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U.S. stock markets are rigged, says author Michael Lewis

223 points by schintan 13y ago

emmelaich 13y ago
I think it's been raised here before, but why can't all trades be submitted, kept secret then only executed simultaneously at some discrete interval - say every 5 minutes?
- kasey_junk 13y ago
  If you have 3 people buying at price x and 2 people selling at price x, which 2 of the 3 buyers get their purchase? The rules for this are the "matching algorithm". In most markets this is determined in a fifo fashion. Adding a discrete time delay wouldn't change this, there would still be a race to be first into the 5 minute period.
  - emmelaich 13y ago
    Then randomise rather than FIFO it. Or pro-rata it -- (an option submitted with the offer)
    - kasey_junk 13y ago
      So A) there are lots of markets that do pro-rata matching (larger orders get priority). B) there is a very reasonable bias against non-repeatable matching algorithms in current markets. If you did randomized matching and 1 market participant seemed to have very good "luck", how could you convince the other market participants that the fix wasn't in? You have to understand that modern markets assume the worst case when it comes to collusion, insider trading, etc. Randomized fills is the worst case scenario given those assumptions.
      - emmelaich 13y ago
        Perhaps publicise the random numbers used at the same time as the order is executed, together with the identifier for the particular trades in the queue.
        kasey_junk 13y ago
        Publishing the number would not in any way, alleviate the concern that the system was not fair. You are thinking about this problem from a mathematics stand point when the issue is a social one.
        emmelaich 13y ago
        I plead guilty to approaching from a mathematics PoV. My sole intent is to overcome the tyranny of distance and exploitation of the time difference. The only people I hope to convince are other, mathematically sophisticated traders. By social do you mean the public-at-large's suspicion?
        platz 13y ago
        1, 1, 1, 1, 1... Can you verify if this sequence is random or not?
        emmelaich 13y ago
        OK, I'm lets stipulate that I am not particularly mathematically sophisticated. However, I thought that you had a list of numbers at least as large as the number of trades expected in the 5 minute period, then you could order the trades by shuffling the numbers. I think it would not be too taxing to determine whether the sequence over time is random enough. That said, I'm starting to see whether that it would impossible to know whether any particular 5 minute (or maybe day's worth) of trading is random enough. Perhaps crypto can come to the rescue here. Publish lists of random numbers in advance pgp signed. Anyway, enough of my ramblings :-)
      - gizmo686 13y ago
        >there is a very reasonable bias against non-repeatable matching algorithms in current markets. What about psuedo-random that uses the trades themselves as a source of entropy?
    - RachelF 13y ago
      Or add a few hundred milliseconds of random jitter to the transaction time. This would remove any advantage to low-latency traders.
  - pak 13y ago
    Then forget the FIFO convention. How about a hardware random number generator? However, this doesn't fix the problem with placing and canceling lots of orders to sway the bucket toward the end of the 5-minute window. I suppose if some could do this faster at the end of the window then others, they would still retain an advantage. (Imagine somebody placing many orders, monitoring how many are likely to be fulfilled advantageously, and then cancelling the disadvantageous ones as close to the end of the window as possible.) That could perhaps be solved with fees for cancelling bids or asks.
    - kasey_junk 13y ago
      There are already fees attached with canceling large amounts of orders, and most exchanges provide less fees (or even rebates) for providing liquidity (being the order that is taken off the book) vs taking liquidity.
  - deleted 13y ago
    [deleted]
- hapless 13y ago
  Because it wouldn't reward insiders.
- joezydeco 13y ago
  "At an event hosted by the [Chicago Mercantile Exchange] in October, Leo Melamed, one of the pioneers of Chicago's financial futures markets, called Budish's proposal a "nonstarter." He said the markets are working pretty well and there's no need to fix something that isn't broken. Otherwise, Melamed said jokingly, "I'm going to consider going to North Korea and show them how they can become the center of finance in about three weeks." So yeah this has been discussed and no, the powers that be like things the way they are. Go figure. This will need stronger powers to force the hand of the traders. http://www.chicagotribune.com/business/ct-high-speed-trading-0330-biz-20140330,0,3561829.story http://www.chicagotribune.com/business/ct-high-speed-trading...
  - crdoconnor 13y ago
    You could hardly expect the people profiting from this to do anything except come out against it.
- bloaf 13y ago
  Its amazing how similar this line of reasoning sounds to the development of democracy mode in Twitch Plays Pokemon.
- sseveran 13y ago
  This is available on exchanges today. It usually happens 2 - 5 times per day.
stillsut 13y ago
Dare I say it, but... "To the tune of Ten of Billions" is that sooo material? That amount's not unheard of for a single company, hedge fund, hell even individual (there was also that guy that loss 8 Billion). If it's half of all trading volumne, but a tiny fraction of profit, then this is razor thin margins. In these areas, we've always been comfortable allowing the big boys in any industry (with their economies-of-scale) to execute efficiently, and hopefully compete each other out of ripping to rest of us off too bad.
- digz 13y ago
  The 'tens of billions' is also without context of how much money HFT save investors by basically keeping spreads at zero, and nearly always guaranteeing liquidity. Providing liquidity to the market isn't a public service... participants need to be compensated.
  - makomk 13y ago
    "Nearly always" guaranteeing liquidity isn't that useful a service - HFT's liquidity evaporates when it's most needed, like when the markets crash.
    - jplewicke 13y ago
      On the other hand, there's a very good reason why HFT liquidity has evaporated in previous crashes (such as the 2010 Flash Crash) -- the exchanges broke trades in an unpredictable fashion, so that any attempt at market-making would have opened the market maker to considerable risk. Let's say you step in during a major market crash and buy AAPL when it's trading at $200/share. Let say it then rises some more to $300/share and you sell, only to see the price recover to $500/share. What happens if the exchange breaks your original buy at $200? Then you end up being short on the way from $300 up to $500, even though you were right about the direction of trading and contributed liquidity during market distress. They've theoretically instituted a fix for this ( http://en.wikipedia.org/wiki/2010_Flash_Crash#Trading_curb http://en.wikipedia.org/wiki/2010_Flash_Crash#Trading_curb ) which will make it clear in advance what trades will be broken, so we'll have to see how HFT and market making responds in the next crash. Bid-ask spreads tend to widen significantly during market distress, which should actually increase the profitability of being a market maker during a crash.
snowwrestler 13y ago
I don't understand how HFT can make me pay more than I want to for a stock. I set a limit order--the limit is how much I'm willing to pay. If some HFT firm pushes the price past my limit, then I don't buy.
- nemasu 13y ago
  This is true, but I believe if you don't set a limit order, then the market value will go up. Then if the price keeps going up, you'll have missed your chance to buy the rest.
- wging 13y ago
  It can make you pay more than you otherwise would, not more than your limit.
- jcdavis 13y ago
  Just because you have a limit order doesn't mean you aren't getting fleeced, as you could've bought it for less otherwise (assuming some level of fixing as is suggested)
- jhonovich 13y ago
  You still lose. In your scenario, you are blocked out of buying the stock. And without a limit order, you get the stock but pay more. Imagine this happened when ordering food. Sure, you could put in a limit (no more than x french fries and y per fry) but your price would either be run up or you'd go hungry.
  - snowwrestler 13y ago
    But I'm not buying food, I'm buying a stock--which, unlike food is a totally optional purchase. My limit is the price at which I thought that stock was worth buying. If the price never falls that far, then I wouldn't want to buy it anyway.
    - barkingcat 13y ago
