6 ms·

You're probably correct here. The part people find a little unsavory is not that it's somehow eroding the middle class. It's the idea that HFT can act as an unn

You're probably correct here. The part people find a little unsavory is not that it's somehow eroding the middle class. It's the idea that HFT can act as an unnecessary intermediary, essentially taxing a transaction that otherwise didn't need to be disrupted and at scale the amount extracted becomes material. Imagine your neighbor owned a Ferrari and you told him one day you were going to buy a gallon of milk at the store. "On sale for $3.99!" you say to him. Now imagine he sped past you on your way to the store and when you arrived there he had bought all the milk at $3.99 and was selling it in the parking lot for $4.01. You wouldn't necessarily be ruined financially paying $4.01 instead of $3.99. The cost is negligible. But you would probably think he was kind of a jerk.

harryh 10y ago
Your intuition about financial markets does not match reality. In financial markets no one knows that you want to buy a gallon of milk (or a share of stock) until your bid has already been submitted. No matter how fast their Ferrari, there is no way for them to get in line ahead of you at the store.
- phonon 10y ago
  Maybe you should read "Flash Boys" then. They can and do. Orders start at one place, and by regulation then can get sent to many other markets. If you can go to those next markets a little faster, you can front run the order.
  - harryh 10y ago
    Maybe you should read "Flash Boys: Not So Fast" then. It highlights a lot of errors in Flash Boys (which I have, in fact, read). https://www.amazon.com/Flash-Boys-Insiders-Perspective-High-Frequency-ebook/dp/B00P0QI2M2 https://www.amazon.com/Flash-Boys-Insiders-Perspective-High-...
  - MichaelGG 10y ago
    Flash Boys uses a totally fabricated use of "front running". It's worse than people that call copyright infringement "theft". That book is probably one of the worst books I've read as far as accuracy goes. At least that I'm aware of. Seriously, at one point, Lewis suggests that the trading station of some big trader is hacked. That just by typing numbers without submitting an order, stuff jumps. This should send huge red flags off on anyone that's even remotely familiar with anything similar to a computer. But it's another "see how rigged it all is?" anecdote blended in with his nonsense.
    - 15thandwhatever 10y ago
      Some programmers don't understand latency, so there's no hope for anyone who's not familiar with software development to wrap their head around the concept of "yes, things happen in milliseconds". Which makes it all the more easier to get away with anything that sounds as sensational as this. https://gist.github.com/jboner/2841832 https://gist.github.com/jboner/2841832
- whoops1122 10y ago
  Ohh there is a way to do it, and it is a show on 60/60. I think to be specific, there is a delay between NJ switch to Wall st, so some ppl tap in the switch in NJ, know what you plan on to order, then make their order use a different route to wall st... this was well documented. I dont know if it still exist though.
  - 15thandwhatever 10y ago
    This is the complete opposite of what is happening. What you're describing is straight up hacking, and if there was as clear of a breach of the law like that, we wouldn't be having civil discussions about whether HFT is good or not. Besides, almost nothing routes to Wall Street anymore. Especially not for stocks. NASDAQ's trading platform is in Carteret, NJ. NYSE's trading platform is in Mahwah, NJ. Most HFT firms, if they're not already colocated in Carteret or Mahwah, are located in Secaucus, NJ.
- hm8 10y ago
  Well, there is in a matter of speaking. To take the analogy further, imagine not buying a gallon of milk but 100,000 1 gallon can of milk. The guy with the Ferrari wouldn't be able to get in front of you at the next door target but they'll loot the most convenient Walgreens, Safeway, Walmart, and Amazon Prime. Of course, the analogy no longer holds for numerous reasons (100000 gallons of milk, driving around, buying from the farms directly) but the point is the Flash Boys work on the likelihood of such an event happening which, believe it or not, is fairly common in the stock markets these days. Think, mutual funds, ETF managers, etc. This is now, largely, considered the cost of doing business.
