8 ms·

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 reas

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...
w0utert 13y ago
I'm not knowledgeble about HFT by any stretch of imagination, but I watched this epsiode of VPRO Backlight when it aired on dutch TV, and what I got from it (not just from Bodek himself, but also the Nanex guy) that initially, these 'special' order types had been a close-kept 'secret' only known by insiders. Maybe not their existence, but how they could be used to 1-up every other HFT algo that wasn't in on this trick. The video isn't only interesting because of Haim Bodek's allegations by the way, there's quite a few fairly high-profile people (formerly) active in the HFT world commenting on how markets are effectively broken and unstable because of opaque HFT algorithms, stock exchanges actively promoting HFT to drive up the volume of trades (and hence their profits), and regulators not really doing anything to reduce the risk of flash crashes or penalize parties that completely break the market every once in a while.
- yummyfajitas 13y ago
  I don't know how Hide-not-slide orders could possibly be described as a "close-kept secret": http://bit.ly/17l8djU http://bit.ly/17l8djU Admittedly, just like Haim Bodek, DirectEdge uses an annoying voiceover format rather than just writing an easily skimmable document.
  - strongvigilance 13y ago
    I don't think the actual order type was a secret, just that some HFT firms figured out a way to use it which gave them an advantage over other HFT firms. The firms who didn't understand it lost out.
    - yummyfajitas 13y ago
      OMFG, people with smarter strategies have an advantage in the marketplace! Call the SEC!
      - jmcmichael 13y ago
        The whole point is that these 'smarter strategies' are only smarter because they are exploiting arbitrary API conventions, not smarter because they improve the utility of markets to society in general. Which is a tragedy, because if all these geniuses were working in the fields they trained in - computer science, physics, or bioinformatics - they would be contributing to society on a more fundamental level.
lrm242 13y ago
Exactly. The vast majority of "exotic" order types fall into generally two categories: 1) Orders that help deal with the asynchronous nature of the market. Removing the restriction on locked markets can reduce the need for these orders, but with that restriction in place these orders are a net benefit IMO. 2) Orders that help a participant control how an order is filled. Post only, etc, to ensure one gets a passive fill vs taking liquidity. There are no secrets here. These orders are all public. Whether you can use them or not is up to how you get to the market.
deleted 13y ago
[deleted]

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...

w0utert 13y ago

I'm not knowledgeble about HFT by any stretch of imagination, but I watched this epsiode of VPRO Backlight when it aired on dutch TV, and what I got from it (not just from Bodek himself, but also the Nanex guy) that initially, these 'special' order types had been a close-kept 'secret' only known by insiders. Maybe not their existence, but how they could be used to 1-up every other HFT algo that wasn't in on this trick. The video isn't only interesting because of Haim Bodek's allegations by the way, there's quite a few fairly high-profile people (formerly) active in the HFT world commenting on how markets are effectively broken and unstable because of opaque HFT algorithms, stock exchanges actively promoting HFT to drive up the volume of trades (and hence their profits), and regulators not really doing anything to reduce the risk of flash crashes or penalize parties that completely break the market every once in a while.

yummyfajitas 13y ago
I don't know how Hide-not-slide orders could possibly be described as a "close-kept secret": http://bit.ly/17l8djU http://bit.ly/17l8djU Admittedly, just like Haim Bodek, DirectEdge uses an annoying voiceover format rather than just writing an easily skimmable document.
- strongvigilance 13y ago
  I don't think the actual order type was a secret, just that some HFT firms figured out a way to use it which gave them an advantage over other HFT firms. The firms who didn't understand it lost out.
  - yummyfajitas 13y ago
    OMFG, people with smarter strategies have an advantage in the marketplace! Call the SEC!
    - jmcmichael 13y ago
      The whole point is that these 'smarter strategies' are only smarter because they are exploiting arbitrary API conventions, not smarter because they improve the utility of markets to society in general. Which is a tragedy, because if all these geniuses were working in the fields they trained in - computer science, physics, or bioinformatics - they would be contributing to society on a more fundamental level.

lrm242 13y ago

Exactly. The vast majority of "exotic" order types fall into generally two categories: 1) Orders that help deal with the asynchronous nature of the market. Removing the restriction on locked markets can reduce the need for these orders, but with that restriction in place these orders are a net benefit IMO. 2) Orders that help a participant control how an order is filled. Post only, etc, to ensure one gets a passive fill vs taking liquidity. There are no secrets here. These orders are all public. Whether you can use them or not is up to how you get to the market.

deleted 13y ago

[deleted]