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Quant turned whistle blower explains how the market is rigged [video]

147 points by gpvos 13y ago

svantana 13y ago
It disgusts me how much talent is wasted on nonsense like this. Like Haim is alluding to in the documentary, imagine if all these smart people focused on real problems instead. If this isn't a good argument for a transaction tax, I don't know what is. Say all you want about increasing efficiencies etc, but it's pretty clear to me that what the world needs is investors, not day traders.
- aet 13y ago
  Algorithmic and HFT lowers costs for retail traders. Transaction taxes increase costs for retail traders.
  - ajays 13y ago
    I hear that often. If HFT is indeed lowering the cost, how come they are making the money and not the retail traders? This last quarter I may have bought/sold on the order of 10K shares max. If there's a $0.0001 tax per share traded, it would've cost me $1. That's ambient noise level.
    - mdkess 13y ago
      That would only be true if you had to pay the tax and nobody else did. Assuming the result of the tax is less liquidity, higher volatility and bigger spreads, it could cost you quite a bit more.
    - kasey_junk 13y ago
      Not all of them are making money. Most of the money is just being shuffled around between various firms. At any given time you can find an HFT firm making money and another one blowing up.
    - twoodfin 13y ago
      If HFT is indeed lowering the cost, how come they are making the money and not the retail traders? This sounds like an odd question if you transpose it to any other market where automated systems have lowered costs: "If Amazon is indeed lowering the cost of buying books, how come they are making the money and not the consumer?" "If Expedia is indeed lowering the cost of booking a plane ticket, how come they are making money and not the traveler?" "If Toyota is indeed lowering the cost of manufacturing a car, how come they are making the money and not the auto buyer?" Retail traders benefit from the cheaper trades facilitated by high liquidity in automated trading. There wouldn't be anywhere near as high liquidity in many of these stocks if there weren't automated systems trying to make money on penny price shifts.
      - tedunangst 13y ago
        That's a great point about Amazon. In fact, Amazon is playing the role of both exchange and market maker. Can you imagine the shitstorm of comments if a stock exchange tried that?
    - radikalus 13y ago
      It's not only about bid-ask spreads; I find this a gross oversimplification of what HFTs bring the market. Other things: - Prices around the world across all exchanges are kept in line. If you need to hedge your Yen exposure and can only trade in Europe, you will get the closest possible price as someone in Asia or the US. This is true across all asset classes. This lack of massive arbitrage may get a lot of investors/hedgers/speculators significantly better prices. - Derivatives on almost any asset are similarly tight as their underlying assets. No longer are you crossing wide/illiquid markets to hedge back month products or options. In a lot of markets, you can trade tight/liquid markets at almost any tenure; this is potentially a LARGE cost savings particularly compared to what some of the markets looked like a decade ago. - Stat Arb + Relative value spreads are kept in line with their variance structures. Stocks move in line with their eigen components, options move smoothly with their volatility structures, futures at various tenures are priced in line with their synthetic interest rate exposure. Without being able to accurately price something, most participants are able to get a 'good' price on almost anything. While a lot of the HFT is indeed zero sum between firms, the net economic effect of their activity is certainly not. The amount of $ that most firms make from the HFT business is really not that large; most of the big trading firms have made their fortunes from large speculative/fortunate events, not from being the best at constantly collecting a 1/10th of a tick of edge over and over.
- qubitsam 13y ago
  raganwald shared a similar sentiment a while back [1] and was discussed here on HN [2]. [1] http://neighborhoodhacker.com/why-the-fuck-raganwalds-posterous/ http://neighborhoodhacker.com/why-the-fuck-raganwalds-poster... [2] https://news.ycombinator.com/item?id=5088815 https://news.ycombinator.com/item?id=5088815
- theorique 13y ago
  And who's going to give those investors their shares and exits when they want to trade? The question that needs to be answered is where trading stocks crosses over between moral to neutral to immoral. If we assume: nanoseconds = worse than Hitler decades = saintly Warren Buffett then there must be some timescale at which trading becomes good or evil. The challenge is that the faster traders operate as counterparties for the slower ones (and for each other). They absorb risk, provide liquidity, and establish definitive prices. One way to enforce a speed limit would be to have a crossing auction every second (similar to what they do prior to the open, or when a stock is halted, or for an IPO). If you wanted to be an active trader, you would participate in many such crossing auctions during the day.
