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So essentially the NYSE is a provably fixed game, with large HFT houses paying for the right to trade on non-public information, and it hides behind the idea th
by tsunamifury 11y ago
So essentially the NYSE is a provably fixed game, with large HFT houses paying for the right to trade on non-public information, and it hides behind the idea that it was just a few hundred milliseconds.
All the while they are selling non-public information as a product that is deliberately used to micro-manipulate the market?
I mean, deep down I always knew this, but to have it all spelled out is shocking because it exposes the NYSE as systemically fraudulent. The implication of that is so overwhelming it causes me to want to ignore it out of sheer inability to think of a way to solve the problem.
- tptacek 11y agoSo, no? From 2008-2012, if you paid NYSE (one of like 15 different exchanges that trade NYSE-listed stocks) for a proprietary feed --- something that costs more than most idle home day traders can afford, but would be affordable by any YC startup --- you were getting an edge in competing with other electronic trading systems. If you were a retail investor or a mutual fund, what NYSE was doing probably didn't impact you at all.
- CyberDildonics 11y ago> what NYSE was doing probably didn't impact you at all. Then where does all the money HFT firms make come from?
- tptacek 11y agoFirst, HFT firms aren't especially lucrative compared to other finance specialties, so one answer to that question is "nowhere". Second, HFT firms compete with other finance firms, so what money they do make comes from bidding down the costs those firms were imposing on the rest of the market. If you're a retail trader, automated electronic traders make money off you by outbidding the markets to quote good prices to you for your dumb market orders, and then pocketing the spread --- in other words, they make money the same way market makers have always made money; they just make less of it at an instant, but at a far larger scale. The same is true of mutual funds, which is why Vanguard --- the firm most people would say is the most trustworthy in all of finance --- has repeatedly claimed that HFT has lowered their cost of trades.
- revelation 11y agoSomethings off. If all this is is market making, why all the trouble with the microsecond latencies? Microwave links? Shared colos? That seems like a lot of cost everyone could save on by simply having the exchange enforce some minimum timings.
- tptacek 11y agoBecause speed is an implicit and intrinsic "figure of merit" in automated market making: if you are faster than other market makers, you outcompete them. There are two straightforward problems with microsecond-speed electronic trading: * At very small timescales, possibly as a sort of inevitable consequence of the CAP theorem, correlations between instruments that should trade in lock step start to break down. Since you can make money correcting these mispricings, time and energy gets sunk into doing that, and that imposes costs on the rest of the market. It's uncertain how high those costs are, but they are small, and clearly a pittance compared to non-automated market making. * Electronic trading provides very nice paychecks for pretty interesting technical work, which means some talent gets attracted to the market that would otherwise get paid less money doing something with more social value. How big a deal this is to you depends a lot on your worldview. To me, neither of these issues seems worth the galactically high cost of restructuring all the markets in such a way that we'd reliably avoid these problems.
- revelation 11y agoThat's circular reasoning: right now speed is a figure of merit because that's how the game has been designed. I'm suggesting to change the game rules. I don't mean to get rid of automatic market making, I'm saying the exchange could just move to a system where it checkpoints every 10ms or whatever, still much faster than humans can blink, but no detriment to the algorithms. Then everyone has 10ms to come up with orders that make sense in the current market situation, instead of the ridiculous timing game.
- harryh 11y ago
- TheNanex 11y agoHe's right - if you weren't part of the group that was paying them over $100M/year in fees for "real-time" data and you weren't buying or selling stock in 2008, 2009, 2010 and 2011, it probably didn't impact you at all.
- Spooky23 11y agoThe people making money on the HFT stuff are the exchanges. The HFT people are making realtively easy money, but require vast bulk to do so.
- owlee 11y agoQuote from an interview with Hunsader on CNBC regarding this topic: Q (CNBC): Should long-term investors care about milliseconds? A (Hunsader): Yes, they should.
- tptacek 11y agoOk, and...?
- deleted 11y ago[deleted]
- msellout 11y agoWhat NYSE was doing seems to have increased frothiness of the markets. Your median individual investor might not pay a direct price for this, but it certainly could increase costs in subtle ways. Or simply make the market more frothy in the macro view as well as the micro (nano?) view. Further, some whales (pension funds) might get hurt and that hurts your median citizen. Many hedge funds seem to have a strategy of whale-hunting. Thus dark pools and all that.
- nanexllc 11y agoIn 2010, internalizers ABSOLUTELY, WITHOUT QUESTION, priced retail investor orders with SIP prices (the feed that got way behind). What the NYSE was doing: ABSOLUTELY. POSITIVELY. Impacted retail investors and mutual funds.
- consz 11y agoShouldn't internalizers be required to use direct feeds instead of the SIP? The SIP, by construction, will always be lagging the 'real' (if that even means anything) NBBO.
- nanexllc 11y agoInternalizers use both. The give retail the slower price, and buy and sell on their own account at the faster price. Nanex has uncovered a document from the NYSE stating that this is the case.
