6 ms·

Traders Profit With Computers Set at High Speed

53 points by mjfern 17y ago

joshu 17y ago
The "slow" traders had off-market places to find liquidity for a long time. Posit does a block crossing every half hour, with reports back to the exchenge. If fairness is such a concern, they should just do a once-a-day crossing. That'd be much more fair, but much less liquid.
ggruschow 17y ago
People want to know they have a legitimate shot at getting a fair deal. Ironically, it's articles like this that give them doubt. They could've just as easily written an article praising high-frequency trading for getting most participants a fairer deal. High-frequency trading has driven down costs. They're the main reason most people will only pay a 1c bid/ask spread for those Broadcom shares. Before computerized trading, they would've paid over 12x that. Additionally, as they push the systems to scale and force competition between markets, the per order and per share fees are driven down. They've also made the market more efficient, so most people don't get screwed by some slime taking them for a quarter to a dollar per share doing arbitrage against another market, mismarking the trade, or maybe the worst, an order his friend is holding in their pocket. Those things are now typically limited to less than a cent. High-frequency traders are usually overjoyed to average 1/4 of a cent profit. You'd be amazed at how many losing trades they do. For most orders, most of the screwing happens between the trader and the broker, not the trader and other traders. It's important to remember that there's two parties involved in every trade. One could easily say the Broadcom buyers described were upset they couldn't screw the sellers as badly anymore. If you look at the details of the Broadcom trading given in the article, it's likely even more simple than what they conjectured. 56,000 shares of Broadcom really isn't that much. It's only 1/2% of the number of Broadcom shares traded daily. The issue the buyers probably had was that MOST bids and offers in such stocks (>80%) are from computers running high-frequency trading strategies. If the computers just stop offering to sell more shares (the simplest reason being they hit their margin limit), you could get the same exact situation described.. Except now, there's nothing sinister at all going on. You just get to see how much they're normally helping you, and you'd write an article about how the SEC should increase the margins for high-frequency traders (which would be equally silly.. and meaningless since the large firms ignore the rules on that point anyway). Disclaimer: I put bread on the table doing this stuff.
- lliiffee 17y ago
  If I understand you, you are basically saying that the main effect of HFT is that the people who bought Broadcom paid more to the people who sold Broadcom, with a small percentage going to the HFT middlemen? Thus, HFT decreases the advantage of people who have more knowledge of the market (the buyers in this case) over those with less knowledge (sellers). Correct? > They've also made the market more efficient, so most people don't get screwed by some slime taking them for a quarter to a dollar per share doing arbitrage against another market, mismarking the trade, or maybe the worst, an order his friend is holding in their pocket. If someone is a "slime" to do arbitrage against another market, how come it is suddenly okay when HFT does it?
  - ggruschow 17y ago
    If I understand you Sorry, probably my error. The main takeaway should've been that the article is skewed, inaccurately presenting traditional traders just as victims, and algorithmic traders as entirely bad. how come it is suddenly okay when HFT does it? I didn't say that. Show me a clean portion of the financial world, and I'll be shocked.
  - jimmybot 17y ago
    Yeah, I mean, if anything, I much prefer those acting on knowledge to those acting simply on just observing moves of others. Decreasing the incentives of the smart money doesn't seem to do anyone any favors.
- ynniv 17y ago
  I don't understand how high frequency trading could be considered beneficial. In the article's example, HFT captures some profit from an unknown trend simply by being faster than the traditional participants. This directly benefits those who can get their software closest to the servers running the markets, to which the average person is limited. Insiders like Goldman Sachs can run their software directly on the routers connecting the markets, and thus benefit from insider access to a natural monopoly on speed. To be clear, this has nothing to do with algorithmic trading. Using computers to detect trends or to plan strategic trades is natural and healthy for the market. I am also not suggesting that computerized trading and reduced fees are bad - they have made the market far more efficient. > One could easily say the Broadcom buyers described were upset they couldn't screw the sellers as badly anymore. But in this case, the Broadcom sellers AND buyers were both screwed by a third party, who bought at a price that hurt sellers and sold at a price that hurt buyers, on the order of milliseconds. This third party runs the same scheme all day, every day, taking money out of everyone's pocket without doing any real work. This is why people would distrust the market.
mhb 17y ago
Not that this is practical, but I wonder what the effect would be of adding a random (milliseond scale) delay to the transmission of orders. Maybe that would force a longer-term outlook (seconds instead of milliseconds). I suppose the effect would just be for firms to find ways around the delay.
- joezydeco 17y ago
  Wasn't there a proposal floating around to make all orders valid for one second, effectively killing these types of trades? I'm all for that. No individual investor can cancel a trade that quickly, how come it's okay for GS and all the other traders to do it?
rbanffy 17y ago
I wonder what the effect of making quick bid/cancel or increasing the cost of canceling a bid would do to the market. My suspicion is that it would make HFT less useful, but, as all things in game theory, results can be surprising.
URSpider94 17y ago
The part of this article that concerned me is the rapid bid/cancel scheme. Traditionally, the cost of finding out about price elasticity in the market is that you have to sell/buy some product and see how the market responds. This kind of rapid bid/cancel would be the equivalent of placing a bid on Ebay to see if your competitor's max auto-bid will top it, then retracting your bid. Do this on a regular basis, and you can figure out exactly how much you'd have to bid to beat out your opponents, without putting a cent at risk. A policy that any order must remain in force for at least one full second (long enough for standard electronic trading services to act on it) would probably limit this behavior.
ewjordan 17y ago
While markets are supposed to ensure transparency by showing orders to everyone simultaneously, a loophole in regulations allows marketplaces like Nasdaq to show traders some orders ahead of everyone else in exchange for a fee. That's just wrong, plain and simple, as is the colocation of certain privileged servers next to (and I mean literally right next to, in the same rooms, even) exchange computers. The exchanges should not be able to profit by offering certain customers higher quality access to data that is supposed to be equally available to all, it seriously raises doubts about the fairness of the system as a whole.
EinhornIsFinkle 17y ago
FWIW, the blog ZeroHedge (www.zerohedge.com) has been following this topic in much more detail for months. The fact that some banks like GS are allowed to have their servers and other equipment co-located at the exchange while most others are prohibited is suspicious albeit not damning. I think the bigger issue here are the dark pools that continue to grow largely due to HFT on the exchanges. When 75%+ of the volume is coming from HFT, a lot of transaction end up occurring off the map reducing transparency and brining along its consequences.
- deleted 17y ago
  [deleted]
known 17y ago
Do we need stock exchanges exclusive for Value Investors?

