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Michael Lewis: shilling for the buyside?

197 points by nbouscal 13y ago

drcode 13y ago
Yeah, Michael Lewis' recent interviews do seem a bit suspect. He is yelling "Hey joe sixpack, Wall Street is eating your lunch!" and then when you hear the details of the supposed "fraud" it all revolves around companies like Goldman Sachs (who work with Katsuyama) whining that they're not getting a fair shake in the world. (Oh right, Goldman Sachs is managing Joe Sixpack's pension fund via two levels of indirection- Oh noes, poor Goldman Sachs!) Plus, the interviews he's given on 60 minutes and Fresh Air never once mention the terms "market order" or "limit order". If you don't explain those two basic terms at the heart of the HFT controversy, you're not giving people information, you're only giving them disinformation. That said, there's obviously lots of shady ass shit happening on Wall Street every day, but Michael Lewis is not helping the situation one iota, from the looks of it.
- jokoon 13y ago
  > but Michael Lewis is not helping the situation one iota, from the looks of it. Hasn't the FBI been recently investigating this ?
- tptacek 13y ago
  Two other concepts you really want to understand before forming an opinion about HFT: "large block trades" and "bid-ask spread". Lewis has a drive-by mention of bid-ask spreads in the book (he concedes that they've been decimated, while asserting without evidence that HFT has created a new "shadow spread"), and, thus far, no mention whatsoever of the mechanics of large-block trades. In Lewis' universe, a hedge fund can unload 100,000 shares of XYZ just as easily as you can sell 10 shares of AAPL.
  - rscale 13y ago
    We must be reading different books, because the one I read clearly discusses the mechanics of large-block trades, and specifically calls out the fact that traders exist because you can't unload 100k shares of XYZ as easily as 10 shares of AAPL (unless you like screwing up the market and losing a ton of money).
  - apaprocki 13y ago
    And just in case it isn't entirely clear, one example of 'algo' trading (algo != HFT) is developing an algorithm to sell smaller blocks of shares over a period of time to "hide" the fact that one participant is unloading 100,000 shares so the the price is not driven down too hard, thereby reducing the overall return from selling the shares.
    - kasey_junk 13y ago
      Just to nitpick a touch. One of the real problems with discussions about HFT is that there is no generally accepted definition of what the term means. In general it is some mix of "computers make trading decisions without human intervention", a high number of trades throughout the trading day, & low latency requirements. The reality is that electronic trading systems have different values for all of those variables. I've worked on a trading system that only traded 4 times a week, had no human operator, but extremely tight latency requirements. I've also worked on a system that did very high volume of trades every day, that was watched like a hawk by a team of human traders, and didn't much care about latency.
      - wglb 13y ago
        One definition I have heard is "multiple trades per day", but likely the common definition, for the liquidity-providing definition, is "multiple trades per millisecond".
        apaprocki 13y ago
        HFT as you read it in most stories/comments is trying to imply is what Mark Cuban is hinting at in his blog post that also made the front page. Being fast or having low-latency does not make you a bad person. Using those advantages to front-run books or other "tricks" are what people imagine when they think of HFT with a negative connotation. A firm simply unloading thousands of shares in 100 block increments in a number of milliseconds with very low latency technically would be a bunch of "high frequency" trades, but that type of activity is not what is being debated.
  - 001sky 13y ago
    tptacek -- Not to nitpick but isn't this comment is like someone accusing you of having a "drive by" understanding of computer security? He knows what a block trade is, and how to quote a market. Lewis worked on a bond trading desk, and coined the phrase "equities in dallas". So it's not CFA 1 here for him. To your point: what's missing is the hedging costs. The reason block trades trade out of the market is not just that they are "bespoke", but that there is the inventory hedge risk. It may take some time to build up a position (during which prices can move adversely). And this may or may not need a hedge to protect the holding period (which someone needs to pay for). Various types of trading strategies have very different risk profiles when compared to required inventory hold/periods etc. And this is a hidden source of economics or cost. Hedging doesn't always scale well, either. So its very hard (especially as a lay-person) to make inferences about many things unless you are taking into account both profits and risk. As I'm sure you know.
    - tptacek 13y ago
      I've reread Liar's Poker at least 5 times (it's what I read when I don't want to think about what I'm reading next, because you can pick it up, turn to a random page, read in either direction, and enjoy yourself for a few minutes). Read reviews of the book from traders and you will see lots of people scratching their heads the same way I am. It is confusing that a former bond salesman, who wrote several famous vignettes about how Salomon got its clients into jams by selling them blocks of bonds and having the market move out from under them, would believe the things he appears to believe about RBC's role in the market. In Lewis' universe, a $2MM/yr sell-side broker accepts a 100,000 share block order from a hedge fund, consults a single blotter screen, enters a 100,000 share order, and is startled and outraged when that order isn't as easy to place as an Amazon one-click order. Egads! The broker has to actually work for his money! Kill the HFTs! I don't understand what inventory hedging has to do with the point I'm making. Hedge trades are trades. Large hedge trades involve block shopping.
      - 001sky 13y ago
        Large hedge trades involve block shopping ELI5 version is that you need to pay for (1) working capital. This scales with the size of the block (capital cost). You also need to pay for (2) some lead-gen fees to get the block (service cost). You also have to pay for (3) a hedge on economics while your lead-gen process play's out. The cost of this hedge scales with size (just like capital cost), but also with vol (of underlying) and time (speed of lead gen process). If you don't cut the deal to cover your hedge (or put one on) you run the risk of massive losses from mino movemnets in the market (ie, if you have a <1% cent spread on 5 mill position and the stock spikes 10%). So a trade's profits: (A) scale+fees = Revenues (B) capital+hedge = Costs Both the hedge and the capital are proportionate to time. TLDR when you talk about HFT you are optimizing on time; and thus talking about (B) as much as (A) in terms of profits. Most of the optimization is on (B). What's unique here is that (B) is blind to the casual observer and to some extent, the market. But analytically, it influences profits and drives behaviour/incentive structure. If you dis-regard it out of hand, you're missing an important part of the picture.
- ryandrake 13y ago
  The way I (as a lay person) read this is: One side: "HFT hurts the little guy and helps billionaires! Boo HFT!" The other side: "HFT helps the little guy and hurts billionaires! Yea HTF!" Reality: "HFT is pretty much irrelevant to the little guy. It helps some billionaires and hurts other billionaires, and this is only a story because billionaires are all talking about it."
  - deleted 13y ago
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    - metaphorm 13y ago
      can you explain how ETF's require HFT? Why is it not possible to maintain an ETF's basket of assets using conventional trading?
    - jonhinson 13y ago
      How is this true since ETFs were around several years before electronic exchanges came into existence?
    - Sniperfish 13y ago
      Genuinely curious, what is the evidence to support this claim? Why do you think massively low latency trading speed is required for ETFs to exist?
      - sseveran 13y ago
        ETF Arb and Latency Arb ensure that the ETF always correctly valued and valued the same across all exchanges.
        phyalow 13y ago
        Incorrect. ETF's are largely never priced at the price of the underlying basket. They often trade rich or under based on the availability, relative borrow rates and liquidity of the individual names. Sure some program trading desks will try and arb based on minute changes but this strategy is not very lucrative. Also the create/redeem cycle of an ETF inherently pegs it's value.
- tootie 13y ago
  It affects mutual fund managers who many joe sixpack types do have a stake in.
  - deleted 13y ago
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  - throwaway13qf85 13y ago
    "Joe Sixpack" is a terrible name for the average US stock investor. The median number of shares owned by the adult US public is exactly zero. Most people who own (publicly traded) stocks are already wealthy. "Joe Chateau Lafite" would be a better name. Source: some Matt Levine article.
    - drcode 13y ago
      The median Joe Sixpack has a pension fund, which is the crux of Lewis' argument (I agree it's ridiculous.)
      - ryandrake 13y ago
        You're right, but BARELY: http://www.csmonitor.com/Business/2013/0508/Dow-hits-15000-but-percentage-of-Americans-owning-stocks-hits-a-low.-Why http://www.csmonitor.com/Business/2013/0508/Dow-hits-15000-b... The rate of stock ownership (including through mutual funds and retirement accounts) for Americans is around 52%, down from last year. So, while the median American owns some stock, it's probably a minuscule amount. Two percentage points lower, and the median American (Joe Six Pack) owns no stock. EDIT for more related info: 45% of Americans have no retirement savings [1] 1/4 of Americans have no savings whatsoever [2] [1] http://www.twincities.com/ci_23505006/americans-retirement-savings-falling-short-new-study-says http://www.twincities.com/ci_23505006/americans-retirement-s... [2] http://www.ibtimes.com/over-fourth-americans-have-no-money-their-savings-accounts-half-them-would-be-broke-within-three http://www.ibtimes.com/over-fourth-americans-have-no-money-t...