  - harryh 10y ago
    If you want to by 100,000 gallons of milk you don't have a god given right to do so at the currently posted prices in every grocery store in town. Those grocers are well within their rights to raise prices as soon as they figure out what you're doing.
    - hm8 10y ago
      The grocers' price is irrelevant to the discussion here. The guy with the Ferrari would still outrun you and offer you a new price, with a margin just enough for them to be profitable, yet not substantially large as to talk you out of the deal altogether.
      - harryh 10y ago
        Once the grocers raise their prices, there's no margin left for the Ferrari owner to capture.
        hm8 10y ago
        There is still a margin if the intended buyer was willing to pay more or would just want to buy the milk at whatever price offered. Of course, the grocers could keep raising the price arbitrarily but there is still a delta that the guy in the Ferrari could overcharge. I think you understand the point we are trying to get across but just trolling it. I'd have appreciated an honest discussion rather than a trolling attitude.
mjfl 10y ago
That analogy is tempting but inaccurate. Pretty popular with the Mike Lewis "the market is RIGGED against the LITTLE GUY and we're all MAD AS HELL" crowd, but in the end it's hyperbole. IEX is not for the little guy. IEX is for the really big guy. Institutional investors. They are tired of having the market run away from them on large orders. A closer analogy would be that the neighbor is the owner of the local supermarket and you have recently announced that you were going to buy all the milk in the region. You go to one local supermarket (not his) first and buy out the entire stock of milk. On your way to the next one (his), he raises the price of milk to $4.20, knowing that your increase in demand is going to drive up the price everywhere and he doesn't want to be the idiot that sold you milk at $4.00/gal and will have to resupply at $4.20, losing 20 cents per gallon on that sale. When you get there your realize that the price of milk has gone up, and you yell and scream and stomp your feet, but you buy the milk anyways, because you have high demand for milk. The supermarket owner is not a jerk for responding to the increased demand for milk, but many people see it that way. So maybe your a really rich guy who can afford a lot of milk, and so you lobby the government to restrict the ability of supermarket owners to talk to each other, maybe they have to wait a day or something. The supermarket owners are just going to respond by increasing the price of milk on average, because there are random milk thirsty people coming through every once in a while buying up all the milk, increasing the price, and they need to increase the milk premium so they can afford to resupply. They need to compensate for that risk. For that reason everybody loses out. Less people are going to buy milk due to increased prices, so that's bad for the store owner, and milk buyers are going to have to pay a higher price. Same thing is going to happen at IEX. There is simply going to be a wider bid/ask spread.
- _asummers 10y ago
  Yours was the comment that made me understand how the spread economics described elsewhere in this thread worked, thanks for that. The average price increase in the absence of the HFT bids was the part that made it click.
- chrisbennet 10y ago
  Very helpful explanation! That said, it should be mentioned that the "rich guy"/"institutional investor" includes various pension funds. "In a letter urging the SEC to approve IEX as a full exchange, the Teacher Retirement System of Texas, a pension fund that manages more than $125 billion, suggested that trading through IEX could save the system millions of dollars a year."
MichaelGG 10y ago
This is not how it works. It's more like he sees you buy one gallon of milk at 399 then decides to go buy others. He has NO idea if you're going to buy it or not. He's taking a risk. What your described is more like real front-running: A customer places an order, the evil broker sees it and goes out in front to buy for himself then gives the customer a lower price. Your buddy in the Ferrari reliably making money requires him to be able to properly predict. AND you're missing the other side of the trade! The poor shopkeep that priced at 399 when you were OK paying 401. Why should he lose out? HFT market makers solve this.

