almost full automated eventually
gchokov 11y ago
That's part of the 4th industrial revolution - automate all the things. What strikes me is that if automated trading is profitable, then it must be predictable as well, meaning trading and market direction is more "Non-random walk" than "Random Walk" ..
- evanpw 11y ago
  Market making is not really like directional trading. When a market-maker trades, the price is very likely to move against them afterwards. To be profitable, all that they need is for the price to move against them by slightly less than the spread (the gap between the price they offer to buy at and the price they offer to sell at) on average. Something like a random walk is exactly what a market maker wants; trending prices are bad.
  - Ntrails 11y ago
    The price will definitely move by more than you make on the spread - but you might win or lose on that. In simple terms what you lose on the swings you gain on the roundabouts.
  - lintiness 11y ago
    most market makers lay trades off against other securities. they quote against bids and offers in other corners of the markets (some relationships are more esoteric than others).
codeshaman 11y ago
"... millions of trades a day". What is that ? How can that be the reflection of what's going on in the 'real' economy ? I interviewed at an HFT firm once and they were doing kernel-bypass networking, latency measured in nanoseconds and all kinds of really low level systems programming tasks. Interesting technical challenges. Except... what does that have to do with the economy ? Why is it that I can make money if my algo runs a microsecond faster than yours ? Why is that time delta measured in money ? I know there's the very rational technical explanation of how the first to react executes the trade, but just step back and look at the bigger picture here - what the fuck are you guys really doing ? Are the people writing these algorithms even remotely thinking that the trades can ruin or starve millions ? Are you even considering that these high frequency "trading" systems have an actual impact on the planet, the air, the water, etc ? Of course no. They don't give a fuck. In fact, you can only survive in this industry by not giving a single fuck. Otherwise you have to look at yourself and realize what a parasite you really are. The stock market made sense when securities actually reflected the "real world" performance of companies. Now it's all reversed - price determines company performance - it's like all companies work for the stock market itself. I don't like these guys. A bunch of crooks and gamblers who have no idea what they are doing, while everyone thinks they do. That's why the prognosis for the world economy is pretty bleak - because the insanity is institutionalized already and we have no idea how to stop it.
- realusername 11y ago
  The feeling is not shared by everyone in the IT field, some people only care about the technology part and the challenges. I agree with you and also consider this industry unethical and I'm not planning to work in it any time soon but I'm sure lots of people don't mind.
  - lintiness 11y ago
    hft is about as unethical as that guy buying that apple you liked before you. speed isn't evil; it's been the deciding force in market based transactions for eons.
    - 11y ago
tmaly 11y ago
market making on the NYSE is not that glamourous. There is an extra set of rules that have to be followed. The margins are already very thin due to the increase in competition.
deleted 11y ago
[deleted]
jagtesh 11y ago
HFT mocks the true essence of trading. That of buying or selling goods or stocks because you see the intrinsic value and care to "invest" in them. This used to give us a real picture of the public sentiment for those companies or commodities. HFT on the other hand is the brutal unempathetic cousin of intra-day trading that completely takes the human element out of the picture. Stocks are bought and sold in micro seconds, creating an unsustainable and unlevel playing field for the real humans in markets. To this day, I fail to see how was this even allowed by regulators. HFT systems should be pitted against other HFT systems on newly created indexes or an alternative system, where humans are not allowed to trade for their own benefit. The current ecosystem is just unsustainable.
- ctlby 11y ago
  > HFT mocks the true essence of trading HFT is the true essence of trading--predicting short-term changes in supply and demand and acting accordingly. > This used to give us a real picture of the public sentiment for those companies or commodities. Can you pinpoint some moment when it stopped? > Stocks are bought and sold in micro seconds Most HFT strategies don't actually do this. Buying and selling in such a short period implies a pure arbitrage, of which there are very few. The ones that do exist are generally fully exploited by the single fastest participant. > creating an unsustainable and unlevel playing field for the real humans in markets. Depends on your investment horizon. The statement is nonsense for all but the shortest timeframes. In particular, the fundamental finance guys (the "investors") are in no danger from the machines. > The current ecosystem is just unsustainable. Why? Automated market-makers are a middle-man that temporally bridge supply and demand between "real" buyers and sellers. Kind of like a grocery store temporally bridges supply and demand between consumers and farmers. Kind of like a car dealer temporally bridges supply and demand between consumers and manufacturers. Kind of like... you get the idea. Why are equity markets different?
  - jagtesh 11y ago