        drcode 13y ago
- robterrell 13y ago
  I found his interviews really compelling and thought about getting the book. But I had this nagging thought the whole time -- you know, I've been hearing about HFT for years, could it really be some super-secret cabal? The linked article does itself no favors with its pissy tone. I almost didn't read through it, but I'm glad I did, because I learned quite a bit. As always, the truth is somewhere in the middle. Michael Lewis is a master of taking something complicated and turning it into a clever narrative. However, this narrative is simpler than, say, Moneyball: bad guys are "stealing" from good guys, there's a detective story about figuring out how it's happening, and there's a build-a-better-mousetrap montage at the end. It's too perfect. Odds are there's a screenwriter crunching this sucker down into three acts right at this moment.
nbouscal 13y ago
An interesting study on the topic concluded that HFT helps retail investors and hurts institutional investors: http://qed.econ.queensu.ca/pub/faculty/milne/322/IIROC_FeeChange_submission_KM_AP3.pdf http://qed.econ.queensu.ca/pub/faculty/milne/322/IIROC_FeeCh...
lmg643 13y ago
This was a great article. I started reading the book. Early on, one of the examples given was "Brad talked to a friend of his at SAC Capital" about how HFT firms were taking advantage of information in the markets. That is the kind of unintentionally ridiculous anecdote which undermines the moral center of this book. SAC Capital, after all, is the same fund which ran into one of the largest insider trading cases in history, which is also about taking advantage of information in a, let's say, special kind of way. I know a lot about this subject, probably too much to let the judgment fall cleanly in one camp or another on HFT, but with all the hubub right now, I find it might be useful to get biblical for a second - let the person who is without sin cast the first stone.
- matthewmcg 13y ago
  Is the anecdote really unintentionally ridiculous? Lewis acknowledges SAC's later infamy in a parenthetical (quotation below). And the point of the anecdote is that even a party that went to great (and illegal) lengths to gain an informational edge didn't understand the new phenomenon of latency arbitrage by the HFTs. Quotation: "He had a good friend who traded stocks at a big-time hedge fund in Greenwhich, Connecticut, called SAC Capital. SAC Capital was famous (AND SOON TO BE INFAMOUS) for being one step ahead of the U.S. stock market. If anyone was going to know something about the market that Brad didn't know, he figured, it would be them."
  - lmg643 13y ago
    Of course it's ridiculous. The book makes no actual mention of what SAC did, to avoid cognitive dissonance. Perhaps SAC was infamous for dwarf tossing - not illegal but in poor taste. I don't think the 60 minutes audience would have SAC's transgressions on instant recall. Lewis declines to specify anywhere in the book that SAC was engaged in criminal violations of established securities laws, while he writes an entire book about the evils of HFT, which in large part is mostly an issue of what types of trading we want to permit and not widespread illegal activity. And did Brad "figure" SAC would know because he knew that SAC pursued informational advantages to the extreme? Did he think that was unethical, crossed a line, so they would know about other activity that crossed the line? That seems like a really strange line of thinking. It also seems strange that this super ethical guy would attack activity which is legal, but turn a blind eye towards known unethical or suspected illegal business. Did he know about the rumors of insider trading? Did he knowingly solicit business from a firm which he had reason to suspect was engaged in insider trading?
cwisecarver 13y ago
It seems this guy isn't the intended audience for the book. I, for instance, know that Netflix performance is bad on certain ISPs because of throttling and peering agreements but if someone wrote a narrative about this I wouldn't berate them for telling the public at large about it in words they would understand.
- falsestprophet 13y ago
  Obviously he isn't the intended audience of the book because he knows its thesis is false.
- fr0sty 13y ago
  There is a real and meaningful difference between popularizing and fictionalizing though. Some amount of gloss is needed to keep things tidy but if/when that crosses the line then the author is doing a disservice to his audience. This is doubly bad when the book in question is an indictment of the status quo with what amounts to a "call to action" in favor of some new business venture. If the book was presented as non-fiction "based on a true story" that's one thing, but If the b
elecengin 13y ago
I think "shilling for the buyside" is a bit strong. Lewis aggressively pursued a compelling and simple narrative in a market that doesnt have an easy story. I get the impression he didnt even recognize that the field he decided to plow was a minefield. The HFT debate is complicated and has serious implications: his treatment didn't respect it. From acquaintances that knew Katsuyama personally, he was described as a genius marketer, not a technologist. Before even Lewis came along, he had crafted a large part of this narrative: the Thor matching technology succeeded on a compelling story. Lewis got sucked in. The personal reactions you may have seen (William O'Brian on CNBC) are authentic: HFT participants (and those who deal with them) have been villified in an industry already viewed in a negative light. There are some bad apples, but there are also many who genuinely believe that they are doing a service for the market. I don't blame Lewis for this. I just hope that there is an author that can create a compelling story that doesnt fall for the tired trope of the evil HFT trader. The story exists - it is just very technical and nuanced at times. Unfortunately, many HFT participants have been shamed away from standing for what they believe in so there are very few left to tell the story. If you want to read a rebuttal and learn more about the markets at the same time, check out this analysis by Larry Tabb - a market research consultant prominent in the US execution technology market: http://www.scribd.com/doc/215693938/No-Michael-Lewis http://www.scribd.com/doc/215693938/No-Michael-Lewis
- nova22033 13y ago
  Bill O'Brien may not be the best person to quote. http://blogs.wsj.com/moneybeat/2014/04/03/bats-forced-to-correct-statements-by-president-obrien-on-how-its-exchanges-work/ http://blogs.wsj.com/moneybeat/2014/04/03/bats-forced-to-cor... BATS Global Markets Inc., under pressure from the New York Attorney General’s office, corrected statements made by a senior executive during a televised interview this week about how its exchanges work. BATS President William O’Brien, during a CNBC interview Tuesday, said BATS’s Direct Edge exchanges use high-speed data feeds to price stock trades. Thursday, the exchange operator said two of its exchanges, EDGA and EGX, use a slower feed, known as the Securities Information Processor, to price trades. The distinction matters because high-speed traders can use powerful computers and superfast links between markets to outpace traders and trading venues that rely on slower market data, such as the SIP.
stygiansonic 13y ago
Seems like this book is causing quite the ruckus with certain brokerages: http://pressroom.aboutschwab.com/press-release/corporate-and-financial-news/schwab-statement-high-frequency-trading http://pressroom.aboutschwab.com/press-release/corporate-and... Yet they are more than happy to sell their order flow to market makers who use HFT. (To allow them to trade against it before going to the exchange - as is customary - nothing wrong with that) http://www.schwab.com/public/schwab/nn/legal_compliance/important_notices/order_routing.html http://www.schwab.com/public/schwab/nn/legal_compliance/impo... Seems like they are jumping on the populist bandwagon by claiming "HFT bad!" but I think what they mean is "HFT bad - unless it's from one of the firms we sold our order flow to!"
- AustinScript 13y ago
  I would disagree that this would be considered jumping on the populous band wagon, if you've read the article, you'll see that Schwab originally released an Op-Ed in the summer of 2103 echoing similar concerns. He took a public stance on HFT a full year before the book was released. Taken directly from the release you linked-> As we noted in an opinion piece in the Wall Street Journal last summer. http://blog.themistrading.com/talk-to-chuck-about-hft/ http://blog.themistrading.com/talk-to-chuck-about-hft/ http://online.wsj.com/article/SB10001424127887323582904578484810838726222.html http://online.wsj.com/article/SB1000142412788732358290457848...
001sky 13y ago
If your ISP packet sniffed your network and traded against your positions in advance of them coming to market would you have a problem with it? How about if they put up an MITM to get your credntials and then installed a key-logger to make it more effective and faster? One could argue that once you hit "sell" or "buy" your electrons are public information. But others might consider them NPI. I don't think that the issue is completely cut and dry, at least no just yet.
matthewmcg 13y ago
