7 ms·

New stock market for long-term investors/reducing high-frequency trading

72 points by ad 16y ago

klochner 16y ago
I like that this innovation is market-driven and introduced as a competing alternative, rather than imposed on existing markets in the form of regulation. It will be interesting to see if this market provides better pricing for non-HFT participants. The HFT outfits claim they net out to better pricing for all ("liquidity benefits"), but that's somewhat hard to swallow given that they're acting as giant money sinks on the market system.
- ewjordan 16y ago
  IMO this is a ridiculous solution to the problem - rather than creating a market that's set up in a way so that high frequency traders can't get an edge (for instance, creating a market structured so that money/speed/location/regulatory status doesn't actually give you any advantage in trading), they're just banning anyone that doesn't fit their definition of "value trader" from the market. It will be interesting to see if this market provides better pricing for non-HFT participants. Given that the only difference between this and a normal market is that a bunch of people offering to buy and/or sell at prices more favorable than the current inside bid/ask are banned from the market, I'm going to go out on a limb and say that no, it won't help pricing very much. Or, rather, what it will do is move profits that would have gone to the HFT firms and shift them to people placing normal, non-speculative/exploitative/high-frequency limit orders. Which means that really, there will be an arms race to figure out how to place orders that are as exploitative as possible without tripping the banhammer. The people that push the closest that limit will make the most money, but spreads will still likely be quite a bit higher than in an unfettered market if the rules have any teeth at all - long term value traders are not good at keeping spreads thin, I'd guess that in the current markets their effects on spreads are not even measurable at all, they are so insignificant...
  - klochner 16y ago
    I honestly didn't read it closely, but apparently you didn't either. Your assertion: Given that the only difference between this and a normal market is that a bunch of people offering to buy and/or sell at prices more favorable than the current inside bid/ask are banned from the market, I'm going to go out on a limb and say that no, it won't help pricing very much. compare that with: Since trading on Light Pool will be more expensive and slower for those firms, they’re not likely to use the ECN, reducing the negative selection investors experience, Galinov said. Contributors, which will include long-term investors, will receive a “significant” rebate when they trade against orders resting in Light Pool, while neutral firms, or those whose behavior falls between the other groups, may or may not get one, Galinov said. So they are trying to get incentives right, rather than outright banning HFTs. Just slowing down the market may be sufficient, try reading this: http://ai.eecs.umich.edu/people/wellman/?p=40 (disclaimer: it's from my Ph.D. advisor, so I'm slightly biased)
    - mapgrep 16y ago
      You: "They are trying to get incentives right, rather than outright banning HFTs." Article: "Firms that fail to meet standards aimed at protecting long- term investors won’t be allowed directly on the Credit Suisse venue" So it's both: They are outright banning AND adjusting incentives.
      - klochner 16y ago
        I think banning is a little strong, article: Opportunistic firms, which Galinov says include some high- frequency trading companies, will be kicked off the platform and prevented from providing orders or executing against bids and offers directly through Light Pool. They’ll instead have to go through the Jersey City, New Jersey-based National Stock Exchange, where Light Pool will also publish its quotes. so they can participate, but they get penalized.
- tptacek 16y ago
  I don't understand that last sentence at all. HFTs demonstrably are liquidity providers. That's a technical term with a real meaning: liquidity is the ability to trade when you want to trade in the quantity you want to trade it, and it most certainly is not a natural property of the market; in order to buy an instrument, someone has to be willing to sell it. Meanwhile, what is a "giant money sink", and how is that what HFTs are? I see how HFTs cut out the middlemen who used to profit from volatility, but the low-tech traders they replaced were not themselves value investors.
  - hackerblues 16y ago
    My take on the money sink comment: If there are n people in the market moving money around in a closed system then the combined wealth of those n people is constant. If another person joins in and is making a net profit then it must be the case that the combined wealth of the original n is decreasing. Admittedly this relies on money not being created or destroyed, which may cause the model to be a poor approximation of reality.
    - tptacek 16y ago
      The stock market is not a closed system. The total value contained in the markets rises over time.
      - klochner 16y ago
