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Wall Street Profits by Putting Investors in the Slow Lane

160 points by chollida1 9y ago

Pxtl 9y ago
Remember when Sanders proposed a small fee on every trade on Wall Street to discourage high frequency trading and to recoup some value from the market? Remember how he was widely pronounced deranged for suggesting that there should be a fee associated with trades? How it would destroy the market? Funny, that.
- QAPereo 9y ago
  Common sense and basic regulations to protect people and economies have no place in this laughable economy. What you're describing, what Sanders proposed, would put a dent in the profits of some of the wealthiest, most powerful, and most soulless people in the world. Of course it was shot down, that's one way to tell that he was cutting close to the bone.
  - stcredzero 9y ago
    would put a dent in the profits of some of the wealthiest, most powerful, This is most certainly factual. and most soulless people in the world. This is a factually unsupportable adhominem. Sentiment that contributes to outrage on social media is a form of cultural pollution. People use it for short term gain, but it's a kind of externality which is tearing society apart. (FWIW, I dislike this situation as well.) (Yes, this is obligatory: https://www.youtube.com/watch?v=rE3j_RHkqJc https://www.youtube.com/watch?v=rE3j_RHkqJc )
    - jorjordandan 9y ago
      Outrage is a form of cultural pollution? So no one should ever be outraged by peoples actions? Or only in the right circumstances? Who gets to say when its justified, if ever?
      - thanatropism 9y ago
        All of those questions apply to air pollution.
        jorjordandan 9y ago
        That's true. I guess the difference is that outrage has a function, and can have a utility, so I don't think it's a good metaphor. Viewing it as just 'pollution' implies that it has no value. It's only 'pollution' to those who don't agree with the outrage.
        stcredzero 9y ago
        That's true. I guess the difference is that outrage has a function, and can have a utility, so I don't think it's a good metaphor CO2 is the best analogy. There needs to be a certain amount for the utility. Too much and too little are detrimental. Viewing it as just 'pollution' implies that it has no value. This is an all-or-nothing fallacy. It's the amount produced which is the issue in the analogy. In reality, there are also finer grained quality issues. To further demonstrate the application of your fallacy, I would agree that there are problems with under-prosecution of certain crimes. https://www.youtube.com/watch?v=rHMGbtGGdbQ https://www.youtube.com/watch?v=rHMGbtGGdbQ However, when the outrage which has reached a fever pitch such that people start calling for abrogation of Innocent Until Proven Guilty based on inherent characteristics, something has gone wrong. Our culture has known, since the times in which the Magna Carta was written, that the protection of the individual from arbitrary imprisonment and prosecution is essential to prevent totalitarian abuses of power. Outrage is easy to over use, its over-use is readily rewarded and such over-use is clearly everywhere, even despite the fact that it's only the excesses of the "other side" that are easily discerned.
        jorjordandan 9y ago
        >This is an all-or-nothing fallacy Not really. Pollution is uniformly unwanted by definition (without you changing the goalposts to CO2, which is naturally occurring, and the naturally occurring CO2 would not be considered as pollution, whereas human created CO2 would). In fact, let's stick with the wikipedia definition: "Pollution is the introduction of contaminants into the natural environment that cause adverse change." Outrage, on the other hand, may be very much wanted, or even required. I'm not defending ALL outrage. I'm defending that some outrage may occasionally be warranted. You saw an all or nothing fallacy where there was none. To recap - Argument: Outrage is cultural pollution. My Response: All pollution is unwanted, some outrage may be occasionally wanted or warranted. Your response: Saying pollution has no value is an all-or-nothing fallacy! The worst kind of bad reasoning is the false accusation of a fallacy. Because the person making that claim should know better.
- harryh 9y ago
  Fees on trading would not meaningfully discourage high frequency trading and would just be passed on to buyers and sellers of stock in the form of larger bid/ask spreads.
  - dm3 9y ago
    Something like a minimum holding time is a more reasonable approach. However, there's not a clear cut answer in any case.
    - harryh 9y ago
      Before you start talking about what would be effective in reducing the amount of high frequency trading you have to make the case that reducing HFT is a good goal in the first place. This is a challenging case to make.
      - Jweb_Guru 9y ago
        Why is it challenging? What conceivable valuable function does front-running serve?
        dsacco 9y ago
        High frequency trading is not front running. It's becoming truly kafkaesque how often this claim comes up on Hacker News.
        theseatoms 9y ago
        Or kafkaesque how often these separate concepts are conflated in popular usage.
        harryh 9y ago
        First you have to tell me what you think front running means. Originally front running had a very specific definition: Someone who has a fiduciary responsibility to me cannot use my trading interests to execute their own trades before they execute my trades. This sort of thing is clearly wrong because it can result in someone I've hired delivering subpar execution prices to me. However the term has expanded a lot over the years to mean a lot of different things to a lot of different people. So what does it mean to you?
- jstanley 9y ago
  What you call "recouping some value from the market", others call "stealing some value from the market".
- javajosh 9y ago
  I've always thought a better solution would be a voluntary market "quantization" at some reasonable human-scale time frame. It would be a little random (to avoid gaming), so all put and asks get resolved "about every hour". There would probably have to be a law to prevent people from running markets at faster time-scales on top of this.
  - sseveran 9y ago
    This has existed in various forms for more than 10 years. Nasdaq I believe has 3 or 4 discrete intraday crosses in addition to the opening and closing cross. You don't want it to be random since participants need certainty about when the cross will occur. In addition there are a variety of venues that allow block trading in various forms that market participants can use.
  - harryh 9y ago
    This solves fewer problems than you might think. 1) Let's say that trades are resolved at time X. Participants have every incentive to submit all bids/asks as close to time X as possible (microseconds possibly). 2) How do you handle a mismatched number of bids/asks at a given price? Resolving this difficulty without creating bigger problems than the problem you were trying to eliminate is challenging. 3) I'm just a regular guy who wants to buy $1000 of stock as part of my monthly savings plan. With an up to date market I can just buy and sell at the market price and not worry about it. But now I have to be afraid that there has been some big news event in the past hour that will make this hours price much different than last hours. One of the biggest services markets provide is up to date pricing information. Why do you want to take that away from me?
    - zo1 9y ago
      1) You only get to see and make a potential buy/bid for last hour's bid/asks, only. 2) The system itself resolves it. Either it prevents you from making a buy/bid for something that was already "fulfilled" (though this would leak information). Or it accepts them sequentially, and refunds you at the end of the hour. 3) We're not taking that away from you. We'd be taking it away from everyone. You are welcome to see last hour's trades and try trade on it. Additional points: 2) Another option. If your order didn't make it, the system can simply let it "stay" on on the system to be fulfilled in the future. If someone wants to take you up on the offer you made, they'll do it in the next hour, or any subsequent hour.
- walkingolof 9y ago
  A variant on the Tobin Tax https://en.wikipedia.org/wiki/Tobin_tax https://en.wikipedia.org/wiki/Tobin_tax
- dsacco 9y ago
  Your comment, while snarky, isn't a refutable statement. As it stands you seem to be endorsing some position, which I'm inferring is in favor of Sanders and maybe in opposition to HFT. I can't really tell what you're getting at precisely though. > Remember how he was widely pronounced deranged for suggesting that there should be a fee associated with trades? How it would destroy the market? Who said this, specifically? What is your point in bringing it up? > Remember when Sanders proposed a small fee on every trade on Wall Street to discourage high frequency trading and to recoup some value from the market? I'm getting the sense that you'd be in favor of this - can you tell me why, in your own words, you believe we should be trying to "recoup value" from the activities of high frequency traders?
  - Pxtl 9y ago