I am still reading the book, but it seems like Lewis' main criticism in the book (vs. interviews) is against the so-called HFT front-running of orders that get routed to multiple exchanges. He is careful to distinguish market-making/liquidity providing functions from the multi-market latency arbitrage and spends a good part of Chapter 4 exploring this distinction. Perhaps his public statements in interviews haven't been so nuanced. Also, these rebuttals to the book don't really address the front-running issue. Is it simply an unavoidable consequence of the physical reality of separate markets? Should anything be done about it? Is it even still occurring or has competition among HFTs and savvier buy-side order routing eliminated it? I would like to read a rebuttal that discusses this.
- minimax 13y ago
  He is careful to distinguish market-making/liquidity providing functions from the multi-market latency arbitrage I don't think the distinction is as clear as you think. If I'm making markets on several of the US equity exchanges, and I see my entire order on one side of the market at one exchange get taken, I will adjust my quotes at the other exchanges. That's not front running. It's a reasonable market making strategy.
  - tpeng 13y ago
    The argument from IEX is that the exchanges intentionally price trades using slower data than what they (the exchanges) have access to. We can call it whatever we want, but natural traders would prefer an exchange that doesn't price match in this way, and have every right to move to such an exchange. http://www.zerohedge.com/news/2014-04-03/bats-admits-ceo-lied-about-hft-cnbc http://www.zerohedge.com/news/2014-04-03/bats-admits-ceo-lie...
    - kasey_junk 13y ago
      Natural large volume traders prefer an exchange that doesn't price match this way. No one is preventing them from creating a dark pool (which is what IEX is) and they already have any number of dark pools available for this sort of trading. Turns out many natural traders (Vanguard is the one that comes first to mind). Really like trading in the new HFT world as it is way cheaper than it used to be.
aasarava 13y ago
Can someone explain how HFT would "provide liquidity", which seems to always be the pro-HFT response? To use an analogy, if I want to buy a house and someone is selling a house, how does a third-party buying the house first and selling it to me a slightly higher price provide liquidity?
- patmcc 13y ago
  If a third-party is always willing to buy houses (or sell houses it owns), then you don't have the awkward case where I want to buy your house today but you really really wanted to sell it a month ago.
- Mikeb85 13y ago
  Because they'd be buying and selling when there isn't a buyer or seller. Imagine if you could have the house off your hands, at market price, in a day instead of listing it for months. That's b what liquidity does for you. Almost all HFT is market making, there's plenty of information about what that means...
  - pkinsky 13y ago
    I thought the whole point of HFT was to wait for a buyer to signal interest in buying X, and then buy X before that buyer and sell it to him at a slightly higher price. If this is true, then in your scenario you would still have your house listed for months, but a high frequency trader would buy it just slightly before it would be brought without any high frequency traders in the loop.
    - kasey_junk 13y ago
      You'd think that is true from all the hoopla wouldn't you. But that simple assumption is exactly what large buy side investors want you to think and it is false* *There are some highly predatory algorithms that try to do this. The problem is that if you are fast enough to do this routinely, you are sophisticated enough to do legitimate market making and make more money.
    - 13y ago
tpeng 13y ago
People ITT are not making a distinction between different types of HFT. Katsuyama and Lewis do not criticize all forms of computerized trading, but specifically computerized scalping that is aided and abetted by exchanges. Their chief complaint is that HFT uses more current prices than the exchanges themselves and they use this to scalp other traders. http://www.zerohedge.com/news/2014-04-03/bats-admits-ceo-lied-about-hft-cnbc http://www.zerohedge.com/news/2014-04-03/bats-admits-ceo-lie... This is actually very simple. Natural buyers and sellers do not need intermediaries, but intermediaries do need the natural traders. So if the natural traders can coordinate, they should be able to set rules that favor themselves and disfavor intermediaries. I won't say that what HFT does is "unfair" (capitalism does not contemplate fairness), but I think it's highly ironic that HFT and their supporters are complaining how "unfair" it is that natural traders are working together, and yes, marketing their new exchange.
- msandford 13y ago
  Very nicely put. Yes it's a bit hilarious. The HFT folks seem to be saying "you don't have a right to add up all the total amount of asks at a certain price across all the exchanges and expect to get execution at that price" and with a bit of thought I might agree with them. But it is very counter-intuitive. If you see 10,000 shares for sale across 10 exchanges at $54.00 your VERY next thought probably isn't "oh that's actually 1,000 shares, but advertised on all the exchanges so it only LOOKS like 10,000" Once you understand how things works, sure fine. The counter to that, though, is that the HFT folks don't have any right to have access to order flow. If market participants want to route their orders to a particular dark pool or exchange they have every right to. The "markets are always right" sword cuts both ways.
  - consz 13y ago
    It isn't only 1000 shares, there is indeed 1000 unique shares on each of those ten exchanges. The problem is that, as soon as the first exchange that you trade on processes your trade of the 1000 shares on that exchange and publicly disseminates that information, that is public information -- and an HFT is totally within their right to pull their remaining 1000 shares on each of the nine remaining exchanges if they so choose. That's why Lewis explains that once they wrote a program to stagger the submission of their orders so they arrive simultaneously to all ten exchanges, they were able to pick off all 10000 shares instead of only the 1000 on the first exchange.
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lotsofmangos 13y ago
I stopped reading at 'potato-wog'.
- tpeng 13y ago
  Why is this downvoted? There are multiple comments in the article based on racial stereotypes which are not only completely unnecessary but reflect negatively upon the author's judgment and credibility. Very ironic considering the article seeks to suppress Mr Lewis's speech.
  - brymaster 13y ago
    To quote te_chris: "On most articles like this it just feels like a bunch of doe-eyed, aspirational men who really want to be rich one day, so don't want to spoil the fun for their future selves." https://news.ycombinator.com/item?id=7257140 https://news.ycombinator.com/item?id=7257140
  - kasey_junk 13y ago
    I also found the racial commentaries problematic and unnecessary. That said, the author is in no way trying to suppress Mr. Lewis's speech. Disagreement is not censorship.
    - tpeng 13y ago
      Only by implication. Calling someone a shill could be considered "only" an attack on credibility, but it's also an implied argument that the speaker lacks the right to speak on that subject.
  - lotsofmangos 13y ago
    I did an actual double take at 'potato-wog'. The only people I have run into who use that term for the Irish in normal speech are BNP.
RockyMcNuts 13y ago
The market exists the benefit for the 'buyside' e.g. people who own stock, not for the benefit of the middlemen like exchanges and HFT marketmakers. You may not like homeowners and think some of them are or should be convicted, but it's ridiculous to say someone is 'shilling for homeowners' when they point out that real estate brokers are overpaid and skimming. Some more balanced discussion - http://streetwiseprofessor.com/?p=8333 http://streetwiseprofessor.com/?p=8333 http://blogmaverick.com/2014/04/03/the-idiots-guide-to-high-frequency-trading/ http://blogmaverick.com/2014/04/03/the-idiots-guide-to-high-... http://blogs.hbr.org/2014/04/high-frequency-trading-threat-or-menace/ http://blogs.hbr.org/2014/04/high-frequency-trading-threat-o... In a nutshell, people who run big portfolios don't want to give away information about what they're doing, and they don't want HFT types to be able to pay exchanges to get first crack at front-running them. On the other hand there is a legitimate market-making function, and there's a tradeoff between transparent markets and forcing people to share info that lets other people trade against them.
- RockyMcNuts 13y ago
  this guy said it better than me - https://news.ycombinator.com/item?id=7546768 https://news.ycombinator.com/item?id=7546768
- drcode 13y ago
  > people who run big portfolios don't want to give away information about what they're doing... Then people shouldn't be investing in these poorly-performing portfolios and use other portfolio managers who are more savvy. These people act like this stuff is MP (my problem, as an average person) whereas it's obviously YP (your problem, Mr. portfolio manager)
- harryh 13y ago
  Yes, some big portfolio guy wants to be able to sell 50M worth of some stock without the price dropping. But what if you were buying stock at the same time? Wouldn't you want that information about that rise in supply to be detected and priced into the market as fast as possible?
- tptacek 13y ago
forgotAgain 13y ago
This article seems like nothing more than an overly long ad hominem attack. The only critique that matters is whether or not front running of buy orders by HFT traders is real or bull. Anything more is just an attempt to cloud the waters.
- aet 13y ago
  Yes, I was also dissapointed by the name calling.
- Guvante 13y ago
  It was especially disappointing when he dismissed the front running as always having been there.
  - harryh 13y ago
    He didn't say front running has always been there. He said market making has always been there. Market making is a valuable service and it's great that it's cheaper than ever.
- NkVczPkybiXICG 13y ago
  There is no front-running: http://clarkgaebel.com/you-are-not-being-front-run/ http://clarkgaebel.com/you-are-not-being-front-run/
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whyme 13y ago