- grandalf 13y ago
  Who should decide what is a "real problem" and what is "nonsense"? Simply being indignant about it does little to further the discussion.
  - AkimChristine 13y ago
    Human beings with a brain, in discussion with other humans, creating the kind of world they want to live in. Just like everything else in the world is decided. It makes no sense at all to pretend that humans are too stupid to understand what is and is not good for our planet. The whole point of having language and intelligence is that it should be used, not just discarded with some discredited hand wave that "if we just do nothing, everything will work out for the best!"
    - lmm 13y ago
      > It makes no sense at all to pretend that humans are too stupid to understand what is and is not good for our planet. The whole point of having language and intelligence is that it should be used, not just discarded with some discredited hand wave that "if we just do nothing, everything will work out for the best!" Centrally planned economies have been tried. The Soviet Union discouraged a lot of research into areas like psychology that they saw as pointless; artists had to conform to traditional styles. It didn't turn out very well. Letting the market allocate resources has a lot of inefficiencies, but it works better than any alternative that has been tried.
      - flumbaps 13y ago
        > Letting the market allocate resources has a lot of inefficiencies, but it works better than any alternative that has been tried. I don't think we've ever tried having the market solely allocate resources. I think pretty much every government has regulated trade, collected taxes, that sort of thing. What seems to have worked best would be letting the market allocate resources to some extent, but collecting taxes and investing in long term goals (such as research and infrastructure). But maybe this isn't necessary, maybe in a truly free market there would always be genius entrepreneurs like Elon Musk appearing every now and again to progress humanity. Still, there's a massive difference between the kinds of long term planning that modern western democracies already do and a communist dictatorship.
- stygiansonic 13y ago
  It's really a balance - you say the world needs "investors" and not "day traders". By this, I am assuming you mean those who purchase shares using a buy-and-hold strategy as opposed to those who seek to profit off of short term swings. It's difficult to have one without the other. Day traders and speculators supply the liquidity that enables long-term investors to buy in when they choose to do so. This does improve the efficiency of the markets, as there has to be another side to every trade. To take it to the extreme: If everyone was a buy-and-hold investor, what would happen? IPOs and infrequent sells from buy-and-holds existing would be the only supply of stock. Would this be efficient? (Note: I'm not asking this as rhetorical question as I actually don't know the answer) I am not arguing for or against HFT, as I've read both sides (from "they provide liquidity and lower spreads" to "they are akin to parasitic front-runners") and am not sure of where the truth lies. Instead, I'm just arguing against this concept that "day trading" provides no value.
- diydsp 13y ago
  > investors, not day traders. Yes, did you see the angst when that one trader got stuck with a stock "overnight" ? He acted like having a stock overnight was the stupidest possible thing. Imagine holding a stock for 12 months! Goodness!
- dragontamer 13y ago
  Day traders help stabilize the prices and ensure liquidity. Sure, they screw over other day-traders to get that position, but long-term investors overall benefit from this sort of squabbling. These HFT guys are complaining about fractions of a penny. Meanwhile, illiquid markets such as the Bond Market have real issues going on, where bid/ask spreads are completely opaque, and pricing on the same bonds are vastly different from broker to broker. (with differences measured in hundreds of dollars... not fractions of a penny)
- deleted 13y ago
  [deleted]
willvarfar 13y ago
Early on in the video there is mention of Haim Bodek's first speech where the audience was astounded. Does anyone have a link/vid for this speech? I've googled and youtubed without luck.
- hft_throwaway 13y ago
  http://showyou.com/v/y-ItfAKguEdAE/haim-bodek-hft-is-an-artificial-industry-tradetech-2013?u=jhcrater http://showyou.com/v/y-ItfAKguEdAE/haim-bodek-hft-is-an-arti... - this possibly? Take it with a grain of salt. He claims one can just use these order types and be fast to basically print money, but glosses over the important parts like deciding how to price a market, when to add or remove liquidity, etc. When he says things like "HFTs use resting orders as insurance to exit at zero-risk", ask yourself how they make those decisions without having some kind of predictive abilities.
yummyfajitas 13y ago