        Not as a result of trading. You can argue that getting equity pricing right helps companies with their access to capital, but once you have the pricing right at 100ms I don't understand what value HFT firms are adding by pouring money and talent into getting the pricing right at 10ns. It seems like such an obvious win for society to mitigate the winner-take-all incentive of being first to market on a pricing disparity.
        tptacek 16y ago
        That's slippery slope logic. If the pricing is right at 1s, why pour money and talent into getting it right at 100ms? What's the win to society to "mitigate" an "incentive"? Is the problem volatility? Other forces create huge volatility. Should we penalize anything that creates volatility? Maybe we should end all program trading? Meanwhile, you're effectively vouching for a comment that models the markets as a closed system of people dividing up a single pot of money. Isn't it plain that such a model is wrongheaded?
beoba 16y ago
"The ECN is aimed at institutional investors such as mutual funds, hedge funds, pensions and endowments." Here's a better solution for us poor people: https://personal.vanguard.com/us/funds/snapshot?FundId=0085&FundIntExt=INT https://personal.vanguard.com/us/funds/snapshot?FundId=0085&...
sundae79 16y ago
Actually since it is aimed at institutional investors such as mutual funds, hedge funds, pensions and endowments this will force you to buy mutual funds instead of being an individuall long term investor.
- klochner 16y ago
  Research points pretty heavily to you being better off buying a basket of index funds rather than playing stock picker.
  - sundae79 16y ago
    That is a totally different discussion. The title of this article is misleading since the exchange that they are creating for supposedly, value investing, doesn't really allows any value investor now, does it? Other than of course institutions.
tastybites 16y ago
How can shares of a particular security have two different prices on two exchanges without a horde of very smart people rushing in to arbitrage?
- tptacek 16y ago
  I can't see how they can.
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  - yummyfajitas 16y ago
    Near as I can tell, fees will be high enough so as to make the arbitrage unprofitable. I believe the mechanism going on here is this: Big Traders offer to buy at $10.00 on Light Pool. Their offer sits there, and gets filled slowly over time. Then, for whatever reason the price moves, and a bunch of speed traders try to sell on INET/ARCA/BATS at $9.99 (perhaps in anticipation of the market moving down to $9.90). Due to the high fees, they don't place those orders on Light Pool. The market crosses for a little while, no trades occur, and Big Traders get the opportunity to pull their $10.00 order from light pool. However, the article wasn't clear enough for me to be certain.
  - asmithmd1 16y ago
    Whenever you see a stock price it is always the price where the stock last changed hands. If the stock is lightly traded then the last trade may have been for as few as 100 shares. So what is the price if you want to buy or sell 200,000 shares of that stock? I am sure it is not the last quoted price. They are setting-up a market where slower and bigger trades can take place
- andrew1 16y ago
  Well, here's a situation where it can't happen: Exchange A: Price you can BUY ACME Co. = $34.50 Exchange B: Price you can BUY ACME Co. = $34.45 Exchange B: Price you can SELL ACME Co. = $34.40 Exchange A: Price you can SELL ACME Co. = $34.35
joshu 16y ago
I wonder how this is different from, say, Posit?
- jeffmiller 16y ago
  Posit only runs crosses at a handful of fixed times throughout the trading day. LightPool sounds like it will be a continuous market.
AndyParkinson 16y ago
Am I the only one who thinks this is pointless? I don't trade billions of dollars of equities, but I am a long-term investor. One of my big rules as a long-term investor is that I can't sweat the 1/8ths and 1/4ths (borrowed from Philip Fisher). The time I spend worrying about these high frequency traders getting a few extra cents out of me is time wasted finding great companies that are selling at a discount. Sure... Its annoying, but if you really are a long-term investor a few tenths of a percent won't kill you.
- tptacek 16y ago
  Who's to say you're on the wrong side of that 1/8th? HFTs have downside risk too.
  - AndyParkinson 16y ago
    Well, thats true. And humans are loss-hating creatures, so we tend to worry about that side of things. I guess what I'm saying is that I don't care either way.
- cjeane 16y ago
  'Uh, no. No, you don’t understand. It’s uh– it’s very complicated. It’s uh– it’s aggregate, so I’m talking about fractions of a penny here. And, uh, over time they add up to a lot.' -Peter Gibbons
- ShabbyDoo 16y ago
  Through competition among each other, aren't the HFTs reducing overall arbitrage opportunities in markets? Therefore, as a small-time, long-term investor, aren't I enriched by a highly-competitive steady-state level of HFT market participants?
borism 16y ago
Doesn't Credit Suisse have pretty active HFT desk? Just another way to shaft their own customers, isn't it?
- andrew1 16y ago
  They're not shafting anyone, no one will be obliged to trade on this market. People are only going to trade on it if they believe they'll gain some advantage through doing it - so conversely you could argue that by offering this service Credit Suisse are doing their customers a favour.