    > Most HFT strategies don't actually do this. Buying and selling in such a short period implies a pure arbitrage, of which there are very few. The ones that do exist are generally fully exploited by the single fastest participant. I assumed most were of that sort. I still fail to understand what does being one millionth of a second faster accomplish if you're going to hold your position longer than that. It still triggers a competition for being the fastest participant that makes the transaction right after an event. >Why? Automated market-makers are a middle-man that temporally bridge supply and demand between "real" buyers and sellers. Kind of like a grocery store temporally bridges supply and demand between consumers and farmers. Kind of like a car dealer temporally bridges supply and demand between consumers and manufacturers. Kind of like... you get the idea. Why are equity markets different? That's an interesting thought. It may just be that the subject has a lot more elements that I haven't considered yet. Here's something for you to consider and I would love to hear your POV on this. What if the regulators decided to ban all HFTs. Transactions had to rate limited by 300ms or more. In your opinion, would the markets behave any differently from now? If not, then what is being gained by all the major investments in HFT systems and platforms? If yes, then what do the markets gain?
theunixbeard 11y ago
For any programmers curious about how HFT actually works in practice --- I recommend checking out our very own patio11 & tptacek's https://www.stockfighter.io https://www.stockfighter.io [1] It's a stock market simulator with a websocket API that you can code against to run your own trading bots in various scenarios. I am currently on level 3 where the exact goal is to write a profitable market maker bot. So far my bot is decidedly UN-profitable, but I hope to change that soon. [1]: And here is the thread when Stockfighter launched on HN: https://news.ycombinator.com/item?id=10724592 https://news.ycombinator.com/item?id=10724592
- jiniba 11y ago
  Hi, that's a really cool project! However, something I noticed with a lot of 'virtual market' simulations is they never take into account bid-ask volumes and allow unlimited volume trades at market values. Unfortunately, a lot of strategies people come up with that are 'profitable' in reality don't work. Do you guys have some sort of mechanic in place to stop this, or are working on one in the future?
  - patio11 11y ago
    Unlike most simulations [+], we run an actual order book. You can very, very easily exhaust the shares available at the best bid or offer and experience price slippage. Avoiding that is literally the goal of level two. + Most investment games generate a spot price by magic and let you transact at it as much as you want. We have actual counter parties (bots) running their own strategies, the number, composition, and interaction of which determine the prices available. This is complicated; most simulations abstract it away to focus on their particular areas of interest. Having a nice crunchy view of market microstructure wrapped in an API is our interest; we in turn punted on a lot of other things. A big one: many people interested in stock markets want to trade Google; Stockfighter doesn't have Google but might have e.g. Amalgamated Tree Frog Airlines (ATFA), with a fake-but-almost-plausible market dynamic to it much of the time.
    - jiniba 11y ago
elecengin 11y ago
The end of this article hints at the real macro trend here: the NYSE floor is a glorified TV stage. Compare NYSE to NASDAQ. First - a quick explanation of what these market makers do. Every security is primarily listed on a single exchange. In the US, this is dominated by NYSE and NASDAQ. Any listing exchange assigns market makers to the securities that it lists - these firms guarantee that they will both offer and buy the stock within certain limit and pricing restrictions. In return for this responsibility the market makers get price breaks and other preferential treatment. NASDAQ never had a floor, so these were just designated firms you could (in the early days) call. NYSE, on the other hand, assigned this responsibility to specific individuals from firms - all in one building on a single trading floor. Once the markets electronified, it was easier for the NASDAQ market makers to adapt and become electronic and more automated as well. As NYSE held on to the old model of individuals on the floor, they attempted to justify it - mostly by spreading distrust of computers. (Distrust which has proven partially justified - see the Knight Capital meltdown a few years ago.) Despite their arguments that the humans are adding to the stability of the market, the reality is the humans are doing less and less. For the last 5 years at least all floor brokers and market makers are managing most of their orders electronically with the help of "upstairs" - other employees of the markets makers / floor brokers who are upstairs. Furthermore, the benefits that come with being a market maker apply to some of the firm's electronic business as well - effectively making the floor presence a cost that is made up off the floor. TL;DR - The NYSE floor is a joke. This just proves it.
- veritas20 11y ago
  > mostly by spreading distrust of computers. (Distrust which has proven partially justified - see the Knight Capital meltdown a few years ago.) Computers only do what they're programmed to do by humans. Inherently, distrust of computers (sans AI) is distrust of humans.
Mikeb85 11y ago
Or, put another way, HFT firms now oversee most market-making. Not surprising really, that what can be automated is left to the experts in automation and fast infrastructure.
lossolo 11y ago
Pay a small fee for every transaction and here you go, HFT will be over.
- kasey_junk 11y ago
  HFT already pay a small fee for every transaction. Any additional fee they will just price into the spread like they currently do.
  - lossolo 11y ago
    Add 1 dolar for every trade. Good luck with adding this to spread. They are making money on small differences, ultra short investments. Then ultra short will not be an option. If you make 1 million transactions then you pay 1 million for transactions. How much do they actually make on this?
    - deleted 11y ago
      [deleted]
    - kasey_junk 11y ago
      Some commodities and options exchanges already have fee ranges of that order of magnitude. They can get away with it because the leverage of the derivatives means the spread is bigger than that. On the equities side, if you went to a dollar per trade it would be priced into the spread one way or the other. My suspicion would be with decreased liquidity due to participants moving to derivatives that allow for ownership in fractional components of large transactions that make the tax more bearable. Either that, or you wouldn't have market makers and the equities market would grind to a halt and things like index funds, etfs, etc would no longer be economically viable.