Is there a text explanation of this? I'm curious to learn what the allegation is, but I don't have 50 minutes to spend on what is likely a silly conspiracy theory. The small amount of text present suggests someone is being allowed to jump the queue. Is that the allegation, or does it go beyond that?
- hft_throwaway 13y ago
  It's an allegation. He's basically referring to Direct Edge's Hide-not-slide order type. The only equities exchange I know of that lets you jump the queue is NYSE where DMMs and floor brokers can join a level and participate along with the front of the electronic book. DMMs have negative obligations though.
- pheon 13y ago
  didnt RTFM thus missed an important detail. Put another way, hes so smart but losing money in the market thus the market is "wrong" and someone is cheating.
- siegecraft 13y ago
  I can't speak to the specifics in this video, but if you want a detailed, text-based explanantion of HFT shenanigans, there's tons of technical details at http://www.nanex.net/flashcrash/ongoingresearch.html http://www.nanex.net/flashcrash/ongoingresearch.html (algos crashing exchanges, running wild and losing insane amounts of money only to have those losses rolled back [sometimes], algos reacting to news a few seconds before it's officially released, etc).
  - yummyfajitas 13y ago
    I've seen Nanex's pretty graphs, but I've never seen an explanation from them. All they do is highlight graphs with wild oscillations and then declare "ooh, evil!"
    - smcl 13y ago
      Me too, the graphs are impressive but hard to digest. The explanations are often very good, however.
hft_throwaway 13y ago
What Haim's referring to are a set of order types used on many exchanges to allow traders to place orders on a level that can't be displayed for regulatory reasons. There's nothing nefarious about them. Reg NMS prohibits exchanges from displaying quotes that would lock (bid==ask) or cross (bid>ask) another marketplace. As an example, say BATS is 10.01 bid 10.02 offered and the 10.02 offer trades out completely. Some HFTs want to be the first to form the new 10.02 bid to earn the spread + liquidity rebate, so they send post-only bids at 10.02. BATS sees stale 10.02 offers on ARCA, so they re-price the trader's order to 10.01 bid, or reject it (behavior depends on the exchange). In response to this, HFT algos would repeatedly re-submit their orders until the exchange let them in. This led to enormous stress on their matching engines during price moves. In response, exchanges created order types that would let the trader bid 10.02, but only display it once the away markets faded from their point of view. It's basically like having a callback API rather than a polling one. The end result is basically the same, except less load is placed on the exchange's matching engine. There's nothing "rigged" about this behavior. Traders forming new price levels on public markets still incur substantial risk that the price will move against them when filled. There aren't any order types that let you get execution priority in front of a large queue like he describes. These order types and their behavior were well-documented on public websites and anyone concerned with the microstructure of how their trades executed could easily use them. The game he's describing is of little concern to anyone other than HFT MMs and execution algos that depend on favorable queue position. The entire process of a level ticking away and a new price being formed in liquid tick-wide names plays out in microseconds these days.
- phyalow 13y ago
  I enjoy reading your comments. I have read Patterson's book which scratches the surface in "Dark Pools", Haim's book "The problem of HFT" and his regular pieces on Zerohedge. I cannot help but feel that Bodek has an ulterior motive "for exposing the system"... I don't buy his narrative largely because all this so called adverse behaviour is widely described in literature especially in exchange/venue published documentation, support and educational material. A prime example is on page 93 of his book [5] which is a scalping scenario based on inter-market sweep orders (he attributes to a significant loss of capital at Trading Machines) to this strategy... Come on Haim really? you never considered the adverse affects of placing vanilla limit orders? The books [1], [2] and [4] touch on these exact scenarios. I don't buy for a second that he couldn't have picked up a phone and called his account manager/support technician at X venue, or his broker to ask why he was getting an abysmally low rate of fills, or seek colour on orderbook oddities. Despite his lofty background it appears he was out of his depth at "trading machines" and now is attempting to sell his ideas to anyone that will listen. I do commend him though on shedding light over the field and on getting me interested in HFT/execution. For anyone interested in learning more, some books I would recommend: [1] Dark Pools - Erik Banks (2010). [2] Empirical Market Microstructure - Joel Hasbrock (2007). [3] Dark Pools - Scott Patterson (2012). [4] HFT - Irene Alridge (2010). Also if anyone is interested here is Haim Bodek's recently self-published book: [5] http://www.amazon.com/Problem-HFT-Collected-Frequency-Structure-ebook/dp/B00B1UDSS4 http://www.amazon.com/Problem-HFT-Collected-Frequency-Struct...
