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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 g

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.
- tptacek 13y ago
  That's a particularly uncharitable way to put it. Another way to put it is this: Regulations encouraged a fragmentation in exchanges (a good thing, since they used to be monopolies). For multiple exchanges to trade in the same instrument, some force needs to synchronize the prices between the markets. The regulations specify a mechanism by which this might work: quotation feeds for different products replicate the NBBO ("current" best bid-ask) across the markets. But the NBBO feed is only an approximation of the best feed --- and it has to be, as anyone who has ever built a distributed system must know. Fast electronic trading can synthesize a BETTER NBBO. If you know what the better NBBO is, you can trade against it, in effect forcing prices to synchronize through arbitrage trades. The net effect is that the markets synchronize on a more accurate BBO, and electronic trading systems get compensated for doing this based on the profits from the arbitrage trades. In the ABSENCE of that trading, the delta between the SIP NBBO and the "real" NBBO still exists; it's just money in the pockets of a different set of entities. In neither case was this money likely to be helping firms that hold long-term positions and make money by allocating capital; the previous crappy NBBO profits were just going to a different set of sell-side firms, who are now angry that they'd been obsoleted. To me, an extremely telling fact here is that Vanguard's Chief Investment Officer went on the record and said that HFT trading, and latency arbitrage in particular, had been helpful to their trading costs. If that doesn't mean anything to you, do some research into how Vanguard works and is structured.
  - hft_throwaway 13y ago
    I'd be curious how much volume occurs like this. I'm in the industry and know of these issues but have never heard of a trade specifically designed to exploit it. Exchanges aren't allowed to accept quotes that would lock/cross each other, so you'd need something to happen like two guys put crossed orders into a wide book like AAPL almost simultaneously on different markets. They'd have to be crossed by more than a cent since the trader taking them out would have to pay remove fees on both (~$0.006) and the person doing it would have the risk of getting legged if he gets the first order but another takes the second one. They should fix the SIP but this is not a common HFT technique as far as I know.
- deleted 13y ago
erichocean 13y ago
> there are also many who genuinely believe that they are doing a service for the market You make it sounds like HFT is some sort of non-profit, community service vocation, like teaching, or fire fighters. Do people actually think this? Regardless of the merits of HFT, that kind of argument seems very disingenuous. I haven't met a single person engaged in HFT who is doing it to smooth the function of the market or "provide liquidity". They may think it has that effect, but no one is in it for that reason. If anything, it's what they tell themselves to justify skimming money from the other market participants.
- lmm 13y ago
  > You make it sounds like HFT is some sort of non-profit, community service vocation, like teaching, or fire fighters. Do people actually think this? They're doing it to make money, but that doesn't mean they're not helping other people out. My uncle is an importer; most of his time is spent finding something that's cheaper in Korea than it is here and drawing up a contract with a supplier there and a buyer here. Does he do it as a community service? No. Does he take his cut? Yes. But every deal he makes benefits both the supplier and the buyer.
- tptacek 13y ago
  You can replace the letters "HFT" in your comment with "any market maker" and come to exactly the same conclusion. Liquidity has always, always been subsidized by "skimming". The rake market makers take from trades is the cost of liquidity: ie, of being able to buy shares immediately without getting shafted because the only orders on the market are from large traders who are holding out for very high prices. Have you ever tried to sell a house? That's what crappy liquidity looks like: there are buyers and there are sellers, but nobody is anywhere near agreeing about the price of the goods being traded, and so it takes months to get in or out of a position, and you sometimes have to do it at extremely unfavorable prices.
  - danielnaab 13y ago
    The problem is that market making is different than the critique, which is that having privileged access to exchange data centers is an unfair advantage that allows rent-seeking. To access information before the general public allows traders to inject themselves into transactions that don't require a market maker. That fact that no one will defend this practice while vehemently defending "HFT" speaks to an impedance mismatch. We're not talking about the same thing.