  - borism 16y ago
    dear god, how tired I am of this "no one will be obliged" argument! no one is obliged to have an iphone or credit card too. that doesn't mean that a lot of people can't have them, and the fact that they got them voluntarily (or more likely trough carefully crafted advertisement) doesn't mean that companies providing them can now do as they wish with their customers! believe they'll gain some advantage through doing it - so conversely you could argue that by offering this service Credit Suisse are doing their customers a favour you're doing your customers a favor when you're actually giving them some advantage, not making them believe in you doing so.
    - andrew1 16y ago
      I'm not really sure what you're talking about. A market participant will choose which exchange to execute a trade on based on their analysis of those exchanges. If for a particular trade they decide that out of all the exchanges, darkpools and this new lightpool available to them that the exchange that is most suited to that order is the lightpool, then they'll probably route it there. What do you expect them to do? If you're going to buy or sell something then there's an associated cost to doing that whether you do it on the NYSE, in a darkpool, or in this new lightpool. Credit Suisse don't 'own' any customers, people who trade on this exchange will have no obligation to trade there, it sounds like you think that there are people who are forced to trade through Credit Suisse and so will be forced to use an exchange run by Credit Suisse. That is not the case. If they don't like what is on offer at Credit Suisse then they can trade directly in a market, or they can use another broker.
noname123 16y ago
Excellent. Another dark pool for people who think that they are safe. There are already have a bunch of these, Crossfinder, Liquidnet etc. Here's how you game them without being detected. Have your long term hedge fund/mutual fund department set up an connection to that market. Make sure that you only do long term investing on these venues (e.g., buy blue chip stocks that have low PE) so that they don't ban you. Now you feed the information about displayed liquidity on high volatility stocks that you are interested in trading (e.g., small biotechs) from those exchanges. Especially this new one that isn't even a dark pool but has displayed liquidity. Now next you use that information to front-run the mutual funds who are trying to execute their VWAP in other exchanges such as BATS. Most investors don't have access to dark pools and dark pools aren't obligated to conform to NBBO, so you could get cheaper shares elsewhere and sell when the VWAP is reported in the next hour/end of trading day by dark pools. Other way you can play this is play the liquidity rebate game. So much rebate, $.14/100 shares. Just trade C all day long, high liquidity, low slippage. Offer and buy back at same price as long as C doesn't slip too much. Guess who's paying for the rebates, the mutual funds who's taking the liquidity. Wall Street, what a scam.
- qq66 16y ago
  You sound like you have a lot of experience here but I can't understand what you've written. Can you explain in a little more detail?
  - noname123 16y ago
    Typical stock exchange is a lot of like eBay bidding auction. A full-depth of quote book is maintained for the best and near-best bid and offers. When a buyer's highest bid price matches with a seller's lowest offer price matches, an transaction is made. For those bids and offers that are below/above the current market price, they are kept on the books. Now HFT algorithms, daytraders and market-makers all monitor this full-depth book for patterns whenever a large order is coming in. Suppose I'm a Fidelity Investment trying to acquire 5 million shares of MSFT for my $20 billion mutual fund, if I just put that huge order out there on the order book. Everyone else will jump in and buy MSFT; front-running me because stock market is like everything else, supply-and-demand; when there's a huge demand and you buy the supply ahead of time, you can charge more and make profit. So to disguise my huge order, mutual funds prefer dark pools where the full-depth of books are not maintained. Instead, it's like shooting fish in the dark. A big mutual fund wants to buy 5 million shares of MSFT at 25, another big fund wants to sell 5 million shares at MSFT at 25. You submit your order to that market totally blind because there's no quote book and just have to see if your order gets filled. But the positive side is that no one could see where the market demand and supply is, so the mutual funds gets their orders filled and not front-runned. Dark pools also typically limit their participants to large institutional investors to limit the information because what HFT firms used to do is to "ping" the dark pools, send out random orders to buy 1 share of MSFT at a certain price to see if there's a "whale" order out there and then proceed to front-run. So lots of them got banned. Now, the problem with dark pools is that there are sometimes not many people who trade on it because it's "dark," kind of like egg-and-chicken problem, no one could see the full-depth of book