5 ms·

The issue seems to be that, when you want to buy a somewhat-large amount of stock, regulations exist which: 1. Force you to split up the purchase among multipl

The issue seems to be that, when you want to buy a somewhat-large amount of stock, regulations exist which: 1. Force you to split up the purchase among multiple exchanges, and 2. To compensate for this disadvantage to the buyer, are supposed to prevent news of the order causing a price change at the other exchanges by spreading faster than filling of the order, so that you don't have to deal with an artificially-inflated price on top of artificially-imposed split of your order. But while (1) is enforced, (2) is not. Which means buyers and most sellers have to play by one set of rules while people who want to inject themselves as middlemen get to play by a different set of rules. At least, that's what seems to be being described here, and I certainly can see problems with it. (not to mention that that "liquidity" and "efficiency" arguments fall flat -- the types of HFT schemes being described here work only by creating artificial illiquidity, and I don't know of any rigorous argument that creating more middlemen improves efficiency)

yummyfajitas 13y ago
There is no regulation which forces you to split up your order. People split their order because one venue does not have enough liquidity. To compensate for this disadvantage to the buyer, are supposed to prevent news of the order causing a price change at the other exchanges by spreading faster than filling of the order, This is simply incorrect. There is a regulation which requires exchanges to transmit news of price changes to the other exchanges as rapidly as possible. The purpose is to ensure that all fills happen at the NBBO. In concrete terms, if BATS has a BUY@$20.00 and ARCA has a BUY@$20.01, BATS is forbidden from filling your order. http://en.wikipedia.org/wiki/National_best_bid_and_offer http://en.wikipedia.org/wiki/National_best_bid_and_offer
- ubernostrum 13y ago
  If you believe the description is wrong, your issue is with the article. Direct quote from article: With Reg NMS, it essentially took x amount of available stock at one place, and made it one tenth of that x at ten different places. If that isn't a regulation forcing large purchases to split up, then it's on you to explain why.
  - yummyfajitas 13y ago
    The most charitable interpretation of that quote is that after RegNMS, multiple trading venues became legalized. Liquidity providers then chose to spread liquidity out because it was now legal. Here is RegNMS. Find me a place where it says liquidity must be divided between all possible exchanges: https://www.sec.gov/rules/final/34-51808.pdf https://www.sec.gov/rules/final/34-51808.pdf
    - ubernostrum 13y ago
      If you believe the description in the article is wrong, then as I said your problem is with the article.
  - theorique 13y ago
    Seller(s) of stock are not required to place shares on different exchanges. This is a side effect of the process of trading, as the NBBO price bounces around to different venues. If I offer 100,000 AAPL at NBO at exchange X, and you are willing to purchase 100,000 AAPL at NBO, your buy order matches mine exactly and the transaction takes place. This is highly unlikely, of course, that an enormous stock transaction like this ($50M) will take place this way.
- maxerickson 13y ago
  It's a lazy question, but what mechanism is the regulator using to score the effort of the exchange? A related topic would be how often they take enforcement actions.
- fsk 13y ago
  Actually, the exchanges are REQUIRED to split up your order, if the bid/offer is better on another exchange. Example: NYSE order book 100,000 shares offered $10.02 100,000 shares offered $10.00 (quote) NASDAQ order book 100,000 shares offered $10.01 (quote) You send a "buy 200,000 shares $10.02 limit" order to the NYSE. The NYSE is REQUIRED to route 100,000 shares away to NASDAQ@$10.01, rather than filling the extra 100,000 at $10.02. An HFT intercepts the trade, buys the 100,000 at NASDAQ @$10.01 ahead of you, and also can buy the 100,000@$10.02 at NYSE ahead of you. Now you have to pay $10.03 to buy the remaining 100,000 shares.
  - fr0sty 13y ago