I haven't read the book, but I've followed the chatter and have been listening to Lewis on Bloomberg. I get the impression that many justify HFT by comparing current or past alternatives, however his argument is that HFT is corrupting an otherwise fairer market place. In other words the market should improve and lessen these side businesses that victimize participants and add to the discredit of the exchanges. If anyone thinks that these side business do not victimize participants you should look back to examples like Knight Capitals glitch that most certainly caused retail investors to lose trust and pull their money from the market, taking a loss. The introduction of non-relevant code is an unnecessary risk that does corrupt the system and does victimize your average investor. 1. http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/9475292/Knight-Capitals-440m-trading-loss-caused-by-disused-software.html http://www.telegraph.co.uk/finance/newsbysector/banksandfina...
joosters 13y ago
I wonder how many people commenting here have actually read the book? Or have they just been reading articles about it?
- kasey_junk 13y ago
  This is a very good point. I finished the book today. The most interesting thing to me is that the book pretty clearly (from the perspective of an HFT engineer) comes down on the side that HFT is not actually a villain and that the large banks (especially Goldman Sachs & Credit Suisse) are pretty much the devil (giving Goldman a pass for their last year of non-deviltry). Yet all the interviews, press junkets, and face time on the Daily Show are saying the exact opposite (to the point that Jon Stewart of all people is extolling the virtues of Goldman). It says way more about the book selling/exchange building business than it does about HFT.
anonu 13y ago
My concern is that Michael Lewis and his books have great popular appeal. Furthermore, he is jumping on the popular bandwagon of bashing HFT. They lay person will look at these facts and simply conclude that he's right. The problem can easily extend to other buy-siders who dont really full understand (or care to understand) how market microstructure works in the US.
JackFr 13y ago
I suppose one could add this book to The Blind Side -- the story of how one of Michael Lewis's classmates as an Ole Miss booster, gave impermissible benefits to a high school recruit and got away with it. Moneyball -- the story of a GM with 0 World Series appearances and a .530 WP.
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scottlocklin 13y ago
If you think I'm a dork, or too much of a Michael Lewis hater, I encourage people to read this Amazon review, which gets into a lot of interesting small details Lewis got wrong: http://www.amazon.com/review/R3PJO6KJGRMWUE/ref=cm_cr_pr_viewpnt#R3PJO6KJGRMWUE http://www.amazon.com/review/R3PJO6KJGRMWUE/ref=cm_cr_pr_vie...
- kasey_junk 13y ago
  This is very close to the blog post I would write if I were going to write a critic of Flash Boys. I'd add the following: IEXT has a few main selling points. 1 transparency, 2 simplicity, 3 looking out for "investors". The problem is that they aren't any of those things and it is obvious from a simple reading of their technical documents. First transparency. Their marketing pitch is that as opposed to other dark pools, they are transparent about what is happening on their markets. Yet the first thing they say in their technical documents is "IEX will commence operation as a fully NON- ---DISPLAYED venue." What this means is that their order books is not available for outside audit. They are meeting the lowest hurdle to regulatory compliance by providing best bid/offer and no more. If you think that is ok, let me ask you. If I told you that there was 1 buyer willing to buy at 10.00 and 1 seller willing to sell at 11.00 what would you think the "real" price for that instrument is? What if I told you that there was 1 buyer at 10, 1 seller at 11, 100 million buyers at 9.99 and zero sellers at 11.01? If you think those markets should be priced the same way, IETX is for you. If not, realize that IETX would tell you those markets are the same thing. As far as simplicity, Flash Boys and the IETX marketing materials make a big deal about all of the order types that provide advantages to market makers, yet they remain silent on those order types that are explicitly there for large institutional investors. Lewis rages against ALO orders yet doesn't even mention iceberg orders which the sole point of is to hide the amount of shares a participant wants to sell. Then he extols the virtue of IETX for only offering 3 order types (which has since risen to 4), yet doesn't explain that in those 3 order types are many variants that only benefit large investors. IETX has literally removed all of the order types that allow market makers to do their jobs, while leaving all the order types that allow large institutions to hide their order flow. One of the most controversial order types out there is an ISO order, which is literally a legislative exemption for large block buyers that allows them to circumvent regulation about the national ticker. IETX offers those sorts of orders, but you will be happy to know they don't support "esoteric" orders. The most egregious problem in Flash Boys is Lewis' use of the term "investor". He uses this term to make his readers think he is talking about them, after all anyone who is not an HFT, who is long holding a stock is an "investor". Yet the practices he describes as predatory, are really simple market dynamics. If an "investor" wants to buy or sell an extremely large block of shares, that should move the market price. No other marketplace would think differently. If McDonalds buys all the cows in America, beef should cost more. We all understand that. But the giant hedge funds of the world hate this. They want to use their privileged information of demand to make money, and not change the prices of the things in demand. They used to be able to accomplish this because the markets were dumb. They aren't anymore. Price discovery is an extremely efficient (and cut throat business). IETX does its gosh darn Canadian best to undercut that. Literally every rule they have is an attempt to hide demand and undermine price discovery. It's possible that bad pricing is an overall societal good. I'm not smart enough to weigh in on that. I will ask, if they are looking out for the little guy though, why do they have a special order type that insures that big investors don't trade with them (min. qty orders)? They will respond that it is protection against predatory HFT. I ask you though, if the huge hedge funds of the world don't want to trade in small volume with the rest of the informed markets, at the lowest prices conceivable, who do they want to trade with? The answer is large dumb funds, who don't care about trading at inflated costs. I.E. pension funds.
blue11 13y ago
You don't have to agree with Michael Lewis' views or buy into the story line 100% in order to enjoy the book. The fact is that this is a well-written book that is full of mini-stories and anecdotes that present very realistic descriptions of how electronic markets and Wall Street in general work. Statements like "the market is rigged" are obviously over the top but that doesn't mean that the book on average is not true to reality. Most books about electronic trading suffer from extreme sensationalism, poor writing, and the inability of the authors to understand the subject matter that they are writing about. Michael Lewis does a better job than everyone else. He is a great writer and he is a smart guy who has some financial background and has a pretty good understanding of financial markets. Yes, there is some sensationalism here (he has to sell a good story after all) and there are many errors in the book, and, yes, the author's biases are quite evident, he's picked a side and he's sticking to his story. On aggregate, though, this is probably the best book about the world of electronic trading that I've read. (Some people mentioned "Dark Pools" by Scott Patterson. Although also interesting, that books was often quite painful to read because it was quite clear that the author did not understand basic financial and programming concepts. "Flash Boys" is much better, in my opinion. Although if you are really interested in the subject, you should read both.)
- harryh 13y ago
  You basically just said that people should read the book because, even though it's mostly wrong, it's well written. Isn't that kind of crazy?
  - blue11 13y ago
    I'm not saying that it's mostly wrong. I am saying that it's a biased perspective, but most of the contents is factual. You can learn interesting things about the markets, and about the individuals and the companies involved. However, this is one side of the story. Michael Lewis' facts were gathered from people that were close to him and the people that he could get to speak to him. It's one circle of people with their own agenda. But there are many other views out there. So he is presenting the facts that he knows about and that he thinks are important. But there are things that he is perhaps omitting on purpose, and things that perhaps he just doesn't know or understand. The book is not the whole truth. As with any good book or article, you can learn a lot without having to agree with the author's conclusions or his personal views.
skywhopper 13y ago
Always good to start out an article critiquing the argument in a new book by showing a picture of the author and making a snide remark about his appearance. Immediately gives you credibility.
stevewilhelm 13y ago
As an aside; I have been thinking it would be useful to have two new levels of capital gains taxes. In addition to long term capital gains, and short term capital gains, there would be "intra-day" capital gains and "sub-second" capital gains. I was thinking the intra-day gains Federal tax rate would be 50% and sub-second capital gains Federal rate would be 90%, but these values are arbitrary. For both new types of capital gains, LIFO trade accounting would be used.

