7 ms·

The High Frequency Trading Scam (2009)

48 points by aliston 16y ago

JacobAldridge 16y ago
Interesting, given the date (July 2009). Is there a presumed connection with last week's 1000 point drop? A mis-order to sell at any price meets the HFT scam that rapidly, though temporarily, drops to the extreme price (in this case, $0.00 or $0.01).
- btilly 16y ago
  The connection is not so simple. People who do HFT are painfully aware that orders get broken, and so all exited the market before the drop really began going. The 0.01 orders are always hanging around. However the fact that people have come to depend on HFT to help make markets means that when they disappear unexpectedly the market is smaller than it would have been, which makes large price swings much more likely.
wglb 16y ago
This is ancient, wrong, and out of date. Ah for the days when Karl was mcs.net. A finer ISP there was not to be had. I wish he were still doing that rather than whatever it is that he is doing these days, with boldface and intensity.
- joezydeco 16y ago
  Seriously, don't poke the yamhead. You'll be sorry.
DavidSJ 16y ago
Doesn't sound like a scam to me. It's as if you own an apple stand, and customers periodically come up to you and say they would like to buy some apples. You offer to sell 1 apple at 20 cents, and they agree. Then you offer another apple at 25 cents, and they agree. Eventually you get to 40 cents, and they disagree. At that point, you offer all the apples they could possibly want at 39 cents, and you make a lot of money. Your advantage wasn't speed. Your advantage is that the other side was a bad negotiator. At the very least, they could have placed an all-or-nothing order. Also, this analysis assumed the seller had no competition.
- ryoshu 16y ago
  It's more like an apple vendor was offering an apple for 20 cents and someone stepped in between you and the vendor and offered it for 21 cents. You have no idea that the person offering the apple for 21 cents is not the real vendor, he's the only person you can buy from. That's what the millisecond HFT systems are doing. The prescient part of the 2009 article: "If you're wondering how Goldman Sachs and other "big banks and hedge funds" made all their money this last quarter, now you know."
  - theli0nheart 16y ago
    Actually, if you have a limit to buy at 25 cents and a seller still exists at 20 cents, the market maker will fill your order at the lower price first.
    - afterburner 16y ago
      But, and someone correct me if I'm wrong, not if the HFT apple trader buys from the apple seller at the lower price and then resells it.
      - grandalf 16y ago
        If course the HFT trader wouldn't sell unless it could profit by selling. They are HFT traders, not market makers. Obviously if you are buying shares sold by an HFT trader, you are not buying them from a market maker, so you are getting a better price than the market maker is willing to offer.
        cturner 16y ago
        HFT is a technique that's used by many people, including exchanges, hedge funds and market makers. You're right though - the exchange is obliged to fill the consumer at the best available price.
        16y ago
grandalf 16y ago
Wow this essay is totally off track. There is no such thing as a "market price". To prove this to yourself, write a simple model of the stock market with buyers and sellers. Every order is a limit order. What is the "market price"? Is it the last trade? Is it a weighted average of the last 10 trades? It doesn't actually exist. At any price there will be a certain amount of liquidity. If you want to guarantee that you can buy a lot, then you have to pay extra b/c the counter party doesn't want to sell low so he hedges by adding a bit of spread. The same applies to selling. If you want to sell a lot you have to discount a bit b/c the buyer will want a bit of insurance that he/she isn't overpaying. The HFT algos do add liquidity b/c if the liquidity were there at the first price probed, then the algo would never really matter, the desired shares would have changed hands with some other counter party.
- megablast 16y ago
  Clearly, in his example, there are people out there willing to sell at $26.10. In the old days, you could put out an order from 100,000 shares, saying you would pay up to $26.40, and you would get most of these shares at the $26.10. If there were enough people willing to sell that many shares at that price. Now, even though there may be people out there willing to sell you the shares at 100,000, these programs can find out your top price, and they will but the shares at $26.10, and sell them to you at $26.39, thus making a profit of the difference. Providing no extra services to you, or the market. They have just stepped in as the middleman with no risk. This is how the article describes it, and this is how I understood it. Is this wrong? I think you are just arguing semantics about the term market price.
  - tedunangst 16y ago
    Are the shares worth 26.40? Then you should be happy to get them for 26.39. If they aren't worth it, then don't make that offer. I don't see why you should care who sells you the shares. You either want them or you don't.
    - andyjdavis 16y ago