89 points by jackgavigan 11y ago

Seems fairly obvious that market making would become almost full automated eventually

That's part of the 4th industrial revolution - automate all the things. What strikes me is that if automated trading is profitable, then it must be predictable as well, meaning trading and market direction is more "Non-random walk" than "Random Walk" ..

evanpw 11y ago
Market making is not really like directional trading. When a market-maker trades, the price is very likely to move against them afterwards. To be profitable, all that they need is for the price to move against them by slightly less than the spread (the gap between the price they offer to buy at and the price they offer to sell at) on average. Something like a random walk is exactly what a market maker wants; trending prices are bad.
- Ntrails 11y ago
  The price will definitely move by more than you make on the spread - but you might win or lose on that. In simple terms what you lose on the swings you gain on the roundabouts.
- lintiness 11y ago
  most market makers lay trades off against other securities. they quote against bids and offers in other corners of the markets (some relationships are more esoteric than others).

codeshaman 11y ago

"... millions of trades a day". What is that ? How can that be the reflection of what's going on in the 'real' economy ? I interviewed at an HFT firm once and they were doing kernel-bypass networking, latency measured in nanoseconds and all kinds of really low level systems programming tasks. Interesting technical challenges. Except... what does that have to do with the economy ? Why is it that I can make money if my algo runs a microsecond faster than yours ? Why is that time delta measured in money ? I know there's the very rational technical explanation of how the first to react executes the trade, but just step back and look at the bigger picture here - what the fuck are you guys really doing ? Are the people writing these algorithms even remotely thinking that the trades can ruin or starve millions ? Are you even considering that these high frequency "trading" systems have an actual impact on the planet, the air, the water, etc ? Of course no. They don't give a fuck. In fact, you can only survive in this industry by not giving a single fuck. Otherwise you have to look at yourself and realize what a parasite you really are. The stock market made sense when securities actually reflected the "real world" performance of companies. Now it's all reversed - price determines company performance - it's like all companies work for the stock market itself. I don't like these guys. A bunch of crooks and gamblers who have no idea what they are doing, while everyone thinks they do. That's why the prognosis for the world economy is pretty bleak - because the insanity is institutionalized already and we have no idea how to stop it.

