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I guess you don't quite understand how HFT works? The simplest example is like this: 1. Bob sees that 10,000 share of MSFT are for sell on exchange X at $50.0
by rondon 13y ago
I guess you don't quite understand how HFT works?
The simplest example is like this:
1. Bob sees that 10,000 share of MSFT are for sell on exchange X at $50.00 and also 30,000 share are for sell on exchange Y at $50.00 and 60,000 shares are for sell on exchange Z at $50.00
2. Bob attempts to buy 100,000 shares of MSFT at $50.00.
3. The HF trader sees the 60,000 order get filled at 50.00 and reasonably assumes that someone is trying to buy more than 60,000 shares right now.
4. He buys the remaining 40,000 shares at $50.00 before Bob's trade is executed.
5. The HF trader immediately lists the 40,000 shares at 50.01
Do you understand how the HF trader is injecting himself into the transaction?
- tptacek 13y agoIt looks like you just gave an example of a trader buying all the liquidity of MSFT on every market with a single market order.
- rondon 13y agoGood point. You should ignore the previous comment based on a technicality. Since I didn't specify that the 100,000 share purchase was not actually 3 different orders
- tptacek 13y agoAside from the strange example you provided, what's funny is that you focused on a 1 cent price movement. The average bid-ask spread before high-volume electronic trading drove it down was 12 cents --- that was money in the pockets of middlemen. Before electronic trading, the spread could have been measured in dollars.
- rondon 13y agoThat is crazy logic. Because international telephone calls used to cost over 12 cents a minute I should let my ISP charge me 1 cent a minute whenever I use Skype internationally?
- harryh 13y agoYou should realize that market makers are actually providing a service that they get paid for and be happy that due to automation & competition the price for that service has dropped by an enormous amount.
- rondon 13y agoI don't want that service, I want to buy something without someone else inserting themselves as a middleman.
- harryh 13y agoThen you don't have to use it. You can issue limit orders instead of market orders as described in the post that started this thread. Lots of people do want to purchase liquidity though which is why these folks exist. (In reality, assuming you're a small retail investor, you don't even have to do what this blog post says. Your transactions are small enough they aren't going to hit the exchanges anyways.)
- kasey_junk 13y agoI know exactly what you mean with this comment, but the idea that anyone can "opt out" of the current markets is ludicrous. I wouldn't attempt to sell titanium to the Amish for the same reason that no rationale investor attempts to sell stocks without the existing market maker system.
- tptacek 13y agoEvery time you place a market order, that is the service you are buying.
- kasey_junk 13y agoSo you'd rather put a massive amount of money into a clearing firms account so they will allow you to trade, pay the DMA, seat, & transaction fees to the exchange, pay for the software developers who connect you to the exchange, and the researchers that make sure the exchange you connect to is providing the correct prices. All those lawyer fees you pay to make sure you are in compliance with an exploding amount of regulation is a fun item to ponder as you ride the train into the office. You'd rather buy and hold shares you aren't sure are priced correctly because you don't know when the opportunity to buy them again will be. Don't forget getting the fun opportunity to explain to your employees how the exchange busted 1 half of your trade and you went from the best trading day ever to the worst, and by the way every one needs to go home cause we are out of business? Simple, start a trading company. Maybe you'd rather just skip all the complication of computers and go back to the good old days of monopoly exchanges and pit traders. Then you get to deal with fees that are 10x of what they are now, the joy of dealing with over the phone brokers and the excellent opportunity to get to buy and sell from specialists who are given cartel status by the monopoly exchange, I'm sure they price things with the retail investor in mind right? At least you won't know how bad you are getting screwed cause there is zero transparency into the market. Sounds good? Get some legislation passed that gives NYSE and Nasdaq back their monopolies. There is probably a third path that involves some sort of governmental agency bid out to a third party for a ridiculous contract that has massive reliability issues and doesn't innovate at all. That might be better, I don't know. Me, even though I know way more about the dirty pool that goes on in the electronic trading space, I'll stick with sending my personal orders through a large retail broker that charges me minimal fees & expense ratios, and allows me access to the lowest bid/ask spreads in history with instantaneous execution to a broad array of risk management and investment opportunities that only big banks used to get. I'd really like access to a massive free social network that doesn't sell my data to the highest bidder, but since I'm unwilling to bank roll that, I can either deal with the social network we have, or opt out.
- kasey_junk 13y agoTGit least is closer to what is actually happening and is much less flawed. I still take issue with your idea that the HFT is injecting itself into some preordained transaction. Information that there is a lot of demand for something should raise the price for that thing. Large institutional buyers already have huge information/infrastructure advantages. Why should they also be given assn exemption from market dynamics that no one else received?
- tptacek 13y agoLet me see if I follow: What you're saying here is that an institutional investor wants to buy MSFT at a price that does not reflect their new demand for 100,000 shares. That order, absent some external force that will put downward pressure on the shares (which, if so, why buy now?) will naturally raise the price of MSFT for everyone in the market. The investor, in other words, wants something for nothing: they want to trade at a price that doesn't reflect their demand, and for some other market participant to take the hit for selling below the true demand.
- rondon 13y agoSomeone pulls into a gas station that says gas is 3.99 a gallon and expects to pay 3.99 a gallon to fill up his car. Should the price increase to 4.00 as soon as he stops in front of the pump to 'reflect the new demand'?
- tptacek 13y agoI don't understand what you're trying to say here. Tradable instruments aren't gasoline. They don't have fixed prices. There is no universe where trading exchanges have ever worked that way.
- kasey_junk 13y agoSomeone pulls into a gas station and buys all the gas they have at 3.99 a gallon. Should they be able to cross the street to the other gas station and expect to do the same thing, or can the across the street gas station raise their prices to 4.00?
- harryh 13y agoI guess you don't quite understand how HFT works? The HFTer is the one offering to sell the shares for $50.00 on exchanges X, Y & Z. He's also offering to buy for $49.99. His goal is to sit there all day long trading with dumb money making 1 cent per share he transacts. The HFTer has a problem though. If a big & smart trader comes along with proprietary knowledge that MSFT should really be trading for $50.10 he could take a big loss. If that HFTer buys everything up for $50.00 and then the price moves to far too fast that's bad. So the HFTer works as hard as he can to detect when this might be happening so that he can update the prices he's offering. A really big signal this might be happening is when someone eats up his whole order book on one exchange all at once. So when that happens he trys to react as fast as possible to updates pricing on the other exchanges. He's not injecting himself into transactions, he's trying to get out of the way as fast as possible.