      The ethical issue is that someone is deriving additional profit through an asymmetrical advantage. It's kind of an interesting ethical question actually. Personally it just feels wrong in some hard to define way to algorithmically determine the other sides maximum/minimum price through some process they don't have access to. I can certainly understand why you would do it but it just doesn't feel quite right. I don't think I have an ethical problem with using small orders to sound out the other party. Where it tips over into being unethical for me is if those exploratory orders are cancelled rather than fulfilled. I'm surprised its even possible to cancel your offer once someone else has accepted it.
bd_at_rivenhill 16y ago
One thing this commentator (and others) gets wrong is the emphasis on the place of flash orders in this process. What they seem to be missing is that flash isn't automatic, it is selected by the sender. In this example, the implication is that the buyers of broadcom were disadvantaged by flash orders, but if flash orders were involved at all, then they would have been selected by those very same buyers, who would presumably not have disadvantaged themselves. Flash is an attempt by the more technically sophisticated markets (DirectEdge and BATS) to provide a service to customers who were tired of slow execution on some exchanges causing their orders to be faded. Any time that I see someone complaining about this, I suspect that they either don't understand it, or that they are being paid by someone at the slower markets (e.g. NYSE) to spread FUD.
- deleted 16y ago
  [deleted]
- fr0sty 16y ago
  What is also missed is that most exchanges discontinued flash orders late in 2009. BATS and NASDAQ both discontinued the practice, Direct Edge still allows them (they are opt-in) and NYSE/ARCA never had them.
cturner 16y ago
I read this article when it was first published, and it was what first sparked my interest in the exchange side of the equities world. There's a lot of junk information on the internet on these topics, and as a result they're difficult to read up on. A common error I've seen is articles that imply that flash orders and high-frequency-trading are the same thing, which is incorrect. "Automatic programs began issuing and canceling tiny orders within milliseconds to determine how much the slower traders were willing to pay I originally understood this to mean that parties were 'painting the tape' by causing trades to appear with prices different to what the actual market price is. But that's not it. In the scenario described, it's not trades that are being issued and cancelled, but orders. As in, an opportunity to trade if the other party matches. I don't think it would be possible to coordinate a situation of sniffing out the best price as described here. Markets have queues, and if you want your order to be filled then you put it in the queue where it sits until you cancel it or it gets filled. It can only be filled when it's at the front of the queue. So participants in the market compete for queue spots at each price point from the moment the market opens. That would be exchange dependent, but that just emphasises the point. If one exchange did this and another didn't then the exchange that didn't would get more business because their prices would be better. A couple of years ago if you entered a limit order for $26.40 with the market at $26.10 odds are excellent that most of your order would have filled down near where the market was when you entered the order - $26.10. Today, odds are excellent that most of your order will fill at $26.39, and the HFT firms will claim this is an "efficient market." Citation required? I don't see how this can be true. If the market is at 26.10, then there will be orders in the queue at price points around that. If the market is scared, then the spread will be wide, but that's to be expected and accounted for by the fear, not by conspiracy. Despite all these problems, the criticism of the flash order culture looks sound. A flash data stream could give a party the ability to cancel stuff they have in the queue earlier than they otherwise would, and to get to the queue faster on new information. It seems wrong that there should be a certain type of information to be available only to certain parties. I think the major exchanges have stopped doing flash orders now though. There was a lot of press about the SEC reviewing it after this article last year.
- andrew1 16y ago
  I don't know if it's the case but if you paid a higher rate of commission/fees on flash orders then it might be the case that the general market is getting slightly worse prices but at the advantage of lower fees. Which could make it beneficial for general market participants. As I say though, I don't know if this is the case.
sireat 16y ago
I just thought of an analogy: If what happens in the article is correct, it is very similar to what auto-bidding shill bots do on auction sites, eBay, they obtain information on the highest price you were willing to pay for an item. Is this the price we(investors) are willing to pay for 0.03sec liquidity? I am not sure it is worth it.
kixxauth 16y ago
People need to adjust to the presence of HFT. For many traders it breaks the model they may have used successfully for some time and they just don't want to go out and update their model. As typically happens, they go crying to the government to stop the evil villains from forcing them to change the way they think about a changing world.

