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High-Speed Traders Rip Investors Off, Michael Lewis Says
- rayiner 13y agoIts like saying computerized grocery checkout machines rip off cashiers.
- er35826 13y agoIf computerized grocery checkout machines would stop halfway through the 10 cases of discount soda you bought to raise the price on the remaining 5 cases, then this analogy would be what the article is talking about.
- deleted 13y ago[deleted]
- Alphasite_ 13y agoIt's exactly like what the airline industry does. Sees that your shopping around so it raises the prices.
- unreal37 13y agoThe argument in favor of HFT is that it both increases liquidity of markets and reduces the spread - both favorable to most investors. But they can actually see you attempting to buy stock, step in front of you, buy it before you, and then try to resell it to you for a higher price? That's bad behavior and reduces confidence in the free market. There needs to be regulation around things like that.
- kasey_junk 13y agoThe idea that an HFT can see you attempt to buy stock before it goes to the market is not true and would be against the law if it happened.
- unreal37 13y agoIt seems like it isn't against the law. The thing is, there are multiple markets not just one. So when you place an order to buy 100 shares of IBM, that order gets sent to many places to try to find the best offer to fill you. If a HFT can see you submit that order to 1 market, and then beat you to the other 4 markets and buy up all the shares before you, that's frontrunning. That would be illegal if your broker did it, but HFT is not your broker, and just has the advantage of being faster than your broker. What makes you say it's "not true"? What evidence do you have of that?
- kasey_junk 13y agoThere are lots of things you are glossing over that complicate this picture quite a bit (like the fact that your broker is almost certainly executing on an HFT platform), but the biggest issue here is that no one can see your order until you place it on the first market. Once that order hits the market it is public signalling data that should impact the prices on every other market. That some traders are more efficient at responding to that public signalling data than others is not an issue and in fact is a large part of why the markets are as efficient as they are.
- foobarqux 13y agoFlashed orders make it a bit more complicated than you suggest.
- kasey_junk 13y agoAs does purchased order flow, internal matching, preferred routing agreements, dark pools etc. But given the simplistic nature of the discussion it is more accurate to say that in general HFT don't see your order before it hits the market than it is to say they do.
- foobarqux 13y agoOkay, as long as people who actually want to understand the issue know that in many cases HFT firms can actually see orders before they become public although they don't actually do much to disadvantage a retail trader.
- josho 13y agoI don't understand how HFT increases liquidity, this Q/A[1] is a start at an answer. My conclusion is that yes HFT probably does increase liquidity at the expense of adding a tax on many of the transactions. Except this tax does nothing else to help the markets except to further feed the beast (profits) of companies running HFT. So the real question to ask is: does a marginal increase in liquidity outweigh the financial cost? I'd argue that it is a tax on society with no real benefit. I've started to hear about auction's to improve the markets which is interesting and saves us from the millions (billions?) of dollars that HFTs pocket for themselves. [1] http://quant.stackexchange.com/questions/1658/has-high-frequency-trading-hft-been-a-net-benefit-or-cost-to-society http://quant.stackexchange.com/questions/1658/has-high-frequ...
- kasey_junk 13y agoIt's not just increased liquidity, it's also a decrease in the bid/ask spread, which is the actual cost of purchasing. HFT drives those much lower, decreasing the cost for most participants.
- josho 13y agoGenuine question, how does it decrease the spread? Let's simplify this: I have a stock to sell, I'm asking $100, you want to buy and offer $95. How does a HFT decrease the spread while keeping a portion of the transaction itself as profit?
- kasey_junk 13y agoWe need to introduce 2 new players. Sally who has some of this stock that she needs to sell for as much as she can get and Bob who wants to buy some of this stock for as little as he has to pay. In the current market Sally gets $95 per share and Bob has to pay $100. Matt looks at the bid ask spread and decides it would be profitable to make a market in that stock. So he simultaneously asks at $99.99 and bids at $95.01. If Sally and Bob were to come back now they each would get a better deal and Matt would make $4.98 on the deal. For Matt to continue doing this that $4.98 needs to cover the risks he is taking, his operational costs, and some profit. An HFT is much more efficient at this than Matt driving down the operational cost & potentially calculating the risk more accurately.
- harryh 13y agoNo, they cannot actually see you attempting to buy stock and step in front of you. That's not true.
- deleted 13y ago[deleted]
- adambratt 13y agoYes, they can and it's called buying dumb flow from brokerages. Now technically they write it off as helping you as they group small orders together and execute them, but that doesn't mean these market makers are making a profit off the transaction.
- foobarqux 13y agoThey sort of can with flashed orders.
- dsjoerg 13y agoIt's like saying Wal-Mart rips off its customers, because they use computers and their market power to buy stuff cheaply, and then they turn right around and sell it to their customers for more, making a profit 100% of the time.