    It's mostly about how skimming a tiny bit of cash off of every trade is perfectly good for the exchanges to do to john Q public, but heaven help us if real traders have to put up with that. I have no idea if Sanders' plan was good or not, I'm more grousing about how critically important principles of how the market is supposed to work seem to vary depending on whether you're talking about consumer-level investments vs. institutional investors.
    - jstanley 9y ago
      I still don't get what you're trying to say. Who is "skimming a tiny bit of cash off of every trade"? Do you buy into the notion that HFT is somehow so fast that it can travel back in time and jump ahead of orders that have just executed?
      - deleted 9y ago
        [deleted]
      - JetSpiegel 9y ago
        Why is it OK for the exchange to charge fees from every trade motivated by profit, but if the government does it to redistribute, it is somehow labelled as "market distortions"? Either fees on every trade distort the market, and in that case the exchange is distorting the market, or they don't have appreciable effects and the government can levy that tax. My opinion is that this a political opinion, and pretending that this is an economic concern is just a smokescreen.
- corporateslave3 9y ago
  You are aware that HFT is essentially dead? It isnt profitable anymore and most of those firms are failing. Trading situations that allow for easy outsized profits like that disappear very fast.
  - lin_lin 9y ago
    Is this true? Any links? Not doubting you, just interested.
    - corporateslave3 9y ago
      Source is I work in the industry. Look at the price of VirtuFinancial stock, who was at one time a premier HFT firm. The amount of disinformation surrounding HFT is staggering.
      - keenerd 9y ago
        Unrelated, but I have a question for you. I've been unable to find a good answer for how exactly HFT benefits the average person. Stuff like antibiotics, electric lights, refrigeration, washing machines, phones, computers all have all led to direct and immediate quality of life improvements. Often on the order of a tenfold improvement for that activity, and they are easily within reach of the majority of the population. What would become 10x worse for the average person if HFT were to vanish overnight? Would mortgage rates massively spike? Would bond rates plummet? Is there some quantifiable financial thing that would regress to whatever terrible situation we were in back in 1990 before HFT was substantial?
        corporateslave3 9y ago
        Right now the newest investment strategies are taking alternative data sets, like mining website data, and using it to predict stock prices. What value does that provide to the average guy? Nothing but market efficiency. It's just how the industry works.
- rramdin 9y ago
  Sanders lacks fundamental understanding of the stock market, indicated by his unsubstantiated refrain "the business model of Wall Street is fraud." First, there are already per-trade regulatory fees, so this isn't a novel idea. Second, this is necessarily a regressive tax: wider spreads mean worse prices for the ultimate owner of stocks; that tax is applied whether trades are retail (you and me), institutional (big Wall Street firms, i.e. IEX's clients), or HFT (small tech firms).
  - lightbyte 9y ago
    >Second, this is necessarily a regressive tax You're putting your own ideas into his mouth. Nobody said anything about the fee being a flat fee, or that it would apply to every single trade in existence.
    - pdeuchler 9y ago
      I'm saying this as a Sanders supporter, but maybe he should have been more specific and detailed about his proposals then. My two biggest frustrations with Sanders were 1) his inability to understand that it was going to take more than just mere backbone and higher taxes to reform wall street and 2) his foreign policy
      - lightbyte 9y ago
        >but maybe he should have been more specific and detailed about his proposals then. I'll agree with you there, his proposals were very similar to Trump's in that they did not have much substance, just broad ideas.
  - Chardok 9y ago
    Your reasoning seems to ignore the evidence in this article; there does seem to be a business model of fraud and, even if he did lack a fundamental understanding of the stock market, I would hope we could all agree that action needs to be taken to regulate and restrict these illegal practices. Perhaps it would not be the specific terms Sanders was describing, but unfortunately he was the only viable candidate that ostensibly wanted to do so.
- alpos 9y ago
  I suspect this debate was/is largely conducted by uninformed parties. There already is a small fee imposed on every trade due to gov't regulation. https://www.sec.gov/fast-answers/answerssec31htm.html https://www.sec.gov/fast-answers/answerssec31htm.html At best, there could be a meaningful debate over increasing the appropriation to the SEC and adding new regulation mandates for them. The question over whether we should have transaction fees should already be settled by the fact that the SEC is currently funded by such fees.
  - jcranberry 9y ago
    IIRC, the bill he proposed had taxes on the value of trades, such as 1% per stock per trade, .05% (maybe off by OOM) on options, etc.
Pxtl 9y ago
Reading further: this really feels like PR for IEX.
amelius 9y ago
Can't practices like these not be considered in the same way as "hacking" and thus made illegal? After all, hacking = influencing electronic systems to make them function in ways they are not intended to function. Replace "electronic" by "legal/financial" and there you are.
- nerdponx 9y ago
  Sure, but the people standing to make millions of dollars on this particular illegal activity are also the people making the rules and laws.
- deong 9y ago
  One immediate problem -- this is how these systems are made to function. It's not like the kickback is happening behind the back of the operators of the exchanges. It's not "hacking" to follow the rules as they're laid out.
  - amelius 9y ago
    So you are saying these systems are bug-free by design/definition? That's quite a statement :)
    - ghostbrainalpha 9y ago
      That's so crazy far from what he is saying. If you enter a building through a front door, you are not "hacking", you are entering the building in the way the designer intended. If you enter a building through a window, you are "hacking" because you are exploiting an unintended ability that the designer did not intend to give you. Just because the comment you replied to said that "kickbacks" are a front door intentional design, you can't then claim he said that the building has no windows. He has said nothing about windows. He just said don't call that door a window, because its not, its a fucking door.
      - amelius 9y ago
        Yes, it's a door, but they told the regulators it was a window. That's a bug in the spec.
chollida1 9y ago
Someone will call this a submarine article for IEX but I don't think this is far, it was written as an oped by Dave Swensen, the famous head of Yale's endowment fund. Just so the issue is clear, almost all hedge funds don't do active/passive also called maker/taker, but rather they pay a flat fee per share traded to their sell side broker. The sell side broker will then collect/pay the exchange fees. This means that the sell side broker has an incentive to post the order to a market that pays them the largest rebate rather than the market with the shorted queue. The buy side clients are not getting worse prices necessarily as you still need to fill orders at the NBBO. So the argument would be, why not post on the exchange with the shortest queue always. And the response would be that 1) markets move fast, and what is the shorted queue when the order is dispatched may not be the shortest queue when the order arrives. 2) Other markets may be more active, ie more orders routed to them first so the shortest queue may not be the best place to route at all. To be fair its not a consensus that the IEX approach is better than maker taker, there is no clear consensus as to what the correct approach is even when you take out the HFT opinions. In case anyone wants to see here's a link to the BATS cash equities execution quality page. https://www.bats.com/us/equities/market_statistics/execution_quality/ https://www.bats.com/us/equities/market_statistics/execution...
- harryh 9y ago
  Worth noting that the head of Yale's endowment fund and IEX's interests are aligned. The business model of IEX is to convince naive investors that high frequency trading is somehow screwing them and that they should choose to route their orders to IEX in order to avoid it. They then facilitate trading between these naive investors and large institutional investors (like Yale) who want to move large blocks of shares before the market moves against them.
  - wbl 9y ago
    Parent is correct. Uninformed order flow is what HFT wants to trade against: people buying because they have cash and selling because they need it. HFT doesn't want to trade with people moving prices at the old prices.
- 9y ago
osrec 9y ago
I think this is well known. The real problem is that the traders are much smarter than the regulators, and their ability to obscure far exceeds the regulators' ability to untangle. Incentivise your regulators better and you might end up attracting some real talent who can unearth the tricks the crafty traders pull every day (I am an ex trader, from a bulge bracket IB, and trust me, what some of these guys do is not at all kosher).
- osrec 9y ago