197 points by nbouscal 13y ago

Yeah, Michael Lewis' recent interviews do seem a bit suspect. He is yelling "Hey joe sixpack, Wall Street is eating your lunch!" and then when you hear the details of the supposed "fraud" it all revolves around companies like Goldman Sachs (who work with Katsuyama) whining that they're not getting a fair shake in the world. (Oh right, Goldman Sachs is managing Joe Sixpack's pension fund via two levels of indirection- Oh noes, poor Goldman Sachs!) Plus, the interviews he's given on 60 minutes and Fresh Air never once mention the terms "market order" or "limit order". If you don't explain those two basic terms at the heart of the HFT controversy, you're not giving people information, you're only giving them disinformation. That said, there's obviously lots of shady ass shit happening on Wall Street every day, but Michael Lewis is not helping the situation one iota, from the looks of it.

jokoon 13y ago
> but Michael Lewis is not helping the situation one iota, from the looks of it. Hasn't the FBI been recently investigating this ?
tptacek 13y ago
Two other concepts you really want to understand before forming an opinion about HFT: "large block trades" and "bid-ask spread". Lewis has a drive-by mention of bid-ask spreads in the book (he concedes that they've been decimated, while asserting without evidence that HFT has created a new "shadow spread"), and, thus far, no mention whatsoever of the mechanics of large-block trades. In Lewis' universe, a hedge fund can unload 100,000 shares of XYZ just as easily as you can sell 10 shares of AAPL.
- rscale 13y ago
  We must be reading different books, because the one I read clearly discusses the mechanics of large-block trades, and specifically calls out the fact that traders exist because you can't unload 100k shares of XYZ as easily as 10 shares of AAPL (unless you like screwing up the market and losing a ton of money).
- apaprocki 13y ago
  And just in case it isn't entirely clear, one example of 'algo' trading (algo != HFT) is developing an algorithm to sell smaller blocks of shares over a period of time to "hide" the fact that one participant is unloading 100,000 shares so the the price is not driven down too hard, thereby reducing the overall return from selling the shares.
  - kasey_junk 13y ago
    Just to nitpick a touch. One of the real problems with discussions about HFT is that there is no generally accepted definition of what the term means. In general it is some mix of "computers make trading decisions without human intervention", a high number of trades throughout the trading day, & low latency requirements. The reality is that electronic trading systems have different values for all of those variables. I've worked on a trading system that only traded 4 times a week, had no human operator, but extremely tight latency requirements. I've also worked on a system that did very high volume of trades every day, that was watched like a hawk by a team of human traders, and didn't much care about latency.
    - wglb 13y ago
      One definition I have heard is "multiple trades per day", but likely the common definition, for the liquidity-providing definition, is "multiple trades per millisecond".
      - apaprocki 13y ago
        HFT as you read it in most stories/comments is trying to imply is what Mark Cuban is hinting at in his blog post that also made the front page. Being fast or having low-latency does not make you a bad person. Using those advantages to front-run books or other "tricks" are what people imagine when they think of HFT with a negative connotation. A firm simply unloading thousands of shares in 100 block increments in a number of milliseconds with very low latency technically would be a bunch of "high frequency" trades, but that type of activity is not what is being debated.
- 001sky 13y ago
  tptacek -- Not to nitpick but isn't this comment is like someone accusing you of having a "drive by" understanding of computer security? He knows what a block trade is, and how to quote a market. Lewis worked on a bond trading desk, and coined the phrase "equities in dallas". So it's not CFA 1 here for him. To your point: what's missing is the hedging costs. The reason block trades trade out of the market is not just that they are "bespoke", but that there is the inventory hedge risk. It may take some time to build up a position (during which prices can move adversely). And this may or may not need a hedge to protect the holding period (which someone needs to pay for). Various types of trading strategies have very different risk profiles when compared to required inventory hold/periods etc. And this is a hidden source of economics or cost. Hedging doesn't always scale well, either. So its very hard (especially as a lay-person) to make inferences about many things unless you are taking into account both profits and risk. As I'm sure you know.
  - tptacek 13y ago
    I've reread Liar's Poker at least 5 times (it's what I read when I don't want to think about what I'm reading next, because you can pick it up, turn to a random page, read in either direction, and enjoy yourself for a few minutes). Read reviews of the book from traders and you will see lots of people scratching their heads the same way I am. It is confusing that a former bond salesman, who wrote several famous vignettes about how Salomon got its clients into jams by selling them blocks of bonds and having the market move out from under them, would believe the things he appears to believe about RBC's role in the market. In Lewis' universe, a $2MM/yr sell-side broker accepts a 100,000 share block order from a hedge fund, consults a single blotter screen, enters a 100,000 share order, and is startled and outraged when that order isn't as easy to place as an Amazon one-click order. Egads! The broker has to actually work for his money! Kill the HFTs! I don't understand what inventory hedging has to do with the point I'm making. Hedge trades are trades. Large hedge trades involve block shopping.
    - 001sky 13y ago
      Large hedge trades involve block shopping ELI5 version is that you need to pay for (1) working capital. This scales with the size of the block (capital cost). You also need to pay for (2) some lead-gen fees to get the block (service cost). You also have to pay for (3) a hedge on economics while your lead-gen process play's out. The cost of this hedge scales with size (just like capital cost), but also with vol (of underlying) and time (speed of lead gen process). If you don't cut the deal to cover your hedge (or put one on) you run the risk of massive losses from mino movemnets in the market (ie, if you have a <1% cent spread on 5 mill position and the stock spikes 10%). So a trade's profits: (A) scale+fees = Revenues (B) capital+hedge = Costs Both the hedge and the capital are proportionate to time. TLDR when you talk about HFT you are optimizing on time; and thus talking about (B) as much as (A) in terms of profits. Most of the optimization is on (B). What's unique here is that (B) is blind to the casual observer and to some extent, the market. But analytically, it influences profits and drives behaviour/incentive structure. If you dis-regard it out of hand, you're missing an important part of the picture.
ryandrake 13y ago
The way I (as a lay person) read this is: One side: "HFT hurts the little guy and helps billionaires! Boo HFT!" The other side: "HFT helps the little guy and hurts billionaires! Yea HTF!" Reality: "HFT is pretty much irrelevant to the little guy. It helps some billionaires and hurts other billionaires, and this is only a story because billionaires are all talking about it."
- deleted 13y ago
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  - metaphorm 13y ago
    can you explain how ETF's require HFT? Why is it not possible to maintain an ETF's basket of assets using conventional trading?
  - jonhinson 13y ago
    How is this true since ETFs were around several years before electronic exchanges came into existence?
  - Sniperfish 13y ago
    Genuinely curious, what is the evidence to support this claim? Why do you think massively low latency trading speed is required for ETFs to exist?
    - sseveran 13y ago
      ETF Arb and Latency Arb ensure that the ETF always correctly valued and valued the same across all exchanges.
      - phyalow 13y ago
        Incorrect. ETF's are largely never priced at the price of the underlying basket. They often trade rich or under based on the availability, relative borrow rates and liquidity of the individual names. Sure some program trading desks will try and arb based on minute changes but this strategy is not very lucrative. Also the create/redeem cycle of an ETF inherently pegs it's value.
tootie 13y ago
It affects mutual fund managers who many joe sixpack types do have a stake in.
- deleted 13y ago
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- throwaway13qf85 13y ago
  "Joe Sixpack" is a terrible name for the average US stock investor. The median number of shares owned by the adult US public is exactly zero. Most people who own (publicly traded) stocks are already wealthy. "Joe Chateau Lafite" would be a better name. Source: some Matt Levine article.
  - drcode 13y ago
    The median Joe Sixpack has a pension fund, which is the crux of Lewis' argument (I agree it's ridiculous.)
    - ryandrake 13y ago
      You're right, but BARELY: http://www.csmonitor.com/Business/2013/0508/Dow-hits-15000-but-percentage-of-Americans-owning-stocks-hits-a-low.-Why http://www.csmonitor.com/Business/2013/0508/Dow-hits-15000-b... The rate of stock ownership (including through mutual funds and retirement accounts) for Americans is around 52%, down from last year. So, while the median American owns some stock, it's probably a minuscule amount. Two percentage points lower, and the median American (Joe Six Pack) owns no stock. EDIT for more related info: 45% of Americans have no retirement savings [1] 1/4 of Americans have no savings whatsoever [2] [1] http://www.twincities.com/ci_23505006/americans-retirement-savings-falling-short-new-study-says http://www.twincities.com/ci_23505006/americans-retirement-s... [2] http://www.ibtimes.com/over-fourth-americans-have-no-money-their-savings-accounts-half-them-would-be-broke-within-three http://www.ibtimes.com/over-fourth-americans-have-no-money-t...
      - drcode 13y ago
robterrell 13y ago
I found his interviews really compelling and thought about getting the book. But I had this nagging thought the whole time -- you know, I've been hearing about HFT for years, could it really be some super-secret cabal? The linked article does itself no favors with its pissy tone. I almost didn't read through it, but I'm glad I did, because I learned quite a bit. As always, the truth is somewhere in the middle. Michael Lewis is a master of taking something complicated and turning it into a clever narrative. However, this narrative is simpler than, say, Moneyball: bad guys are "stealing" from good guys, there's a detective story about figuring out how it's happening, and there's a build-a-better-mousetrap montage at the end. It's too perfect. Odds are there's a screenwriter crunching this sucker down into three acts right at this moment.