53 points by mjfern 17y ago

joshu 17y ago

The "slow" traders had off-market places to find liquidity for a long time. Posit does a block crossing every half hour, with reports back to the exchenge. If fairness is such a concern, they should just do a once-a-day crossing. That'd be much more fair, but much less liquid.

ggruschow 17y ago

People want to know they have a legitimate shot at getting a fair deal. Ironically, it's articles like this that give them doubt. They could've just as easily written an article praising high-frequency trading for getting most participants a fairer deal. High-frequency trading has driven down costs. They're the main reason most people will only pay a 1c bid/ask spread for those Broadcom shares. Before computerized trading, they would've paid over 12x that. Additionally, as they push the systems to scale and force competition between markets, the per order and per share fees are driven down. They've also made the market more efficient, so most people don't get screwed by some slime taking them for a quarter to a dollar per share doing arbitrage against another market, mismarking the trade, or maybe the worst, an order his friend is holding in their pocket. Those things are now typically limited to less than a cent. High-frequency traders are usually overjoyed to average 1/4 of a cent profit. You'd be amazed at how many losing trades they do. For most orders, most of the screwing happens between the trader and the broker, not the trader and other traders. It's important to remember that there's two parties involved in every trade. One could easily say the Broadcom buyers described were upset they couldn't screw the sellers as badly anymore. If you look at the details of the Broadcom trading given in the article, it's likely even more simple than what they conjectured. 56,000 shares of Broadcom really isn't that much. It's only 1/2% of the number of Broadcom shares traded daily. The issue the buyers probably had was that MOST bids and offers in such stocks (>80%) are from computers running high-frequency trading strategies. If the computers just stop offering to sell more shares (the simplest reason being they hit their margin limit), you could get the same exact situation described.. Except now, there's nothing sinister at all going on. You just get to see how much they're normally helping you, and you'd write an article about how the SEC should increase the margins for high-frequency traders (which would be equally silly.. and meaningless since the large firms ignore the rules on that point anyway). Disclaimer: I put bread on the table doing this stuff.

