4 ms·

Plucking from throwaway's example. You have 20,000 copies of a book you just wrote. You put half of them on Amazon, and the other half on eBay, so Amazon has

by bmelton 12y ago

Plucking from throwaway's example. You have 20,000 copies of a book you just wrote. You put half of them on Amazon, and the other half on eBay, so Amazon has 10,000 and ebay has 10,000 of them. You see an order come in for 5,000 of them on Amazon. You think "Hot dog, these books are popular. I must be selling them too cheaply!" You immediately raise the price of all the books by 25 cents to capitalize on this. The books you sold on Amazon are sold, so they're gone. The remaining books on Amazon are slightly more expensive. The guy who bought the books on Amazon also bought the same number of books on eBay, but the order hadn't arrived there yet, so between when he hit the buy button and the time the order arrived, the price had changed, so those orders aren't filled.

laichzeit0 12y ago
Yeah, and if this happened at, let's say, 10 hour intervals, I'm sure the average layman would have no problem with the "fairness" of this. People are getting their panties in knot because it's somehow "unfair" that this can happen at the millisecond level. I personally don't have a problem with this type of trading activity. A few guys are making easy money. So what?
- kasey_junk 12y ago
  Actually it's not easy money at all. It is very risky money done on razor thin margins.
  - josephlord 12y ago
    I don't think that makes the case for allowing it any stronger. What I do wonder is if these market reactions are so automatic and predictable whether there is a way to game them (I'm sure people already do this). It is probably a deterrent to front running on a large scale.
    - kasey_junk 12y ago
      A) Repeat after me. There is no front running in these scenarios. Front running happens between a client and his intermediary that has a fiduciary duty to him. Other market participants do not have that duty. B) Yes, market making HFT are routinely fighting against other HFT that are designed to predict their behavior and make money from them. The case for allowing it is simple. How do you disallow it without having even worse outcomes. There is quite a bit of evidence that suggests that for the average market participant HFT market makers are a positive not a negative.
      - josephlord 12y ago
        A) I wasn't saying that there was front running in the scenario, just that the exploitability of front running by deliberately trying to trigger it was probably a deterrent. Not convinced about that statement about average market participants, also define average market participant and explain where the HFT's profits come from if not other participants. How do you disallow it? My initial suggestion was to slow down cancellations so that they take substantially longer than a new trade does to pass through the system. My perception is that it might reduce the visible liquidity/availability but not the real liquidity as much of the visible liquidity disappears when someone tries to trade against it. Another suggestion would be to move to a single exchange
        harryh 12y ago
        Yes, HFTs profit from other participants because they are selling a service: liquidity. There have ALWAYS been sellers of liquidity. Due to automation human sellers have been replaced by computers that cost far far less. So the cost of liquidity has gone down DRAMATICALLY. Spreads used to be a quarter (or higher). Now they are a penny. That's a 25x reduction! Here's the chief executive of Vanguard (the world's largest mutual fund company) talking about how HFTs have lowered trading costs for their clients: http://www.cnbc.com/id/101615521 http://www.cnbc.com/id/101615521 If you slow down cancellations or otherwise try to slow information flow to HFTs you will simply raise their risk which will force them to raise the price they charge for selling liquidity by increasing spreads. Stop thinking of HFTers as parasites and think of them as service providers and you'll have a clearer picture of reality.
stevejones 12y ago
The difference would be that you cancel all the orders currently in progress, so a bunch of people who've clicked "buy" are now in the lurch.
josephlord 12y ago
Using the analogy of the books you are raising the price in the milliseconds between the customer clicking buy and packets of that request reaching ebay's servers and all after the user has seen your price and stock availability a second ago. I don't think this acceptable business practice, if you have seen a price and a stock you should be able to place the order and (unless another order that isn't front running has arrived first to deplete the stock) the order should be fulfilled even if you show a different price to the next visitor to the product page. I can sort of see that but I don't quite understand why there are different exchanges. I can't see the benefit except to those for whom it is an arbitrage opportunity. I would also expect there to be low cost systems by which you could place simultaneous orders on all exchanges (at the cost of a slight delay in the order starting to allow them all to be posted at the same time as the furthest one. The HFT still seems to add little real liquidity. The spreads that are shown may be narrower but the real spread seems much higher.
- bmelton 12y ago
  > Using the analogy of the books you are raising the price in the milliseconds between the customer clicking buy and packets of that request reaching ebay's servers and all after the user has seen your price and stock availability a second ago. I don't think this acceptable business practice Speed shouldn't be the factor for why this isn't acceptable. The seller doesn't know that there are orders in the queue for the eBay order, they're just raising the price. That they're doing it quickly is just a matter of efficiency. > I can sort of see that but I don't quite understand why there are different exchanges. Yeah. No idea there. > I would also expect there to be low cost systems by which you could place simultaneous orders on all exchanges There are.
  - josephlord 12y ago
    Fair enough speed isn't really the criteria. In the Ebay example Ebay know what price they showed the customer on the product page when they went to the checkout and should fulfil it if they can (provided the transaction is completed in reasonable time - a couple of minutes in the book buying world). This is maybe an illustration of the problem with the analogy rather than being a useful insight into the trading system.

