7 ms·

How, precisely, does an HFT tax a stock transaction that I make?

by harryh 13y ago

dredmorbius 13y ago
By getting in before you on the seller. HFT arbitrages the price differential by means of moving faster than you can. Rather than buying Wigets-R-Us at $100/share, the HFT slips in with a, say, $99.99 offer to the seller, and offers you $100.01. Rinse, wash, repeat a few million times a day, and those two cents add up. And it's cost you (and the seller) a penny a share each. The numbers are made up here, but that's the principle.
- gd1 13y ago
  You have no actual idea how a limit order book works do you?
  - deleted 13y ago
    [deleted]
  - dredmorbius 13y ago
    You have no idea how to actually write an informational comment rather than hinting at some received wisdom and greater general understanding without actually revealing any of it, wrapped in condescension which actually lands far of the mark and fails to address the points raised here, do you?
    - gd1 13y ago
      Fine, I'll attempt to parse through your example. "Rather than buying Wigets-R-Us at $100/share, the HFT slips in with a, say, $99.99 offer to the seller, and offers you $100.01." So, 2 possibilities, you don't say, but you are sending a limit order to buy at $100 or a market (or marketable limit, or fill-and-kill) order to buy at $100. Apparently, you seem to be suggesting that there is a seller in the market, presumably offering at $100. Now, you seem to be suggesting that the HFT sees your order before it hits the matching engine (nonsense) and also that they can somehow re-negotiate with the seller and get him to lower his limit sell to 99.99 (I'm not sure how, do they send goons around to kneecap him if he doesn't? All in the 20 milliseconds your order is on the way to the market?). " and offers you $100.01" ...but let's assume that somehow the magic omnipotent packet-sniffing HFT knows your order is enroute to the exchange, can force market participants to lower their offers, now you're claiming that it can force you to buy at $100.01. Why didn't you send a limit buy at $100, if that's the price you wanted, you saw, and were prepared to pay? >wrapped in condescension If you want to write entire paragraphs about something you know nothing about, you're not really adding to the conversation are you? So you'll open yourself up to a little condescension.
      - dredmorbius 13y ago
        Thanks, that's better than your first pass, though I'm still not buying the story. My social engineering effort worked though. I'll freely admit I find this confusing. And that's with having studied this shit in school and worked in the financial industry (in trading no less). There are a number of methods of getting inside or around the order book, most of which involve breaking rules. But the regulators aren't even playing catch-up, they're so far behind. HFT is very time sensitive, operating at or within the 250 microsecond window -- that's the time a light beam takes to travel 75 km. So one way of jumping in on the order is being, say, a few thousand km closer to the exchange than some other trader. As to limit orders (and you really haven't explained how the order book avoids this), by beating others to the trade on both sides of the order, the HFT can get in and spin the equity, taking a cut, or stealing your trade (you look to buy at $100, seller is at $99.99, HFT buys at $99.99 but finds a buyer at $100.01). The point is that by inserting themselves between other traders, by virtue of speed, HFTs skim a proft. It's small (and was enabled largely by decimalization), but can be made up for in volume. The saving grace is that the HFTs are up against one another (at least until they start colluding), so they're weaving complexity traps against one another that wear down the advantage. Though there's the risk of more flash crashes and other disasters resulting from processes they barely understand themselves.
        gd1 13y ago