kumarm 13y ago
Golden at 13:00. The dude brings up iPad like device he invented in 1980 (Touch screen none the less). Says he doesn't believe in patenting as it will stop other people from inventing.
- csmuk 13y ago
  Everyone has invented an iPad. This is not news. Even with ARM CPUs and touch screens... http://acorn.chriswhy.co.uk/Computers/NC.html#NewsPAD http://acorn.chriswhy.co.uk/Computers/NC.html#NewsPAD
- minimax 13y ago
  That dude is Thomas Peterffy who founded Interactive Brokers and is now worth something like $6 billion.
ddeck 13y ago
It's a long video (with an agenda), but despite the somewhat conspiratorial tone, there's some really interesting stuff in there. For example, Thomas Peterffy (founder of Interactive Brokers) talking about how they built a robot typist during the 80's to get around NASDAQ rules that required all orders to be entered via the keyboard (14:25). From another interview [1]: "Q: What did that thing sound like when it was running?" "A: Like a machine gun. Brrrrr. Because it was typing so fast." [1] http://m.npr.org/story/159992076?url=/blogs/money/2012/08/27/159992076/a-father-of-high-speed-trading-thinks-we-should-slow-down http://m.npr.org/story/159992076?url=/blogs/money/2012/08/27...
- agravier 13y ago
  That is sort of awesome. Developments in robotics not to overcome physics, but to overcome arbitrary man-made rules (outside of a robotics competition). I'd like to see more of that as long as it's not military or violent.
  - grandalf 13y ago
    Arguably assembly plant robots exist to overcome arbitrary man-made rules (labor laws)... edit: not sure why this was downvoted.
    - tbrownaw 13y ago
      I thought they existed to overcome the limits of what humans are capable of. People are only able to move so fast, are only able to lift so much, become less mentally present after so long, etc.
      - grandalf 13y ago
        That's not generally true. In some cases robots offer improved precision, but in many cases a robotics-oriented factory takes a tremendous amount of capital to design/create and there would rarely be a business case to build it if human labor weren't so costly (due to labor laws).
- 13y ago
strongvigilance 13y ago
Like many vocal HFT critics, he was trying to play the same game, and was outcompeted.
newsmaster 13y ago
Is it possible for a non-finance orientated coder to get into the industry? Or does one need to be a math genius as well as a coder?
- lrm242 13y ago
  There are plenty of regular old software engineers in the industry. You don't have to be a math genius or a finance oriented guy. Doesn't mean you'll be trading or working directly with quants, but the amount of code required to make this work end to end is quite large and requires a lot of good software engineers.
- ollieglass 13y ago
  Related, what's the fin-tech equivalent of Hacker News? Is there one?
  - guiomie 13y ago
    zerohedge maybe ? It is not really tech, but a blog on economy and finance, and it does talk about HFT often.
    - kasey_junk 13y ago
      Maybe if hacker news thought everything wrong with the technology industry is due to startups. Hacker news is essentially the dailywtf for traders. Most of the people there have an ax to grind and/or no experience in real markets.
      - angersock 13y ago
        Do you mean zerohedge is the dailywtf for traders?
        kasey_junk 13y ago
        yes sorry
deleted 13y ago
[deleted]
augustuz 13y ago
See this: http://tabbforum.com/opinions/the-secret-world-of-algos-a-high-frequency-developer's-story http://tabbforum.com/opinions/the-secret-world-of-algos-a-hi...
rlwolfcastle 13y ago
Bodek ... is famous among traders for having broken the Street's omertà and complained to the Securities Exchange Commission in 2011 -- after his own HFT firm, Trading Machines, crashed and burned More disgruntled trader than whistleblower?
6thSigma 13y ago
> If Haim Bodek couldn’t beat the system, what chance do ordinary Apple investors have? Trading != investing
- jaynos 13y ago
  Ordinary Apple investor beating the system? Not sure what that would entail, but I do know that if you invested in Apple in 10 years ago, your investment would be worth a lot more today.
  - tedunangst 13y ago
    If you bought AAPL at $10.45 ten years ago, you'd have made $511 today. That's with one trade. But in 10 years of 252 trading days of 6.5 trading hours, there are 58968000 seconds. If you'd traded AAPL a million times every second, you'd have made $30132648000000000. That's a lot more money. See how unfair it is?
    - onebaddude 13y ago
      >But in 10 years of 252 trading days of 6.5 trading hours, there are 58968000 seconds. If you'd traded AAPL a million times every second, you'd have made $30132648000000000 This makes no sense whatsoever.
      - tedunangst 13y ago
        Indeed.
snarfy 13y ago
Can someone explain to me how HFT is different than front running? I fail to see the difference.
ffrryuu 13y ago
The age of heroes.