lliiffee 17y ago
If I understand you, you are basically saying that the main effect of HFT is that the people who bought Broadcom paid more to the people who sold Broadcom, with a small percentage going to the HFT middlemen? Thus, HFT decreases the advantage of people who have more knowledge of the market (the buyers in this case) over those with less knowledge (sellers). Correct? > They've also made the market more efficient, so most people don't get screwed by some slime taking them for a quarter to a dollar per share doing arbitrage against another market, mismarking the trade, or maybe the worst, an order his friend is holding in their pocket. If someone is a "slime" to do arbitrage against another market, how come it is suddenly okay when HFT does it?
- ggruschow 17y ago
  If I understand you Sorry, probably my error. The main takeaway should've been that the article is skewed, inaccurately presenting traditional traders just as victims, and algorithmic traders as entirely bad. how come it is suddenly okay when HFT does it? I didn't say that. Show me a clean portion of the financial world, and I'll be shocked.
- jimmybot 17y ago
  Yeah, I mean, if anything, I much prefer those acting on knowledge to those acting simply on just observing moves of others. Decreasing the incentives of the smart money doesn't seem to do anyone any favors.
ynniv 17y ago
I don't understand how high frequency trading could be considered beneficial. In the article's example, HFT captures some profit from an unknown trend simply by being faster than the traditional participants. This directly benefits those who can get their software closest to the servers running the markets, to which the average person is limited. Insiders like Goldman Sachs can run their software directly on the routers connecting the markets, and thus benefit from insider access to a natural monopoly on speed. To be clear, this has nothing to do with algorithmic trading. Using computers to detect trends or to plan strategic trades is natural and healthy for the market. I am also not suggesting that computerized trading and reduced fees are bad - they have made the market far more efficient. > One could easily say the Broadcom buyers described were upset they couldn't screw the sellers as badly anymore. But in this case, the Broadcom sellers AND buyers were both screwed by a third party, who bought at a price that hurt sellers and sold at a price that hurt buyers, on the order of milliseconds. This third party runs the same scheme all day, every day, taking money out of everyone's pocket without doing any real work. This is why people would distrust the market.

mhb 17y ago

Not that this is practical, but I wonder what the effect would be of adding a random (milliseond scale) delay to the transmission of orders. Maybe that would force a longer-term outlook (seconds instead of milliseconds). I suppose the effect would just be for firms to find ways around the delay.

joezydeco 17y ago
Wasn't there a proposal floating around to make all orders valid for one second, effectively killing these types of trades? I'm all for that. No individual investor can cancel a trade that quickly, how come it's okay for GS and all the other traders to do it?

rbanffy 17y ago

I wonder what the effect of making quick bid/cancel or increasing the cost of canceling a bid would do to the market. My suspicion is that it would make HFT less useful, but, as all things in game theory, results can be surprising.

URSpider94 17y ago

The part of this article that concerned me is the rapid bid/cancel scheme. Traditionally, the cost of finding out about price elasticity in the market is that you have to sell/buy some product and see how the market responds. This kind of rapid bid/cancel would be the equivalent of placing a bid on Ebay to see if your competitor's max auto-bid will top it, then retracting your bid. Do this on a regular basis, and you can figure out exactly how much you'd have to bid to beat out your opponents, without putting a cent at risk. A policy that any order must remain in force for at least one full second (long enough for standard electronic trading services to act on it) would probably limit this behavior.

ewjordan 17y ago

While markets are supposed to ensure transparency by showing orders to everyone simultaneously, a loophole in regulations allows marketplaces like Nasdaq to show traders some orders ahead of everyone else in exchange for a fee. That's just wrong, plain and simple, as is the colocation of certain privileged servers next to (and I mean literally right next to, in the same rooms, even) exchange computers. The exchanges should not be able to profit by offering certain customers higher quality access to data that is supposed to be equally available to all, it seriously raises doubts about the fairness of the system as a whole.

EinhornIsFinkle 17y ago

FWIW, the blog ZeroHedge (www.zerohedge.com) has been following this topic in much more detail for months. The fact that some banks like GS are allowed to have their servers and other equipment co-located at the exchange while most others are prohibited is suspicious albeit not damning. I think the bigger issue here are the dark pools that continue to grow largely due to HFT on the exchanges. When 75%+ of the volume is coming from HFT, a lot of transaction end up occurring off the map reducing transparency and brining along its consequences.

deleted 17y ago
[deleted]

known 17y ago

Do we need stock exchanges exclusive for Value Investors?