- unreal37 13y agoNo, its like saying Walmart watches as you put the item in your shopping cart, and raises the price before you can get to the cashier.
- deleted 13y ago[deleted]
- harryh 13y agoIt's worth nothing that Walmart actually does change prices in real time. If lots of people start buying a particular item then the price for that item is automatically raised.
- er35826 13y agoThe problem is not the HFT firms buying stock cheaply and reselling it for a profit. As the article points out the problem is investors placing a buy order, and the HFT firms seeing this buy order and snapping up the remaining stocks before the original buy order is fully completed. This has the negative side effect of essentially making it impossible to buy for the listed price, even when there are supposedly enough shares available for purchase at that price. As I pointed out in another comment, it's not just buying low and selling high; it's like Walmart interrupting a customer to jack up the prices on a purchase in the middle of that purchse, precisely because that customer is buying that specific item.
- reverend_gonzo 13y agoHFT firms don't see the buy order before its get to the market. They see that a bunch of quantity was bought so they raise their prices on the other markets. Because the purchaser had bad order routing, he moved the market and the hft firms were able to raise prices for what they believe the new market price to be. Say you decide you want to buy up a bunch of property that's all on one street, and the market price for each property is listed at $100,000. Once word gets out that you made the first purchase for $100k, the prices on those other properties are going to go up, because if there's a buy at $100k, they might as well start negotiating at $110k, but they have no idea if there's a buyer who wants just one property, or all of them. Now, only the buyer know how much he wants to buy. If he was smart, he'd go to each seller and execute at the exact same time so when word gets out of a purchase and prices go up, he's already purchased everything he wanted, the uptick in market prices actually benefits him. It's the same thing with trading. If the guy is buying a couple thousand shares scattered across a dozen exchanges, he absolutely needs to make sure they get posted to the exchange at the same time, or he needs to break them up in small orders over a period of time so he doesn't affect the market with his purchases.
- 001sky 13y agoThe original# piece somehow made it through the cracks at HN. https://news.ycombinator.com/item?id=7500426 https://news.ycombinator.com/item?id=7500426 6 points by dcaisen 4 hours ago | flag | discuss [no comments] __________ # By Michael Lewis, published in the NYT today
- josephlord 13y agoNYT => paywall (maybe a weak one but there nevertheless and I don't read rather than working around it). Also I suspect (note I have read the NYT piece) that this is an equally original piece and the Michael Lewis with a book to sell has done similar interviews (or other PR such as press releases) with as many relevant publications as possible.
- 001sky 13y agoThe actual Michael Lewis article (linked above) is 10,000 words. It's not (the expected) fluff piece for PR purposes. More reminiscent of how books used to be serialized/published in the press before going to print. Definitely worth reading. The piece here is fine for promting discussion but the info in the original work would make that discussion better. Its simple to Delete your cookies and/or just use incognito if the NYT is being a PITA.
- deleted 13y ago[deleted]
- kasey_junk 13y agoAnalogies with stores/checkers/soda etc. are all flawed because they are based on something that does not exist in the markets, that is a fixed price. When you buy a physical good in a store they have a published price that you can trust to be what you will pay (in western countries that is the norm, not so in many other places.) Conversely, when talking about equities markets there is no such thing as the stock "price". This is a short hand that is used. In reality, there are groups of people, some willing to buy shares at a variety of prices, and some willing to sell shares at a variety of prices. The job of the exchange is to match these 2 groups when the buy/sell prices intersect or cross. This gets complicated when there is more quantity on 1 side of the buy/sell than the other. Exchanges have rules how this imbalance will get resolved, most of the time it is based on who has been at that price point the longest.
- keithwarren 13y agoI don't like taxes in general but wouldn't a small tax per share (pennies even) pretty much end HFT?
- kasey_junk 13y agoChris Stucchio has a couple of good blog posts explaining why this common reaction would not have the impact most people think it would. http://www.chrisstucchio.com/blog/2012/hft_apology.html http://www.chrisstucchio.com/blog/2012/hft_apology.html
- Zweihander 13y agoYup - http://en.wikipedia.org/wiki/Tobin_tax http://en.wikipedia.org/wiki/Tobin_tax You can make it very small to cut out almost all of these problems and it wouldn't be noticeable to any non-HF traders. It's not gotten very far in the US and is only partially supported in the EU (though I think there's something amiss with the EU proposal).
- icebraining 13y agoBut why should we care? The thing I don't understand about the whole debate is, even if the HFTs are milking investors, so what? We're not talking about powerless individuals versus giant companies that we might need to protect, why not just let the investors deal with it by pressuring the exchanges into banning HFTs, or making new exchanges where HFTs aren't allowed? Is it just moral outrage because the HFTs are perceived to profit from "doing nothing"? Frankly, I'm at a loss why do so many people feel bad for the "poor" investors.