dpierce9 13y ago
Lewis's book examines one kind of HFT, argues that it is objectionable, and takes a look at one method of mitigation. Where this bites is that this HFT method is super common and relatively common knowledge to insiders but not outsiders. This criticism, that Lewis doesn't take a comprehensive view, is inapt since Lewis's book is not a treatise on HFT and its implications. It is like criticizing a scientist for publishing an article on a narrow topic rather than describing everything in the world in one giant book. You can say that this method of HFT isn't front-running or that front-running shouldn't be illegal (and back up your case with arguments) but you can't say this criticism of one HFT method is wrong because HFT does other stuff too. Edit: Source: actually read the book
nissimk 13y ago
This is a complicated issue and not very well understood as you can see in some of the replies to this comment. The term HFT is used to describe a lot of strategies, and many of them are overall good for the market. Elimination of human specialists and market makers and subsequent tightening of spreads is definitely a good thing. Also, arbing prices between different markets is also a good thing and those with the best technology will succeed there. But there are HFT strategies that are bad for the market where the HFT algorithms are enriching themselves while providing no benefit to anyone else and actually causing the market harm. Take a look here for more details on "quote stuffing" and other malicious HFT practices: http://www.nanex.net/aqck2/4022.html http://www.nanex.net/aqck2/4022.html
dpcheng2003 13y ago
I think it's disingenuous to project motivations for Michael Lewis. Is he shilling for the buyside the same way he was shilling for the Oakland A's? In my opinion, the only thing we know based on facts is that Michael Lewis, the author, has one objective in mind: To sell more books. In order to sell books, the story and narrative has to be compelling. Is the story of a Canadian guy making millions of dollars at his trading desk quitting his job and starting a company (we love startups!) that may undermine a controversial trading tactic a compelling story? Absolutely. Is the story of Einhorn or Cohen or Icahn doing things like insider trading or activist investing equally compelling? Probably not, since it's on the cover of the WSJ or on CNBC every week. Michael Lewis does not have a responsibility to educate main street about the nuances of HFT, although as a secondary benefit of his noble pursuit to sell more books, he does shine a light on the topic. In this regard, Lewis is exceptionally successful. He's sparked a debate, he's created controversy, he's made smart people discuss a topic they had previously less interest in. Think about what Moneyball did for professional sports? Lewis was hardly the first (e.g, Bill James) but he popularized it so we, the general population, could discuss the topic with some conviction and knowledge. If he can do the same for HFT and trading in general, then good job. And he sells more books.
- drited 13y ago
  "Is the story of Einhorn or Cohen or Icahn doing things like insider trading or activist investing equally compelling" Why do you put activism in this sentence along with insider trading? Are you implying that it is morally reprehensible in the same way that insider trading is? Activism is in no way illegal and many consider it a counter against corporate cronyism that can infect public corporations due to the principal/agent problem.
  - dpcheng2003 13y ago
    I put them together because they're news items on financial shows/periodicals. I am not confusing the two (yes one is illegal, the other can do good). I apologize for the unintended obfuscation.
pron 13y ago
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. Without discussing this particular issue, doing evil and feeling evil are two very different things. People who do evil almost never see themselves as evil people, and they almost always justify their actions to themselves. There are no Bond-villains in real life, and if you look for them to find evil you miss its actual manifestations. Those are often quite elusive.
alexqgb 13y ago
"There are some bad apples, but there are also many who genuinely believe that they are doing a service for the market." Believing they are doing a service and actually doing a service are two different things. I agree it's important not to tar the latter of your two cases with the brush reserved for the former, but that doesn't mean sparing them entirely. It simply means selecting a more appropriate brush. While malicious intent and clueless idiocy may be different from a moral perspective, they're indistinguishable in terms of effect. In either case, it falls to the law to limit these effects. Between the lack of ethics and the general ignorance, both types lack the ability to restrain themselves from harming others, not to mention the institutions we all rely on.