by bmelton 12y ago

laichzeit0 12y ago

Yeah, and if this happened at, let's say, 10 hour intervals, I'm sure the average layman would have no problem with the "fairness" of this. People are getting their panties in knot because it's somehow "unfair" that this can happen at the millisecond level. I personally don't have a problem with this type of trading activity. A few guys are making easy money. So what?

kasey_junk 12y ago
Actually it's not easy money at all. It is very risky money done on razor thin margins.
- josephlord 12y ago
  I don't think that makes the case for allowing it any stronger. What I do wonder is if these market reactions are so automatic and predictable whether there is a way to game them (I'm sure people already do this). It is probably a deterrent to front running on a large scale.
  - kasey_junk 12y ago
    A) Repeat after me. There is no front running in these scenarios. Front running happens between a client and his intermediary that has a fiduciary duty to him. Other market participants do not have that duty. B) Yes, market making HFT are routinely fighting against other HFT that are designed to predict their behavior and make money from them. The case for allowing it is simple. How do you disallow it without having even worse outcomes. There is quite a bit of evidence that suggests that for the average market participant HFT market makers are a positive not a negative.
    - josephlord 12y ago
      A) I wasn't saying that there was front running in the scenario, just that the exploitability of front running by deliberately trying to trigger it was probably a deterrent. Not convinced about that statement about average market participants, also define average market participant and explain where the HFT's profits come from if not other participants. How do you disallow it? My initial suggestion was to slow down cancellations so that they take substantially longer than a new trade does to pass through the system. My perception is that it might reduce the visible liquidity/availability but not the real liquidity as much of the visible liquidity disappears when someone tries to trade against it. Another suggestion would be to move to a single exchange
      - harryh 12y ago
        Yes, HFTs profit from other participants because they are selling a service: liquidity. There have ALWAYS been sellers of liquidity. Due to automation human sellers have been replaced by computers that cost far far less. So the cost of liquidity has gone down DRAMATICALLY. Spreads used to be a quarter (or higher). Now they are a penny. That's a 25x reduction! Here's the chief executive of Vanguard (the world's largest mutual fund company) talking about how HFTs have lowered trading costs for their clients: http://www.cnbc.com/id/101615521 http://www.cnbc.com/id/101615521 If you slow down cancellations or otherwise try to slow information flow to HFTs you will simply raise their risk which will force them to raise the price they charge for selling liquidity by increasing spreads. Stop thinking of HFTers as parasites and think of them as service providers and you'll have a clearer picture of reality.

stevejones 12y ago

The difference would be that you cancel all the orders currently in progress, so a bunch of people who've clicked "buy" are now in the lurch.

josephlord 12y ago

Using the analogy of the books you are raising the price in the milliseconds between the customer clicking buy and packets of that request reaching ebay's servers and all after the user has seen your price and stock availability a second ago. I don't think this acceptable business practice, if you have seen a price and a stock you should be able to place the order and (unless another order that isn't front running has arrived first to deplete the stock) the order should be fulfilled even if you show a different price to the next visitor to the product page. I can sort of see that but I don't quite understand why there are different exchanges. I can't see the benefit except to those for whom it is an arbitrage opportunity. I would also expect there to be low cost systems by which you could place simultaneous orders on all exchanges (at the cost of a slight delay in the order starting to allow them all to be posted at the same time as the furthest one. The HFT still seems to add little real liquidity. The spreads that are shown may be narrower but the real spread seems much higher.

bmelton 12y ago
> Using the analogy of the books you are raising the price in the milliseconds between the customer clicking buy and packets of that request reaching ebay's servers and all after the user has seen your price and stock availability a second ago. I don't think this acceptable business practice Speed shouldn't be the factor for why this isn't acceptable. The seller doesn't know that there are orders in the queue for the eBay order, they're just raising the price. That they're doing it quickly is just a matter of efficiency. > I can sort of see that but I don't quite understand why there are different exchanges. Yeah. No idea there. > I would also expect there to be low cost systems by which you could place simultaneous orders on all exchanges There are.
- josephlord 12y ago
  Fair enough speed isn't really the criteria. In the Ebay example Ebay know what price they showed the customer on the product page when they went to the checkout and should fulfil it if they can (provided the transaction is completed in reasonable time - a couple of minutes in the book buying world). This is maybe an illustration of the problem with the analogy rather than being a useful insight into the trading system.