  Also, there is an argument for more time controlled auctions rather than giving everyone a continuous look at the order book. Much like the start of day auction, you could have something similar every minute, where traders submit prices but matching only occurs at the end of each minute. This would certainly put an end to the annoying high/low ticking that happens all too often.
  - harryh 9y ago
    There is no good argument for this. The problems you think it might solve...it doesn't solve. Hint: if the minute long auction closes at precisely the minute boundary at what time do you want to put your orders in?
    - osrec 9y ago
      Hint: If you can't see the orders during that minute, it doesn't matter when you submit...
      - harryh 9y ago
        Might other things be happening in the world besides orders on a single exchange?
        orclev 9y ago
        It seems like that would only matter if you assume that a bid can't be canceled or changed. Assuming you're free to cancel or modify a bid right up until the close, whether you put the bid in at the start of the window or the close of the window wouldn't matter as you could always modify or cancel the bid as new information comes in.
netcan 9y ago
This is a quasi-inevitable side issue. Generally, investors eat transaction costs and aren’t party to decisions that affect them. There are related issues in many 3-party systems. In medicine, doctors, insurers and other people tend to decide on (prescribe) products and services. The consumer eats the costs (sometimes it’s a 4th party) and decision makers have an incentive to take kickbacks. The regulator could do stricter rules/policing, for a partial fix.
bradleyjg 9y ago
I realize this in the op-ed section of the paper, but where the issues are complex and most people are totally unfamiliar with them, printing one side of the story feels a lot like endorsement. When Flash Boys came out there was extensive discussion here on HN about IEX's claims. I was convinced that Lewis at the very least exaggerated the benefits of thier speedbump model. On the issue of rebates, I'd keep on eye out for other takes (especially from Matt Levine at Bloomberg) before forming any firm opinions.
bko 9y ago
Every article I read on the topic has a plug for IEX, an exchange that "refuses to pay kickbacks" which make me think that these peices are basically advertisements. Either kick backs serve no purpose and IEX will thrive especially in this environment where where investors are clamoring for yield. Or it does have some purpose or is not significant. Putting in regulations would likely lead to more complexity and regulatory capture
- harryh 9y ago
  Kickbacks to brokers that are sending out retail flow allow those brokers to reduce commissions on trading. These reductions have gone all the way to zero in a lot of places.
  - chollida1 9y ago
    > Kickbacks to brokers that are sending out retail flow allow those brokers to reduce commissions on trading. These reductions have gone all the way to zero in a lot of places. I think you are wrong here. Most consumer orders are active meaning typically the broker would pay the maker fee instead of collecting a kick back. I mean, inverted exchanges are a thing but do very little volume. Now pay for order flwo from wholesalers like Citadel is a big win for brokerages and does help to reduce trading fees.
harryh 9y ago
The problem with this essay is that it conflates the needs of a large institutional investors like Yale with the needs of small investors (like you and me). In many cases these needs can be inverted. Yale wants to buy and sell large blocks of stock without the price moving away from them. I want to buy and sell stock at the best possible price with all of the latest information transmitted to the market as fast as possible. This is why Yale would prefer to trade in "darker" exchanges like IEX and most retail investors should prefer other exchanges.
- hectorr 9y ago
  Yes. This isn't Wall Street is bilking the common man. This is one side of Wall Street trying to squeeze the other side, and appealing to the public to help their case. It's a tough market for big money right now. Opportunities are scarce and their customers are pushing down costs, so they're putting pressure on their suppliers.
- pm90 9y ago
  > small investors (like you and me) Uhmm, maybe you, but definitely not me. Most people I know (I agree though, I live outside NYC or any big financial center) don't give a rat's ass about where the market is going, which stocks are good and which are bad. We invest a lot into our 401(k)'s and the rest we put in index funds. So my interests are definitely aligned more with large institutional investors. BTW my personal investment strategy is not to get some kind of windfall during retirement. The only thing I really look for is that if I saved well, I will have enough to retire on (i.e. not ask for others for monetary help). I just want my funds to not fail.
  - harryh 9y ago
    That makes you like me. You aren't buying and selling based on proprietary information about where you think the market is going, but because of your cash flow situation (You save $1000 a month now, and hope to withdraw $5000 a month in retirement or whatever).
hendzen 9y ago
So lets say they extend Reg NMS to require sending the order to the NMS exchange with the shortest queue at the BBO? I can imagine some potential ways that could be gamed as well...
NicoJuicy 9y ago
Don't get me started by putting out warnings of stocks they are shorting for no reason. It's despicable. Not only companies, but also countries. While America will always be aaa
inthewoods 9y ago
Taking aside the speed bump that IEX provides, how it is meaningfully different from Liquidnet?
andrewla 9y ago
Some of the underlying data here [1] on the effective spreads of the various market centers. Bats also publishes the definitions of these metrics [2]. They seem to be difficult to game, since they're derived from actually executed trades compared to the midpoint NBBO (that is, the national best bid/offer -- by definition, at that time, cheaper than any exchange to buy, and more expensive than any exchange to sell). The low volume numbers make it slightly more difficult to determine significance, but the effect does appear to be real, which I found slightly surprising. [1] https://www.bats.com/us/equities/market_statistics/execution_quality/ https://www.bats.com/us/equities/market_statistics/execution... [2] https://www.bats.com/us/equities/market_statistics/execution_quality/definitions/ https://www.bats.com/us/equities/market_statistics/execution...
dsacco 9y ago
Articles like this are so mind-numbingly frustrating because they completely muddle the water for any reasoned debate about the true advantages and disadvantages of high frequency trading. > Wall Street has developed a new way, clouded in obscurity, to fleece the hundreds of millions of Americans who have money invested in company pension plans, mutual funds and insurance policies. Well, that sure is a neutral way of presenting it, isn't it? > Instead, brokers routinely take kickbacks, euphemistically referred to as “rebates,” for routing orders to a particular exchange. As a result, the brokers produce worse outcomes for their institutional investor clients — and therefore, for individual pension beneficiaries, mutual fund investors and insurance policy holders — and ill-gotten gains for the brokers. "Kickbacks"...that's a strategic word to use. Technically true, but more importantly, emotionally loaded. "Kickback" is not often associated with positive sentiment. "Union leaders receiving kickbacks"..."politicians receiving kickbacks"... More importantly, this claim is neither axiomatic nor defended by the article. How precisely do these rebates harm investors? > The diffuse harm to individuals and the concentrated benefit to Wall Street create yet another way in which the system is rigged, justifiably eroding public confidence in the fairness of the financial system. What the hell? The rhetoric is so heavy-handed - is there no attempt at an unbiased presentation here? I understand this is an opinion piece but come on. > And yet, brokers choose longer queues hundreds of thousands, if not millions, of times a day. Publicly available trade and quote data show that the queues to buy or sell stock are considerably longer on exchanges that offer kickbacks. Even though the queues decrease the likelihood of getting a trade completed and impair the price performance after the trade is executed, brokers still direct trades to these places because of the kickbacks they receive. Yes, that's interesting. But how does that correlate with the liquidity available on these exchanges? If you have reduced liquidity, do you want to be in a smaller queue with less price competition? This isn't even addressed. > One exchange, the IEX, refuses to pay rebates. Created by Brad Katsuyama (whose odyssey to defy the ethos of Wall Street was told in Michael Lewis’s “Flash Boys”), IEX has a speed bump that prevents high-frequency traders from front-running ordinary investors. (Yale University, where we work, has a de minimis exposure to IEX through an investment by one of the university’s external managers.) Okay, so we have blatant hero worship and the claim that high frequency trading is front running in 2017. And this article has reached the front page of Hacker News. > BATS (a rival stock exchange founded by a high-frequency trader) posts data on this measure of execution quality for the major exchanges on its website. According to our calculations, in the six months before IEX’s arrival, Nasdaq led the effective spread rankings in the widely used Standard & Poor’s 500 index, with the number of top ranks ranging from 169 to 216 stocks. Okay, where are these calculations? What is the point of making the claim if you don't quantify it whatsoever?!