realusername 11y ago
The feeling is not shared by everyone in the IT field, some people only care about the technology part and the challenges. I agree with you and also consider this industry unethical and I'm not planning to work in it any time soon but I'm sure lots of people don't mind.
- lintiness 11y ago
  hft is about as unethical as that guy buying that apple you liked before you. speed isn't evil; it's been the deciding force in market based transactions for eons.
  - 11y ago

tmaly 11y ago

market making on the NYSE is not that glamourous. There is an extra set of rules that have to be followed. The margins are already very thin due to the increase in competition.

deleted 11y ago

[deleted]

jagtesh 11y ago

HFT mocks the true essence of trading. That of buying or selling goods or stocks because you see the intrinsic value and care to "invest" in them. This used to give us a real picture of the public sentiment for those companies or commodities. HFT on the other hand is the brutal unempathetic cousin of intra-day trading that completely takes the human element out of the picture. Stocks are bought and sold in micro seconds, creating an unsustainable and unlevel playing field for the real humans in markets. To this day, I fail to see how was this even allowed by regulators. HFT systems should be pitted against other HFT systems on newly created indexes or an alternative system, where humans are not allowed to trade for their own benefit. The current ecosystem is just unsustainable.

ctlby 11y ago
> HFT mocks the true essence of trading HFT is the true essence of trading--predicting short-term changes in supply and demand and acting accordingly. > This used to give us a real picture of the public sentiment for those companies or commodities. Can you pinpoint some moment when it stopped? > Stocks are bought and sold in micro seconds Most HFT strategies don't actually do this. Buying and selling in such a short period implies a pure arbitrage, of which there are very few. The ones that do exist are generally fully exploited by the single fastest participant. > creating an unsustainable and unlevel playing field for the real humans in markets. Depends on your investment horizon. The statement is nonsense for all but the shortest timeframes. In particular, the fundamental finance guys (the "investors") are in no danger from the machines. > The current ecosystem is just unsustainable. Why? Automated market-makers are a middle-man that temporally bridge supply and demand between "real" buyers and sellers. Kind of like a grocery store temporally bridges supply and demand between consumers and farmers. Kind of like a car dealer temporally bridges supply and demand between consumers and manufacturers. Kind of like... you get the idea. Why are equity markets different?
- jagtesh 11y ago
  > Most HFT strategies don't actually do this. Buying and selling in such a short period implies a pure arbitrage, of which there are very few. The ones that do exist are generally fully exploited by the single fastest participant. I assumed most were of that sort. I still fail to understand what does being one millionth of a second faster accomplish if you're going to hold your position longer than that. It still triggers a competition for being the fastest participant that makes the transaction right after an event. >Why? Automated market-makers are a middle-man that temporally bridge supply and demand between "real" buyers and sellers. Kind of like a grocery store temporally bridges supply and demand between consumers and farmers. Kind of like a car dealer temporally bridges supply and demand between consumers and manufacturers. Kind of like... you get the idea. Why are equity markets different? That's an interesting thought. It may just be that the subject has a lot more elements that I haven't considered yet. Here's something for you to consider and I would love to hear your POV on this. What if the regulators decided to ban all HFTs. Transactions had to rate limited by 300ms or more. In your opinion, would the markets behave any differently from now? If not, then what is being gained by all the major investments in HFT systems and platforms? If yes, then what do the markets gain?