        You're still not getting it. You send your messages on a private link to the exchange. Then the exchange processes them (either puts an order in the order book) or matches a trade, and only then publishes that this has happened on the public market feed. At which point other participants can react. This: "So one way of jumping in on the order is being, say, a few thousand km closer to the exchange than some other trader." ...is silly. No one gets to jump in front of anyone. Being closer to the exchange allows you to react quicker to a public event, but not a private one (which you can't see). In fact, even if you could somehow see someone else's TCP packets departing, from point A to the exchange, and you were in co-location next to the exchange at point B, you'd still have to get the information in their packet from point A to point B, run decision logic on it, then dispatch your own orders to the exchange (point B to the exchange). Faster than their already in-flight packet could arrive. It would still be impossible. What you're talking about is a common public misconception, that somehow the HFT bogeyman sees your order before it arrives.
- deleted 13y ago
  [deleted]
  - dredmorbius 13y ago
    There are numerous ways: http://www.stocktrading.com/HFTDennis.ppt http://www.stocktrading.com/HFTDennis.ppt http://online.wsj.com/news/articles/SB10000872396390444032404578006043208324014 http://online.wsj.com/news/articles/SB1000087239639044403240... Broker-dealer internalization, queue jumping, flash trading. Regulators are years behind the traders on methods. Trading center proximity is a big one. The Internet travels at the speed of light (actually, somewhat less than that). Which is finite and within the bounds of algorithmic trading. The HFTs get pricing data before the general public, even if it's just a few thousandths of a second (5000 km is about 0.01 light seconds, 500km is 0.001 ls). With HFT operating at the 250 microsecond level, 75 km is significant. http://queue.acm.org/detail.cfm?ref=rss&id=2536492 http://queue.acm.org/detail.cfm?ref=rss&id=2536492 Or just plain cheating. Remember the Chicago Faster-Than-Light trades? http://www.theverge.com/2013/10/3/4798542/whats-faster-than-a-light-speed-trade-inside-the-sketchy-world-of http://www.theverge.com/2013/10/3/4798542/whats-faster-than-...
- harryh 13y ago
  Am I trying to place a market order or a limit order for Widgets-R-Us in the scenario you describe? Precision is important here.
  - dredmorbius 13y ago
    A limit order only specifies your price. Nothing keeps the HFT from getting between you and another long-term trader in that case. Which can have a few effects. One is that the seller loses on additional value. The other is that the HFT has bought from a seller who would have sold to you, but sees a higher buy price and sells to that instead, so you miss your trade. For low-volume traders these aren't huge issues, but for institutionals or others looking to make or exit a large position the costs can mount. Again: HFT wouldn't be undertaken if there wasn't value to be extracted in doing it, and that value is coming directly from other buyers and sellers, just as when you introduce a middleman to any other transaction.
    - harryh 13y ago
      HFTs certainly are making money. But they're making money by making the market. And they're making a lot less money than they used to which you can see because spreads have shrunk dramatically. This is because computers can do this job much faster and cheaper than the humans who did it before could. It's the same kind of automation we've seen in many other industries.
      - dredmorbius 13y ago
        But they're making money by making the market. That's ... an unsubtantiated assertion. Lots of evidence to suggest the situation's otherwise, at least in large part. There was an excellent ACM paper posted to HN a few weeks back: http://queue.acm.org/detail.cfm?ref=rss&id=2536492 http://queue.acm.org/detail.cfm?ref=rss&id=2536492