      HFT is manipulating the pricing so that it is no longer worth it for you to buy it, therefore fleecing you of the profits you would have made if they weren't there. Of course, this is not illegal (it's like any other type of trading, pushing up the value so it goes beyond what you're willing to pay) - but it's achieved by using robots in such a way that normal humans can't hope to compete. Of course, you can build your own robots (ie your own HFT software) to take advantage of the weaknesses of existing HFT programs, but if you can do this, you would be working at an ibank as a quant of some kind.
svedlin 13y ago
University of Michigan researchers proposed a "centralized call market" to mitigate fragmentation (inconsistent pricing and order handling across different exchanges) and latency disadvantages: http://www.ns.umich.edu/new/releases/21535-high-frequency-trading-tactic-lowers-investor-profits http://www.ns.umich.edu/new/releases/21535-high-frequency-tr... Haim Bodek discusses how certain exchanges provide special order types that give traders priority over others: http://online.wsj.com/news/articles/SB10000872396390443989204577599243693561670 http://online.wsj.com/news/articles/SB1000087239639044398920... Of course HFT is just a small part of the built-in asymmetries in the markets. Firms exploiting their own clients, conflicted investment advice, corrupt fund management, routinized insider trading, retail bucket shops, hidden fees, payment for order flow, specialist/MM privileges, etc. are all ways that investors and beneficiaries can be disadvantaged.
- cma 13y ago
  It's not just insider information that is a problem. Is the world really better off because UBS/hedge-funds hire out satellites to surveil Wal-mart parking lots in order to get an earnings prediction 1 day before Wal-mart files their public earnings disclosure?
  - dclowd9901 13y ago
    Tell me you have a source for this.
    - cma 13y ago
      http://www.cnbc.com/id/38722872 http://www.cnbc.com/id/38722872 http://gawker.com/hedge-funds-are-now-poring-over-satellite-photos-of-wal-1327499137/all http://gawker.com/hedge-funds-are-now-poring-over-satellite-... wasn't necessarily goldman-sachs, changed the post
    - interknot 13y ago
      Skybox is already launching satellites explicitly for this purpose (and others): http://skybox.com/products#applications http://skybox.com/products#applications Scroll through to the "Financial Trading Intelligence". If only they had offices in places besides California...
deleted 13y ago
[deleted]
gautamc 13y ago
There are a many of news articles and youtube videos which present HFT as a bad thing. Since large orders are filled by different markets, anyone who has studied the mechanisms via which these orders are full-filled can theoretically arrive at a strategy that might be profitable. Overtime, more and more people will learn these things and it will no longer be a profitable strategy to implement - this is sort of like the "January Effect" described in the book named intelligent investor. I don't understand why HFT has to be blamed for a difference in prices across multiple markets. I read somewhere that REGNMS caused market fragmentation and HFT traders spend time studying the current markets and identify inefficiencies that can be used to make profitable trades. This Reuters article is like an advertisement for the IEX trading platform. IEX figured out a certain way to beat the other algorithms and they told Reuters about it. Now that everyone knows it, I think, pretty soon other algorithm developers will modify their implementations. Overall, I think that HFT is basically algorithmic trading, but which needs more investment (for renting/buying server/connectivity) and more time/interest (for studying and understanding the order placement/fulfilment mechanisms involved).
- dllthomas 13y ago
  It's not that HFT is to blame for differences between markets, but that differences between markets plus the market structure are to blame for (the socially wasteful bits of) HFT.
- crdoconnor 13y ago
  >I don't understand why HFT has to be blamed for a difference in prices across multiple markets. Because it isn't.
Destitute 13y ago
To give you an idea on how HFT has blown up since 2007: http://www.technologyreview.com/sites/default/files/legacy/dxwer.gif http://www.technologyreview.com/sites/default/files/legacy/d... Context: http://www.technologyreview.com/view/428756/watch-high-speed-trading-bots-go-berserk/ http://www.technologyreview.com/view/428756/watch-high-speed...
yummyfajitas 13y ago
For those of you who want to understand this topic better (i.e., a lot of the people spinning conspiracy theories), you might want to learn the basic mechanics of HFT. I wrote a tutorial on the topic a couple of years ago, might be helpful: http://www.chrisstucchio.com/blog/2012/hft_apology.html http://www.chrisstucchio.com/blog/2012/hft_apology.html http://www.chrisstucchio.com/blog/2012/hft_apology2.html http://www.chrisstucchio.com/blog/2012/hft_apology2.html
- AndrewBissell 13y ago
  I really like your idea of allowing sub-penny ticks in the highly liquid stocks as a way of tilting algo trading away from the latency arms race. Unfortunately, it probably runs too counter to the uninformed "no one should be trading to make $0.01 per transaction!" popular perspective for the SEC & exchanges to implement it.
  - kasey_junk 13y ago
    As someone who actually makes a living in HFT, if you really wanted to get rid of me, sub-penny ticks would be the single worst thing I can think of. There is literally no transaction tax that would make trading unprofitable. 2 zero's worth of decimilazation though and I have to go find honest work.
    - yummyfajitas 13y ago
      I'd only get rid of you insofar as you are fighting over latency. If you can deliver price improvement or useful market depth there is still a place for you.
      - sseveran 13y ago
        latency arb is still important to keep venues in sync.
      - kasey_junk 13y ago
        I think decreasing the minimum bid/ask spread value would make it very difficult to continue doing traditional market making. I think that exchanges would then need to add some other incentives/perks to ensure liquidity providers stayed on their exchange, which starts to sound more and more like a specialist system which I'm generally against. Of course, I don't think there is some natural right for market makers to exist. I do really like the idea of an extremely small tick size as it much more elegant than a transaction tax.
gojomo 13y ago
The approach touted by the 60Minutes piece, the coop-like IEX market that aims to equalize participant lags, is one obvious countermeasure. Another promising tactic could be the "Frequent Batch Auctions" as described in the paper referenced in this blog post: http://johnhcochrane.blogspot.com/2014/02/budish-cramton-and-shim-on-high.html?spref=tw http://johnhcochrane.blogspot.com/2014/02/budish-cramton-and... Direct paper link: http://faculty.chicagobooth.edu/eric.budish/research/HFT-FrequentBatchAuctions.pdf http://faculty.chicagobooth.edu/eric.budish/research/HFT-Fre... Paper abstract: We argue that the continuous limit order book is a flawed market design and propose that financial exchanges instead use frequent batch auctions: uniform-price sealed-bid double auctions conducted at frequent but discrete time intervals, e.g., every 1 second. Our argument has four parts. First, we use millisecond-level direct-feed data from exchanges to show that the continuous limit order book market design does not really “work” in continuous time: market correlations completely break down at high-frequency time horizons. Second, we show that this correlation breakdown creates frequent technical arbitrage opportunities, available to whomever is fastest, which in turn creates an arms race to exploit such opportunities. Third, we develop a simple new theory model motivated by these empirical facts. The model shows that the arms race is not only socially wasteful – a prisoner’s dilemma built directly into the market design – but moreover that its cost is ultimately borne by investors via wider spreads and thinner markets. Last, we show that frequent batch auctions eliminate the arms race, both because they reduce the value of tiny speed advantages and because they transform competition on speed into competition on price. Consequently, frequent batch auctions lead to narrower spreads, deeper markets, and increased social welfare.
- minimax 13y ago
  In a batch auction like that you still have a latency game. There is no reason to submit your order until the last possible moment since you will want to incorporate as much information from other markets and news sources as possible. You would just end up with a crush of orders in the last 100 uS of the batch interval.
  - RoboTeddy 13y ago
    I haven't read the paper, but I would guess that the one-second-worth of orders in each batch are secret until the batch executes
d23 13y ago
The criticism I've heard of this is that HFT only extracts at most 2-4 billion from the economy each year. Is that the case? If so, I find the arguments against to be kind of trivial.
jamieabe 13y ago
