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The Market War Between Traders and Investors

16 points by pathik 16y ago

chopsueyar 16y ago
Conclusion: "Whom should the market be designed to serve: Short-term traders or long-term investors?"
- lrm242 16y ago
  The concluding question from the article is fundamentally flawed and completely invalid. The market functions because people who want to buy are matched with people who want to sell. This fundamental concepts requires there be an asynchrony in market participant motivations. Leaning the market to one type of participant (let's say, long term value investors) will disincent others to participate. By doing this, the market will find it harder and harder to serve those it deems most important because no one will take the other side of their trades. People seem to think that markets are there to serve them. In reality, markets are there to serve two people at once. The unique pairing of a buyer and seller is required for the market to function and by definition requires the market to cater to no one. It simply must provide a service that is deemed fair by all participants. Fair to the point that they are not disincented to participate. From the article, if the mutual funds actually stand up and say, "You know what, I'm not trading Tape C securities anymore, especially not on BATS or Nasdaq. I will now only trade Tape A, NYSE listed, specialist controlled stocks" you can bet that the other exchangse will listen and do what's required to maintain their order flow. Of course, the mutual fund managers WON'T do this precisely because they know whatever disincentive they are faced with by participating in venues where automated trading is prevelant are far outweighed by the benefits they receive by trading there. This is nothing more than a group of people wanting the good old days back. Times change, to keep up you must adapt. Those mutual funds need to invest in better execution. They need to learn to play in the new world and stop trying to introduce misleading rules into the system to fix the game like it's 1993. Markets change, if you want to keep playing you change too.
  - StrawberryFrog 16y ago
    I'm struggling to see exactly what you're saying beyond "the way things are now suits me fine, and you can't do anything about it, so nyah to you".
    - lrm242 16y ago
      Interesting. How about this: the rules of the market must be as general as possible to encourage as many participants with competing motivations to participate. Doing anything but this will create a market that is, by definition, less efficient and more costly. Simple enough for you?
      - borism 16y ago
        Less efficient and more costly might be acceptable trade-off depending on "by how much?" Like you say market shouldn't be favoring one type of participant over another. Seems to me like market favors HFT guys more than others these days.
        joe_the_user 16y ago
        ... except he's saying the market should accommodate them... As far as I can see, HFT makes the market more costly, allocates capital less efficiently and doesn't do so for any "greater good" but the enrichment of a connected few who talk about a rather odd kind of efficiency ... sure, tapping your competitor's phone is another highly "efficient" way to make profits as well.
        borism 16y ago
        care to explain the difference between "shouldn't be favoring" and "should accommodate"?
        joe_the_user 16y ago
        "Should accommodate X" means that you should not make policy that is unfavorable to X. He's saying that the market should be open to all strategies. There's no statement in there saying that the market should stop favoring one or another strategy. This comes because others have have implied that the present system is favoring HFT and he's basically rebutting those claims using this argument.
ig1 16y ago
There's absolutely nothing stopping the big institutional players setting up a private secondary exchange between themselves which doesn't allow short-term traders (even using something like a dark pool if they want to keep sizes quiet). The reason they don't is because exchanges that have short-term traders have more liquidity and better prices.
- joshu 16y ago
  And in fact they did, years ago. Lots of block trades go across posit or whatever.
- lrm242 16y ago
  They do set up off-exchange venues. Any of the block trade matching services, for example. There are also sources of liquidity that require non-trivial amounts of capital to access like dark pools. Regardless, each of these venues provide additional service that compensates for their reduced liquidity. Posit, for example, helps you match large, anonymous block trades at prices that might be inferior to the NBBO, but only inferior within limits. The benefits to you, the user of posit, are clear. Get very large orders crossed with some bounded market impact. For this, you're happy to pay the price.
hristov 16y ago
There is absolutely no reason anybody should be able to buy information about order flow. High freq traders like to pretend that they make money because they are so smart and so fast, but the real reason they make money is because the exchanges are willing to sell them information about somebody else's orders before those orders are executed. That of course is highly unfair to the person whose orders are being sold. Selling order flows is basically an act of greed by the exchanges which screws over most of the stock trading/investing population in favour of the high freq traders and also dramatically destabilises the markets. This is terrible because it is the ordinary investors that perform the function that the market was created for (providing capital to business) and this high frequency trading stuff appears simply as a huge tax on ordinary investment. Congress should simply ban the exchanges from selling any information about incoming orders. If I order to buy or sell a stock the only thing I want from the exchange is to buy or sell the stock for me. I do not want the exchange to tell somebody else about my order before it is executed so that other person can screw me over. If the high freq traders are really smart they should figure out how to make money without getting the order flow info.
- lrm242 16y ago
  You don't know what you're talking about, unfortunately. No one buys order flow. The only time your order won't receive price time priority on the US equities markets is when your broker internalizes the order and matches or improves the price as compared to the NBBO. And if you're thinking flash orders then you're also wrong. Not only is the practice not used anymore, but even if you're order is flashed it will only match if the price is improved.
  - beagle3 16y ago
    Why do you think flash orders are not practiced anymore? The SEC hasn't banned them, and AFAIK some brokers still flash their clients orders before executing them. > but even if you're order is flashed it will only match if the price is improved. I don't think you understand how flash orders work -- flash orders tell some 3rd party what YOU will be doing in the next second, enough time for that 3rd party to snatch all offers at that price, raising the price for you. Of course if you had a limit order it wouldn't match; but now, if you still want to buy those shares (which most flashed clients do, for whatever reasons), you have to pay a higher price. Incidentally, it's almost always that 3rd party which offers those shares to you -- guaranteeing their profit.

