8 ms·

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 deta

by 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
  [deleted]
  - 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
  [deleted]
- 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.

by drcode 13y ago

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
[deleted]
- 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
[deleted]
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.