The bigger story of HFT is that it enables the big banks to manipulate the stock market. Because they know all market orders before they are executed, they are able to cancel all bids and offers before it is possible for anyone to hit or take them. They can also put up huge orders on the bid or offer to make a stock look weak or strong in the short run, knowing there is no risk of being executed. If they see another order come in they can just cancel their order. The most criminal advantage HFT gives them is that they can front run orders. Let's say for example that Fidelity calls Goldman Sachs and says they want to buy 1 million shares of Tesla. This information is priceless as Tesla stock is guaranteed to fly higher on this trade. Acting on this information is the most blatant form of insider trading that exists. However, somehow the big banks can create programs that do exactly this. Whenever they see a huge influx of buy or sell volume they can quickly jump in front and close out the transaction a few seconds later for a huge profit.
- AndrewBissell 13y ago
  What you describe above would be highly illegal.
  - jamieabe 13y ago
    That's the whole point...Michael Lewis said he can't believe it hasn't been made illegal....5 years ago, during the financial crisis there was a good story on it in the New York Time and one of the Senators said they were outraged and he was going to change it, etc, and of course nothing ever happened.
    - AndrewBissell 13y ago
      Are you saying that Goldman Sachs's brokerage division is transmitting information about its customers' orders to the GS prop trading desks before submitting them to the market?
      - jamieabe 13y ago
        No, I'm saying Goldman Sachs has computers located at the stock exchange that are programmed to trade based on order flow information.
TempleOSV2 13y ago
God's world is perfectly just. God says... I_love_you if_and_only_if Obama in_other_words food zoot BBC car failure_is_not_an_option adjusted_for_inflation I_hate_when_that_happens hooah fight Obama I_am_not_amused silly_human hopefully cracks_me_up so_he_sess God_is_not_mocked battle you_know_a_better_God overflow endeavor so_let_it_be_written in_a_perfect_world you'll_see ohh_thank_you C:\TAD\Text\Words\AUGUST.TXT at formlessness, whereof heaven and earth were made, might be called heaven and earth. It is true, that of things having form, there is not any nearer to having no form, than the earth and the deep. It is true, that not only every created and formed thing, but whatsoever is capable of being created and formed, Thou madest, of Whom are all things. It is true, that whatsoever is formed out of that which had no form, was unformed before it was formed. Out of these truths, of which they doubt not w
fleitz 13y ago
Hmm... it's almost as if brokers break up large orders into smaller orders for exactly this reason.
jonemo 13y ago
The story states that IEX runs HFT trades through an additional 60km of cable. Does anyone know or have a source for how this specific number was chosen? Who decides whose orders have to go through those extra 60km and whose don't?
tim333 13y ago
Interesting article - I'd only seen high speed trading discussed rather abstractly before. Katsuyama's "Essentially, our fill rates went to 100 percent. We couldn't believe it when we actually figured it out," is interesting experimental data on how it's actually working. I wish him luck with the IEX thing.
Nursie 13y ago
All stock markets are so far removed from actual useful endeavour that it's hard to see what their function might be. I think we need some human-friendly reform in this area.
zaroth 13y ago
The HFTs are doing something which reminds me of the mutant attack with Bitcoin. And the 'fix' is also very similar to how you can try to defeat mutants, if not by making mutation impossible in the protocol (which we are trying to do), but also making it more difficult to beat the propagation of the original transaction with mutants; by transmitting it to more nodes concurrently. Unlike the mutant attack, in this case there are possible positive effects that can arise. But what I don't understand is this. I place a human order to buy 1,000 shares of X for price P through a public exchange. The HFT algorithm can get those shares for (P - a) on a private order book I don't see, before my order even arrives there. But from the perspective of the seller(s) on the private book, they had open sell orders with weighted average (P - a) for those 1,000 shares. That's open orders, a.k.a willing sellers. As long as there are real shares being bought by the HFT before the sale to the original buyer, then how can you complain? But what I really want is to be able to place these cross-exchange orders with something like a 2 phase commit. Get a 'lock' on the public buy and the corresponding private sell(s) before having to commit. And then clear the committed transactions concurrently on both exchanges. That's a risk-free trade, and the result you might expect is the spread is shared between buyer and seller. Maybe some of it goes to transaction fees. And that's how I look at the HFT algos. They are basically a hidden transaction fee on a very fast routing of your order. There super-order-routers charge a transaction fee which is applied by tweaking the listed price. Over time the amount of the tweak decreases until it exactly equals your stated price, which means the super-order-router gets no fee. If you had [paid for] access to that other order book, you could have spent less / earned more on the trade. But there's the added cost of having a direct connection to that order book. So basically you buy it yourself, or someone else pays for it and acts like an automatic passive router. In the end you get exactly the price that you asked for. I wonder how often the HFT algorithm is selling shares that it doesn't really own. No one should have been surprised that MtGox wasn't running full reserve. Who's publishing the crypto-proof that the public exchanges are running full reserve? Haha, actually we know that they don't - they just call it naked shorting. So I guess I'm asking, how much naked shorting (even over brief time periods) do the HFT algos get away with?
- sseveran 13y ago
  What order book are you talking about? And any broker dealer can sell shares they don't own...Because they are a broker dealer. Call your congressman.
HoneyDaPooh 13y ago
FYI, all Michael Lewis books are must-read for those interested in Finance and especially useful to understand some important Wall Street psychological features and possibly explain why some bubbles have gone bust in the past decade. These books are also technically pretty sound. In order of personal preference: The Big Short, Liar's Poker and Boomerang. Lowenstein on LTCM is also good in the same verge with a similar technical level as Flash Boy seems to be but for 1990s Arbitrage Trading.
deleted 13y ago
[deleted]
eyeareque 13y ago
All time stock market highs, inflated stock prices due to HFT bidding up prices and thus siphoning off money by the billions, companies operating at a loss or minimal profits getting billion dollar valuations, it's been a while since the last major stock market drop hasn't it?.. Is it just me, or are we playing with fire here? It seems like if one thing goes wrong the whole house of cards will come crumbling down. I'm worried about my retirement after reading more about HFT. Where should I put my 401k to avoid losing a big chunk of it as soon as the market takes its next drop?
pippy 13y ago
Stock markets aren't rigged, they're fundamentally flawed. HFT is only a small modern flaw that's emerged. In theory a company can float itself in order to raise capital and improve performance. The business will invest the capital, and in turn return some of the improved profits to the share holders. In a modern context it simply can't work this way. In a world with fiat currencies, any organisation with securities can directly invest in an stocks/bonds higher with a return higher than the Bank Rate to an extent far greater than individuals, with less risk. This leaves individuals with little to no capacity to get a decent return without brokerage. While possible to make money, it's a roll of the die that would be better of done in a casino.
eddd 13y ago
I see much of propositions for solving problem with HFT. Mine? "Random delay for signal (between 100-200ms) on network devices", problem solved. Book "Dark Pools" describes how HFT works 'behind the scenes', great pice of journalism what's more: people rarly point out, how big drain on resource HFT is, bilions of dollars spended on fiber lines between continents, to gain a few miliseconds, this is madness.
prostoalex 13y ago
I never buy/sell at market price, always at limit. Am I still affected by HFT in a meaningful way? If not, perhaps the every small-time investor should be defaulted to a limit buy/sell unless they choose otherwise.
- megaframe 13y ago
  Yes if you've ever had an order not get completely filled... happens to me a lot, it's kind of annoying and usually not worth chasing the price up. Every small investor should use limit orders. Market orders are rigged at the Market Maker levels via a process called Slippage. "Slippage occurs when a market maker changes the spread to his advantage on market orders." basically they stretch the spread out forcing you to pay a higher or get a lower price for the stock to their advantage since they fill the quantity from their own volume.