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.

tptacek 13y ago
That's a particularly uncharitable way to put it. Another way to put it is this: Regulations encouraged a fragmentation in exchanges (a good thing, since they used to be monopolies). For multiple exchanges to trade in the same instrument, some force needs to synchronize the prices between the markets. The regulations specify a mechanism by which this might work: quotation feeds for different products replicate the NBBO ("current" best bid-ask) across the markets. But the NBBO feed is only an approximation of the best feed --- and it has to be, as anyone who has ever built a distributed system must know. Fast electronic trading can synthesize a BETTER NBBO. If you know what the better NBBO is, you can trade against it, in effect forcing prices to synchronize through arbitrage trades. The net effect is that the markets synchronize on a more accurate BBO, and electronic trading systems get compensated for doing this based on the profits from the arbitrage trades. In the ABSENCE of that trading, the delta between the SIP NBBO and the "real" NBBO still exists; it's just money in the pockets of a different set of entities. In neither case was this money likely to be helping firms that hold long-term positions and make money by allocating capital; the previous crappy NBBO profits were just going to a different set of sell-side firms, who are now angry that they'd been obsoleted. To me, an extremely telling fact here is that Vanguard's Chief Investment Officer went on the record and said that HFT trading, and latency arbitrage in particular, had been helpful to their trading costs. If that doesn't mean anything to you, do some research into how Vanguard works and is structured.
- hft_throwaway 13y ago
  I'd be curious how much volume occurs like this. I'm in the industry and know of these issues but have never heard of a trade specifically designed to exploit it. Exchanges aren't allowed to accept quotes that would lock/cross each other, so you'd need something to happen like two guys put crossed orders into a wide book like AAPL almost simultaneously on different markets. They'd have to be crossed by more than a cent since the trader taking them out would have to pay remove fees on both (~$0.006) and the person doing it would have the risk of getting legged if he gets the first order but another takes the second one. They should fix the SIP but this is not a common HFT technique as far as I know.
deleted 13y ago

erichocean 13y ago

> there are also many who genuinely believe that they are doing a service for the market You make it sounds like HFT is some sort of non-profit, community service vocation, like teaching, or fire fighters. Do people actually think this? Regardless of the merits of HFT, that kind of argument seems very disingenuous. I haven't met a single person engaged in HFT who is doing it to smooth the function of the market or "provide liquidity". They may think it has that effect, but no one is in it for that reason. If anything, it's what they tell themselves to justify skimming money from the other market participants.

lmm 13y ago
> You make it sounds like HFT is some sort of non-profit, community service vocation, like teaching, or fire fighters. Do people actually think this? They're doing it to make money, but that doesn't mean they're not helping other people out. My uncle is an importer; most of his time is spent finding something that's cheaper in Korea than it is here and drawing up a contract with a supplier there and a buyer here. Does he do it as a community service? No. Does he take his cut? Yes. But every deal he makes benefits both the supplier and the buyer.
tptacek 13y ago
You can replace the letters "HFT" in your comment with "any market maker" and come to exactly the same conclusion. Liquidity has always, always been subsidized by "skimming". The rake market makers take from trades is the cost of liquidity: ie, of being able to buy shares immediately without getting shafted because the only orders on the market are from large traders who are holding out for very high prices. Have you ever tried to sell a house? That's what crappy liquidity looks like: there are buyers and there are sellers, but nobody is anywhere near agreeing about the price of the goods being traded, and so it takes months to get in or out of a position, and you sometimes have to do it at extremely unfavorable prices.
- danielnaab 13y ago
  The problem is that market making is different than the critique, which is that having privileged access to exchange data centers is an unfair advantage that allows rent-seeking. To access information before the general public allows traders to inject themselves into transactions that don't require a market maker. That fact that no one will defend this practice while vehemently defending "HFT" speaks to an impedance mismatch. We're not talking about the same thing.