- keithwarren 13y agoMy outrage (not sure you could really call it that) is not some moral thing or based on a perception that they are doing nothing. My issue comes from the fact that securities trading is based on the idea that we buy and sell parts of these securities under the idea we see value in the company. This fits best with a long term hold position but is not really that divergent with a day trader who buys AAPL today because he thinks news later today about some new product will cause the price to go up thus increasing the value of the company. He will sell later in the day because he thinks that it may drop later. My issue with HFT is that these trades (well most of them) are not based on the value of the security but rather on the act of buying and selling itself. It is meta in a sense. That in my mind creates a fundamental flaw in the marketplace around the true purpose of a securities exchange.
- badman_ting 13y agoI work for a financial services company and I still don't invest in stocks. Not that high-freq trading is specifically the problem (maybe it is, maybe it isn't, I dunno) -- retail investing just seems like a sucker's game, though admittedly that leaves me a little stumped as to how a schmuck like me is supposed to grow his money.
- harryh 13y agoHistorically the stock market has returned about 10% a year. You should be investing in stocks if you're investing over the long term.
- notastartup 13y agoValue investing.
- fauigerzigerk 13y agoCan someone help me understand this beyond analogies please? If I submit a buy order for 10 shares of GOOG with a limit of $1134 that order is going to show up in the data stream of HFTs only after it has become a valid open order on the exchange, right? If at that time there is a sufficient volume of open sell orders at or below my limit, does my order go through or is there a way for an HFT to overtake my order? The only way I can see how an HFT could possibly overtake my order is by offering to buy at a higher price than me before my order goes through, hoping that he could sell the shares to me later on for an even higher price. But that's a pretty risky bet for the HFT assuming he needs to be out of the market before the market closes. It seems to me that the most likely victims are other HFTs because they are the ones who will quickly raise their limits when they see the price go up. A low frequency trader like myself can just sit there and wait until the price comes down again or just walk away. Is there something I misunderstand? [Edit]: So, summing up the replies I got here, the only problem seems to be that my broker is allowed to send my order to HFTs before it goes live on the exchange. Wouldn't it be incredibly simple to ban this practice? If it's that simple to solve, why all the fuss about HFT?
- kasey_junk 13y ago"If I submit a buy order for 10 shares of GOOG with a limit of $1134 that order is going to show up in the data stream of HFTs only after it has become a valid open order on the exchange, right?" Correct. "If at that time there is a sufficient volume of open sell orders at or below my limit, does my order go through or is there a way for an HFT to overtake my order?" You will get filled with at worse, your limit price. "The only way I can see how an HFT could possibly overtake my order is by offering to buy at a higher price than me before my order goes through, hoping that he could sell the shares to me later on for an even higher price." Correct.
- adambratt 13y ago> If I submit a buy order for 10 shares of GOOG with a limit of $1134 that order is going to show up in the data stream of HFTs only after it has become a valid open order on the exchange, right? False. HFTs and other trading firms actually buy up the order flow from brokerages. In fact, retail investors making trades in their brokerage accounts are actually referred to as "dumb flow". Having access to the order flow and controlling the routing of it can allow them to jump in front of your trade. For example, they could see that your limit order of $1134 came in when the lowest ask price was $1133.90. They could buy that for $1133.90 and sell it back to you at $1134 for a 10 cent profit. It's not too much different than in the old days when the market makers would delay buy/sells calls to their pits to their own advantage in order to scrape a small profit on the spread.
- skywhopper 13y agoMy understanding of high speed trading is that this has always been the point. I have to assume there's so much money in it that the obvious move to outlaw it as soon as it was devised was already pre-paid off.
- foobarqux 13y agoCan anyone explain how IEX is supposed to be a better exchange?
- notastartup 13y agoI thought free market meant equal playing field for all. From what I read, HFT is limited to people with large amount of money both to start and put their money in. I think 30 years ago, HFT traders would've spent jail time.
- harryh 13y agoLot's of things are limited to people who have (or can raise) a large amount of startup capital. Go try to start a company to compete with Boeing! There's nothing illegal about an industry with high capital costs.
- skybrian 13y agoIt seems like the problem is executing a trade when the first buyer (or seller) comes along to take the other side of the trade, rather than waiting a bit to see if someone else will give you an even better price. That is, trades shouldn't execute immediately when prices cross. Instead it should start an auction. If you're more interested in getting out a few milliseconds sooner than in getting a better price then the front-runner is doing you a service. Otherwise, it seems like the time needed to run a brief auction would be well-spent.
- harryh 13y agoThere already is an auction. It happens once per stock market tick. You don't trade with the first buyer or seller that comes along you trade with the buyer or seller that submits the best price. If a whole bunch of them submit the same price you trade with the one that does it first (hence all the effort HFTs put into moving faster).