16 points by pathik 16y ago

chopsueyar 16y ago

Conclusion: "Whom should the market be designed to serve: Short-term traders or long-term investors?"

lrm242 16y ago
The concluding question from the article is fundamentally flawed and completely invalid. The market functions because people who want to buy are matched with people who want to sell. This fundamental concepts requires there be an asynchrony in market participant motivations. Leaning the market to one type of participant (let's say, long term value investors) will disincent others to participate. By doing this, the market will find it harder and harder to serve those it deems most important because no one will take the other side of their trades. People seem to think that markets are there to serve them. In reality, markets are there to serve two people at once. The unique pairing of a buyer and seller is required for the market to function and by definition requires the market to cater to no one. It simply must provide a service that is deemed fair by all participants. Fair to the point that they are not disincented to participate. From the article, if the mutual funds actually stand up and say, "You know what, I'm not trading Tape C securities anymore, especially not on BATS or Nasdaq. I will now only trade Tape A, NYSE listed, specialist controlled stocks" you can bet that the other exchangse will listen and do what's required to maintain their order flow. Of course, the mutual fund managers WON'T do this precisely because they know whatever disincentive they are faced with by participating in venues where automated trading is prevelant are far outweighed by the benefits they receive by trading there. This is nothing more than a group of people wanting the good old days back. Times change, to keep up you must adapt. Those mutual funds need to invest in better execution. They need to learn to play in the new world and stop trying to introduce misleading rules into the system to fix the game like it's 1993. Markets change, if you want to keep playing you change too.
- StrawberryFrog 16y ago
  I'm struggling to see exactly what you're saying beyond "the way things are now suits me fine, and you can't do anything about it, so nyah to you".
  - lrm242 16y ago
    Interesting. How about this: the rules of the market must be as general as possible to encourage as many participants with competing motivations to participate. Doing anything but this will create a market that is, by definition, less efficient and more costly. Simple enough for you?
    - borism 16y ago
      Less efficient and more costly might be acceptable trade-off depending on "by how much?" Like you say market shouldn't be favoring one type of participant over another. Seems to me like market favors HFT guys more than others these days.
      - joe_the_user 16y ago
        ... except he's saying the market should accommodate them... As far as I can see, HFT makes the market more costly, allocates capital less efficiently and doesn't do so for any "greater good" but the enrichment of a connected few who talk about a rather odd kind of efficiency ... sure, tapping your competitor's phone is another highly "efficient" way to make profits as well.
        borism 16y ago
        care to explain the difference between "shouldn't be favoring" and "should accommodate"?
        joe_the_user 16y ago
        "Should accommodate X" means that you should not make policy that is unfavorable to X. He's saying that the market should be open to all strategies. There's no statement in there saying that the market should stop favoring one or another strategy. This comes because others have have implied that the present system is favoring HFT and he's basically rebutting those claims using this argument.

ig1 16y ago

There's absolutely nothing stopping the big institutional players setting up a private secondary exchange between themselves which doesn't allow short-term traders (even using something like a dark pool if they want to keep sizes quiet). The reason they don't is because exchanges that have short-term traders have more liquidity and better prices.

joshu 16y ago
And in fact they did, years ago. Lots of block trades go across posit or whatever.
lrm242 16y ago
They do set up off-exchange venues. Any of the block trade matching services, for example. There are also sources of liquidity that require non-trivial amounts of capital to access like dark pools. Regardless, each of these venues provide additional service that compensates for their reduced liquidity. Posit, for example, helps you match large, anonymous block trades at prices that might be inferior to the NBBO, but only inferior within limits. The benefits to you, the user of posit, are clear. Get very large orders crossed with some bounded market impact. For this, you're happy to pay the price.

hristov 16y ago

There is absolutely no reason anybody should be able to buy information about order flow. High freq traders like to pretend that they make money because they are so smart and so fast, but the real reason they make money is because the exchanges are willing to sell them information about somebody else's orders before those orders are executed. That of course is highly unfair to the person whose orders are being sold. Selling order flows is basically an act of greed by the exchanges which screws over most of the stock trading/investing population in favour of the high freq traders and also dramatically destabilises the markets. This is terrible because it is the ordinary investors that perform the function that the market was created for (providing capital to business) and this high frequency trading stuff appears simply as a huge tax on ordinary investment. Congress should simply ban the exchanges from selling any information about incoming orders. If I order to buy or sell a stock the only thing I want from the exchange is to buy or sell the stock for me. I do not want the exchange to tell somebody else about my order before it is executed so that other person can screw me over. If the high freq traders are really smart they should figure out how to make money without getting the order flow info.

lrm242 16y ago
You don't know what you're talking about, unfortunately. No one buys order flow. The only time your order won't receive price time priority on the US equities markets is when your broker internalizes the order and matches or improves the price as compared to the NBBO. And if you're thinking flash orders then you're also wrong. Not only is the practice not used anymore, but even if you're order is flashed it will only match if the price is improved.
- beagle3 16y ago
  Why do you think flash orders are not practiced anymore? The SEC hasn't banned them, and AFAIK some brokers still flash their clients orders before executing them. > but even if you're order is flashed it will only match if the price is improved. I don't think you understand how flash orders work -- flash orders tell some 3rd party what YOU will be doing in the next second, enough time for that 3rd party to snatch all offers at that price, raising the price for you. Of course if you had a limit order it wouldn't match; but now, if you still want to buy those shares (which most flashed clients do, for whatever reasons), you have to pay a higher price. Incidentally, it's almost always that 3rd party which offers those shares to you -- guaranteeing their profit.