147 points by gpvos 13y ago

It disgusts me how much talent is wasted on nonsense like this. Like Haim is alluding to in the documentary, imagine if all these smart people focused on real problems instead. If this isn't a good argument for a transaction tax, I don't know what is. Say all you want about increasing efficiencies etc, but it's pretty clear to me that what the world needs is investors, not day traders.

aet 13y ago
Algorithmic and HFT lowers costs for retail traders. Transaction taxes increase costs for retail traders.
- ajays 13y ago
  I hear that often. If HFT is indeed lowering the cost, how come they are making the money and not the retail traders? This last quarter I may have bought/sold on the order of 10K shares max. If there's a $0.0001 tax per share traded, it would've cost me $1. That's ambient noise level.
  - mdkess 13y ago
    That would only be true if you had to pay the tax and nobody else did. Assuming the result of the tax is less liquidity, higher volatility and bigger spreads, it could cost you quite a bit more.
  - kasey_junk 13y ago
    Not all of them are making money. Most of the money is just being shuffled around between various firms. At any given time you can find an HFT firm making money and another one blowing up.
  - twoodfin 13y ago
    If HFT is indeed lowering the cost, how come they are making the money and not the retail traders? This sounds like an odd question if you transpose it to any other market where automated systems have lowered costs: "If Amazon is indeed lowering the cost of buying books, how come they are making the money and not the consumer?" "If Expedia is indeed lowering the cost of booking a plane ticket, how come they are making money and not the traveler?" "If Toyota is indeed lowering the cost of manufacturing a car, how come they are making the money and not the auto buyer?" Retail traders benefit from the cheaper trades facilitated by high liquidity in automated trading. There wouldn't be anywhere near as high liquidity in many of these stocks if there weren't automated systems trying to make money on penny price shifts.
    - tedunangst 13y ago
      That's a great point about Amazon. In fact, Amazon is playing the role of both exchange and market maker. Can you imagine the shitstorm of comments if a stock exchange tried that?
  - radikalus 13y ago
    It's not only about bid-ask spreads; I find this a gross oversimplification of what HFTs bring the market. Other things: - Prices around the world across all exchanges are kept in line. If you need to hedge your Yen exposure and can only trade in Europe, you will get the closest possible price as someone in Asia or the US. This is true across all asset classes. This lack of massive arbitrage may get a lot of investors/hedgers/speculators significantly better prices. - Derivatives on almost any asset are similarly tight as their underlying assets. No longer are you crossing wide/illiquid markets to hedge back month products or options. In a lot of markets, you can trade tight/liquid markets at almost any tenure; this is potentially a LARGE cost savings particularly compared to what some of the markets looked like a decade ago. - Stat Arb + Relative value spreads are kept in line with their variance structures. Stocks move in line with their eigen components, options move smoothly with their volatility structures, futures at various tenures are priced in line with their synthetic interest rate exposure. Without being able to accurately price something, most participants are able to get a 'good' price on almost anything. While a lot of the HFT is indeed zero sum between firms, the net economic effect of their activity is certainly not. The amount of $ that most firms make from the HFT business is really not that large; most of the big trading firms have made their fortunes from large speculative/fortunate events, not from being the best at constantly collecting a 1/10th of a tick of edge over and over.
qubitsam 13y ago
raganwald shared a similar sentiment a while back [1] and was discussed here on HN [2]. [1] http://neighborhoodhacker.com/why-the-fuck-raganwalds-posterous/ http://neighborhoodhacker.com/why-the-fuck-raganwalds-poster... [2] https://news.ycombinator.com/item?id=5088815 https://news.ycombinator.com/item?id=5088815
theorique 13y ago