- consz 11y agoLet me be more clear -- if internalizers are regulated to use anything, why aren't they regulated to use the direct feeds specifically? If the regulation specifically allows them to use the SIP, that seems to be a failure of the regulation itself.
- deleted 11y ago[deleted]
- tptacek 11y agoI adore George Carlin but he's not an especially good source for market microstructure.
- reverend_gonzo 11y agoMarket data is not non-public definition. NYSE was simply slow in aggregating market data during times of high volume. This did not affect you as a retail investor, as you get the NBBO price. This only affected you if you were an HFT firm with bad infrastructure who depended on the aggregate feed and not their direct line. Like tptacek said, the price for getting a direct line, while expensive, is not unreasonable for a business. The largest cost will be salaries for the people writing your code and maintaining your infrastructure.
- bonestamp2 11y ago> NYSE was simply slow in aggregating market data during times of high volume. Maybe I misunderstood, but it seems like they're saying that's not the case: FTA: "First, we had to rule out the possibility of the delay being caused by the consolidation process (which people often erroneously point out)."
- reverend_gonzo 11y agoBy consolidation, he means the Consolidated Tape Association which takes feeds from all exchanges (NYSE, Nasdaq, AMEX, etc) and puts out a single consolidated feed that most non-HFT entities use because its good enough. They get their data from NYSE from apparently an aggregate feed, which was unintentionally delayed by NYSE. In my opinion, they should have been getting the direct feed and doing all consolidation themselves. However, HFT firms will still have a vested interest in making more efficient aggregate feeds than the consolidators/exchanges.
- ethbro 11y ago> Like tptacek said, the price for getting a direct line, while expensive, is not unreasonable for a business. The largest cost will be salaries for the people writing your code and maintaining your infrastructure. Be that as it may in reality, per below quote I assume that behavior is still illegal. "A crucial sub-ruling in the regulations prohibits exchanges from giving stock quotes to special groups faster than to the public. This sub-rule is of such importance, that without it, the rest of the rules (Reg. NMS) essentially become meaningless."
- djsumdog 11y agoIs this the same thing that was discussed in the documentary Wall Street Code (http://topdocumentaryfilms.com/wall-street-code/ http://topdocumentaryfilms.com/wall-street-code/) where certain types of order/purchase types actually bumped your position in the queue?
- tptacek 11y agoNo.
- easytiger 11y agoits pretty amazing how few people seem to have base domain knowledge of core market infrastructure considering how many people work in that area and that it isn't particularly tricky. It certainly colours the opinions of everyone here jumping to entirely silly conclusions.
- PhantomGremlin 11y agoI can read (and have read) Volumes 1, 2, and 3 of The Art of Computer Programming and thereby acquire a considerable amount of "base domain knowledge" in that area. I'm not aware of a correspondingly simple way of acquiring base domain knowledge of the topics we are discussing here. Perhaps you can suggest some books?
- easytiger 11y agoThis is OK as a book, I read much of it many years ago: The Complete Guide to Capital Markets for Quantitative Professionals (McGraw-Hill Library of Investment & Finance) Hardcover – 1 Dec 2006 by Alex Kuznetsov A book on trading is prob more useful. There are many public specs of exchanges. For example: http://www.cmegroup.com/confluence/display/EPICSANDBOX/MDP+3.0+-+Dissemination http://www.cmegroup.com/confluence/display/EPICSANDBOX/MDP+3... The main thing to learn is orderbook building mechanics
- anonu 11y agoYou can also come to the same conclusion if you see how NYSE conducts opening and closing auctions. The presence of human specialists and d-quotes is in the same vein...
- zekevermillion 11y agoAnd $5mm seems like a very small penalty to pay for systematically ripping off retail investors. I wonder if there is a valid basis for a class action that could recoup more of the theoretical losses due to the delayed quotation...
- tptacek 11y agoCan you explain exactly how this is an instance of NYSE "systematically ripping off retail investors"? Please be as specific as you can.
- zekevermillion 11y agoThe article detailed how NYSE provided delayed quotations to it public service. This means that investors without access to the real-time info unknowingly traded at a disadvantage to those who did.
- tptacek 11y agoIn exactly what way is a retail investor harmed by the kinds of delays that this problem introduced? Please be specific. Note: despite the fact that retail investors virtually never trade directly on exchanges, let's stipulate that they always do. I don't think it's a good thing that the NYSE's feeds were this crappy; that's not what I'm debating.
- zekevermillion 11y agoI don't see a need to pretend that retail investors trade directly on an exchange to show harm. The reason that some firms pay for access to current information is that it gives them an advantage. An advantage against whom? Is this only a matter of HFT firms trading against each other, and they all have access to the same info? Or, is the info asymmetric and someone is disadvantaged in a trade? I have to think that at some level, HFT will result in higher prices paid by brokers and their clients, and directly or indirectly by mutual funds. It's a bit of a stretch, and I think that may explain why we haven't heard of any civil lawsuits based on these facts. Also statute of limits on some related claims may have expired.