4 ms·

The real issue is that in order to get an edge, HFT traders are engaging in electronic warfare in order to slow down their opponents. One of the worst things t

The real issue is that in order to get an edge, HFT traders are engaging in electronic warfare in order to slow down their opponents. One of the worst things they are doing is "quote stuffing", which means submitting bids and cancelling them tens of thousands of times per second. They stuff the exchanges with quotes and eventually cause a huge latency with respect to the quotes that are shown by the exchange, such as NYSE, NASDAQ, etc. However, they aren't affected because they can see the prices because they have a raw data feed. This gives them an edge relative to the other traders that don't have their own raw feed straight from the exchanges, and they use that to basically shoot fish in a barrel. This was one of the main causes for the flash crash in 2010. The excessive quotes The thing is that they could stop this by implementing a minimum time for a quote to exist, something innocuous like 100 ms, but they don't because this would be a detriment to the HFT shops. The other thing is that HFT shops behave like market makers, and they claim to provide liquidity, however, they have no obligation to provide liquidity, like real market makers. So just like during the flash crash, they turned off their machines, and the markets went haywire. So they want their cake and eat it too. If they are going to trade like market makers, they need to have the obligation to continue to provide liquidity.

javert 14y ago
If I recall correctly, wasn't there, like, an extremely fast recovery from the flash crash? Why does the flash crash even matter? (I'm not being snarky at all, BTW.)
- steve8918 14y ago
  A lot of people lost a lot of money during the flash crash, through margin calls, stop loss hits, etc. It also called into question the stability of our markets. If people lose confidence in our stock markets, then people stop trading on them. If we have another flash crash, you can bet that the already-low volumes on the markets will be met with even lower volumes, which could damage our economic recovery. Most peoples' 401ks are tied to the stock market, and the last thing we need is a generation of un-retireable people because they lost a lot of their retirement on the stock market.
  - javert 14y ago
    A lot of people lost a lot of money during the flash crash, through margin calls, stop loss hits, etc. Well, if day traders lost money, who cares? That's the business they're in. It also called into question the stability of our markets. If people lose confidence in our stock markets, then people stop trading on them. True, but there was a fast recovery, and people are still trading. You mentioned that volume is low. I wasn't aware of that (just don't follow things that closely). Does that correlate to when the flash crash was? I'd be surprised if the flash crash rattled people so much that it still has an effect on market confidence. Most peoples' 401ks are tied to the stock market, and the last thing we need is a generation of un-retireable people because they lost a lot of their retirement on the stock market. Well, investment managers who control people's 401ks should not be trading during a flash crash. I mean, I'm just not so sure that it affected everyday people much. Also, there are a LOT of things to blame the current economic scewing-over of people on, and the market would be near the bottom of my list.
    - scotch_drinker 14y ago
      It's not the day trader losses we're worried about. It's the average investor who had trailing loss orders in on P&G (just an example) who had to sell their positions at steep losses only to see the market rebound immediately leaving them with zilch. This attitude of "If day traders lost money, who cares" is missing the forest for the trees. Lots and lots of people got screwed by the flash crash and that starts to cause credibility issues.
      - javert 14y ago
        That is a very good point. I know the exchange can automatically put a halt to the trading of an asset, and that seems (to me) like a good tool in this case. e.g. if there is a certain pre-defined amount of volatility in a certain time. Do you think that would address this concern?
        runako 14y ago
        No. The exchanges had similar circuit breakers in place during the flash crash. They even cancelled some orders after the fact. But the flash crash still caused real investors (not professionals) to lose real money for the reasons outlined.
hogu 14y ago
Some have suggested that the problem was when the quotes were timestamped. http://www.nanex.net/FlashCrash/FlashCrashAnalysis_NBBO.html http://www.nanex.net/FlashCrash/FlashCrashAnalysis_NBBO.html I don't really understand how you could abuse an exchange through quote stuffing - I've heard(and it seems reasonable to me) that they would use round robin queues to protect from exactly this sort of thing.

javert 14y ago

If I recall correctly, wasn't there, like, an extremely fast recovery from the flash crash? Why does the flash crash even matter? (I'm not being snarky at all, BTW.)

steve8918 14y ago
A lot of people lost a lot of money during the flash crash, through margin calls, stop loss hits, etc. It also called into question the stability of our markets. If people lose confidence in our stock markets, then people stop trading on them. If we have another flash crash, you can bet that the already-low volumes on the markets will be met with even lower volumes, which could damage our economic recovery. Most peoples' 401ks are tied to the stock market, and the last thing we need is a generation of un-retireable people because they lost a lot of their retirement on the stock market.
- javert 14y ago
  A lot of people lost a lot of money during the flash crash, through margin calls, stop loss hits, etc. Well, if day traders lost money, who cares? That's the business they're in. It also called into question the stability of our markets. If people lose confidence in our stock markets, then people stop trading on them. True, but there was a fast recovery, and people are still trading. You mentioned that volume is low. I wasn't aware of that (just don't follow things that closely). Does that correlate to when the flash crash was? I'd be surprised if the flash crash rattled people so much that it still has an effect on market confidence. Most peoples' 401ks are tied to the stock market, and the last thing we need is a generation of un-retireable people because they lost a lot of their retirement on the stock market. Well, investment managers who control people's 401ks should not be trading during a flash crash. I mean, I'm just not so sure that it affected everyday people much. Also, there are a LOT of things to blame the current economic scewing-over of people on, and the market would be near the bottom of my list.
  - scotch_drinker 14y ago
    It's not the day trader losses we're worried about. It's the average investor who had trailing loss orders in on P&G (just an example) who had to sell their positions at steep losses only to see the market rebound immediately leaving them with zilch. This attitude of "If day traders lost money, who cares" is missing the forest for the trees. Lots and lots of people got screwed by the flash crash and that starts to cause credibility issues.
    - javert 14y ago
      That is a very good point. I know the exchange can automatically put a halt to the trading of an asset, and that seems (to me) like a good tool in this case. e.g. if there is a certain pre-defined amount of volatility in a certain time. Do you think that would address this concern?
      - runako 14y ago
        No. The exchanges had similar circuit breakers in place during the flash crash. They even cancelled some orders after the fact. But the flash crash still caused real investors (not professionals) to lose real money for the reasons outlined.

hogu 14y ago

Some have suggested that the problem was when the quotes were timestamped. http://www.nanex.net/FlashCrash/FlashCrashAnalysis_NBBO.html http://www.nanex.net/FlashCrash/FlashCrashAnalysis_NBBO.html I don't really understand how you could abuse an exchange through quote stuffing - I've heard(and it seems reasonable to me) that they would use round robin queues to protect from exactly this sort of thing.