heptathorp 9y ago
> IEX has a speed bump that prevents high-frequency traders from front-running ordinary investors. Anyone care to explain, in precise terms, how a high-frequency trader front-runs ordinary investors on a typical exchange and how putting a delay on all incoming orders prevents it?
- physguy1123 9y ago
  They don't. That term has basically become an advertising slogan for IEX. HFT is great for retail investors because you trade cheaper and faster. Usually retail investors get price improvement over the market since HFT brokerages compete for retail flow. HFT is bad for institutional investors who don't want to invest in sophisticated execution since the market reacts very quickly to large orders. Institutional investors include firms like Vanguard or firms that greatly inform price discovery, so it's worth thinking about both sides of the market and not just optimizing for best retail execution. IEX is by and for large institutional investors. IEX's delay doesn't apply to one (multiple?) of their hidden/protected order types, which allows larger orders resting on the book to avoid market impact and execution at 'bad' prices as these orders can move away from the top of the book in 'unfavorable' market conditions.
- rramdin 9y ago
  Michael Lewis and Brad Katsuyama misuse the term "front running," either willfully to stir people up or out out of ignorance. Front-running refers to the practice of a broker holding customer orders, but trading for their own accounts at a better price before executing their client's orders (i.e. using privileged information for their benefit). Katsuyama's uses "front running" to describe a practice where if an HFT sees a price change happening (i.e. trades are being reported or a level is going away), they quickly go and remove liquidity before others have gotten a chance to react to this new information. An HFT with faster technology will beat an institutional trader in this race (even though all market participants must always send bona fide orders that they intend to have filled). IEX solves this problem by slowing down incoming orders to give special orders on the exchange (D-pegs, which automatically change prices as the prevailing market price changes) an opportunity to reprice. The HFT has put millions of dollars into fast technology, whereas the institutional investment firms have presumably put millions of dollars into long term research. IEX allows institutional investors to outsource this technology investment to the exchange, which puts an artificial delay to give its matching engine time to reprice special orders during market moves.
rramdin 9y ago
Whenever I see these IEX articles, I think it is useful to point out that they generally describe 3 types of traders: 1) Retail - you and me, who make money through asset appreciation 2) Institutional (IEX's client-base) - big Wall Street firms, big money managers, big pensions, who make money by charging fees 3) HFT - small technology firms, who make money through trading
Stradivarius 9y ago
Kickbacks result in worse trade execution, brokers that route client orders for kickbacks violate their duty of best execution. So, not only is this unethical, it's arguably illegal.
aphextron 9y ago
More generally, consumers have been fleeced and left out to dry over the past 10 year economic cycle. Take a look at a graph of the S&P500 from 2009-2017, then look at consumer interest rates of 0.5% (in a 'high yield' savings or CD account). It simply makes no sense. We simply cannot build wealth any longer. Baby boomers had CD rates of >10% [0]. Think about that for a moment. [0] http://www.forecast-chart.com/rate-cd-interest.html http://www.forecast-chart.com/rate-cd-interest.html
- deleted 9y ago
  [deleted]
- usefulcat 9y ago
  > Baby boomers had CD rates of >10% [0]. Think about that for a moment. My aunt and uncle (who happen to be baby boomers) bought their first house in the early '80s when inflation was rampant. Their first mortgage had something like an 18% rate. It should be obvious that a 10% CD rate is worthless if inflation is nearly as high or higher.
  - dragonwriter 9y ago
    > It should be obvious that a 10% CD rate is worthless if inflation is nearly as high or higher. Well, yes, that would be useless, but that's not what happened for most of the time with high CD ratee. The period of CD rates ranging from just under 10% to over 17% in the 1978-1984, saw inflation peak at 14.8% and spend much of the time below 5%. Recently CD interest rates are not only low but for many years below inflation most of the time; in the period of high interest rates and high inflation, CD rates were still above inflation.
- dgudkov 9y ago
  This is one of the most disturbing charts I've seen recently. Especially with the 45yr history.
kcorbitt 9y ago
> Although the harm suffered on each trade is minuscule — fractions of a cent per share — the aggregate kickbacks amount to billions of dollars a year. That's the money quote. 99% of retail investors should be buying stock infrequently, maybe once a month when the paycheck comes in. Ideally you're buying one or a few index funds, so the total number of transactions is small. If you're in that boat, this order-of-fulfillment tax really doesn't affect you and can be entirely ignored. Your returns are really only in danger of being dragged down by this thing if you're executing many trades per day. But if you're doing that, you had better be a sophisticated investor anyway, or else you're definitely losing money.
- havella 9y ago
  This is true, but incomplete. Such unsophisticated investor has to control his frequency of trading, and also the frequency of trading of his etf or mutual fund. Any fund needs to do trading, re balancing, etc. So there's a double layer where ppl get charged 'the vig'.
nostrademons 9y ago
Heh. My second project at my first employer out of college (back in 2006) was building a system to detect violations of this rule (Reg NMS, if you're curious). We found that there were trade-throughs happening on a daily basis, it was so common that it appeared to be just how the markets worked. Tried to sell it to the SEC and they weren't interested. Then we pivoted to try to sell to traders, so they could prove to clients that they were getting the best execution possible (or occasionally better than the best possible, but that gets washed out of the aggregate stats). They were very interested, until the data showed that most of the ones who don't already have a proprietary version of this were actually doing terribly on their trade executions. Then they weren't interested at all. I ended up leaving the company - and the financial industry - at that point. My take-away from the whole experience is that the game really is rigged. I remember reading a non-mainstream economics paper in college that modeled the world not in terms of price equilibria or value-add, but assumed that all actors were basically bandits who would try to take whatever they could by force or deceit. It was horribly depressing at the time, but it actually seems like a more accurate model of how the world really works, the remarkable part being that democratic capitalism has managed to channel the impulses of those bandits (while still being utterly crooked) into a system that on a macro-level basically kinda/sorta works.
- neuronexmachina 9y ago
  > I remember reading a non-mainstream economics paper in college that modeled the world not in terms of price equilibria or value-add, but assumed that all actors were basically bandits who would try to take whatever they could by force or deceit. If you can find the paper I'd love to see it.
  - nostrademons 9y ago
    Ooh, I think I got closer, though I still haven't found the exact paper. Search for the work of Mancur Olson. I think "Dictatorship, Democracy, and Development" was the paper, but I just got a JStor link, so I'm not sure it was exactly it.
- justadeveloper2 9y ago
abhi3 9y ago
I see no social benefit that accrues from allowing trading (vs. investing) in the stock market. The usual arguments that traders make in its favor are just a plain attempt at legitimizing their stealing from market participants who are less sophisticated and resourceful. 1) Efficient price discovery - Individual stock prices often move 20,30,50%+ in short periods of time, prices can't be efficient with such high volatility. Trading more likely causes inefficient pricing due to speculations, margin calls, trigger orders. 2) Liquidity - Sure they do increase liquidity in the market but as long as sellers can find buyers I don't see any benefit from increased liquidity other than (3) 3) Bid/ask spread - I'll admit that lower spreads are desirable and traders to play a vital role in keeping it so, but I'll question how important it is for a long term investor if has to cover a spread of an extra 0.1% and then weigh that against the social cost of tens of billions of dollars worth of wealth transfers from retail traders to some HFT shops in New York.