48 points by aliston 16y ago

Interesting, given the date (July 2009). Is there a presumed connection with last week's 1000 point drop? A mis-order to sell at any price meets the HFT scam that rapidly, though temporarily, drops to the extreme price (in this case, $0.00 or $0.01).

btilly 16y ago
The connection is not so simple. People who do HFT are painfully aware that orders get broken, and so all exited the market before the drop really began going. The 0.01 orders are always hanging around. However the fact that people have come to depend on HFT to help make markets means that when they disappear unexpectedly the market is smaller than it would have been, which makes large price swings much more likely.

wglb 16y ago

This is ancient, wrong, and out of date. Ah for the days when Karl was mcs.net. A finer ISP there was not to be had. I wish he were still doing that rather than whatever it is that he is doing these days, with boldface and intensity.

joezydeco 16y ago
Seriously, don't poke the yamhead. You'll be sorry.

DavidSJ 16y ago

Doesn't sound like a scam to me. It's as if you own an apple stand, and customers periodically come up to you and say they would like to buy some apples. You offer to sell 1 apple at 20 cents, and they agree. Then you offer another apple at 25 cents, and they agree. Eventually you get to 40 cents, and they disagree. At that point, you offer all the apples they could possibly want at 39 cents, and you make a lot of money. Your advantage wasn't speed. Your advantage is that the other side was a bad negotiator. At the very least, they could have placed an all-or-nothing order. Also, this analysis assumed the seller had no competition.

ryoshu 16y ago
It's more like an apple vendor was offering an apple for 20 cents and someone stepped in between you and the vendor and offered it for 21 cents. You have no idea that the person offering the apple for 21 cents is not the real vendor, he's the only person you can buy from. That's what the millisecond HFT systems are doing. The prescient part of the 2009 article: "If you're wondering how Goldman Sachs and other "big banks and hedge funds" made all their money this last quarter, now you know."
- theli0nheart 16y ago
  Actually, if you have a limit to buy at 25 cents and a seller still exists at 20 cents, the market maker will fill your order at the lower price first.
  - afterburner 16y ago
    But, and someone correct me if I'm wrong, not if the HFT apple trader buys from the apple seller at the lower price and then resells it.
    - grandalf 16y ago
      If course the HFT trader wouldn't sell unless it could profit by selling. They are HFT traders, not market makers. Obviously if you are buying shares sold by an HFT trader, you are not buying them from a market maker, so you are getting a better price than the market maker is willing to offer.
      - cturner 16y ago
        HFT is a technique that's used by many people, including exchanges, hedge funds and market makers. You're right though - the exchange is obliged to fill the consumer at the best available price.
        16y ago

grandalf 16y ago

Wow this essay is totally off track. There is no such thing as a "market price". To prove this to yourself, write a simple model of the stock market with buyers and sellers. Every order is a limit order. What is the "market price"? Is it the last trade? Is it a weighted average of the last 10 trades? It doesn't actually exist. At any price there will be a certain amount of liquidity. If you want to guarantee that you can buy a lot, then you have to pay extra b/c the counter party doesn't want to sell low so he hedges by adding a bit of spread. The same applies to selling. If you want to sell a lot you have to discount a bit b/c the buyer will want a bit of insurance that he/she isn't overpaying. The HFT algos do add liquidity b/c if the liquidity were there at the first price probed, then the algo would never really matter, the desired shares would have changed hands with some other counter party.

megablast 16y ago
Clearly, in his example, there are people out there willing to sell at $26.10. In the old days, you could put out an order from 100,000 shares, saying you would pay up to $26.40, and you would get most of these shares at the $26.10. If there were enough people willing to sell that many shares at that price. Now, even though there may be people out there willing to sell you the shares at 100,000, these programs can find out your top price, and they will but the shares at $26.10, and sell them to you at $26.39, thus making a profit of the difference. Providing no extra services to you, or the market. They have just stepped in as the middleman with no risk. This is how the article describes it, and this is how I understood it. Is this wrong? I think you are just arguing semantics about the term market price.
- tedunangst 16y ago
  Are the shares worth 26.40? Then you should be happy to get them for 26.39. If they aren't worth it, then don't make that offer. I don't see why you should care who sells you the shares. You either want them or you don't.
  - andyjdavis 16y ago
    The ethical issue is that someone is deriving additional profit through an asymmetrical advantage. It's kind of an interesting ethical question actually. Personally it just feels wrong in some hard to define way to algorithmically determine the other sides maximum/minimum price through some process they don't have access to. I can certainly understand why you would do it but it just doesn't feel quite right. I don't think I have an ethical problem with using small orders to sound out the other party. Where it tips over into being unethical for me is if those exploratory orders are cancelled rather than fulfilled. I'm surprised its even possible to cancel your offer once someone else has accepted it.