harryh 10y ago

Your intuition about financial markets does not match reality. In financial markets no one knows that you want to buy a gallon of milk (or a share of stock) until your bid has already been submitted. No matter how fast their Ferrari, there is no way for them to get in line ahead of you at the store.

phonon 10y ago
Maybe you should read "Flash Boys" then. They can and do. Orders start at one place, and by regulation then can get sent to many other markets. If you can go to those next markets a little faster, you can front run the order.
- harryh 10y ago
  Maybe you should read "Flash Boys: Not So Fast" then. It highlights a lot of errors in Flash Boys (which I have, in fact, read). https://www.amazon.com/Flash-Boys-Insiders-Perspective-High-Frequency-ebook/dp/B00P0QI2M2 https://www.amazon.com/Flash-Boys-Insiders-Perspective-High-...
- MichaelGG 10y ago
  Flash Boys uses a totally fabricated use of "front running". It's worse than people that call copyright infringement "theft". That book is probably one of the worst books I've read as far as accuracy goes. At least that I'm aware of. Seriously, at one point, Lewis suggests that the trading station of some big trader is hacked. That just by typing numbers without submitting an order, stuff jumps. This should send huge red flags off on anyone that's even remotely familiar with anything similar to a computer. But it's another "see how rigged it all is?" anecdote blended in with his nonsense.
  - 15thandwhatever 10y ago
    Some programmers don't understand latency, so there's no hope for anyone who's not familiar with software development to wrap their head around the concept of "yes, things happen in milliseconds". Which makes it all the more easier to get away with anything that sounds as sensational as this. https://gist.github.com/jboner/2841832 https://gist.github.com/jboner/2841832
whoops1122 10y ago
Ohh there is a way to do it, and it is a show on 60/60. I think to be specific, there is a delay between NJ switch to Wall st, so some ppl tap in the switch in NJ, know what you plan on to order, then make their order use a different route to wall st... this was well documented. I dont know if it still exist though.
- 15thandwhatever 10y ago
  This is the complete opposite of what is happening. What you're describing is straight up hacking, and if there was as clear of a breach of the law like that, we wouldn't be having civil discussions about whether HFT is good or not. Besides, almost nothing routes to Wall Street anymore. Especially not for stocks. NASDAQ's trading platform is in Carteret, NJ. NYSE's trading platform is in Mahwah, NJ. Most HFT firms, if they're not already colocated in Carteret or Mahwah, are located in Secaucus, NJ.
hm8 10y ago
Well, there is in a matter of speaking. To take the analogy further, imagine not buying a gallon of milk but 100,000 1 gallon can of milk. The guy with the Ferrari wouldn't be able to get in front of you at the next door target but they'll loot the most convenient Walgreens, Safeway, Walmart, and Amazon Prime. Of course, the analogy no longer holds for numerous reasons (100000 gallons of milk, driving around, buying from the farms directly) but the point is the Flash Boys work on the likelihood of such an event happening which, believe it or not, is fairly common in the stock markets these days. Think, mutual funds, ETF managers, etc. This is now, largely, considered the cost of doing business.
- harryh 10y ago
  If you want to by 100,000 gallons of milk you don't have a god given right to do so at the currently posted prices in every grocery store in town. Those grocers are well within their rights to raise prices as soon as they figure out what you're doing.
  - hm8 10y ago
    The grocers' price is irrelevant to the discussion here. The guy with the Ferrari would still outrun you and offer you a new price, with a margin just enough for them to be profitable, yet not substantially large as to talk you out of the deal altogether.
    - harryh 10y ago
      Once the grocers raise their prices, there's no margin left for the Ferrari owner to capture.
      - hm8 10y ago
        There is still a margin if the intended buyer was willing to pay more or would just want to buy the milk at whatever price offered. Of course, the grocers could keep raising the price arbitrarily but there is still a delta that the guy in the Ferrari could overcharge. I think you understand the point we are trying to get across but just trolling it. I'd have appreciated an honest discussion rather than a trolling attitude.

mjfl 10y ago

That analogy is tempting but inaccurate. Pretty popular with the Mike Lewis "the market is RIGGED against the LITTLE GUY and we're all MAD AS HELL" crowd, but in the end it's hyperbole. IEX is not for the little guy. IEX is for the really big guy. Institutional investors. They are tired of having the market run away from them on large orders. A closer analogy would be that the neighbor is the owner of the local supermarket and you have recently announced that you were going to buy all the milk in the region. You go to one local supermarket (not his) first and buy out the entire stock of milk. On your way to the next one (his), he raises the price of milk to $4.20, knowing that your increase in demand is going to drive up the price everywhere and he doesn't want to be the idiot that sold you milk at $4.00/gal and will have to resupply at $4.20, losing 20 cents per gallon on that sale. When you get there your realize that the price of milk has gone up, and you yell and scream and stomp your feet, but you buy the milk anyways, because you have high demand for milk. The supermarket owner is not a jerk for responding to the increased demand for milk, but many people see it that way. So maybe your a really rich guy who can afford a lot of milk, and so you lobby the government to restrict the ability of supermarket owners to talk to each other, maybe they have to wait a day or something. The supermarket owners are just going to respond by increasing the price of milk on average, because there are random milk thirsty people coming through every once in a while buying up all the milk, increasing the price, and they need to increase the milk premium so they can afford to resupply. They need to compensate for that risk. For that reason everybody loses out. Less people are going to buy milk due to increased prices, so that's bad for the store owner, and milk buyers are going to have to pay a higher price. Same thing is going to happen at IEX. There is simply going to be a wider bid/ask spread.

_asummers 10y ago
Yours was the comment that made me understand how the spread economics described elsewhere in this thread worked, thanks for that. The average price increase in the absence of the HFT bids was the part that made it click.
chrisbennet 10y ago
Very helpful explanation! That said, it should be mentioned that the "rich guy"/"institutional investor" includes various pension funds. "In a letter urging the SEC to approve IEX as a full exchange, the Teacher Retirement System of Texas, a pension fund that manages more than $125 billion, suggested that trading through IEX could save the system millions of dollars a year."

MichaelGG 10y ago

This is not how it works. It's more like he sees you buy one gallon of milk at 399 then decides to go buy others. He has NO idea if you're going to buy it or not. He's taking a risk. What your described is more like real front-running: A customer places an order, the evil broker sees it and goes out in front to buy for himself then gives the customer a lower price. Your buddy in the Ferrari reliably making money requires him to be able to properly predict. AND you're missing the other side of the trade! The poor shopkeep that priced at 399 when you were OK paying 401. Why should he lose out? HFT market makers solve this.