160 points by chollida1 9y ago

Pxtl 9y ago

Remember when Sanders proposed a small fee on every trade on Wall Street to discourage high frequency trading and to recoup some value from the market? Remember how he was widely pronounced deranged for suggesting that there should be a fee associated with trades? How it would destroy the market? Funny, that.

QAPereo 9y ago
Common sense and basic regulations to protect people and economies have no place in this laughable economy. What you're describing, what Sanders proposed, would put a dent in the profits of some of the wealthiest, most powerful, and most soulless people in the world. Of course it was shot down, that's one way to tell that he was cutting close to the bone.
- stcredzero 9y ago
  would put a dent in the profits of some of the wealthiest, most powerful, This is most certainly factual. and most soulless people in the world. This is a factually unsupportable adhominem. Sentiment that contributes to outrage on social media is a form of cultural pollution. People use it for short term gain, but it's a kind of externality which is tearing society apart. (FWIW, I dislike this situation as well.) (Yes, this is obligatory: https://www.youtube.com/watch?v=rE3j_RHkqJc https://www.youtube.com/watch?v=rE3j_RHkqJc )
  - jorjordandan 9y ago
    Outrage is a form of cultural pollution? So no one should ever be outraged by peoples actions? Or only in the right circumstances? Who gets to say when its justified, if ever?
    - thanatropism 9y ago
      All of those questions apply to air pollution.
      - jorjordandan 9y ago
        That's true. I guess the difference is that outrage has a function, and can have a utility, so I don't think it's a good metaphor. Viewing it as just 'pollution' implies that it has no value. It's only 'pollution' to those who don't agree with the outrage.
        stcredzero 9y ago
        That's true. I guess the difference is that outrage has a function, and can have a utility, so I don't think it's a good metaphor CO2 is the best analogy. There needs to be a certain amount for the utility. Too much and too little are detrimental. Viewing it as just 'pollution' implies that it has no value. This is an all-or-nothing fallacy. It's the amount produced which is the issue in the analogy. In reality, there are also finer grained quality issues. To further demonstrate the application of your fallacy, I would agree that there are problems with under-prosecution of certain crimes. https://www.youtube.com/watch?v=rHMGbtGGdbQ https://www.youtube.com/watch?v=rHMGbtGGdbQ However, when the outrage which has reached a fever pitch such that people start calling for abrogation of Innocent Until Proven Guilty based on inherent characteristics, something has gone wrong. Our culture has known, since the times in which the Magna Carta was written, that the protection of the individual from arbitrary imprisonment and prosecution is essential to prevent totalitarian abuses of power. Outrage is easy to over use, its over-use is readily rewarded and such over-use is clearly everywhere, even despite the fact that it's only the excesses of the "other side" that are easily discerned.
        jorjordandan 9y ago
        >This is an all-or-nothing fallacy Not really. Pollution is uniformly unwanted by definition (without you changing the goalposts to CO2, which is naturally occurring, and the naturally occurring CO2 would not be considered as pollution, whereas human created CO2 would). In fact, let's stick with the wikipedia definition: "Pollution is the introduction of contaminants into the natural environment that cause adverse change." Outrage, on the other hand, may be very much wanted, or even required. I'm not defending ALL outrage. I'm defending that some outrage may occasionally be warranted. You saw an all or nothing fallacy where there was none. To recap - Argument: Outrage is cultural pollution. My Response: All pollution is unwanted, some outrage may be occasionally wanted or warranted. Your response: Saying pollution has no value is an all-or-nothing fallacy! The worst kind of bad reasoning is the false accusation of a fallacy. Because the person making that claim should know better.
harryh 9y ago
Fees on trading would not meaningfully discourage high frequency trading and would just be passed on to buyers and sellers of stock in the form of larger bid/ask spreads.
- dm3 9y ago
  Something like a minimum holding time is a more reasonable approach. However, there's not a clear cut answer in any case.
  - harryh 9y ago
    Before you start talking about what would be effective in reducing the amount of high frequency trading you have to make the case that reducing HFT is a good goal in the first place. This is a challenging case to make.
    - Jweb_Guru 9y ago
      Why is it challenging? What conceivable valuable function does front-running serve?
      - dsacco 9y ago
        High frequency trading is not front running. It's becoming truly kafkaesque how often this claim comes up on Hacker News.
        theseatoms 9y ago
        Or kafkaesque how often these separate concepts are conflated in popular usage.
      - harryh 9y ago
        First you have to tell me what you think front running means. Originally front running had a very specific definition: Someone who has a fiduciary responsibility to me cannot use my trading interests to execute their own trades before they execute my trades. This sort of thing is clearly wrong because it can result in someone I've hired delivering subpar execution prices to me. However the term has expanded a lot over the years to mean a lot of different things to a lot of different people. So what does it mean to you?
jstanley 9y ago
What you call "recouping some value from the market", others call "stealing some value from the market".
javajosh 9y ago
I've always thought a better solution would be a voluntary market "quantization" at some reasonable human-scale time frame. It would be a little random (to avoid gaming), so all put and asks get resolved "about every hour". There would probably have to be a law to prevent people from running markets at faster time-scales on top of this.
- sseveran 9y ago
  This has existed in various forms for more than 10 years. Nasdaq I believe has 3 or 4 discrete intraday crosses in addition to the opening and closing cross. You don't want it to be random since participants need certainty about when the cross will occur. In addition there are a variety of venues that allow block trading in various forms that market participants can use.
- harryh 9y ago
  This solves fewer problems than you might think. 1) Let's say that trades are resolved at time X. Participants have every incentive to submit all bids/asks as close to time X as possible (microseconds possibly). 2) How do you handle a mismatched number of bids/asks at a given price? Resolving this difficulty without creating bigger problems than the problem you were trying to eliminate is challenging. 3) I'm just a regular guy who wants to buy $1000 of stock as part of my monthly savings plan. With an up to date market I can just buy and sell at the market price and not worry about it. But now I have to be afraid that there has been some big news event in the past hour that will make this hours price much different than last hours. One of the biggest services markets provide is up to date pricing information. Why do you want to take that away from me?
  - zo1 9y ago
    1) You only get to see and make a potential buy/bid for last hour's bid/asks, only. 2) The system itself resolves it. Either it prevents you from making a buy/bid for something that was already "fulfilled" (though this would leak information). Or it accepts them sequentially, and refunds you at the end of the hour. 3) We're not taking that away from you. We'd be taking it away from everyone. You are welcome to see last hour's trades and try trade on it. Additional points: 2) Another option. If your order didn't make it, the system can simply let it "stay" on on the system to be fulfilled in the future. If someone wants to take you up on the offer you made, they'll do it in the next hour, or any subsequent hour.
walkingolof 9y ago
A variant on the Tobin Tax https://en.wikipedia.org/wiki/Tobin_tax https://en.wikipedia.org/wiki/Tobin_tax
dsacco 9y ago
Your comment, while snarky, isn't a refutable statement. As it stands you seem to be endorsing some position, which I'm inferring is in favor of Sanders and maybe in opposition to HFT. I can't really tell what you're getting at precisely though. > Remember how he was widely pronounced deranged for suggesting that there should be a fee associated with trades? How it would destroy the market? Who said this, specifically? What is your point in bringing it up? > Remember when Sanders proposed a small fee on every trade on Wall Street to discourage high frequency trading and to recoup some value from the market? I'm getting the sense that you'd be in favor of this - can you tell me why, in your own words, you believe we should be trying to "recoup value" from the activities of high frequency traders?
- Pxtl 9y ago
  It's mostly about how skimming a tiny bit of cash off of every trade is perfectly good for the exchanges to do to john Q public, but heaven help us if real traders have to put up with that. I have no idea if Sanders' plan was good or not, I'm more grousing about how critically important principles of how the market is supposed to work seem to vary depending on whether you're talking about consumer-level investments vs. institutional investors.
  - jstanley 9y ago
    I still don't get what you're trying to say. Who is "skimming a tiny bit of cash off of every trade"? Do you buy into the notion that HFT is somehow so fast that it can travel back in time and jump ahead of orders that have just executed?
    - deleted 9y ago
      [deleted]
    - JetSpiegel 9y ago
      Why is it OK for the exchange to charge fees from every trade motivated by profit, but if the government does it to redistribute, it is somehow labelled as "market distortions"? Either fees on every trade distort the market, and in that case the exchange is distorting the market, or they don't have appreciable effects and the government can levy that tax. My opinion is that this a political opinion, and pretending that this is an economic concern is just a smokescreen.
corporateslave3 9y ago
You are aware that HFT is essentially dead? It isnt profitable anymore and most of those firms are failing. Trading situations that allow for easy outsized profits like that disappear very fast.
- lin_lin 9y ago
  Is this true? Any links? Not doubting you, just interested.
  - corporateslave3 9y ago
    Source is I work in the industry. Look at the price of VirtuFinancial stock, who was at one time a premier HFT firm. The amount of disinformation surrounding HFT is staggering.
    - keenerd 9y ago
      Unrelated, but I have a question for you. I've been unable to find a good answer for how exactly HFT benefits the average person. Stuff like antibiotics, electric lights, refrigeration, washing machines, phones, computers all have all led to direct and immediate quality of life improvements. Often on the order of a tenfold improvement for that activity, and they are easily within reach of the majority of the population. What would become 10x worse for the average person if HFT were to vanish overnight? Would mortgage rates massively spike? Would bond rates plummet? Is there some quantifiable financial thing that would regress to whatever terrible situation we were in back in 1990 before HFT was substantial?
      - corporateslave3 9y ago
        Right now the newest investment strategies are taking alternative data sets, like mining website data, and using it to predict stock prices. What value does that provide to the average guy? Nothing but market efficiency. It's just how the industry works.
rramdin 9y ago
Sanders lacks fundamental understanding of the stock market, indicated by his unsubstantiated refrain "the business model of Wall Street is fraud." First, there are already per-trade regulatory fees, so this isn't a novel idea. Second, this is necessarily a regressive tax: wider spreads mean worse prices for the ultimate owner of stocks; that tax is applied whether trades are retail (you and me), institutional (big Wall Street firms, i.e. IEX's clients), or HFT (small tech firms).
- lightbyte 9y ago
  >Second, this is necessarily a regressive tax You're putting your own ideas into his mouth. Nobody said anything about the fee being a flat fee, or that it would apply to every single trade in existence.
  - pdeuchler 9y ago
    I'm saying this as a Sanders supporter, but maybe he should have been more specific and detailed about his proposals then. My two biggest frustrations with Sanders were 1) his inability to understand that it was going to take more than just mere backbone and higher taxes to reform wall street and 2) his foreign policy
    - lightbyte 9y ago
      >but maybe he should have been more specific and detailed about his proposals then. I'll agree with you there, his proposals were very similar to Trump's in that they did not have much substance, just broad ideas.
- Chardok 9y ago
  Your reasoning seems to ignore the evidence in this article; there does seem to be a business model of fraud and, even if he did lack a fundamental understanding of the stock market, I would hope we could all agree that action needs to be taken to regulate and restrict these illegal practices. Perhaps it would not be the specific terms Sanders was describing, but unfortunately he was the only viable candidate that ostensibly wanted to do so.
alpos 9y ago
I suspect this debate was/is largely conducted by uninformed parties. There already is a small fee imposed on every trade due to gov't regulation. https://www.sec.gov/fast-answers/answerssec31htm.html https://www.sec.gov/fast-answers/answerssec31htm.html At best, there could be a meaningful debate over increasing the appropriation to the SEC and adding new regulation mandates for them. The question over whether we should have transaction fees should already be settled by the fact that the SEC is currently funded by such fees.
- jcranberry 9y ago
  IIRC, the bill he proposed had taxes on the value of trades, such as 1% per stock per trade, .05% (maybe off by OOM) on options, etc.