    Please explain how My. HFT "intercepts" the trade in this case? How does he know your limit price? How does he know your parent quantity? Imagine an alternate scenario: You send an order "buy 100,000 shares $10.00 limit" to NYSE. Does the HFT spend $4MM buying up 200k on the off chance that you want more than the 100k you already bought? If not, why?
    - fsk 13y ago
      The feed the HFT gets is faster than the NYSE to NASDAQ feed. That lets them trade ahead of you. You placed an ordinary 200,000 share limit order. You didn't use one of the special order types. It is riskless for the HFT to buy 100,000 from NASDAQ, knowing they can sell back to you when you buy the other half of your order. Other algos, seeing a big buy, move up the price, so the HFT (may) be able to safely buy and then sell to them.
      - fr0sty 13y ago
        > The feed the HFT gets is faster than the NYSE to NASDAQ feed. Assuming for the moment that someone can see an execution from NYSE and route an order to NASDAQ in response in less time than NYSE can send their own order to that Exchange you haven't answered the rest of the question. How does the HFT even know there is an order in-flight to NASDAQ? How does the HFT know that the buyer is willing to pay $10.02? > You placed an ordinary 200,000 share limit order. You didn't use one of the special order types. Is this supposed to be an answer? 100k executed at NYSE @ $10.00, this is public information. NYSE routed the other 100k to NASDAQ. Are you saying there is some way for Mr. HFT to know the particulars of that order to NASDAQ? > knowing they can sell back to you when you buy the other half of your order. You seem to be under the impression that at some point along the line someone besides the NUSE is seeing the parent order details (buy 200k @ $10.02). Please explain how you believe this information is transmitted to third parties.
wcummings 13y ago
>(not to mention that that "liquidity" and "efficiency" arguments fall flat -- the types of HFT schemes being described here work only by creating artificial illiquidity, and I don't know of any rigorous argument that creating more middlemen improves efficiency) A lot of HFT is market-makers competing for positions in the book. They're simply providing liquidity and literally the more trades they make the more money they make. Market-making is socially valuable (decreases the cost of trading aka the spread) in a similar way that arbitrage is, and as I understand it this is why people are so hesitant to regulate HFT, despite some of the problems it causes. As far as preferential treatment, consider that exchange fee schedules prefer these kinds of traders for a reason. Exchanges are for-profit and their liquidity providers don't execute trades for the fun of it, there has to be incentive, even if the incentives are at times perverse
- ubernostrum 13y ago
  If someone was already willing to sell 50 shares of Acme Corp. at $20.00, having an HFT bot get advance knowledge of an order, buy those shares and then re-offer them at $20.01 is not market-making and is not providing liquidity -- it is injecting an artificial middleman, with the cost of a middleman, for no other reason than "we can make money off injecting a middleman".
  - wcummings 13y ago
    My point is that regulating this kind of trading can also damage socially useful trading activity and that's why it's unlikely to happen. There's a lot of rabble rousing about HFT in these discussions on HN (in a similar thread someone went as far as to say arbitrage was not socially useful), I thought it was worth pointing out its more complicated than "HFT IS A BIG SCAM" I'll admit its funny to see the libertarian bastion of HN get so worked up about HFT. Free markets are all fun and games when it's Uber or AirBnB, but HFT harming retail investors seems to really hit a nerve
    - fleitz 13y ago
      That's the funny thing too, retail investors are fucked beyond believe and it has nothing to do with HFT and everything to do with not having satellite pictures of walmart parking lots, etc. They trade at such an unbelievable disadvantage that it's laughable that HFT could make any difference. (Plus retailers dont move big enough blocks to get into HFT issues)