How, precisely, does an HFT tax a stock transaction that I make?

by harryh 13y ago

How, precisely, does an HFT tax a stock transaction that I make?

By getting in before you on the seller. HFT arbitrages the price differential by means of moving faster than you can. Rather than buying Wigets-R-Us at $100/share, the HFT slips in with a, say, $99.99 offer to the seller, and offers you $100.01. Rinse, wash, repeat a few million times a day, and those two cents add up. And it's cost you (and the seller) a penny a share each. The numbers are made up here, but that's the principle.

gd1 13y ago
You have no actual idea how a limit order book works do you?
- deleted 13y ago
  [deleted]
- dredmorbius 13y ago
  You have no idea how to actually write an informational comment rather than hinting at some received wisdom and greater general understanding without actually revealing any of it, wrapped in condescension which actually lands far of the mark and fails to address the points raised here, do you?
  - gd1 13y ago
    Fine, I'll attempt to parse through your example. "Rather than buying Wigets-R-Us at $100/share, the HFT slips in with a, say, $99.99 offer to the seller, and offers you $100.01." So, 2 possibilities, you don't say, but you are sending a limit order to buy at $100 or a market (or marketable limit, or fill-and-kill) order to buy at $100. Apparently, you seem to be suggesting that there is a seller in the market, presumably offering at $100. Now, you seem to be suggesting that the HFT sees your order before it hits the matching engine (nonsense) and also that they can somehow re-negotiate with the seller and get him to lower his limit sell to 99.99 (I'm not sure how, do they send goons around to kneecap him if he doesn't? All in the 20 milliseconds your order is on the way to the market?). " and offers you $100.01" ...but let's assume that somehow the magic omnipotent packet-sniffing HFT knows your order is enroute to the exchange, can force market participants to lower their offers, now you're claiming that it can force you to buy at $100.01. Why didn't you send a limit buy at $100, if that's the price you wanted, you saw, and were prepared to pay? >wrapped in condescension If you want to write entire paragraphs about something you know nothing about, you're not really adding to the conversation are you? So you'll open yourself up to a little condescension.
    - dredmorbius 13y ago
      Thanks, that's better than your first pass, though I'm still not buying the story. My social engineering effort worked though. I'll freely admit I find this confusing. And that's with having studied this shit in school and worked in the financial industry (in trading no less). There are a number of methods of getting inside or around the order book, most of which involve breaking rules. But the regulators aren't even playing catch-up, they're so far behind. HFT is very time sensitive, operating at or within the 250 microsecond window -- that's the time a light beam takes to travel 75 km. So one way of jumping in on the order is being, say, a few thousand km closer to the exchange than some other trader. As to limit orders (and you really haven't explained how the order book avoids this), by beating others to the trade on both sides of the order, the HFT can get in and spin the equity, taking a cut, or stealing your trade (you look to buy at $100, seller is at $99.99, HFT buys at $99.99 but finds a buyer at $100.01). The point is that by inserting themselves between other traders, by virtue of speed, HFTs skim a proft. It's small (and was enabled largely by decimalization), but can be made up for in volume. The saving grace is that the HFTs are up against one another (at least until they start colluding), so they're weaving complexity traps against one another that wear down the advantage. Though there's the risk of more flash crashes and other disasters resulting from processes they barely understand themselves.
      - gd1 13y ago
        You're still not getting it. You send your messages on a private link to the exchange. Then the exchange processes them (either puts an order in the order book) or matches a trade, and only then publishes that this has happened on the public market feed. At which point other participants can react. This: "So one way of jumping in on the order is being, say, a few thousand km closer to the exchange than some other trader." ...is silly. No one gets to jump in front of anyone. Being closer to the exchange allows you to react quicker to a public event, but not a private one (which you can't see). In fact, even if you could somehow see someone else's TCP packets departing, from point A to the exchange, and you were in co-location next to the exchange at point B, you'd still have to get the information in their packet from point A to point B, run decision logic on it, then dispatch your own orders to the exchange (point B to the exchange). Faster than their already in-flight packet could arrive. It would still be impossible. What you're talking about is a common public misconception, that somehow the HFT bogeyman sees your order before it arrives.
deleted 13y ago
[deleted]
- dredmorbius 13y ago
  There are numerous ways: http://www.stocktrading.com/HFTDennis.ppt http://www.stocktrading.com/HFTDennis.ppt http://online.wsj.com/news/articles/SB10000872396390444032404578006043208324014 http://online.wsj.com/news/articles/SB1000087239639044403240... Broker-dealer internalization, queue jumping, flash trading. Regulators are years behind the traders on methods. Trading center proximity is a big one. The Internet travels at the speed of light (actually, somewhat less than that). Which is finite and within the bounds of algorithmic trading. The HFTs get pricing data before the general public, even if it's just a few thousandths of a second (5000 km is about 0.01 light seconds, 500km is 0.001 ls). With HFT operating at the 250 microsecond level, 75 km is significant. http://queue.acm.org/detail.cfm?ref=rss&id=2536492 http://queue.acm.org/detail.cfm?ref=rss&id=2536492 Or just plain cheating. Remember the Chicago Faster-Than-Light trades? http://www.theverge.com/2013/10/3/4798542/whats-faster-than-a-light-speed-trade-inside-the-sketchy-world-of http://www.theverge.com/2013/10/3/4798542/whats-faster-than-...
harryh 13y ago
Am I trying to place a market order or a limit order for Widgets-R-Us in the scenario you describe? Precision is important here.
- dredmorbius 13y ago
  A limit order only specifies your price. Nothing keeps the HFT from getting between you and another long-term trader in that case. Which can have a few effects. One is that the seller loses on additional value. The other is that the HFT has bought from a seller who would have sold to you, but sees a higher buy price and sells to that instead, so you miss your trade. For low-volume traders these aren't huge issues, but for institutionals or others looking to make or exit a large position the costs can mount. Again: HFT wouldn't be undertaken if there wasn't value to be extracted in doing it, and that value is coming directly from other buyers and sellers, just as when you introduce a middleman to any other transaction.
  - harryh 13y ago
    HFTs certainly are making money. But they're making money by making the market. And they're making a lot less money than they used to which you can see because spreads have shrunk dramatically. This is because computers can do this job much faster and cheaper than the humans who did it before could. It's the same kind of automation we've seen in many other industries.
    - dredmorbius 13y ago
      But they're making money by making the market. That's ... an unsubtantiated assertion. Lots of evidence to suggest the situation's otherwise, at least in large part. There was an excellent ACM paper posted to HN a few weeks back: http://queue.acm.org/detail.cfm?ref=rss&id=2536492 http://queue.acm.org/detail.cfm?ref=rss&id=2536492