Pxtl 9y ago

Reading further: this really feels like PR for IEX.

amelius 9y ago

Can't practices like these not be considered in the same way as "hacking" and thus made illegal? After all, hacking = influencing electronic systems to make them function in ways they are not intended to function. Replace "electronic" by "legal/financial" and there you are.

nerdponx 9y ago
Sure, but the people standing to make millions of dollars on this particular illegal activity are also the people making the rules and laws.
deong 9y ago
One immediate problem -- this is how these systems are made to function. It's not like the kickback is happening behind the back of the operators of the exchanges. It's not "hacking" to follow the rules as they're laid out.
- amelius 9y ago
  So you are saying these systems are bug-free by design/definition? That's quite a statement :)
  - ghostbrainalpha 9y ago
    That's so crazy far from what he is saying. If you enter a building through a front door, you are not "hacking", you are entering the building in the way the designer intended. If you enter a building through a window, you are "hacking" because you are exploiting an unintended ability that the designer did not intend to give you. Just because the comment you replied to said that "kickbacks" are a front door intentional design, you can't then claim he said that the building has no windows. He has said nothing about windows. He just said don't call that door a window, because its not, its a fucking door.
    - amelius 9y ago
      Yes, it's a door, but they told the regulators it was a window. That's a bug in the spec.

chollida1 9y ago

Someone will call this a submarine article for IEX but I don't think this is far, it was written as an oped by Dave Swensen, the famous head of Yale's endowment fund. Just so the issue is clear, almost all hedge funds don't do active/passive also called maker/taker, but rather they pay a flat fee per share traded to their sell side broker. The sell side broker will then collect/pay the exchange fees. This means that the sell side broker has an incentive to post the order to a market that pays them the largest rebate rather than the market with the shorted queue. The buy side clients are not getting worse prices necessarily as you still need to fill orders at the NBBO. So the argument would be, why not post on the exchange with the shortest queue always. And the response would be that 1) markets move fast, and what is the shorted queue when the order is dispatched may not be the shortest queue when the order arrives. 2) Other markets may be more active, ie more orders routed to them first so the shortest queue may not be the best place to route at all. To be fair its not a consensus that the IEX approach is better than maker taker, there is no clear consensus as to what the correct approach is even when you take out the HFT opinions. In case anyone wants to see here's a link to the BATS cash equities execution quality page. https://www.bats.com/us/equities/market_statistics/execution_quality/ https://www.bats.com/us/equities/market_statistics/execution...

harryh 9y ago
Worth noting that the head of Yale's endowment fund and IEX's interests are aligned. The business model of IEX is to convince naive investors that high frequency trading is somehow screwing them and that they should choose to route their orders to IEX in order to avoid it. They then facilitate trading between these naive investors and large institutional investors (like Yale) who want to move large blocks of shares before the market moves against them.
- wbl 9y ago
  Parent is correct. Uninformed order flow is what HFT wants to trade against: people buying because they have cash and selling because they need it. HFT doesn't want to trade with people moving prices at the old prices.
9y ago

osrec 9y ago

I think this is well known. The real problem is that the traders are much smarter than the regulators, and their ability to obscure far exceeds the regulators' ability to untangle. Incentivise your regulators better and you might end up attracting some real talent who can unearth the tricks the crafty traders pull every day (I am an ex trader, from a bulge bracket IB, and trust me, what some of these guys do is not at all kosher).