bd_at_rivenhill 16y ago

One thing this commentator (and others) gets wrong is the emphasis on the place of flash orders in this process. What they seem to be missing is that flash isn't automatic, it is selected by the sender. In this example, the implication is that the buyers of broadcom were disadvantaged by flash orders, but if flash orders were involved at all, then they would have been selected by those very same buyers, who would presumably not have disadvantaged themselves. Flash is an attempt by the more technically sophisticated markets (DirectEdge and BATS) to provide a service to customers who were tired of slow execution on some exchanges causing their orders to be faded. Any time that I see someone complaining about this, I suspect that they either don't understand it, or that they are being paid by someone at the slower markets (e.g. NYSE) to spread FUD.

deleted 16y ago
[deleted]
fr0sty 16y ago
What is also missed is that most exchanges discontinued flash orders late in 2009. BATS and NASDAQ both discontinued the practice, Direct Edge still allows them (they are opt-in) and NYSE/ARCA never had them.

cturner 16y ago

I read this article when it was first published, and it was what first sparked my interest in the exchange side of the equities world. There's a lot of junk information on the internet on these topics, and as a result they're difficult to read up on. A common error I've seen is articles that imply that flash orders and high-frequency-trading are the same thing, which is incorrect. "Automatic programs began issuing and canceling tiny orders within milliseconds to determine how much the slower traders were willing to pay I originally understood this to mean that parties were 'painting the tape' by causing trades to appear with prices different to what the actual market price is. But that's not it. In the scenario described, it's not trades that are being issued and cancelled, but orders. As in, an opportunity to trade if the other party matches. I don't think it would be possible to coordinate a situation of sniffing out the best price as described here. Markets have queues, and if you want your order to be filled then you put it in the queue where it sits until you cancel it or it gets filled. It can only be filled when it's at the front of the queue. So participants in the market compete for queue spots at each price point from the moment the market opens. That would be exchange dependent, but that just emphasises the point. If one exchange did this and another didn't then the exchange that didn't would get more business because their prices would be better. A couple of years ago if you entered a limit order for $26.40 with the market at $26.10 odds are excellent that most of your order would have filled down near where the market was when you entered the order - $26.10. Today, odds are excellent that most of your order will fill at $26.39, and the HFT firms will claim this is an "efficient market." Citation required? I don't see how this can be true. If the market is at 26.10, then there will be orders in the queue at price points around that. If the market is scared, then the spread will be wide, but that's to be expected and accounted for by the fear, not by conspiracy. Despite all these problems, the criticism of the flash order culture looks sound. A flash data stream could give a party the ability to cancel stuff they have in the queue earlier than they otherwise would, and to get to the queue faster on new information. It seems wrong that there should be a certain type of information to be available only to certain parties. I think the major exchanges have stopped doing flash orders now though. There was a lot of press about the SEC reviewing it after this article last year.

andrew1 16y ago
I don't know if it's the case but if you paid a higher rate of commission/fees on flash orders then it might be the case that the general market is getting slightly worse prices but at the advantage of lower fees. Which could make it beneficial for general market participants. As I say though, I don't know if this is the case.

sireat 16y ago

I just thought of an analogy: If what happens in the article is correct, it is very similar to what auto-bidding shill bots do on auction sites, eBay, they obtain information on the highest price you were willing to pay for an item. Is this the price we(investors) are willing to pay for 0.03sec liquidity? I am not sure it is worth it.

kixxauth 16y ago

People need to adjust to the presence of HFT. For many traders it breaks the model they may have used successfully for some time and they just don't want to go out and update their model. As typically happens, they go crying to the government to stop the evil villains from forcing them to change the way they think about a changing world.