  - throwaway13qf85 13y ago
    That is the entire game of market making. You are literally complaining about market makers doing their jobs. As a market maker, I might sit out there offering to buy 1000 shares of Microsoft at $40.20 and sell 1000 shares at $40.30. Then someone comes along and buys 1000 shares from me at $40.30, so I need to put a new quote into the market. Do I put it in at $40.30 again? Hell no! There are two main reasons why not - 1. I know that there are buyers out there, and most likely the reason there are buyers at $40.30 is because they believe the stock is worth more than that. I need to revise my prices upward to reflect that new information. 2. I'm now short 1000 shares of MSFT. If the price goes up further, I will lose out. I need to persuade someone to sell me 1000 shares to cover that short position, so I need to offer more money - therefore I need to raise my quotes. Most likely is that I'd now put in a new offer at $40.32 and raise my bid from $40.20 to $40.22. This is the mechanism by which market prices reflect new information. Market makers change their prices to reflect information in the order flow. This is the entire reason that liquid, efficient markets are able to exist.
bherms 13y ago
Bogle has a great book on how horrible hft is for our economy (well, he has several technically) called The Clash of Cultures... Reading it now and am fascinated. Could be that this is my first foray into learning about finance, but either way, I highly recommend checking it out.
- chrisbennet 13y ago
  Thanks for the recommendation. (Why did someone down vote you??)
bachback 13y ago
great. here is the new exchange they are talking about: http://www.iextrading.com/ http://www.iextrading.com/ next step: build an investor exchange opensource based on bitcoin. take over the world. if you're into this kind of thing let me know.
- junto 13y ago
  > build an investor exchange opensource based on bitcoin Can you elaborate?
marincounty 13y ago
I have always felt the markets are rigged, but by insider trading. High frequency traders just add to the problem. I thought the Internet, and websites like Stocktwits might level out the playing field, but the I've Never seen anything close to insider information on any of these sites. I truely believe we are on a bubble right now--especially tech stocks(Tesla might be the exception, even with the owner telling investors the stock is overpriced.) Facebook throwing around billions for for that disappearing picture company floored me. Oh, and Google--the minute Duckduckgo gets a little bit better--bye--bye, but I'll use your free Api's as long as they stay somewhat free. My deceased father spent years dabbling in the stock macket when he retired; the only real money he made was on a tip he got from a drunk, bolsterious father in law who was a CEO. Oh yea, this brings me to Jim Cramer. I have watched him for years. He has never timed a down turn right. He just might be the best ironic contrarian stock adviser ever? Right now, he believes the stock market will just continue to rise. I am waiting for the drop. We are in a weird time though; gold at unheard of levels. Stock market rising. The only real inflation I see is food. I have a funny feeling the economy is much worse than it seems though. Companies know we cannot go without eating--so let's raise the price. I'm a nobody, but I hate to see middle class families loose their life savings when the market takes a dive. I hope these lucky tech billionaires help the American poor when things get really bad? There are very few countries that would have allowed them to Mae there wad as easily as they had it in America. Could you imagine having a billion dollars in Mexico? You couldn't leave your home. That's the one thing they take for granted, while griping about tax rates? Sorry for rambling.
brudgers 13y ago
As Mark Cuban might ask, "Can you spot the sucker in the stock market?"
otikik 13y ago
Group the requests by second and randomize their order. Boom.
alexeisadeski3 13y ago
Someone's trying to sell a book.
bayesianhorse 13y ago
To me this does not sound "rigged". It sounds like one participant in the market feels entitled to the profit another market participant makes. One issue with most criticism of financial markets is that people tend to view only the price, and may be the transaction cost. What they completely fail to see is risk management and liquidity. Both have intrinsic value, and people are selling and buying liquidity and risk management. This concept is hard to grasp. But the HFT traders are providing a value to the market. Restricting HFT will undoubtedly lower liquidity, and maybe even increase risk. That's why regulators are so anxious about it. The HFT traders are indeed taking on some amount of risk, which otherwise would be with the stock exchange or the other participants. The salient question is whether or not the competition among HFTs is hard enough for the Bertrand paradox to kick in.
- kelvin0 13y ago
  OK, then why would investors actually switch to doing business with iEX if HFT brings any value at all? Looks to me like HFT is a like 'free' games that 'offer' to buy in-game items which are needed to play the game properly. In this case, investing is the game and if you don`t have a billion dollar fiber optic running, you play at a net disadvantage.
  - bayesianhorse 13y ago
    "a billion dollar fiber optic" has to come from someplace. Money costs money, which is the basic tenet of finance. If an HFT company invests a few hundred million Dollars into the trading system, the profit better beat the market. That's why I think that there are probably enough competitors in the HFT sector to squeeze the profits. The investors who "switch to iEX" are money managers who have to place orders to diversify a portfolio. Without the new strategy they essentially pay some extra money to intermediary traders. The value of intermediary traders is hard to grasp. They do carry the risk inherent in their positions, and they provide liquidity by bridging the time-gap between the intention to buy and the intention to sell. iEX basically seems to offer their clients the chance to bridge this gap themselves by cleverly dispersing orders over different markets and obfuscating their intentions. Finance is a fascinating technology in itself...
newblahbl4hblah 13y ago
WHAT????!?!!?!?!?! Oh my god...
arbuge 13y ago
"They are able to identify your desire to buy shares in Microsoft and buy them in front of you and sell them back to you at a higher price," Lewis, whose book is available on Monday, said on the television program "60 Minutes" on Sunday. I'm guessing the net effect of this is that you get trades for a few cents more than they would cost you otherwise. I guess "otherwise" means a perfect world where Goldman Sachs is a charitable organization run by Mother Teresa directing a band of angels. This might be an issue for day-traders but if you're a buy and hold investor aiming for doubling or tripling of your holdings over years-decades, this small fractional cost at inception is likely negligible. (Which is not to say that the stock market is a safe place to be - there are many other cons to be aware of if you're a buy and hold person - insider trading, bad quality earnings, etc.). It was not that long ago that investors were stuck with paying high commissions equivalent to several percentage points to acquire a stock. Now you can get 1000 shares of anything for $5. And maybe a few dollars more to line the pockets of HFT firms. Things seem better to me now on the whole.
- lee 13y ago
  I don't think the cost is necessarily negligible. If the system is setup in such a way that there are those who benefit from every trade, skimming fractions of a percent per trade, those add up. They are effectively shrinking the market capitalization of that stock... and over a long period of time that could be significant. If a stock's losses to this are in the range of 3% per year, over a 25 year period the stock will lose 50% of it's market cap from this activity. That's fairly significant.
georgehaake 13y ago
It's good this is getting more attention, however there were many good books before this one. "Quants" and "Dark Pools" were my favorites and a good place to start. The Physics of Wall Street: A Brief History of Predicting the Unpredictable Automate This The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It Dark Pools: High-Speed Traders, A.I. Bandits, and the Threat to the Global Financial System Hedge Fund Market Wizards
Zenst 13y ago
This caught my eye "travelled along fibre optic lines and hit the closest exchange first, where high frequency traders would get a glimpse, and then use their speed advantage to beat him to the other 12 US public exchanges and 45 private trading venues." Why not simple stagger the network dispatch to those exchanges so the order hits all exchanges at exactly the same time and with that protect you from HFT snipping tactics. Seem simple solution and somewhat obvious so what am I missing?