and so don't put their orders out there. That's what's called lack of "liquidity". Exchanges want to have people trade, because the higher volume, the more people will come and trade on that venue and the more money they make. So this "light pool" tries to fix this problem by having "displayed" quote book but the market participants are still limited and regulated still to make mutual fund participants comfortable about not being front-runned. Well, as the saying goes, "it's never illegal unless you get caught"; so suppose if you are a huge fund or a bank with a HFT prop desk. You could register your mutual fund section with this "light pool" for its displayed liquidity. Now, you might even do some real trades on the exchange to make everything legit; but feed the market data section for your HFT prop desk which is registered with a totally different LLC designation, and have that fund execute orders on other exchanges based on information from this "light pool" (e.g., whale buy order on IBM on "light pool," front-run IBM on BATS). Now for liquidity rebates on these exchanges, exchanges are now locked in a bitter battle to see who can attract the most volume and trades (because it's a snowball effect, more volume, more interested traders who come on to trade, more money). So they offer "liquidity rebates" for traders who put orders out there on the full quote-book because the more entries on a exchange's order book means that there are greater potential for greater volume on a exchange. A more concrete example is, let's say I'm a liquidity rebate trader on Citigroup (NYSE: C); C is last traded at $4.30, with national's best bid at 4.29 and national's best offer at 4.30 (NBBO). So I could submit out a sell order for C at $4.30 on the exchange's quotebook (I don't have to physically own C, I could short sell the stock). Now although NBB was at 4.29, someone might come alone and they are really impatient and submit a market order to buy C at $4.30 and they hit my order; now they are "taking" liquidity that I put out there on the market. So they are paying the exchange for the liquidity for doing so, typically, $0.02-$0.05/100 shares and to encourage more liquidity providers like me, the exchange passes some of that profit to me, $0.01-$0.03/100 shares. Now a stock like C is heavily traded, there are literally thousands of orders on C's quotebook just between $4.30 and $4.29; suppose that a bad/good news come out on Citigroup, many of the traders who have their offers to buy or sell C at these cents increments might not all cancel their orders to adjust the valuation of C to the new news. This is called "low slippage," that in a high volatile event, you could trade out of your positions very easily with no "slippage" as trading in a small cap stock where in a volatile event, no one's willing to trade with you. This is perfect for a liquidity rebate trader who literally goes around all day, offer to sell C at 4.30 and then buying back their short C shares at 4.30. They break even on the trade and get to collect $0.02-$0.05/100 shares liquidity rebates. So you do this over and over again on the market, generating higher volume on the exchanges and get to collect more rebates and everyone's happy at the expense of the liquidity takers. Now, with this exchange, the liquidity rebate is at $0.14/100 shares because they want to be attractive to the liquidity rebate crowd and generate lots of volume; and because the rebate is high, you could afford even higher slippage on C.
jrockway 16y ago
What exactly is the incentive for reducing high-frequency trading? People are offended that computers can make investment decisions better than humans? Computers making trades is not "really" investing? Markets are based on trading. If there are no trades, there are no markets. If you want to buy 1000 shares of ABC company, and nobody has 1000 shares, guess what, the trade is not going to go through. This is what will happen on a restricted market. Similarly, high-frequency trading means price corrections occur more quickly, meaning that when you buy or sell security foo, it is more likely at the correct price. Now you can argue that nobody really knows the correct price, but that is orthogonal. (Computers make mistakes, but so do people. There are some markets that are still not made on exchanges, and they are subject to the same whims that the equity markets are. Computers are buggy. People are irrational.) My guess is that this market is for people with a lot of money that like to talk on the phone with bankers. They will get a "safe" investment (or so the dude on the phone says), and Credit Suisse will get a nice cut. Hint: whenever a bank invents a product, the main idea usually revolves around them getting a cut.
- grav1tas 16y ago
  > Hint: whenever a bank invents a product, the main idea usually revolves around them getting a cut. Replace "bank" with "just about anybody" and you have a winner.
hop 16y ago
HFT has a negligible effect on long term investors anyways, its all on the the underlying company.
gersh 16y ago
I think Credit Suisse is just spreading FUD, so they get people to trade on their own market, instead of some upstart HFT firm. Every new rule and game is just another money making opportunity for a opportunistic firm.