nbouscal 13y ago

An interesting study on the topic concluded that HFT helps retail investors and hurts institutional investors: http://qed.econ.queensu.ca/pub/faculty/milne/322/IIROC_FeeChange_submission_KM_AP3.pdf http://qed.econ.queensu.ca/pub/faculty/milne/322/IIROC_FeeCh...

lmg643 13y ago

This was a great article. I started reading the book. Early on, one of the examples given was "Brad talked to a friend of his at SAC Capital" about how HFT firms were taking advantage of information in the markets. That is the kind of unintentionally ridiculous anecdote which undermines the moral center of this book. SAC Capital, after all, is the same fund which ran into one of the largest insider trading cases in history, which is also about taking advantage of information in a, let's say, special kind of way. I know a lot about this subject, probably too much to let the judgment fall cleanly in one camp or another on HFT, but with all the hubub right now, I find it might be useful to get biblical for a second - let the person who is without sin cast the first stone.

matthewmcg 13y ago
Is the anecdote really unintentionally ridiculous? Lewis acknowledges SAC's later infamy in a parenthetical (quotation below). And the point of the anecdote is that even a party that went to great (and illegal) lengths to gain an informational edge didn't understand the new phenomenon of latency arbitrage by the HFTs. Quotation: "He had a good friend who traded stocks at a big-time hedge fund in Greenwhich, Connecticut, called SAC Capital. SAC Capital was famous (AND SOON TO BE INFAMOUS) for being one step ahead of the U.S. stock market. If anyone was going to know something about the market that Brad didn't know, he figured, it would be them."
- lmg643 13y ago
  Of course it's ridiculous. The book makes no actual mention of what SAC did, to avoid cognitive dissonance. Perhaps SAC was infamous for dwarf tossing - not illegal but in poor taste. I don't think the 60 minutes audience would have SAC's transgressions on instant recall. Lewis declines to specify anywhere in the book that SAC was engaged in criminal violations of established securities laws, while he writes an entire book about the evils of HFT, which in large part is mostly an issue of what types of trading we want to permit and not widespread illegal activity. And did Brad "figure" SAC would know because he knew that SAC pursued informational advantages to the extreme? Did he think that was unethical, crossed a line, so they would know about other activity that crossed the line? That seems like a really strange line of thinking. It also seems strange that this super ethical guy would attack activity which is legal, but turn a blind eye towards known unethical or suspected illegal business. Did he know about the rumors of insider trading? Did he knowingly solicit business from a firm which he had reason to suspect was engaged in insider trading?

cwisecarver 13y ago

It seems this guy isn't the intended audience for the book. I, for instance, know that Netflix performance is bad on certain ISPs because of throttling and peering agreements but if someone wrote a narrative about this I wouldn't berate them for telling the public at large about it in words they would understand.

falsestprophet 13y ago
Obviously he isn't the intended audience of the book because he knows its thesis is false.
fr0sty 13y ago
There is a real and meaningful difference between popularizing and fictionalizing though. Some amount of gloss is needed to keep things tidy but if/when that crosses the line then the author is doing a disservice to his audience. This is doubly bad when the book in question is an indictment of the status quo with what amounts to a "call to action" in favor of some new business venture. If the book was presented as non-fiction "based on a true story" that's one thing, but If the b

elecengin 13y ago

I think "shilling for the buyside" is a bit strong. Lewis aggressively pursued a compelling and simple narrative in a market that doesnt have an easy story. I get the impression he didnt even recognize that the field he decided to plow was a minefield. The HFT debate is complicated and has serious implications: his treatment didn't respect it. From acquaintances that knew Katsuyama personally, he was described as a genius marketer, not a technologist. Before even Lewis came along, he had crafted a large part of this narrative: the Thor matching technology succeeded on a compelling story. Lewis got sucked in. The personal reactions you may have seen (William O'Brian on CNBC) are authentic: HFT participants (and those who deal with them) have been villified in an industry already viewed in a negative light. There are some bad apples, but there are also many who genuinely believe that they are doing a service for the market. I don't blame Lewis for this. I just hope that there is an author that can create a compelling story that doesnt fall for the tired trope of the evil HFT trader. The story exists - it is just very technical and nuanced at times. Unfortunately, many HFT participants have been shamed away from standing for what they believe in so there are very few left to tell the story. If you want to read a rebuttal and learn more about the markets at the same time, check out this analysis by Larry Tabb - a market research consultant prominent in the US execution technology market: http://www.scribd.com/doc/215693938/No-Michael-Lewis http://www.scribd.com/doc/215693938/No-Michael-Lewis

nova22033 13y ago
Bill O'Brien may not be the best person to quote. http://blogs.wsj.com/moneybeat/2014/04/03/bats-forced-to-correct-statements-by-president-obrien-on-how-its-exchanges-work/ http://blogs.wsj.com/moneybeat/2014/04/03/bats-forced-to-cor... BATS Global Markets Inc., under pressure from the New York Attorney General’s office, corrected statements made by a senior executive during a televised interview this week about how its exchanges work. BATS President William O’Brien, during a CNBC interview Tuesday, said BATS’s Direct Edge exchanges use high-speed data feeds to price stock trades. Thursday, the exchange operator said two of its exchanges, EDGA and EGX, use a slower feed, known as the Securities Information Processor, to price trades. The distinction matters because high-speed traders can use powerful computers and superfast links between markets to outpace traders and trading venues that rely on slower market data, such as the SIP.

stygiansonic 13y ago

Seems like this book is causing quite the ruckus with certain brokerages: http://pressroom.aboutschwab.com/press-release/corporate-and-financial-news/schwab-statement-high-frequency-trading http://pressroom.aboutschwab.com/press-release/corporate-and... Yet they are more than happy to sell their order flow to market makers who use HFT. (To allow them to trade against it before going to the exchange - as is customary - nothing wrong with that) http://www.schwab.com/public/schwab/nn/legal_compliance/important_notices/order_routing.html http://www.schwab.com/public/schwab/nn/legal_compliance/impo... Seems like they are jumping on the populist bandwagon by claiming "HFT bad!" but I think what they mean is "HFT bad - unless it's from one of the firms we sold our order flow to!"

AustinScript 13y ago
I would disagree that this would be considered jumping on the populous band wagon, if you've read the article, you'll see that Schwab originally released an Op-Ed in the summer of 2103 echoing similar concerns. He took a public stance on HFT a full year before the book was released. Taken directly from the release you linked-> As we noted in an opinion piece in the Wall Street Journal last summer. http://blog.themistrading.com/talk-to-chuck-about-hft/ http://blog.themistrading.com/talk-to-chuck-about-hft/ http://online.wsj.com/article/SB10001424127887323582904578484810838726222.html http://online.wsj.com/article/SB1000142412788732358290457848...