223 points by schintan 13y ago

I think it's been raised here before, but why can't all trades be submitted, kept secret then only executed simultaneously at some discrete interval - say every 5 minutes?

kasey_junk 13y ago
If you have 3 people buying at price x and 2 people selling at price x, which 2 of the 3 buyers get their purchase? The rules for this are the "matching algorithm". In most markets this is determined in a fifo fashion. Adding a discrete time delay wouldn't change this, there would still be a race to be first into the 5 minute period.
- emmelaich 13y ago
  Then randomise rather than FIFO it. Or pro-rata it -- (an option submitted with the offer)
  - kasey_junk 13y ago
    So A) there are lots of markets that do pro-rata matching (larger orders get priority). B) there is a very reasonable bias against non-repeatable matching algorithms in current markets. If you did randomized matching and 1 market participant seemed to have very good "luck", how could you convince the other market participants that the fix wasn't in? You have to understand that modern markets assume the worst case when it comes to collusion, insider trading, etc. Randomized fills is the worst case scenario given those assumptions.
    - emmelaich 13y ago
      Perhaps publicise the random numbers used at the same time as the order is executed, together with the identifier for the particular trades in the queue.
      - kasey_junk 13y ago
        Publishing the number would not in any way, alleviate the concern that the system was not fair. You are thinking about this problem from a mathematics stand point when the issue is a social one.
        emmelaich 13y ago
        I plead guilty to approaching from a mathematics PoV. My sole intent is to overcome the tyranny of distance and exploitation of the time difference. The only people I hope to convince are other, mathematically sophisticated traders. By social do you mean the public-at-large's suspicion?
      - platz 13y ago
        1, 1, 1, 1, 1... Can you verify if this sequence is random or not?
        emmelaich 13y ago
        OK, I'm lets stipulate that I am not particularly mathematically sophisticated. However, I thought that you had a list of numbers at least as large as the number of trades expected in the 5 minute period, then you could order the trades by shuffling the numbers. I think it would not be too taxing to determine whether the sequence over time is random enough. That said, I'm starting to see whether that it would impossible to know whether any particular 5 minute (or maybe day's worth) of trading is random enough. Perhaps crypto can come to the rescue here. Publish lists of random numbers in advance pgp signed. Anyway, enough of my ramblings :-)
    - gizmo686 13y ago
      >there is a very reasonable bias against non-repeatable matching algorithms in current markets. What about psuedo-random that uses the trades themselves as a source of entropy?
  - RachelF 13y ago
    Or add a few hundred milliseconds of random jitter to the transaction time. This would remove any advantage to low-latency traders.
- pak 13y ago
  Then forget the FIFO convention. How about a hardware random number generator? However, this doesn't fix the problem with placing and canceling lots of orders to sway the bucket toward the end of the 5-minute window. I suppose if some could do this faster at the end of the window then others, they would still retain an advantage. (Imagine somebody placing many orders, monitoring how many are likely to be fulfilled advantageously, and then cancelling the disadvantageous ones as close to the end of the window as possible.) That could perhaps be solved with fees for cancelling bids or asks.
  - kasey_junk 13y ago
    There are already fees attached with canceling large amounts of orders, and most exchanges provide less fees (or even rebates) for providing liquidity (being the order that is taken off the book) vs taking liquidity.
- deleted 13y ago
  [deleted]
hapless 13y ago
Because it wouldn't reward insiders.
joezydeco 13y ago
"At an event hosted by the [Chicago Mercantile Exchange] in October, Leo Melamed, one of the pioneers of Chicago's financial futures markets, called Budish's proposal a "nonstarter." He said the markets are working pretty well and there's no need to fix something that isn't broken. Otherwise, Melamed said jokingly, "I'm going to consider going to North Korea and show them how they can become the center of finance in about three weeks." So yeah this has been discussed and no, the powers that be like things the way they are. Go figure. This will need stronger powers to force the hand of the traders. http://www.chicagotribune.com/business/ct-high-speed-trading-0330-biz-20140330,0,3561829.story http://www.chicagotribune.com/business/ct-high-speed-trading...
- crdoconnor 13y ago
  You could hardly expect the people profiting from this to do anything except come out against it.
bloaf 13y ago
Its amazing how similar this line of reasoning sounds to the development of democracy mode in Twitch Plays Pokemon.
sseveran 13y ago
This is available on exchanges today. It usually happens 2 - 5 times per day.

stillsut 13y ago

Dare I say it, but... "To the tune of Ten of Billions" is that sooo material? That amount's not unheard of for a single company, hedge fund, hell even individual (there was also that guy that loss 8 Billion). If it's half of all trading volumne, but a tiny fraction of profit, then this is razor thin margins. In these areas, we've always been comfortable allowing the big boys in any industry (with their economies-of-scale) to execute efficiently, and hopefully compete each other out of ripping to rest of us off too bad.

digz 13y ago
The 'tens of billions' is also without context of how much money HFT save investors by basically keeping spreads at zero, and nearly always guaranteeing liquidity. Providing liquidity to the market isn't a public service... participants need to be compensated.
- makomk 13y ago
  "Nearly always" guaranteeing liquidity isn't that useful a service - HFT's liquidity evaporates when it's most needed, like when the markets crash.
  - jplewicke 13y ago
    On the other hand, there's a very good reason why HFT liquidity has evaporated in previous crashes (such as the 2010 Flash Crash) -- the exchanges broke trades in an unpredictable fashion, so that any attempt at market-making would have opened the market maker to considerable risk. Let's say you step in during a major market crash and buy AAPL when it's trading at $200/share. Let say it then rises some more to $300/share and you sell, only to see the price recover to $500/share. What happens if the exchange breaks your original buy at $200? Then you end up being short on the way from $300 up to $500, even though you were right about the direction of trading and contributed liquidity during market distress. They've theoretically instituted a fix for this ( http://en.wikipedia.org/wiki/2010_Flash_Crash#Trading_curb http://en.wikipedia.org/wiki/2010_Flash_Crash#Trading_curb ) which will make it clear in advance what trades will be broken, so we'll have to see how HFT and market making responds in the next crash. Bid-ask spreads tend to widen significantly during market distress, which should actually increase the profitability of being a market maker during a crash.

snowwrestler 13y ago

I don't understand how HFT can make me pay more than I want to for a stock. I set a limit order--the limit is how much I'm willing to pay. If some HFT firm pushes the price past my limit, then I don't buy.

nemasu 13y ago
This is true, but I believe if you don't set a limit order, then the market value will go up. Then if the price keeps going up, you'll have missed your chance to buy the rest.
wging 13y ago
It can make you pay more than you otherwise would, not more than your limit.
jcdavis 13y ago
Just because you have a limit order doesn't mean you aren't getting fleeced, as you could've bought it for less otherwise (assuming some level of fixing as is suggested)
jhonovich 13y ago
You still lose. In your scenario, you are blocked out of buying the stock. And without a limit order, you get the stock but pay more. Imagine this happened when ordering food. Sure, you could put in a limit (no more than x french fries and y per fry) but your price would either be run up or you'd go hungry.
- snowwrestler 13y ago
  But I'm not buying food, I'm buying a stock--which, unlike food is a totally optional purchase. My limit is the price at which I thought that stock was worth buying. If the price never falls that far, then I wouldn't want to buy it anyway.
  - barkingcat 13y ago
    HFT is manipulating the pricing so that it is no longer worth it for you to buy it, therefore fleecing you of the profits you would have made if they weren't there. Of course, this is not illegal (it's like any other type of trading, pushing up the value so it goes beyond what you're willing to pay) - but it's achieved by using robots in such a way that normal humans can't hope to compete. Of course, you can build your own robots (ie your own HFT software) to take advantage of the weaknesses of existing HFT programs, but if you can do this, you would be working at an ibank as a quant of some kind.