72 points by ad 16y ago

I like that this innovation is market-driven and introduced as a competing alternative, rather than imposed on existing markets in the form of regulation. It will be interesting to see if this market provides better pricing for non-HFT participants. The HFT outfits claim they net out to better pricing for all ("liquidity benefits"), but that's somewhat hard to swallow given that they're acting as giant money sinks on the market system.

ewjordan 16y ago
IMO this is a ridiculous solution to the problem - rather than creating a market that's set up in a way so that high frequency traders can't get an edge (for instance, creating a market structured so that money/speed/location/regulatory status doesn't actually give you any advantage in trading), they're just banning anyone that doesn't fit their definition of "value trader" from the market. It will be interesting to see if this market provides better pricing for non-HFT participants. Given that the only difference between this and a normal market is that a bunch of people offering to buy and/or sell at prices more favorable than the current inside bid/ask are banned from the market, I'm going to go out on a limb and say that no, it won't help pricing very much. Or, rather, what it will do is move profits that would have gone to the HFT firms and shift them to people placing normal, non-speculative/exploitative/high-frequency limit orders. Which means that really, there will be an arms race to figure out how to place orders that are as exploitative as possible without tripping the banhammer. The people that push the closest that limit will make the most money, but spreads will still likely be quite a bit higher than in an unfettered market if the rules have any teeth at all - long term value traders are not good at keeping spreads thin, I'd guess that in the current markets their effects on spreads are not even measurable at all, they are so insignificant...
- klochner 16y ago
  I honestly didn't read it closely, but apparently you didn't either. Your assertion: Given that the only difference between this and a normal market is that a bunch of people offering to buy and/or sell at prices more favorable than the current inside bid/ask are banned from the market, I'm going to go out on a limb and say that no, it won't help pricing very much. compare that with: Since trading on Light Pool will be more expensive and slower for those firms, they’re not likely to use the ECN, reducing the negative selection investors experience, Galinov said. Contributors, which will include long-term investors, will receive a “significant” rebate when they trade against orders resting in Light Pool, while neutral firms, or those whose behavior falls between the other groups, may or may not get one, Galinov said. So they are trying to get incentives right, rather than outright banning HFTs. Just slowing down the market may be sufficient, try reading this: http://ai.eecs.umich.edu/people/wellman/?p=40 (disclaimer: it's from my Ph.D. advisor, so I'm slightly biased)
  - mapgrep 16y ago
    You: "They are trying to get incentives right, rather than outright banning HFTs." Article: "Firms that fail to meet standards aimed at protecting long- term investors won’t be allowed directly on the Credit Suisse venue" So it's both: They are outright banning AND adjusting incentives.
    - klochner 16y ago
      I think banning is a little strong, article: Opportunistic firms, which Galinov says include some high- frequency trading companies, will be kicked off the platform and prevented from providing orders or executing against bids and offers directly through Light Pool. They’ll instead have to go through the Jersey City, New Jersey-based National Stock Exchange, where Light Pool will also publish its quotes. so they can participate, but they get penalized.
tptacek 16y ago
I don't understand that last sentence at all. HFTs demonstrably are liquidity providers. That's a technical term with a real meaning: liquidity is the ability to trade when you want to trade in the quantity you want to trade it, and it most certainly is not a natural property of the market; in order to buy an instrument, someone has to be willing to sell it. Meanwhile, what is a "giant money sink", and how is that what HFTs are? I see how HFTs cut out the middlemen who used to profit from volatility, but the low-tech traders they replaced were not themselves value investors.
- hackerblues 16y ago
  My take on the money sink comment: If there are n people in the market moving money around in a closed system then the combined wealth of those n people is constant. If another person joins in and is making a net profit then it must be the case that the combined wealth of the original n is decreasing. Admittedly this relies on money not being created or destroyed, which may cause the model to be a poor approximation of reality.
  - tptacek 16y ago
    The stock market is not a closed system. The total value contained in the markets rises over time.
    - klochner 16y ago
      Not as a result of trading. You can argue that getting equity pricing right helps companies with their access to capital, but once you have the pricing right at 100ms I don't understand what value HFT firms are adding by pouring money and talent into getting the pricing right at 10ns. It seems like such an obvious win for society to mitigate the winner-take-all incentive of being first to market on a pricing disparity.
      - tptacek 16y ago
        That's slippery slope logic. If the pricing is right at 1s, why pour money and talent into getting it right at 100ms? What's the win to society to "mitigate" an "incentive"? Is the problem volatility? Other forces create huge volatility. Should we penalize anything that creates volatility? Maybe we should end all program trading? Meanwhile, you're effectively vouching for a comment that models the markets as a closed system of people dividing up a single pot of money. Isn't it plain that such a model is wrongheaded?