osrec 9y ago
Also, there is an argument for more time controlled auctions rather than giving everyone a continuous look at the order book. Much like the start of day auction, you could have something similar every minute, where traders submit prices but matching only occurs at the end of each minute. This would certainly put an end to the annoying high/low ticking that happens all too often.
- harryh 9y ago
  There is no good argument for this. The problems you think it might solve...it doesn't solve. Hint: if the minute long auction closes at precisely the minute boundary at what time do you want to put your orders in?
  - osrec 9y ago
    Hint: If you can't see the orders during that minute, it doesn't matter when you submit...
    - harryh 9y ago
      Might other things be happening in the world besides orders on a single exchange?
      - orclev 9y ago
        It seems like that would only matter if you assume that a bid can't be canceled or changed. Assuming you're free to cancel or modify a bid right up until the close, whether you put the bid in at the start of the window or the close of the window wouldn't matter as you could always modify or cancel the bid as new information comes in.

netcan 9y ago

This is a quasi-inevitable side issue. Generally, investors eat transaction costs and aren’t party to decisions that affect them. There are related issues in many 3-party systems. In medicine, doctors, insurers and other people tend to decide on (prescribe) products and services. The consumer eats the costs (sometimes it’s a 4th party) and decision makers have an incentive to take kickbacks. The regulator could do stricter rules/policing, for a partial fix.

bradleyjg 9y ago

I realize this in the op-ed section of the paper, but where the issues are complex and most people are totally unfamiliar with them, printing one side of the story feels a lot like endorsement. When Flash Boys came out there was extensive discussion here on HN about IEX's claims. I was convinced that Lewis at the very least exaggerated the benefits of thier speedbump model. On the issue of rebates, I'd keep on eye out for other takes (especially from Matt Levine at Bloomberg) before forming any firm opinions.

bko 9y ago

Every article I read on the topic has a plug for IEX, an exchange that "refuses to pay kickbacks" which make me think that these peices are basically advertisements. Either kick backs serve no purpose and IEX will thrive especially in this environment where where investors are clamoring for yield. Or it does have some purpose or is not significant. Putting in regulations would likely lead to more complexity and regulatory capture

harryh 9y ago
Kickbacks to brokers that are sending out retail flow allow those brokers to reduce commissions on trading. These reductions have gone all the way to zero in a lot of places.
- chollida1 9y ago
  > Kickbacks to brokers that are sending out retail flow allow those brokers to reduce commissions on trading. These reductions have gone all the way to zero in a lot of places. I think you are wrong here. Most consumer orders are active meaning typically the broker would pay the maker fee instead of collecting a kick back. I mean, inverted exchanges are a thing but do very little volume. Now pay for order flwo from wholesalers like Citadel is a big win for brokerages and does help to reduce trading fees.

harryh 9y ago

The problem with this essay is that it conflates the needs of a large institutional investors like Yale with the needs of small investors (like you and me). In many cases these needs can be inverted. Yale wants to buy and sell large blocks of stock without the price moving away from them. I want to buy and sell stock at the best possible price with all of the latest information transmitted to the market as fast as possible. This is why Yale would prefer to trade in "darker" exchanges like IEX and most retail investors should prefer other exchanges.

hectorr 9y ago
Yes. This isn't Wall Street is bilking the common man. This is one side of Wall Street trying to squeeze the other side, and appealing to the public to help their case. It's a tough market for big money right now. Opportunities are scarce and their customers are pushing down costs, so they're putting pressure on their suppliers.
pm90 9y ago
> small investors (like you and me) Uhmm, maybe you, but definitely not me. Most people I know (I agree though, I live outside NYC or any big financial center) don't give a rat's ass about where the market is going, which stocks are good and which are bad. We invest a lot into our 401(k)'s and the rest we put in index funds. So my interests are definitely aligned more with large institutional investors. BTW my personal investment strategy is not to get some kind of windfall during retirement. The only thing I really look for is that if I saved well, I will have enough to retire on (i.e. not ask for others for monetary help). I just want my funds to not fail.
- harryh 9y ago
  That makes you like me. You aren't buying and selling based on proprietary information about where you think the market is going, but because of your cash flow situation (You save $1000 a month now, and hope to withdraw $5000 a month in retirement or whatever).

hendzen 9y ago

So lets say they extend Reg NMS to require sending the order to the NMS exchange with the shortest queue at the BBO? I can imagine some potential ways that could be gamed as well...

NicoJuicy 9y ago

Don't get me started by putting out warnings of stocks they are shorting for no reason. It's despicable. Not only companies, but also countries. While America will always be aaa

inthewoods 9y ago

Taking aside the speed bump that IEX provides, how it is meaningfully different from Liquidnet?

andrewla 9y ago

Some of the underlying data here [1] on the effective spreads of the various market centers. Bats also publishes the definitions of these metrics [2]. They seem to be difficult to game, since they're derived from actually executed trades compared to the midpoint NBBO (that is, the national best bid/offer -- by definition, at that time, cheaper than any exchange to buy, and more expensive than any exchange to sell). The low volume numbers make it slightly more difficult to determine significance, but the effect does appear to be real, which I found slightly surprising. [1] https://www.bats.com/us/equities/market_statistics/execution_quality/ https://www.bats.com/us/equities/market_statistics/execution... [2] https://www.bats.com/us/equities/market_statistics/execution_quality/definitions/ https://www.bats.com/us/equities/market_statistics/execution...

dsacco 9y ago

Articles like this are so mind-numbingly frustrating because they completely muddle the water for any reasoned debate about the true advantages and disadvantages of high frequency trading. > Wall Street has developed a new way, clouded in obscurity, to fleece the hundreds of millions of Americans who have money invested in company pension plans, mutual funds and insurance policies. Well, that sure is a neutral way of presenting it, isn't it? > Instead, brokers routinely take kickbacks, euphemistically referred to as “rebates,” for routing orders to a particular exchange. As a result, the brokers produce worse outcomes for their institutional investor clients — and therefore, for individual pension beneficiaries, mutual fund investors and insurance policy holders — and ill-gotten gains for the brokers. "Kickbacks"...that's a strategic word to use. Technically true, but more importantly, emotionally loaded. "Kickback" is not often associated with positive sentiment. "Union leaders receiving kickbacks"..."politicians receiving kickbacks"... More importantly, this claim is neither axiomatic nor defended by the article. How precisely do these rebates harm investors? > The diffuse harm to individuals and the concentrated benefit to Wall Street create yet another way in which the system is rigged, justifiably eroding public confidence in the fairness of the financial system. What the hell? The rhetoric is so heavy-handed - is there no attempt at an unbiased presentation here? I understand this is an opinion piece but come on. > And yet, brokers choose longer queues hundreds of thousands, if not millions, of times a day. Publicly available trade and quote data show that the queues to buy or sell stock are considerably longer on exchanges that offer kickbacks. Even though the queues decrease the likelihood of getting a trade completed and impair the price performance after the trade is executed, brokers still direct trades to these places because of the kickbacks they receive. Yes, that's interesting. But how does that correlate with the liquidity available on these exchanges? If you have reduced liquidity, do you want to be in a smaller queue with less price competition? This isn't even addressed. > One exchange, the IEX, refuses to pay rebates. Created by Brad Katsuyama (whose odyssey to defy the ethos of Wall Street was told in Michael Lewis’s “Flash Boys”), IEX has a speed bump that prevents high-frequency traders from front-running ordinary investors. (Yale University, where we work, has a de minimis exposure to IEX through an investment by one of the university’s external managers.) Okay, so we have blatant hero worship and the claim that high frequency trading is front running in 2017. And this article has reached the front page of Hacker News. > BATS (a rival stock exchange founded by a high-frequency trader) posts data on this measure of execution quality for the major exchanges on its website. According to our calculations, in the six months before IEX’s arrival, Nasdaq led the effective spread rankings in the widely used Standard & Poor’s 500 index, with the number of top ranks ranging from 169 to 216 stocks. Okay, where are these calculations? What is the point of making the claim if you don't quantify it whatsoever?!