svedlin 13y ago

University of Michigan researchers proposed a "centralized call market" to mitigate fragmentation (inconsistent pricing and order handling across different exchanges) and latency disadvantages: http://www.ns.umich.edu/new/releases/21535-high-frequency-trading-tactic-lowers-investor-profits http://www.ns.umich.edu/new/releases/21535-high-frequency-tr... Haim Bodek discusses how certain exchanges provide special order types that give traders priority over others: http://online.wsj.com/news/articles/SB10000872396390443989204577599243693561670 http://online.wsj.com/news/articles/SB1000087239639044398920... Of course HFT is just a small part of the built-in asymmetries in the markets. Firms exploiting their own clients, conflicted investment advice, corrupt fund management, routinized insider trading, retail bucket shops, hidden fees, payment for order flow, specialist/MM privileges, etc. are all ways that investors and beneficiaries can be disadvantaged.

cma 13y ago
It's not just insider information that is a problem. Is the world really better off because UBS/hedge-funds hire out satellites to surveil Wal-mart parking lots in order to get an earnings prediction 1 day before Wal-mart files their public earnings disclosure?
- dclowd9901 13y ago
  Tell me you have a source for this.
  - cma 13y ago
    http://www.cnbc.com/id/38722872 http://www.cnbc.com/id/38722872 http://gawker.com/hedge-funds-are-now-poring-over-satellite-photos-of-wal-1327499137/all http://gawker.com/hedge-funds-are-now-poring-over-satellite-... wasn't necessarily goldman-sachs, changed the post
  - interknot 13y ago
    Skybox is already launching satellites explicitly for this purpose (and others): http://skybox.com/products#applications http://skybox.com/products#applications Scroll through to the "Financial Trading Intelligence". If only they had offices in places besides California...

deleted 13y ago

[deleted]

gautamc 13y ago

There are a many of news articles and youtube videos which present HFT as a bad thing. Since large orders are filled by different markets, anyone who has studied the mechanisms via which these orders are full-filled can theoretically arrive at a strategy that might be profitable. Overtime, more and more people will learn these things and it will no longer be a profitable strategy to implement - this is sort of like the "January Effect" described in the book named intelligent investor. I don't understand why HFT has to be blamed for a difference in prices across multiple markets. I read somewhere that REGNMS caused market fragmentation and HFT traders spend time studying the current markets and identify inefficiencies that can be used to make profitable trades. This Reuters article is like an advertisement for the IEX trading platform. IEX figured out a certain way to beat the other algorithms and they told Reuters about it. Now that everyone knows it, I think, pretty soon other algorithm developers will modify their implementations. Overall, I think that HFT is basically algorithmic trading, but which needs more investment (for renting/buying server/connectivity) and more time/interest (for studying and understanding the order placement/fulfilment mechanisms involved).

dllthomas 13y ago
It's not that HFT is to blame for differences between markets, but that differences between markets plus the market structure are to blame for (the socially wasteful bits of) HFT.
crdoconnor 13y ago
>I don't understand why HFT has to be blamed for a difference in prices across multiple markets. Because it isn't.

Destitute 13y ago

To give you an idea on how HFT has blown up since 2007: http://www.technologyreview.com/sites/default/files/legacy/dxwer.gif http://www.technologyreview.com/sites/default/files/legacy/d... Context: http://www.technologyreview.com/view/428756/watch-high-speed-trading-bots-go-berserk/ http://www.technologyreview.com/view/428756/watch-high-speed...

yummyfajitas 13y ago

For those of you who want to understand this topic better (i.e., a lot of the people spinning conspiracy theories), you might want to learn the basic mechanics of HFT. I wrote a tutorial on the topic a couple of years ago, might be helpful: http://www.chrisstucchio.com/blog/2012/hft_apology.html http://www.chrisstucchio.com/blog/2012/hft_apology.html http://www.chrisstucchio.com/blog/2012/hft_apology2.html http://www.chrisstucchio.com/blog/2012/hft_apology2.html

AndrewBissell 13y ago
I really like your idea of allowing sub-penny ticks in the highly liquid stocks as a way of tilting algo trading away from the latency arms race. Unfortunately, it probably runs too counter to the uninformed "no one should be trading to make $0.01 per transaction!" popular perspective for the SEC & exchanges to implement it.
- kasey_junk 13y ago
  As someone who actually makes a living in HFT, if you really wanted to get rid of me, sub-penny ticks would be the single worst thing I can think of. There is literally no transaction tax that would make trading unprofitable. 2 zero's worth of decimilazation though and I have to go find honest work.
  - yummyfajitas 13y ago
    I'd only get rid of you insofar as you are fighting over latency. If you can deliver price improvement or useful market depth there is still a place for you.
    - sseveran 13y ago
      latency arb is still important to keep venues in sync.
    - kasey_junk 13y ago
      I think decreasing the minimum bid/ask spread value would make it very difficult to continue doing traditional market making. I think that exchanges would then need to add some other incentives/perks to ensure liquidity providers stayed on their exchange, which starts to sound more and more like a specialist system which I'm generally against. Of course, I don't think there is some natural right for market makers to exist. I do really like the idea of an extremely small tick size as it much more elegant than a transaction tax.

gojomo 13y ago

The approach touted by the 60Minutes piece, the coop-like IEX market that aims to equalize participant lags, is one obvious countermeasure. Another promising tactic could be the "Frequent Batch Auctions" as described in the paper referenced in this blog post: http://johnhcochrane.blogspot.com/2014/02/budish-cramton-and-shim-on-high.html?spref=tw http://johnhcochrane.blogspot.com/2014/02/budish-cramton-and... Direct paper link: http://faculty.chicagobooth.edu/eric.budish/research/HFT-FrequentBatchAuctions.pdf http://faculty.chicagobooth.edu/eric.budish/research/HFT-Fre... Paper abstract: We argue that the continuous limit order book is a flawed market design and propose that financial exchanges instead use frequent batch auctions: uniform-price sealed-bid double auctions conducted at frequent but discrete time intervals, e.g., every 1 second. Our argument has four parts. First, we use millisecond-level direct-feed data from exchanges to show that the continuous limit order book market design does not really “work” in continuous time: market correlations completely break down at high-frequency time horizons. Second, we show that this correlation breakdown creates frequent technical arbitrage opportunities, available to whomever is fastest, which in turn creates an arms race to exploit such opportunities. Third, we develop a simple new theory model motivated by these empirical facts. The model shows that the arms race is not only socially wasteful – a prisoner’s dilemma built directly into the market design – but moreover that its cost is ultimately borne by investors via wider spreads and thinner markets. Last, we show that frequent batch auctions eliminate the arms race, both because they reduce the value of tiny speed advantages and because they transform competition on speed into competition on price. Consequently, frequent batch auctions lead to narrower spreads, deeper markets, and increased social welfare.

minimax 13y ago
In a batch auction like that you still have a latency game. There is no reason to submit your order until the last possible moment since you will want to incorporate as much information from other markets and news sources as possible. You would just end up with a crush of orders in the last 100 uS of the batch interval.
- RoboTeddy 13y ago
  I haven't read the paper, but I would guess that the one-second-worth of orders in each batch are secret until the batch executes

d23 13y ago

The criticism I've heard of this is that HFT only extracts at most 2-4 billion from the economy each year. Is that the case? If so, I find the arguments against to be kind of trivial.

jamieabe 13y ago

The bigger story of HFT is that it enables the big banks to manipulate the stock market. Because they know all market orders before they are executed, they are able to cancel all bids and offers before it is possible for anyone to hit or take them. They can also put up huge orders on the bid or offer to make a stock look weak or strong in the short run, knowing there is no risk of being executed. If they see another order come in they can just cancel their order. The most criminal advantage HFT gives them is that they can front run orders. Let's say for example that Fidelity calls Goldman Sachs and says they want to buy 1 million shares of Tesla. This information is priceless as Tesla stock is guaranteed to fly higher on this trade. Acting on this information is the most blatant form of insider trading that exists. However, somehow the big banks can create programs that do exactly this. Whenever they see a huge influx of buy or sell volume they can quickly jump in front and close out the transaction a few seconds later for a huge profit.