001sky 13y ago

If your ISP packet sniffed your network and traded against your positions in advance of them coming to market would you have a problem with it? How about if they put up an MITM to get your credntials and then installed a key-logger to make it more effective and faster? One could argue that once you hit "sell" or "buy" your electrons are public information. But others might consider them NPI. I don't think that the issue is completely cut and dry, at least no just yet.

matthewmcg 13y ago

I am still reading the book, but it seems like Lewis' main criticism in the book (vs. interviews) is against the so-called HFT front-running of orders that get routed to multiple exchanges. He is careful to distinguish market-making/liquidity providing functions from the multi-market latency arbitrage and spends a good part of Chapter 4 exploring this distinction. Perhaps his public statements in interviews haven't been so nuanced. Also, these rebuttals to the book don't really address the front-running issue. Is it simply an unavoidable consequence of the physical reality of separate markets? Should anything be done about it? Is it even still occurring or has competition among HFTs and savvier buy-side order routing eliminated it? I would like to read a rebuttal that discusses this.

minimax 13y ago
He is careful to distinguish market-making/liquidity providing functions from the multi-market latency arbitrage I don't think the distinction is as clear as you think. If I'm making markets on several of the US equity exchanges, and I see my entire order on one side of the market at one exchange get taken, I will adjust my quotes at the other exchanges. That's not front running. It's a reasonable market making strategy.
- tpeng 13y ago
  The argument from IEX is that the exchanges intentionally price trades using slower data than what they (the exchanges) have access to. We can call it whatever we want, but natural traders would prefer an exchange that doesn't price match in this way, and have every right to move to such an exchange. http://www.zerohedge.com/news/2014-04-03/bats-admits-ceo-lied-about-hft-cnbc http://www.zerohedge.com/news/2014-04-03/bats-admits-ceo-lie...
  - kasey_junk 13y ago
    Natural large volume traders prefer an exchange that doesn't price match this way. No one is preventing them from creating a dark pool (which is what IEX is) and they already have any number of dark pools available for this sort of trading. Turns out many natural traders (Vanguard is the one that comes first to mind). Really like trading in the new HFT world as it is way cheaper than it used to be.

aasarava 13y ago

Can someone explain how HFT would "provide liquidity", which seems to always be the pro-HFT response? To use an analogy, if I want to buy a house and someone is selling a house, how does a third-party buying the house first and selling it to me a slightly higher price provide liquidity?

patmcc 13y ago
If a third-party is always willing to buy houses (or sell houses it owns), then you don't have the awkward case where I want to buy your house today but you really really wanted to sell it a month ago.
Mikeb85 13y ago
Because they'd be buying and selling when there isn't a buyer or seller. Imagine if you could have the house off your hands, at market price, in a day instead of listing it for months. That's b what liquidity does for you. Almost all HFT is market making, there's plenty of information about what that means...
- pkinsky 13y ago
  I thought the whole point of HFT was to wait for a buyer to signal interest in buying X, and then buy X before that buyer and sell it to him at a slightly higher price. If this is true, then in your scenario you would still have your house listed for months, but a high frequency trader would buy it just slightly before it would be brought without any high frequency traders in the loop.
  - kasey_junk 13y ago
    You'd think that is true from all the hoopla wouldn't you. But that simple assumption is exactly what large buy side investors want you to think and it is false* *There are some highly predatory algorithms that try to do this. The problem is that if you are fast enough to do this routinely, you are sophisticated enough to do legitimate market making and make more money.
  - 13y ago

tpeng 13y ago

People ITT are not making a distinction between different types of HFT. Katsuyama and Lewis do not criticize all forms of computerized trading, but specifically computerized scalping that is aided and abetted by exchanges. Their chief complaint is that HFT uses more current prices than the exchanges themselves and they use this to scalp other traders. http://www.zerohedge.com/news/2014-04-03/bats-admits-ceo-lied-about-hft-cnbc http://www.zerohedge.com/news/2014-04-03/bats-admits-ceo-lie... This is actually very simple. Natural buyers and sellers do not need intermediaries, but intermediaries do need the natural traders. So if the natural traders can coordinate, they should be able to set rules that favor themselves and disfavor intermediaries. I won't say that what HFT does is "unfair" (capitalism does not contemplate fairness), but I think it's highly ironic that HFT and their supporters are complaining how "unfair" it is that natural traders are working together, and yes, marketing their new exchange.

msandford 13y ago
Very nicely put. Yes it's a bit hilarious. The HFT folks seem to be saying "you don't have a right to add up all the total amount of asks at a certain price across all the exchanges and expect to get execution at that price" and with a bit of thought I might agree with them. But it is very counter-intuitive. If you see 10,000 shares for sale across 10 exchanges at $54.00 your VERY next thought probably isn't "oh that's actually 1,000 shares, but advertised on all the exchanges so it only LOOKS like 10,000" Once you understand how things works, sure fine. The counter to that, though, is that the HFT folks don't have any right to have access to order flow. If market participants want to route their orders to a particular dark pool or exchange they have every right to. The "markets are always right" sword cuts both ways.
- consz 13y ago
  It isn't only 1000 shares, there is indeed 1000 unique shares on each of those ten exchanges. The problem is that, as soon as the first exchange that you trade on processes your trade of the 1000 shares on that exchange and publicly disseminates that information, that is public information -- and an HFT is totally within their right to pull their remaining 1000 shares on each of the nine remaining exchanges if they so choose. That's why Lewis explains that once they wrote a program to stagger the submission of their orders so they arrive simultaneously to all ten exchanges, they were able to pick off all 10000 shares instead of only the 1000 on the first exchange.

deleted 13y ago

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lotsofmangos 13y ago

I stopped reading at 'potato-wog'.

tpeng 13y ago
Why is this downvoted? There are multiple comments in the article based on racial stereotypes which are not only completely unnecessary but reflect negatively upon the author's judgment and credibility. Very ironic considering the article seeks to suppress Mr Lewis's speech.
- brymaster 13y ago
  To quote te_chris: "On most articles like this it just feels like a bunch of doe-eyed, aspirational men who really want to be rich one day, so don't want to spoil the fun for their future selves." https://news.ycombinator.com/item?id=7257140 https://news.ycombinator.com/item?id=7257140
- kasey_junk 13y ago
  I also found the racial commentaries problematic and unnecessary. That said, the author is in no way trying to suppress Mr. Lewis's speech. Disagreement is not censorship.
  - tpeng 13y ago
    Only by implication. Calling someone a shill could be considered "only" an attack on credibility, but it's also an implied argument that the speaker lacks the right to speak on that subject.
- lotsofmangos 13y ago
  I did an actual double take at 'potato-wog'. The only people I have run into who use that term for the Irish in normal speech are BNP.

RockyMcNuts 13y ago

The market exists the benefit for the 'buyside' e.g. people who own stock, not for the benefit of the middlemen like exchanges and HFT marketmakers. You may not like homeowners and think some of them are or should be convicted, but it's ridiculous to say someone is 'shilling for homeowners' when they point out that real estate brokers are overpaid and skimming. Some more balanced discussion - http://streetwiseprofessor.com/?p=8333 http://streetwiseprofessor.com/?p=8333 http://blogmaverick.com/2014/04/03/the-idiots-guide-to-high-frequency-trading/ http://blogmaverick.com/2014/04/03/the-idiots-guide-to-high-... http://blogs.hbr.org/2014/04/high-frequency-trading-threat-or-menace/ http://blogs.hbr.org/2014/04/high-frequency-trading-threat-o... In a nutshell, people who run big portfolios don't want to give away information about what they're doing, and they don't want HFT types to be able to pay exchanges to get first crack at front-running them. On the other hand there is a legitimate market-making function, and there's a tradeoff between transparent markets and forcing people to share info that lets other people trade against them.