And who's going to give those investors their shares and exits when they want to trade? The question that needs to be answered is where trading stocks crosses over between moral to neutral to immoral. If we assume: nanoseconds = worse than Hitler decades = saintly Warren Buffett then there must be some timescale at which trading becomes good or evil. The challenge is that the faster traders operate as counterparties for the slower ones (and for each other). They absorb risk, provide liquidity, and establish definitive prices. One way to enforce a speed limit would be to have a crossing auction every second (similar to what they do prior to the open, or when a stock is halted, or for an IPO). If you wanted to be an active trader, you would participate in many such crossing auctions during the day.
grandalf 13y ago
Who should decide what is a "real problem" and what is "nonsense"? Simply being indignant about it does little to further the discussion.
- AkimChristine 13y ago
  Human beings with a brain, in discussion with other humans, creating the kind of world they want to live in. Just like everything else in the world is decided. It makes no sense at all to pretend that humans are too stupid to understand what is and is not good for our planet. The whole point of having language and intelligence is that it should be used, not just discarded with some discredited hand wave that "if we just do nothing, everything will work out for the best!"
  - lmm 13y ago
    > It makes no sense at all to pretend that humans are too stupid to understand what is and is not good for our planet. The whole point of having language and intelligence is that it should be used, not just discarded with some discredited hand wave that "if we just do nothing, everything will work out for the best!" Centrally planned economies have been tried. The Soviet Union discouraged a lot of research into areas like psychology that they saw as pointless; artists had to conform to traditional styles. It didn't turn out very well. Letting the market allocate resources has a lot of inefficiencies, but it works better than any alternative that has been tried.
    - flumbaps 13y ago
      > Letting the market allocate resources has a lot of inefficiencies, but it works better than any alternative that has been tried. I don't think we've ever tried having the market solely allocate resources. I think pretty much every government has regulated trade, collected taxes, that sort of thing. What seems to have worked best would be letting the market allocate resources to some extent, but collecting taxes and investing in long term goals (such as research and infrastructure). But maybe this isn't necessary, maybe in a truly free market there would always be genius entrepreneurs like Elon Musk appearing every now and again to progress humanity. Still, there's a massive difference between the kinds of long term planning that modern western democracies already do and a communist dictatorship.
stygiansonic 13y ago
It's really a balance - you say the world needs "investors" and not "day traders". By this, I am assuming you mean those who purchase shares using a buy-and-hold strategy as opposed to those who seek to profit off of short term swings. It's difficult to have one without the other. Day traders and speculators supply the liquidity that enables long-term investors to buy in when they choose to do so. This does improve the efficiency of the markets, as there has to be another side to every trade. To take it to the extreme: If everyone was a buy-and-hold investor, what would happen? IPOs and infrequent sells from buy-and-holds existing would be the only supply of stock. Would this be efficient? (Note: I'm not asking this as rhetorical question as I actually don't know the answer) I am not arguing for or against HFT, as I've read both sides (from "they provide liquidity and lower spreads" to "they are akin to parasitic front-runners") and am not sure of where the truth lies. Instead, I'm just arguing against this concept that "day trading" provides no value.
diydsp 13y ago
> investors, not day traders. Yes, did you see the angst when that one trader got stuck with a stock "overnight" ? He acted like having a stock overnight was the stupidest possible thing. Imagine holding a stock for 12 months! Goodness!
dragontamer 13y ago
Day traders help stabilize the prices and ensure liquidity. Sure, they screw over other day-traders to get that position, but long-term investors overall benefit from this sort of squabbling. These HFT guys are complaining about fractions of a penny. Meanwhile, illiquid markets such as the Bond Market have real issues going on, where bid/ask spreads are completely opaque, and pricing on the same bonds are vastly different from broker to broker. (with differences measured in hundreds of dollars... not fractions of a penny)
deleted 13y ago
[deleted]