beoba 16y ago

"The ECN is aimed at institutional investors such as mutual funds, hedge funds, pensions and endowments." Here's a better solution for us poor people: https://personal.vanguard.com/us/funds/snapshot?FundId=0085&FundIntExt=INT https://personal.vanguard.com/us/funds/snapshot?FundId=0085&...

sundae79 16y ago

Actually since it is aimed at institutional investors such as mutual funds, hedge funds, pensions and endowments this will force you to buy mutual funds instead of being an individuall long term investor.

klochner 16y ago
Research points pretty heavily to you being better off buying a basket of index funds rather than playing stock picker.
- sundae79 16y ago
  That is a totally different discussion. The title of this article is misleading since the exchange that they are creating for supposedly, value investing, doesn't really allows any value investor now, does it? Other than of course institutions.

tastybites 16y ago

How can shares of a particular security have two different prices on two exchanges without a horde of very smart people rushing in to arbitrage?

tptacek 16y ago
I can't see how they can.
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- yummyfajitas 16y ago
  Near as I can tell, fees will be high enough so as to make the arbitrage unprofitable. I believe the mechanism going on here is this: Big Traders offer to buy at $10.00 on Light Pool. Their offer sits there, and gets filled slowly over time. Then, for whatever reason the price moves, and a bunch of speed traders try to sell on INET/ARCA/BATS at $9.99 (perhaps in anticipation of the market moving down to $9.90). Due to the high fees, they don't place those orders on Light Pool. The market crosses for a little while, no trades occur, and Big Traders get the opportunity to pull their $10.00 order from light pool. However, the article wasn't clear enough for me to be certain.
- asmithmd1 16y ago
  Whenever you see a stock price it is always the price where the stock last changed hands. If the stock is lightly traded then the last trade may have been for as few as 100 shares. So what is the price if you want to buy or sell 200,000 shares of that stock? I am sure it is not the last quoted price. They are setting-up a market where slower and bigger trades can take place
andrew1 16y ago
Well, here's a situation where it can't happen: Exchange A: Price you can BUY ACME Co. = $34.50 Exchange B: Price you can BUY ACME Co. = $34.45 Exchange B: Price you can SELL ACME Co. = $34.40 Exchange A: Price you can SELL ACME Co. = $34.35

joshu 16y ago

I wonder how this is different from, say, Posit?

jeffmiller 16y ago
Posit only runs crosses at a handful of fixed times throughout the trading day. LightPool sounds like it will be a continuous market.

AndyParkinson 16y ago

Am I the only one who thinks this is pointless? I don't trade billions of dollars of equities, but I am a long-term investor. One of my big rules as a long-term investor is that I can't sweat the 1/8ths and 1/4ths (borrowed from Philip Fisher). The time I spend worrying about these high frequency traders getting a few extra cents out of me is time wasted finding great companies that are selling at a discount. Sure... Its annoying, but if you really are a long-term investor a few tenths of a percent won't kill you.

tptacek 16y ago
Who's to say you're on the wrong side of that 1/8th? HFTs have downside risk too.
- AndyParkinson 16y ago
  Well, thats true. And humans are loss-hating creatures, so we tend to worry about that side of things. I guess what I'm saying is that I don't care either way.
cjeane 16y ago
'Uh, no. No, you don’t understand. It’s uh– it’s very complicated. It’s uh– it’s aggregate, so I’m talking about fractions of a penny here. And, uh, over time they add up to a lot.' -Peter Gibbons
ShabbyDoo 16y ago
Through competition among each other, aren't the HFTs reducing overall arbitrage opportunities in markets? Therefore, as a small-time, long-term investor, aren't I enriched by a highly-competitive steady-state level of HFT market participants?

borism 16y ago

Doesn't Credit Suisse have pretty active HFT desk? Just another way to shaft their own customers, isn't it?