dpierce9 13y ago

Lewis's book examines one kind of HFT, argues that it is objectionable, and takes a look at one method of mitigation. Where this bites is that this HFT method is super common and relatively common knowledge to insiders but not outsiders. This criticism, that Lewis doesn't take a comprehensive view, is inapt since Lewis's book is not a treatise on HFT and its implications. It is like criticizing a scientist for publishing an article on a narrow topic rather than describing everything in the world in one giant book. You can say that this method of HFT isn't front-running or that front-running shouldn't be illegal (and back up your case with arguments) but you can't say this criticism of one HFT method is wrong because HFT does other stuff too. Edit: Source: actually read the book

nissimk 13y ago

This is a complicated issue and not very well understood as you can see in some of the replies to this comment. The term HFT is used to describe a lot of strategies, and many of them are overall good for the market. Elimination of human specialists and market makers and subsequent tightening of spreads is definitely a good thing. Also, arbing prices between different markets is also a good thing and those with the best technology will succeed there. But there are HFT strategies that are bad for the market where the HFT algorithms are enriching themselves while providing no benefit to anyone else and actually causing the market harm. Take a look here for more details on "quote stuffing" and other malicious HFT practices: http://www.nanex.net/aqck2/4022.html http://www.nanex.net/aqck2/4022.html

dpcheng2003 13y ago

I think it's disingenuous to project motivations for Michael Lewis. Is he shilling for the buyside the same way he was shilling for the Oakland A's? In my opinion, the only thing we know based on facts is that Michael Lewis, the author, has one objective in mind: To sell more books. In order to sell books, the story and narrative has to be compelling. Is the story of a Canadian guy making millions of dollars at his trading desk quitting his job and starting a company (we love startups!) that may undermine a controversial trading tactic a compelling story? Absolutely. Is the story of Einhorn or Cohen or Icahn doing things like insider trading or activist investing equally compelling? Probably not, since it's on the cover of the WSJ or on CNBC every week. Michael Lewis does not have a responsibility to educate main street about the nuances of HFT, although as a secondary benefit of his noble pursuit to sell more books, he does shine a light on the topic. In this regard, Lewis is exceptionally successful. He's sparked a debate, he's created controversy, he's made smart people discuss a topic they had previously less interest in. Think about what Moneyball did for professional sports? Lewis was hardly the first (e.g, Bill James) but he popularized it so we, the general population, could discuss the topic with some conviction and knowledge. If he can do the same for HFT and trading in general, then good job. And he sells more books.

drited 13y ago
"Is the story of Einhorn or Cohen or Icahn doing things like insider trading or activist investing equally compelling" Why do you put activism in this sentence along with insider trading? Are you implying that it is morally reprehensible in the same way that insider trading is? Activism is in no way illegal and many consider it a counter against corporate cronyism that can infect public corporations due to the principal/agent problem.
- dpcheng2003 13y ago
  I put them together because they're news items on financial shows/periodicals. I am not confusing the two (yes one is illegal, the other can do good). I apologize for the unintended obfuscation.

pron 13y ago

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. Without discussing this particular issue, doing evil and feeling evil are two very different things. People who do evil almost never see themselves as evil people, and they almost always justify their actions to themselves. There are no Bond-villains in real life, and if you look for them to find evil you miss its actual manifestations. Those are often quite elusive.

alexqgb 13y ago

"There are some bad apples, but there are also many who genuinely believe that they are doing a service for the market." Believing they are doing a service and actually doing a service are two different things. I agree it's important not to tar the latter of your two cases with the brush reserved for the former, but that doesn't mean sparing them entirely. It simply means selecting a more appropriate brush. While malicious intent and clueless idiocy may be different from a moral perspective, they're indistinguishable in terms of effect. In either case, it falls to the law to limit these effects. Between the lack of ethics and the general ignorance, both types lack the ability to restrain themselves from harming others, not to mention the institutions we all rely on.