willvarfar 13y ago

Early on in the video there is mention of Haim Bodek's first speech where the audience was astounded. Does anyone have a link/vid for this speech? I've googled and youtubed without luck.

hft_throwaway 13y ago
http://showyou.com/v/y-ItfAKguEdAE/haim-bodek-hft-is-an-artificial-industry-tradetech-2013?u=jhcrater http://showyou.com/v/y-ItfAKguEdAE/haim-bodek-hft-is-an-arti... - this possibly? Take it with a grain of salt. He claims one can just use these order types and be fast to basically print money, but glosses over the important parts like deciding how to price a market, when to add or remove liquidity, etc. When he says things like "HFTs use resting orders as insurance to exit at zero-risk", ask yourself how they make those decisions without having some kind of predictive abilities.

yummyfajitas 13y ago

Is there a text explanation of this? I'm curious to learn what the allegation is, but I don't have 50 minutes to spend on what is likely a silly conspiracy theory. The small amount of text present suggests someone is being allowed to jump the queue. Is that the allegation, or does it go beyond that?

hft_throwaway 13y ago
It's an allegation. He's basically referring to Direct Edge's Hide-not-slide order type. The only equities exchange I know of that lets you jump the queue is NYSE where DMMs and floor brokers can join a level and participate along with the front of the electronic book. DMMs have negative obligations though.
pheon 13y ago
didnt RTFM thus missed an important detail. Put another way, hes so smart but losing money in the market thus the market is "wrong" and someone is cheating.
siegecraft 13y ago
I can't speak to the specifics in this video, but if you want a detailed, text-based explanantion of HFT shenanigans, there's tons of technical details at http://www.nanex.net/flashcrash/ongoingresearch.html http://www.nanex.net/flashcrash/ongoingresearch.html (algos crashing exchanges, running wild and losing insane amounts of money only to have those losses rolled back [sometimes], algos reacting to news a few seconds before it's officially released, etc).
- yummyfajitas 13y ago
  I've seen Nanex's pretty graphs, but I've never seen an explanation from them. All they do is highlight graphs with wild oscillations and then declare "ooh, evil!"
  - smcl 13y ago
    Me too, the graphs are impressive but hard to digest. The explanations are often very good, however.

hft_throwaway 13y ago

What Haim's referring to are a set of order types used on many exchanges to allow traders to place orders on a level that can't be displayed for regulatory reasons. There's nothing nefarious about them. Reg NMS prohibits exchanges from displaying quotes that would lock (bid==ask) or cross (bid>ask) another marketplace. As an example, say BATS is 10.01 bid 10.02 offered and the 10.02 offer trades out completely. Some HFTs want to be the first to form the new 10.02 bid to earn the spread + liquidity rebate, so they send post-only bids at 10.02. BATS sees stale 10.02 offers on ARCA, so they re-price the trader's order to 10.01 bid, or reject it (behavior depends on the exchange). In response to this, HFT algos would repeatedly re-submit their orders until the exchange let them in. This led to enormous stress on their matching engines during price moves. In response, exchanges created order types that would let the trader bid 10.02, but only display it once the away markets faded from their point of view. It's basically like having a callback API rather than a polling one. The end result is basically the same, except less load is placed on the exchange's matching engine. There's nothing "rigged" about this behavior. Traders forming new price levels on public markets still incur substantial risk that the price will move against them when filled. There aren't any order types that let you get execution priority in front of a large queue like he describes. These order types and their behavior were well-documented on public websites and anyone concerned with the microstructure of how their trades executed could easily use them. The game he's describing is of little concern to anyone other than HFT MMs and execution algos that depend on favorable queue position. The entire process of a level ticking away and a new price being formed in liquid tick-wide names plays out in microseconds these days.

phyalow 13y ago
I enjoy reading your comments. I have read Patterson's book which scratches the surface in "Dark Pools", Haim's book "The problem of HFT" and his regular pieces on Zerohedge. I cannot help but feel that Bodek has an ulterior motive "for exposing the system"... I don't buy his narrative largely because all this so called adverse behaviour is widely described in literature especially in exchange/venue published documentation, support and educational material. A prime example is on page 93 of his book [5] which is a scalping scenario based on inter-market sweep orders (he attributes to a significant loss of capital at Trading Machines) to this strategy... Come on Haim really? you never considered the adverse affects of placing vanilla limit orders? The books [1], [2] and [4] touch on these exact scenarios. I don't buy for a second that he couldn't have picked up a phone and called his account manager/support technician at X venue, or his broker to ask why he was getting an abysmally low rate of fills, or seek colour on orderbook oddities. Despite his lofty background it appears he was out of his depth at "trading machines" and now is attempting to sell his ideas to anyone that will listen. I do commend him though on shedding light over the field and on getting me interested in HFT/execution. For anyone interested in learning more, some books I would recommend: [1] Dark Pools - Erik Banks (2010). [2] Empirical Market Microstructure - Joel Hasbrock (2007). [3] Dark Pools - Scott Patterson (2012). [4] HFT - Irene Alridge (2010). Also if anyone is interested here is Haim Bodek's recently self-published book: [5] http://www.amazon.com/Problem-HFT-Collected-Frequency-Structure-ebook/dp/B00B1UDSS4 http://www.amazon.com/Problem-HFT-Collected-Frequency-Struct...

kumarm 13y ago

Golden at 13:00. The dude brings up iPad like device he invented in 1980 (Touch screen none the less). Says he doesn't believe in patenting as it will stop other people from inventing.