theunixbeard 11y ago

For any programmers curious about how HFT actually works in practice --- I recommend checking out our very own patio11 & tptacek's https://www.stockfighter.io https://www.stockfighter.io [1] It's a stock market simulator with a websocket API that you can code against to run your own trading bots in various scenarios. I am currently on level 3 where the exact goal is to write a profitable market maker bot. So far my bot is decidedly UN-profitable, but I hope to change that soon. [1]: And here is the thread when Stockfighter launched on HN: https://news.ycombinator.com/item?id=10724592 https://news.ycombinator.com/item?id=10724592

jiniba 11y ago
Hi, that's a really cool project! However, something I noticed with a lot of 'virtual market' simulations is they never take into account bid-ask volumes and allow unlimited volume trades at market values. Unfortunately, a lot of strategies people come up with that are 'profitable' in reality don't work. Do you guys have some sort of mechanic in place to stop this, or are working on one in the future?
- patio11 11y ago
  Unlike most simulations [+], we run an actual order book. You can very, very easily exhaust the shares available at the best bid or offer and experience price slippage. Avoiding that is literally the goal of level two. + Most investment games generate a spot price by magic and let you transact at it as much as you want. We have actual counter parties (bots) running their own strategies, the number, composition, and interaction of which determine the prices available. This is complicated; most simulations abstract it away to focus on their particular areas of interest. Having a nice crunchy view of market microstructure wrapped in an API is our interest; we in turn punted on a lot of other things. A big one: many people interested in stock markets want to trade Google; Stockfighter doesn't have Google but might have e.g. Amalgamated Tree Frog Airlines (ATFA), with a fake-but-almost-plausible market dynamic to it much of the time.
  - jiniba 11y ago

elecengin 11y ago

The end of this article hints at the real macro trend here: the NYSE floor is a glorified TV stage. Compare NYSE to NASDAQ. First - a quick explanation of what these market makers do. Every security is primarily listed on a single exchange. In the US, this is dominated by NYSE and NASDAQ. Any listing exchange assigns market makers to the securities that it lists - these firms guarantee that they will both offer and buy the stock within certain limit and pricing restrictions. In return for this responsibility the market makers get price breaks and other preferential treatment. NASDAQ never had a floor, so these were just designated firms you could (in the early days) call. NYSE, on the other hand, assigned this responsibility to specific individuals from firms - all in one building on a single trading floor. Once the markets electronified, it was easier for the NASDAQ market makers to adapt and become electronic and more automated as well. As NYSE held on to the old model of individuals on the floor, they attempted to justify it - mostly by spreading distrust of computers. (Distrust which has proven partially justified - see the Knight Capital meltdown a few years ago.) Despite their arguments that the humans are adding to the stability of the market, the reality is the humans are doing less and less. For the last 5 years at least all floor brokers and market makers are managing most of their orders electronically with the help of "upstairs" - other employees of the markets makers / floor brokers who are upstairs. Furthermore, the benefits that come with being a market maker apply to some of the firm's electronic business as well - effectively making the floor presence a cost that is made up off the floor. TL;DR - The NYSE floor is a joke. This just proves it.

veritas20 11y ago
> mostly by spreading distrust of computers. (Distrust which has proven partially justified - see the Knight Capital meltdown a few years ago.) Computers only do what they're programmed to do by humans. Inherently, distrust of computers (sans AI) is distrust of humans.

Mikeb85 11y ago

Or, put another way, HFT firms now oversee most market-making. Not surprising really, that what can be automated is left to the experts in automation and fast infrastructure.

lossolo 11y ago

Pay a small fee for every transaction and here you go, HFT will be over.

kasey_junk 11y ago
HFT already pay a small fee for every transaction. Any additional fee they will just price into the spread like they currently do.
- lossolo 11y ago
  Add 1 dolar for every trade. Good luck with adding this to spread. They are making money on small differences, ultra short investments. Then ultra short will not be an option. If you make 1 million transactions then you pay 1 million for transactions. How much do they actually make on this?
  - deleted 11y ago
    [deleted]
  - kasey_junk 11y ago
    Some commodities and options exchanges already have fee ranges of that order of magnitude. They can get away with it because the leverage of the derivatives means the spread is bigger than that. On the equities side, if you went to a dollar per trade it would be priced into the spread one way or the other. My suspicion would be with decreased liquidity due to participants moving to derivatives that allow for ownership in fractional components of large transactions that make the tax more bearable. Either that, or you wouldn't have market makers and the equities market would grind to a halt and things like index funds, etfs, etc would no longer be economically viable.