yummyfajitas 13y ago

There is no regulation which forces you to split up your order. People split their order because one venue does not have enough liquidity. To compensate for this disadvantage to the buyer, are supposed to prevent news of the order causing a price change at the other exchanges by spreading faster than filling of the order, This is simply incorrect. There is a regulation which requires exchanges to transmit news of price changes to the other exchanges as rapidly as possible. The purpose is to ensure that all fills happen at the NBBO. In concrete terms, if BATS has a BUY@$20.00 and ARCA has a BUY@$20.01, BATS is forbidden from filling your order. http://en.wikipedia.org/wiki/National_best_bid_and_offer http://en.wikipedia.org/wiki/National_best_bid_and_offer

ubernostrum 13y ago
If you believe the description is wrong, your issue is with the article. Direct quote from article: With Reg NMS, it essentially took x amount of available stock at one place, and made it one tenth of that x at ten different places. If that isn't a regulation forcing large purchases to split up, then it's on you to explain why.
- yummyfajitas 13y ago
  The most charitable interpretation of that quote is that after RegNMS, multiple trading venues became legalized. Liquidity providers then chose to spread liquidity out because it was now legal. Here is RegNMS. Find me a place where it says liquidity must be divided between all possible exchanges: https://www.sec.gov/rules/final/34-51808.pdf https://www.sec.gov/rules/final/34-51808.pdf
  - ubernostrum 13y ago
    If you believe the description in the article is wrong, then as I said your problem is with the article.
- theorique 13y ago
  Seller(s) of stock are not required to place shares on different exchanges. This is a side effect of the process of trading, as the NBBO price bounces around to different venues. If I offer 100,000 AAPL at NBO at exchange X, and you are willing to purchase 100,000 AAPL at NBO, your buy order matches mine exactly and the transaction takes place. This is highly unlikely, of course, that an enormous stock transaction like this ($50M) will take place this way.
maxerickson 13y ago
It's a lazy question, but what mechanism is the regulator using to score the effort of the exchange? A related topic would be how often they take enforcement actions.
fsk 13y ago
Actually, the exchanges are REQUIRED to split up your order, if the bid/offer is better on another exchange. Example: NYSE order book 100,000 shares offered $10.02 100,000 shares offered $10.00 (quote) NASDAQ order book 100,000 shares offered $10.01 (quote) You send a "buy 200,000 shares $10.02 limit" order to the NYSE. The NYSE is REQUIRED to route 100,000 shares away to NASDAQ@$10.01, rather than filling the extra 100,000 at $10.02. An HFT intercepts the trade, buys the 100,000 at NASDAQ @$10.01 ahead of you, and also can buy the 100,000@$10.02 at NYSE ahead of you. Now you have to pay $10.03 to buy the remaining 100,000 shares.
- fr0sty 13y ago
  Please explain how My. HFT "intercepts" the trade in this case? How does he know your limit price? How does he know your parent quantity? Imagine an alternate scenario: You send an order "buy 100,000 shares $10.00 limit" to NYSE. Does the HFT spend $4MM buying up 200k on the off chance that you want more than the 100k you already bought? If not, why?
  - fsk 13y ago
    The feed the HFT gets is faster than the NYSE to NASDAQ feed. That lets them trade ahead of you. You placed an ordinary 200,000 share limit order. You didn't use one of the special order types. It is riskless for the HFT to buy 100,000 from NASDAQ, knowing they can sell back to you when you buy the other half of your order. Other algos, seeing a big buy, move up the price, so the HFT (may) be able to safely buy and then sell to them.
    - fr0sty 13y ago
      > The feed the HFT gets is faster than the NYSE to NASDAQ feed. Assuming for the moment that someone can see an execution from NYSE and route an order to NASDAQ in response in less time than NYSE can send their own order to that Exchange you haven't answered the rest of the question. How does the HFT even know there is an order in-flight to NASDAQ? How does the HFT know that the buyer is willing to pay $10.02? > You placed an ordinary 200,000 share limit order. You didn't use one of the special order types. Is this supposed to be an answer? 100k executed at NYSE @ $10.00, this is public information. NYSE routed the other 100k to NASDAQ. Are you saying there is some way for Mr. HFT to know the particulars of that order to NASDAQ? > knowing they can sell back to you when you buy the other half of your order. You seem to be under the impression that at some point along the line someone besides the NUSE is seeing the parent order details (buy 200k @ $10.02). Please explain how you believe this information is transmitted to third parties.

wcummings 13y ago

>(not to mention that that "liquidity" and "efficiency" arguments fall flat -- the types of HFT schemes being described here work only by creating artificial illiquidity, and I don't know of any rigorous argument that creating more middlemen improves efficiency) A lot of HFT is market-makers competing for positions in the book. They're simply providing liquidity and literally the more trades they make the more money they make. Market-making is socially valuable (decreases the cost of trading aka the spread) in a similar way that arbitrage is, and as I understand it this is why people are so hesitant to regulate HFT, despite some of the problems it causes. As far as preferential treatment, consider that exchange fee schedules prefer these kinds of traders for a reason. Exchanges are for-profit and their liquidity providers don't execute trades for the fun of it, there has to be incentive, even if the incentives are at times perverse

ubernostrum 13y ago
If someone was already willing to sell 50 shares of Acme Corp. at $20.00, having an HFT bot get advance knowledge of an order, buy those shares and then re-offer them at $20.01 is not market-making and is not providing liquidity -- it is injecting an artificial middleman, with the cost of a middleman, for no other reason than "we can make money off injecting a middleman".
- wcummings 13y ago
  My point is that regulating this kind of trading can also damage socially useful trading activity and that's why it's unlikely to happen. There's a lot of rabble rousing about HFT in these discussions on HN (in a similar thread someone went as far as to say arbitrage was not socially useful), I thought it was worth pointing out its more complicated than "HFT IS A BIG SCAM" I'll admit its funny to see the libertarian bastion of HN get so worked up about HFT. Free markets are all fun and games when it's Uber or AirBnB, but HFT harming retail investors seems to really hit a nerve
  - fleitz 13y ago
    That's the funny thing too, retail investors are fucked beyond believe and it has nothing to do with HFT and everything to do with not having satellite pictures of walmart parking lots, etc. They trade at such an unbelievable disadvantage that it's laughable that HFT could make any difference. (Plus retailers dont move big enough blocks to get into HFT issues)