heptathorp 9y ago

> IEX has a speed bump that prevents high-frequency traders from front-running ordinary investors. Anyone care to explain, in precise terms, how a high-frequency trader front-runs ordinary investors on a typical exchange and how putting a delay on all incoming orders prevents it?

physguy1123 9y ago
They don't. That term has basically become an advertising slogan for IEX. HFT is great for retail investors because you trade cheaper and faster. Usually retail investors get price improvement over the market since HFT brokerages compete for retail flow. HFT is bad for institutional investors who don't want to invest in sophisticated execution since the market reacts very quickly to large orders. Institutional investors include firms like Vanguard or firms that greatly inform price discovery, so it's worth thinking about both sides of the market and not just optimizing for best retail execution. IEX is by and for large institutional investors. IEX's delay doesn't apply to one (multiple?) of their hidden/protected order types, which allows larger orders resting on the book to avoid market impact and execution at 'bad' prices as these orders can move away from the top of the book in 'unfavorable' market conditions.
rramdin 9y ago
Michael Lewis and Brad Katsuyama misuse the term "front running," either willfully to stir people up or out out of ignorance. Front-running refers to the practice of a broker holding customer orders, but trading for their own accounts at a better price before executing their client's orders (i.e. using privileged information for their benefit). Katsuyama's uses "front running" to describe a practice where if an HFT sees a price change happening (i.e. trades are being reported or a level is going away), they quickly go and remove liquidity before others have gotten a chance to react to this new information. An HFT with faster technology will beat an institutional trader in this race (even though all market participants must always send bona fide orders that they intend to have filled). IEX solves this problem by slowing down incoming orders to give special orders on the exchange (D-pegs, which automatically change prices as the prevailing market price changes) an opportunity to reprice. The HFT has put millions of dollars into fast technology, whereas the institutional investment firms have presumably put millions of dollars into long term research. IEX allows institutional investors to outsource this technology investment to the exchange, which puts an artificial delay to give its matching engine time to reprice special orders during market moves.

rramdin 9y ago

Whenever I see these IEX articles, I think it is useful to point out that they generally describe 3 types of traders: 1) Retail - you and me, who make money through asset appreciation 2) Institutional (IEX's client-base) - big Wall Street firms, big money managers, big pensions, who make money by charging fees 3) HFT - small technology firms, who make money through trading

Stradivarius 9y ago

Kickbacks result in worse trade execution, brokers that route client orders for kickbacks violate their duty of best execution. So, not only is this unethical, it's arguably illegal.

aphextron 9y ago

More generally, consumers have been fleeced and left out to dry over the past 10 year economic cycle. Take a look at a graph of the S&P500 from 2009-2017, then look at consumer interest rates of 0.5% (in a 'high yield' savings or CD account). It simply makes no sense. We simply cannot build wealth any longer. Baby boomers had CD rates of >10% [0]. Think about that for a moment. [0] http://www.forecast-chart.com/rate-cd-interest.html http://www.forecast-chart.com/rate-cd-interest.html

deleted 9y ago
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usefulcat 9y ago
> Baby boomers had CD rates of >10% [0]. Think about that for a moment. My aunt and uncle (who happen to be baby boomers) bought their first house in the early '80s when inflation was rampant. Their first mortgage had something like an 18% rate. It should be obvious that a 10% CD rate is worthless if inflation is nearly as high or higher.
- dragonwriter 9y ago
  > It should be obvious that a 10% CD rate is worthless if inflation is nearly as high or higher. Well, yes, that would be useless, but that's not what happened for most of the time with high CD ratee. The period of CD rates ranging from just under 10% to over 17% in the 1978-1984, saw inflation peak at 14.8% and spend much of the time below 5%. Recently CD interest rates are not only low but for many years below inflation most of the time; in the period of high interest rates and high inflation, CD rates were still above inflation.
dgudkov 9y ago
This is one of the most disturbing charts I've seen recently. Especially with the 45yr history.

kcorbitt 9y ago

> Although the harm suffered on each trade is minuscule — fractions of a cent per share — the aggregate kickbacks amount to billions of dollars a year. That's the money quote. 99% of retail investors should be buying stock infrequently, maybe once a month when the paycheck comes in. Ideally you're buying one or a few index funds, so the total number of transactions is small. If you're in that boat, this order-of-fulfillment tax really doesn't affect you and can be entirely ignored. Your returns are really only in danger of being dragged down by this thing if you're executing many trades per day. But if you're doing that, you had better be a sophisticated investor anyway, or else you're definitely losing money.

havella 9y ago
This is true, but incomplete. Such unsophisticated investor has to control his frequency of trading, and also the frequency of trading of his etf or mutual fund. Any fund needs to do trading, re balancing, etc. So there's a double layer where ppl get charged 'the vig'.

nostrademons 9y ago

Heh. My second project at my first employer out of college (back in 2006) was building a system to detect violations of this rule (Reg NMS, if you're curious). We found that there were trade-throughs happening on a daily basis, it was so common that it appeared to be just how the markets worked. Tried to sell it to the SEC and they weren't interested. Then we pivoted to try to sell to traders, so they could prove to clients that they were getting the best execution possible (or occasionally better than the best possible, but that gets washed out of the aggregate stats). They were very interested, until the data showed that most of the ones who don't already have a proprietary version of this were actually doing terribly on their trade executions. Then they weren't interested at all. I ended up leaving the company - and the financial industry - at that point. My take-away from the whole experience is that the game really is rigged. I remember reading a non-mainstream economics paper in college that modeled the world not in terms of price equilibria or value-add, but assumed that all actors were basically bandits who would try to take whatever they could by force or deceit. It was horribly depressing at the time, but it actually seems like a more accurate model of how the world really works, the remarkable part being that democratic capitalism has managed to channel the impulses of those bandits (while still being utterly crooked) into a system that on a macro-level basically kinda/sorta works.

neuronexmachina 9y ago
> I remember reading a non-mainstream economics paper in college that modeled the world not in terms of price equilibria or value-add, but assumed that all actors were basically bandits who would try to take whatever they could by force or deceit. If you can find the paper I'd love to see it.
- nostrademons 9y ago
  Ooh, I think I got closer, though I still haven't found the exact paper. Search for the work of Mancur Olson. I think "Dictatorship, Democracy, and Development" was the paper, but I just got a JStor link, so I'm not sure it was exactly it.
justadeveloper2 9y ago

abhi3 9y ago

I see no social benefit that accrues from allowing trading (vs. investing) in the stock market. The usual arguments that traders make in its favor are just a plain attempt at legitimizing their stealing from market participants who are less sophisticated and resourceful. 1) Efficient price discovery - Individual stock prices often move 20,30,50%+ in short periods of time, prices can't be efficient with such high volatility. Trading more likely causes inefficient pricing due to speculations, margin calls, trigger orders. 2) Liquidity - Sure they do increase liquidity in the market but as long as sellers can find buyers I don't see any benefit from increased liquidity other than (3) 3) Bid/ask spread - I'll admit that lower spreads are desirable and traders to play a vital role in keeping it so, but I'll question how important it is for a long term investor if has to cover a spread of an extra 0.1% and then weigh that against the social cost of tens of billions of dollars worth of wealth transfers from retail traders to some HFT shops in New York.