andrew1 16y ago
They're not shafting anyone, no one will be obliged to trade on this market. People are only going to trade on it if they believe they'll gain some advantage through doing it - so conversely you could argue that by offering this service Credit Suisse are doing their customers a favour.
- borism 16y ago
  dear god, how tired I am of this "no one will be obliged" argument! no one is obliged to have an iphone or credit card too. that doesn't mean that a lot of people can't have them, and the fact that they got them voluntarily (or more likely trough carefully crafted advertisement) doesn't mean that companies providing them can now do as they wish with their customers! believe they'll gain some advantage through doing it - so conversely you could argue that by offering this service Credit Suisse are doing their customers a favour you're doing your customers a favor when you're actually giving them some advantage, not making them believe in you doing so.
  - andrew1 16y ago
    I'm not really sure what you're talking about. A market participant will choose which exchange to execute a trade on based on their analysis of those exchanges. If for a particular trade they decide that out of all the exchanges, darkpools and this new lightpool available to them that the exchange that is most suited to that order is the lightpool, then they'll probably route it there. What do you expect them to do? If you're going to buy or sell something then there's an associated cost to doing that whether you do it on the NYSE, in a darkpool, or in this new lightpool. Credit Suisse don't 'own' any customers, people who trade on this exchange will have no obligation to trade there, it sounds like you think that there are people who are forced to trade through Credit Suisse and so will be forced to use an exchange run by Credit Suisse. That is not the case. If they don't like what is on offer at Credit Suisse then they can trade directly in a market, or they can use another broker.

noname123 16y ago

Excellent. Another dark pool for people who think that they are safe. There are already have a bunch of these, Crossfinder, Liquidnet etc. Here's how you game them without being detected. Have your long term hedge fund/mutual fund department set up an connection to that market. Make sure that you only do long term investing on these venues (e.g., buy blue chip stocks that have low PE) so that they don't ban you. Now you feed the information about displayed liquidity on high volatility stocks that you are interested in trading (e.g., small biotechs) from those exchanges. Especially this new one that isn't even a dark pool but has displayed liquidity. Now next you use that information to front-run the mutual funds who are trying to execute their VWAP in other exchanges such as BATS. Most investors don't have access to dark pools and dark pools aren't obligated to conform to NBBO, so you could get cheaper shares elsewhere and sell when the VWAP is reported in the next hour/end of trading day by dark pools. Other way you can play this is play the liquidity rebate game. So much rebate, $.14/100 shares. Just trade C all day long, high liquidity, low slippage. Offer and buy back at same price as long as C doesn't slip too much. Guess who's paying for the rebates, the mutual funds who's taking the liquidity. Wall Street, what a scam.