RockyMcNuts 13y ago
this guy said it better than me - https://news.ycombinator.com/item?id=7546768 https://news.ycombinator.com/item?id=7546768
drcode 13y ago
> people who run big portfolios don't want to give away information about what they're doing... Then people shouldn't be investing in these poorly-performing portfolios and use other portfolio managers who are more savvy. These people act like this stuff is MP (my problem, as an average person) whereas it's obviously YP (your problem, Mr. portfolio manager)
harryh 13y ago
Yes, some big portfolio guy wants to be able to sell 50M worth of some stock without the price dropping. But what if you were buying stock at the same time? Wouldn't you want that information about that rise in supply to be detected and priced into the market as fast as possible?
tptacek 13y ago

forgotAgain 13y ago

This article seems like nothing more than an overly long ad hominem attack. The only critique that matters is whether or not front running of buy orders by HFT traders is real or bull. Anything more is just an attempt to cloud the waters.

aet 13y ago
Yes, I was also dissapointed by the name calling.
Guvante 13y ago
It was especially disappointing when he dismissed the front running as always having been there.
- harryh 13y ago
  He didn't say front running has always been there. He said market making has always been there. Market making is a valuable service and it's great that it's cheaper than ever.
NkVczPkybiXICG 13y ago
There is no front-running: http://clarkgaebel.com/you-are-not-being-front-run/ http://clarkgaebel.com/you-are-not-being-front-run/

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whyme 13y ago

I haven't read the book, but I've followed the chatter and have been listening to Lewis on Bloomberg. I get the impression that many justify HFT by comparing current or past alternatives, however his argument is that HFT is corrupting an otherwise fairer market place. In other words the market should improve and lessen these side businesses that victimize participants and add to the discredit of the exchanges. If anyone thinks that these side business do not victimize participants you should look back to examples like Knight Capitals glitch that most certainly caused retail investors to lose trust and pull their money from the market, taking a loss. The introduction of non-relevant code is an unnecessary risk that does corrupt the system and does victimize your average investor. 1. http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/9475292/Knight-Capitals-440m-trading-loss-caused-by-disused-software.html http://www.telegraph.co.uk/finance/newsbysector/banksandfina...

joosters 13y ago

I wonder how many people commenting here have actually read the book? Or have they just been reading articles about it?

kasey_junk 13y ago
This is a very good point. I finished the book today. The most interesting thing to me is that the book pretty clearly (from the perspective of an HFT engineer) comes down on the side that HFT is not actually a villain and that the large banks (especially Goldman Sachs & Credit Suisse) are pretty much the devil (giving Goldman a pass for their last year of non-deviltry). Yet all the interviews, press junkets, and face time on the Daily Show are saying the exact opposite (to the point that Jon Stewart of all people is extolling the virtues of Goldman). It says way more about the book selling/exchange building business than it does about HFT.

anonu 13y ago

My concern is that Michael Lewis and his books have great popular appeal. Furthermore, he is jumping on the popular bandwagon of bashing HFT. They lay person will look at these facts and simply conclude that he's right. The problem can easily extend to other buy-siders who dont really full understand (or care to understand) how market microstructure works in the US.

JackFr 13y ago

I suppose one could add this book to The Blind Side -- the story of how one of Michael Lewis's classmates as an Ole Miss booster, gave impermissible benefits to a high school recruit and got away with it. Moneyball -- the story of a GM with 0 World Series appearances and a .530 WP.

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scottlocklin 13y ago

If you think I'm a dork, or too much of a Michael Lewis hater, I encourage people to read this Amazon review, which gets into a lot of interesting small details Lewis got wrong: http://www.amazon.com/review/R3PJO6KJGRMWUE/ref=cm_cr_pr_viewpnt#R3PJO6KJGRMWUE http://www.amazon.com/review/R3PJO6KJGRMWUE/ref=cm_cr_pr_vie...

kasey_junk 13y ago
This is very close to the blog post I would write if I were going to write a critic of Flash Boys. I'd add the following: IEXT has a few main selling points. 1 transparency, 2 simplicity, 3 looking out for "investors". The problem is that they aren't any of those things and it is obvious from a simple reading of their technical documents. First transparency. Their marketing pitch is that as opposed to other dark pools, they are transparent about what is happening on their markets. Yet the first thing they say in their technical documents is "IEX will commence operation as a fully NON- ---DISPLAYED venue." What this means is that their order books is not available for outside audit. They are meeting the lowest hurdle to regulatory compliance by providing best bid/offer and no more. If you think that is ok, let me ask you. If I told you that there was 1 buyer willing to buy at 10.00 and 1 seller willing to sell at 11.00 what would you think the "real" price for that instrument is? What if I told you that there was 1 buyer at 10, 1 seller at 11, 100 million buyers at 9.99 and zero sellers at 11.01? If you think those markets should be priced the same way, IETX is for you. If not, realize that IETX would tell you those markets are the same thing. As far as simplicity, Flash Boys and the IETX marketing materials make a big deal about all of the order types that provide advantages to market makers, yet they remain silent on those order types that are explicitly there for large institutional investors. Lewis rages against ALO orders yet doesn't even mention iceberg orders which the sole point of is to hide the amount of shares a participant wants to sell. Then he extols the virtue of IETX for only offering 3 order types (which has since risen to 4), yet doesn't explain that in those 3 order types are many variants that only benefit large investors. IETX has literally removed all of the order types that allow market makers to do their jobs, while leaving all the order types that allow large institutions to hide their order flow. One of the most controversial order types out there is an ISO order, which is literally a legislative exemption for large block buyers that allows them to circumvent regulation about the national ticker. IETX offers those sorts of orders, but you will be happy to know they don't support "esoteric" orders. The most egregious problem in Flash Boys is Lewis' use of the term "investor". He uses this term to make his readers think he is talking about them, after all anyone who is not an HFT, who is long holding a stock is an "investor". Yet the practices he describes as predatory, are really simple market dynamics. If an "investor" wants to buy or sell an extremely large block of shares, that should move the market price. No other marketplace would think differently. If McDonalds buys all the cows in America, beef should cost more. We all understand that. But the giant hedge funds of the world hate this. They want to use their privileged information of demand to make money, and not change the prices of the things in demand. They used to be able to accomplish this because the markets were dumb. They aren't anymore. Price discovery is an extremely efficient (and cut throat business). IETX does its gosh darn Canadian best to undercut that. Literally every rule they have is an attempt to hide demand and undermine price discovery. It's possible that bad pricing is an overall societal good. I'm not smart enough to weigh in on that. I will ask, if they are looking out for the little guy though, why do they have a special order type that insures that big investors don't trade with them (min. qty orders)? They will respond that it is protection against predatory HFT. I ask you though, if the huge hedge funds of the world don't want to trade in small volume with the rest of the informed markets, at the lowest prices conceivable, who do they want to trade with? The answer is large dumb funds, who don't care about trading at inflated costs. I.E. pension funds.

blue11 13y ago

You don't have to agree with Michael Lewis' views or buy into the story line 100% in order to enjoy the book. The fact is that this is a well-written book that is full of mini-stories and anecdotes that present very realistic descriptions of how electronic markets and Wall Street in general work. Statements like "the market is rigged" are obviously over the top but that doesn't mean that the book on average is not true to reality. Most books about electronic trading suffer from extreme sensationalism, poor writing, and the inability of the authors to understand the subject matter that they are writing about. Michael Lewis does a better job than everyone else. He is a great writer and he is a smart guy who has some financial background and has a pretty good understanding of financial markets. Yes, there is some sensationalism here (he has to sell a good story after all) and there are many errors in the book, and, yes, the author's biases are quite evident, he's picked a side and he's sticking to his story. On aggregate, though, this is probably the best book about the world of electronic trading that I've read. (Some people mentioned "Dark Pools" by Scott Patterson. Although also interesting, that books was often quite painful to read because it was quite clear that the author did not understand basic financial and programming concepts. "Flash Boys" is much better, in my opinion. Although if you are really interested in the subject, you should read both.)

harryh 13y ago
You basically just said that people should read the book because, even though it's mostly wrong, it's well written. Isn't that kind of crazy?
- blue11 13y ago
  I'm not saying that it's mostly wrong. I am saying that it's a biased perspective, but most of the contents is factual. You can learn interesting things about the markets, and about the individuals and the companies involved. However, this is one side of the story. Michael Lewis' facts were gathered from people that were close to him and the people that he could get to speak to him. It's one circle of people with their own agenda. But there are many other views out there. So he is presenting the facts that he knows about and that he thinks are important. But there are things that he is perhaps omitting on purpose, and things that perhaps he just doesn't know or understand. The book is not the whole truth. As with any good book or article, you can learn a lot without having to agree with the author's conclusions or his personal views.

skywhopper 13y ago

Always good to start out an article critiquing the argument in a new book by showing a picture of the author and making a snide remark about his appearance. Immediately gives you credibility.

stevewilhelm 13y ago

As an aside; I have been thinking it would be useful to have two new levels of capital gains taxes. In addition to long term capital gains, and short term capital gains, there would be "intra-day" capital gains and "sub-second" capital gains. I was thinking the intra-day gains Federal tax rate would be 50% and sub-second capital gains Federal rate would be 90%, but these values are arbitrary. For both new types of capital gains, LIFO trade accounting would be used.