AndrewBissell 13y ago
What you describe above would be highly illegal.
- jamieabe 13y ago
  That's the whole point...Michael Lewis said he can't believe it hasn't been made illegal....5 years ago, during the financial crisis there was a good story on it in the New York Time and one of the Senators said they were outraged and he was going to change it, etc, and of course nothing ever happened.
  - AndrewBissell 13y ago
    Are you saying that Goldman Sachs's brokerage division is transmitting information about its customers' orders to the GS prop trading desks before submitting them to the market?
    - jamieabe 13y ago
      No, I'm saying Goldman Sachs has computers located at the stock exchange that are programmed to trade based on order flow information.

TempleOSV2 13y ago

God's world is perfectly just. God says... I_love_you if_and_only_if Obama in_other_words food zoot BBC car failure_is_not_an_option adjusted_for_inflation I_hate_when_that_happens hooah fight Obama I_am_not_amused silly_human hopefully cracks_me_up so_he_sess God_is_not_mocked battle you_know_a_better_God overflow endeavor so_let_it_be_written in_a_perfect_world you'll_see ohh_thank_you C:\TAD\Text\Words\AUGUST.TXT at formlessness, whereof heaven and earth were made, might be called heaven and earth. It is true, that of things having form, there is not any nearer to having no form, than the earth and the deep. It is true, that not only every created and formed thing, but whatsoever is capable of being created and formed, Thou madest, of Whom are all things. It is true, that whatsoever is formed out of that which had no form, was unformed before it was formed. Out of these truths, of which they doubt not w

fleitz 13y ago

Hmm... it's almost as if brokers break up large orders into smaller orders for exactly this reason.

jonemo 13y ago

The story states that IEX runs HFT trades through an additional 60km of cable. Does anyone know or have a source for how this specific number was chosen? Who decides whose orders have to go through those extra 60km and whose don't?

tim333 13y ago

Interesting article - I'd only seen high speed trading discussed rather abstractly before. Katsuyama's "Essentially, our fill rates went to 100 percent. We couldn't believe it when we actually figured it out," is interesting experimental data on how it's actually working. I wish him luck with the IEX thing.

Nursie 13y ago

All stock markets are so far removed from actual useful endeavour that it's hard to see what their function might be. I think we need some human-friendly reform in this area.

zaroth 13y ago

The HFTs are doing something which reminds me of the mutant attack with Bitcoin. And the 'fix' is also very similar to how you can try to defeat mutants, if not by making mutation impossible in the protocol (which we are trying to do), but also making it more difficult to beat the propagation of the original transaction with mutants; by transmitting it to more nodes concurrently. Unlike the mutant attack, in this case there are possible positive effects that can arise. But what I don't understand is this. I place a human order to buy 1,000 shares of X for price P through a public exchange. The HFT algorithm can get those shares for (P - a) on a private order book I don't see, before my order even arrives there. But from the perspective of the seller(s) on the private book, they had open sell orders with weighted average (P - a) for those 1,000 shares. That's open orders, a.k.a willing sellers. As long as there are real shares being bought by the HFT before the sale to the original buyer, then how can you complain? But what I really want is to be able to place these cross-exchange orders with something like a 2 phase commit. Get a 'lock' on the public buy and the corresponding private sell(s) before having to commit. And then clear the committed transactions concurrently on both exchanges. That's a risk-free trade, and the result you might expect is the spread is shared between buyer and seller. Maybe some of it goes to transaction fees. And that's how I look at the HFT algos. They are basically a hidden transaction fee on a very fast routing of your order. There super-order-routers charge a transaction fee which is applied by tweaking the listed price. Over time the amount of the tweak decreases until it exactly equals your stated price, which means the super-order-router gets no fee. If you had [paid for] access to that other order book, you could have spent less / earned more on the trade. But there's the added cost of having a direct connection to that order book. So basically you buy it yourself, or someone else pays for it and acts like an automatic passive router. In the end you get exactly the price that you asked for. I wonder how often the HFT algorithm is selling shares that it doesn't really own. No one should have been surprised that MtGox wasn't running full reserve. Who's publishing the crypto-proof that the public exchanges are running full reserve? Haha, actually we know that they don't - they just call it naked shorting. So I guess I'm asking, how much naked shorting (even over brief time periods) do the HFT algos get away with?

sseveran 13y ago
What order book are you talking about? And any broker dealer can sell shares they don't own...Because they are a broker dealer. Call your congressman.

HoneyDaPooh 13y ago

FYI, all Michael Lewis books are must-read for those interested in Finance and especially useful to understand some important Wall Street psychological features and possibly explain why some bubbles have gone bust in the past decade. These books are also technically pretty sound. In order of personal preference: The Big Short, Liar's Poker and Boomerang. Lowenstein on LTCM is also good in the same verge with a similar technical level as Flash Boy seems to be but for 1990s Arbitrage Trading.

deleted 13y ago

[deleted]

eyeareque 13y ago

All time stock market highs, inflated stock prices due to HFT bidding up prices and thus siphoning off money by the billions, companies operating at a loss or minimal profits getting billion dollar valuations, it's been a while since the last major stock market drop hasn't it?.. Is it just me, or are we playing with fire here? It seems like if one thing goes wrong the whole house of cards will come crumbling down. I'm worried about my retirement after reading more about HFT. Where should I put my 401k to avoid losing a big chunk of it as soon as the market takes its next drop?

pippy 13y ago

Stock markets aren't rigged, they're fundamentally flawed. HFT is only a small modern flaw that's emerged. In theory a company can float itself in order to raise capital and improve performance. The business will invest the capital, and in turn return some of the improved profits to the share holders. In a modern context it simply can't work this way. In a world with fiat currencies, any organisation with securities can directly invest in an stocks/bonds higher with a return higher than the Bank Rate to an extent far greater than individuals, with less risk. This leaves individuals with little to no capacity to get a decent return without brokerage. While possible to make money, it's a roll of the die that would be better of done in a casino.

eddd 13y ago

I see much of propositions for solving problem with HFT. Mine? "Random delay for signal (between 100-200ms) on network devices", problem solved. Book "Dark Pools" describes how HFT works 'behind the scenes', great pice of journalism what's more: people rarly point out, how big drain on resource HFT is, bilions of dollars spended on fiber lines between continents, to gain a few miliseconds, this is madness.

prostoalex 13y ago

I never buy/sell at market price, always at limit. Am I still affected by HFT in a meaningful way? If not, perhaps the every small-time investor should be defaulted to a limit buy/sell unless they choose otherwise.