qq66 16y ago
You sound like you have a lot of experience here but I can't understand what you've written. Can you explain in a little more detail?
- noname123 16y ago
  Typical stock exchange is a lot of like eBay bidding auction. A full-depth of quote book is maintained for the best and near-best bid and offers. When a buyer's highest bid price matches with a seller's lowest offer price matches, an transaction is made. For those bids and offers that are below/above the current market price, they are kept on the books. Now HFT algorithms, daytraders and market-makers all monitor this full-depth book for patterns whenever a large order is coming in. Suppose I'm a Fidelity Investment trying to acquire 5 million shares of MSFT for my $20 billion mutual fund, if I just put that huge order out there on the order book. Everyone else will jump in and buy MSFT; front-running me because stock market is like everything else, supply-and-demand; when there's a huge demand and you buy the supply ahead of time, you can charge more and make profit. So to disguise my huge order, mutual funds prefer dark pools where the full-depth of books are not maintained. Instead, it's like shooting fish in the dark. A big mutual fund wants to buy 5 million shares of MSFT at 25, another big fund wants to sell 5 million shares at MSFT at 25. You submit your order to that market totally blind because there's no quote book and just have to see if your order gets filled. But the positive side is that no one could see where the market demand and supply is, so the mutual funds gets their orders filled and not front-runned. Dark pools also typically limit their participants to large institutional investors to limit the information because what HFT firms used to do is to "ping" the dark pools, send out random orders to buy 1 share of MSFT at a certain price to see if there's a "whale" order out there and then proceed to front-run. So lots of them got banned. Now, the problem with dark pools is that there are sometimes not many people who trade on it because it's "dark," kind of like egg-and-chicken problem, no one could see the full-depth of book and so don't put their orders out there. That's what's called lack of "liquidity". Exchanges want to have people trade, because the higher volume, the more people will come and trade on that venue and the more money they make. So this "light pool" tries to fix this problem by having "displayed" quote book but the market participants are still limited and regulated still to make mutual fund participants comfortable about not being front-runned. Well, as the saying goes, "it's never illegal unless you get caught"; so suppose if you are a huge fund or a bank with a HFT prop desk. You could register your mutual fund section with this "light pool" for its displayed liquidity. Now, you might even do some real trades on the exchange to make everything legit; but feed the market data section for your HFT prop desk which is registered with a totally different LLC designation, and have that fund execute orders on other exchanges based on information from this "light pool" (e.g., whale buy order on IBM on "light pool," front-run IBM on BATS). Now for liquidity rebates on these exchanges, exchanges are now locked in a bitter battle to see who can attract the most volume and trades (because it's a snowball effect, more volume, more interested traders who come on to trade, more money). So they offer "liquidity rebates" for traders who put orders out there on the full quote-book because the more entries on a exchange's order book means that there are greater potential for greater volume on a exchange. A more concrete example is, let's say I'm a liquidity rebate trader on Citigroup (NYSE: C); C is last traded at $4.30, with national's best bid at 4.29 and national's best offer at 4.30 (NBBO). So I could submit out a sell order for C at $4.30 on the exchange's quotebook (I don't have to physically own C, I could short sell the stock). Now although NBB was at 4.29, someone might come alone and they are really impatient and submit a market order to buy C at $4.30 and they hit my order; now they are "taking" liquidity that I put out there on the market. So they are paying the exchange for the liquidity for doing so, typically, $0.02-$0.05/100 shares and to encourage more liquidity providers like me, the exchange passes some of that profit to me, $0.01-$0.03/100 shares. Now a stock like C is heavily traded, there are literally thousands of orders on C's quotebook just between $4.30 and $4.29; suppose that a bad/good news come out on Citigroup, many of the traders who have their offers to buy or sell C at these cents increments might not all cancel their orders to adjust the valuation of C to the new news. This is called "low slippage," that in a high volatile event, you could trade out of your positions very easily with no "slippage" as trading in a small cap stock where in a volatile event, no one's willing to trade with you. This is perfect for a liquidity rebate trader who literally goes around all day, offer to sell C at 4.30 and then buying back their short C shares at 4.30. They break even on the trade and get to collect $0.02-$0.05/100 shares liquidity rebates. So you do this over and over again on the market, generating higher volume on the exchanges and get to collect more rebates and everyone's happy at the expense of the liquidity takers. Now, with this exchange, the liquidity rebate is at $0.14/100 shares because they want to be attractive to the liquidity rebate crowd and generate lots of volume; and because the rebate is high, you could afford even higher slippage on C.

jrockway 16y ago

What exactly is the incentive for reducing high-frequency trading? People are offended that computers can make investment decisions better than humans? Computers making trades is not "really" investing? Markets are based on trading. If there are no trades, there are no markets. If you want to buy 1000 shares of ABC company, and nobody has 1000 shares, guess what, the trade is not going to go through. This is what will happen on a restricted market. Similarly, high-frequency trading means price corrections occur more quickly, meaning that when you buy or sell security foo, it is more likely at the correct price. Now you can argue that nobody really knows the correct price, but that is orthogonal. (Computers make mistakes, but so do people. There are some markets that are still not made on exchanges, and they are subject to the same whims that the equity markets are. Computers are buggy. People are irrational.) My guess is that this market is for people with a lot of money that like to talk on the phone with bankers. They will get a "safe" investment (or so the dude on the phone says), and Credit Suisse will get a nice cut. Hint: whenever a bank invents a product, the main idea usually revolves around them getting a cut.

grav1tas 16y ago
> Hint: whenever a bank invents a product, the main idea usually revolves around them getting a cut. Replace "bank" with "just about anybody" and you have a winner.

hop 16y ago

HFT has a negligible effect on long term investors anyways, its all on the the underlying company.

gersh 16y ago

I think Credit Suisse is just spreading FUD, so they get people to trade on their own market, instead of some upstart HFT firm. Every new rule and game is just another money making opportunity for a opportunistic firm.