csmuk 13y ago
Everyone has invented an iPad. This is not news. Even with ARM CPUs and touch screens... http://acorn.chriswhy.co.uk/Computers/NC.html#NewsPAD http://acorn.chriswhy.co.uk/Computers/NC.html#NewsPAD
minimax 13y ago
That dude is Thomas Peterffy who founded Interactive Brokers and is now worth something like $6 billion.

ddeck 13y ago

It's a long video (with an agenda), but despite the somewhat conspiratorial tone, there's some really interesting stuff in there. For example, Thomas Peterffy (founder of Interactive Brokers) talking about how they built a robot typist during the 80's to get around NASDAQ rules that required all orders to be entered via the keyboard (14:25). From another interview [1]: "Q: What did that thing sound like when it was running?" "A: Like a machine gun. Brrrrr. Because it was typing so fast." [1] http://m.npr.org/story/159992076?url=/blogs/money/2012/08/27/159992076/a-father-of-high-speed-trading-thinks-we-should-slow-down http://m.npr.org/story/159992076?url=/blogs/money/2012/08/27...

agravier 13y ago
That is sort of awesome. Developments in robotics not to overcome physics, but to overcome arbitrary man-made rules (outside of a robotics competition). I'd like to see more of that as long as it's not military or violent.
- grandalf 13y ago
  Arguably assembly plant robots exist to overcome arbitrary man-made rules (labor laws)... edit: not sure why this was downvoted.
  - tbrownaw 13y ago
    I thought they existed to overcome the limits of what humans are capable of. People are only able to move so fast, are only able to lift so much, become less mentally present after so long, etc.
    - grandalf 13y ago
      That's not generally true. In some cases robots offer improved precision, but in many cases a robotics-oriented factory takes a tremendous amount of capital to design/create and there would rarely be a business case to build it if human labor weren't so costly (due to labor laws).
13y ago

strongvigilance 13y ago

Like many vocal HFT critics, he was trying to play the same game, and was outcompeted.

newsmaster 13y ago

Is it possible for a non-finance orientated coder to get into the industry? Or does one need to be a math genius as well as a coder?

lrm242 13y ago
There are plenty of regular old software engineers in the industry. You don't have to be a math genius or a finance oriented guy. Doesn't mean you'll be trading or working directly with quants, but the amount of code required to make this work end to end is quite large and requires a lot of good software engineers.
ollieglass 13y ago
Related, what's the fin-tech equivalent of Hacker News? Is there one?
- guiomie 13y ago
  zerohedge maybe ? It is not really tech, but a blog on economy and finance, and it does talk about HFT often.
  - kasey_junk 13y ago
    Maybe if hacker news thought everything wrong with the technology industry is due to startups. Hacker news is essentially the dailywtf for traders. Most of the people there have an ax to grind and/or no experience in real markets.
    - angersock 13y ago
      Do you mean zerohedge is the dailywtf for traders?
      - kasey_junk 13y ago
        yes sorry

deleted 13y ago

[deleted]

augustuz 13y ago

See this: http://tabbforum.com/opinions/the-secret-world-of-algos-a-high-frequency-developer's-story http://tabbforum.com/opinions/the-secret-world-of-algos-a-hi...

rlwolfcastle 13y ago

Bodek ... is famous among traders for having broken the Street's omertà and complained to the Securities Exchange Commission in 2011 -- after his own HFT firm, Trading Machines, crashed and burned More disgruntled trader than whistleblower?

6thSigma 13y ago

> If Haim Bodek couldn’t beat the system, what chance do ordinary Apple investors have? Trading != investing

jaynos 13y ago
Ordinary Apple investor beating the system? Not sure what that would entail, but I do know that if you invested in Apple in 10 years ago, your investment would be worth a lot more today.
- tedunangst 13y ago
  If you bought AAPL at $10.45 ten years ago, you'd have made $511 today. That's with one trade. But in 10 years of 252 trading days of 6.5 trading hours, there are 58968000 seconds. If you'd traded AAPL a million times every second, you'd have made $30132648000000000. That's a lot more money. See how unfair it is?
  - onebaddude 13y ago
    >But in 10 years of 252 trading days of 6.5 trading hours, there are 58968000 seconds. If you'd traded AAPL a million times every second, you'd have made $30132648000000000 This makes no sense whatsoever.
    - tedunangst 13y ago
      Indeed.

snarfy 13y ago

Can someone explain to me how HFT is different than front running? I fail to see the difference.

ffrryuu 13y ago

The age of heroes.