megaframe 13y ago
Yes if you've ever had an order not get completely filled... happens to me a lot, it's kind of annoying and usually not worth chasing the price up. Every small investor should use limit orders. Market orders are rigged at the Market Maker levels via a process called Slippage. "Slippage occurs when a market maker changes the spread to his advantage on market orders." basically they stretch the spread out forcing you to pay a higher or get a lower price for the stock to their advantage since they fill the quantity from their own volume.
- throwaway13qf85 13y ago
  That is the entire game of market making. You are literally complaining about market makers doing their jobs. As a market maker, I might sit out there offering to buy 1000 shares of Microsoft at $40.20 and sell 1000 shares at $40.30. Then someone comes along and buys 1000 shares from me at $40.30, so I need to put a new quote into the market. Do I put it in at $40.30 again? Hell no! There are two main reasons why not - 1. I know that there are buyers out there, and most likely the reason there are buyers at $40.30 is because they believe the stock is worth more than that. I need to revise my prices upward to reflect that new information. 2. I'm now short 1000 shares of MSFT. If the price goes up further, I will lose out. I need to persuade someone to sell me 1000 shares to cover that short position, so I need to offer more money - therefore I need to raise my quotes. Most likely is that I'd now put in a new offer at $40.32 and raise my bid from $40.20 to $40.22. This is the mechanism by which market prices reflect new information. Market makers change their prices to reflect information in the order flow. This is the entire reason that liquid, efficient markets are able to exist.

bherms 13y ago

Bogle has a great book on how horrible hft is for our economy (well, he has several technically) called The Clash of Cultures... Reading it now and am fascinated. Could be that this is my first foray into learning about finance, but either way, I highly recommend checking it out.

chrisbennet 13y ago
Thanks for the recommendation. (Why did someone down vote you??)

bachback 13y ago

great. here is the new exchange they are talking about: http://www.iextrading.com/ http://www.iextrading.com/ next step: build an investor exchange opensource based on bitcoin. take over the world. if you're into this kind of thing let me know.

junto 13y ago
> build an investor exchange opensource based on bitcoin Can you elaborate?

marincounty 13y ago

I have always felt the markets are rigged, but by insider trading. High frequency traders just add to the problem. I thought the Internet, and websites like Stocktwits might level out the playing field, but the I've Never seen anything close to insider information on any of these sites. I truely believe we are on a bubble right now--especially tech stocks(Tesla might be the exception, even with the owner telling investors the stock is overpriced.) Facebook throwing around billions for for that disappearing picture company floored me. Oh, and Google--the minute Duckduckgo gets a little bit better--bye--bye, but I'll use your free Api's as long as they stay somewhat free. My deceased father spent years dabbling in the stock macket when he retired; the only real money he made was on a tip he got from a drunk, bolsterious father in law who was a CEO. Oh yea, this brings me to Jim Cramer. I have watched him for years. He has never timed a down turn right. He just might be the best ironic contrarian stock adviser ever? Right now, he believes the stock market will just continue to rise. I am waiting for the drop. We are in a weird time though; gold at unheard of levels. Stock market rising. The only real inflation I see is food. I have a funny feeling the economy is much worse than it seems though. Companies know we cannot go without eating--so let's raise the price. I'm a nobody, but I hate to see middle class families loose their life savings when the market takes a dive. I hope these lucky tech billionaires help the American poor when things get really bad? There are very few countries that would have allowed them to Mae there wad as easily as they had it in America. Could you imagine having a billion dollars in Mexico? You couldn't leave your home. That's the one thing they take for granted, while griping about tax rates? Sorry for rambling.

brudgers 13y ago

As Mark Cuban might ask, "Can you spot the sucker in the stock market?"

otikik 13y ago

Group the requests by second and randomize their order. Boom.

alexeisadeski3 13y ago

Someone's trying to sell a book.

bayesianhorse 13y ago

To me this does not sound "rigged". It sounds like one participant in the market feels entitled to the profit another market participant makes. One issue with most criticism of financial markets is that people tend to view only the price, and may be the transaction cost. What they completely fail to see is risk management and liquidity. Both have intrinsic value, and people are selling and buying liquidity and risk management. This concept is hard to grasp. But the HFT traders are providing a value to the market. Restricting HFT will undoubtedly lower liquidity, and maybe even increase risk. That's why regulators are so anxious about it. The HFT traders are indeed taking on some amount of risk, which otherwise would be with the stock exchange or the other participants. The salient question is whether or not the competition among HFTs is hard enough for the Bertrand paradox to kick in.

kelvin0 13y ago
OK, then why would investors actually switch to doing business with iEX if HFT brings any value at all? Looks to me like HFT is a like 'free' games that 'offer' to buy in-game items which are needed to play the game properly. In this case, investing is the game and if you don`t have a billion dollar fiber optic running, you play at a net disadvantage.
- bayesianhorse 13y ago
  "a billion dollar fiber optic" has to come from someplace. Money costs money, which is the basic tenet of finance. If an HFT company invests a few hundred million Dollars into the trading system, the profit better beat the market. That's why I think that there are probably enough competitors in the HFT sector to squeeze the profits. The investors who "switch to iEX" are money managers who have to place orders to diversify a portfolio. Without the new strategy they essentially pay some extra money to intermediary traders. The value of intermediary traders is hard to grasp. They do carry the risk inherent in their positions, and they provide liquidity by bridging the time-gap between the intention to buy and the intention to sell. iEX basically seems to offer their clients the chance to bridge this gap themselves by cleverly dispersing orders over different markets and obfuscating their intentions. Finance is a fascinating technology in itself...

newblahbl4hblah 13y ago

WHAT????!?!!?!?!?! Oh my god...

arbuge 13y ago

"They are able to identify your desire to buy shares in Microsoft and buy them in front of you and sell them back to you at a higher price," Lewis, whose book is available on Monday, said on the television program "60 Minutes" on Sunday. I'm guessing the net effect of this is that you get trades for a few cents more than they would cost you otherwise. I guess "otherwise" means a perfect world where Goldman Sachs is a charitable organization run by Mother Teresa directing a band of angels. This might be an issue for day-traders but if you're a buy and hold investor aiming for doubling or tripling of your holdings over years-decades, this small fractional cost at inception is likely negligible. (Which is not to say that the stock market is a safe place to be - there are many other cons to be aware of if you're a buy and hold person - insider trading, bad quality earnings, etc.). It was not that long ago that investors were stuck with paying high commissions equivalent to several percentage points to acquire a stock. Now you can get 1000 shares of anything for $5. And maybe a few dollars more to line the pockets of HFT firms. Things seem better to me now on the whole.

lee 13y ago
I don't think the cost is necessarily negligible. If the system is setup in such a way that there are those who benefit from every trade, skimming fractions of a percent per trade, those add up. They are effectively shrinking the market capitalization of that stock... and over a long period of time that could be significant. If a stock's losses to this are in the range of 3% per year, over a 25 year period the stock will lose 50% of it's market cap from this activity. That's fairly significant.

georgehaake 13y ago

It's good this is getting more attention, however there were many good books before this one. "Quants" and "Dark Pools" were my favorites and a good place to start. The Physics of Wall Street: A Brief History of Predicting the Unpredictable Automate This The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It Dark Pools: High-Speed Traders, A.I. Bandits, and the Threat to the Global Financial System Hedge Fund Market Wizards

Zenst 13y ago

This caught my eye "travelled along fibre optic lines and hit the closest exchange first, where high frequency traders would get a glimpse, and then use their speed advantage to beat him to the other 12 US public exchanges and 45 private trading venues." Why not simple stagger the network dispatch to those exchanges so the order hits all exchanges at exactly the same time and with that protect you from HFT snipping tactics. Seem simple solution and somewhat obvious so what am I missing?