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Norway Wealth Fund Outsmarts Flash Boys as Algorithms Abandoned

45 points by dataminer 12y ago

lrm242 12y ago
Since Flash Boys keeps coming up in these threads I want to provide an alternate reference for those curious. A recent rebuttal has been published called "Flash Boys Not So Fast". If you're interested in the topic, I highly suggest you pick it up. http://www.amazon.com/Flash-Boys-Insiders-Perspective-High-Frequency-ebook/dp/B00P0QI2M2 http://www.amazon.com/Flash-Boys-Insiders-Perspective-High-F...
- chollida1 12y ago
  I posted that book awhile ago. https://news.ycombinator.com/item?id=8577237 https://news.ycombinator.com/item?id=8577237 It didn't really get any attention.
phaefele 12y ago
Content free - there is really no information in this article outside of the fact they say Norway's Sovereign fund use "Block Trades" which is really what dark-pools are supposed to be all about. Dark pools and block networks have been around for at least the last 5 years, and introduce their own set of issues (not getting your orders filled, showing Goldman Sachs your order on their promise that they won't don't anything with that information :-)
- tptacek 12y ago
  A block trade is simply a large coherent set of orders; it's the purchase or sale of a big number of tradable instruments, which usually requires a lot of little orders to execute. This is pure pedantry on my part, but I wouldn't want the thread to leave the impression that "block trades" are some technological feature of electronic markets. They're a fundamental problem of trading.
- yummyfajitas 12y ago
  Well, they do point out why you don't want to be a little player on IEX: “Trying to find liquidity without having an impact when you’re doing it is an over-arching challenge we will always have,” Huge players don't want to have a price impact before they trade - they want the price impact to happen after. I.e., it'll happen to the little guy rather than to them.
tptacek 12y ago
Galactically enormous state-sponsored buy-side firm thwarts tiny sell-side firms. Implications for broader market contemplated.
jellicle 12y ago
"But flash trading isn't about front-running" -- standard HN apologist
- tedunangst 12y ago
  "I have no idea what front running actually is" -- standard HN complainer
  - TrainedMonkey 12y ago
    When a large buy order comes in price rises. Front running would be buying before that large order can execute, and selling immediately after it completed and moved market price up.
    - lrm242 12y ago
      Wrong. Front running has a very specific definition and requires a broker to be acting on behalf of a client. 1. Broker takes client order. 2. broker trades his own account first (with knowledge of client order) 3. Broker executes client order. If you don't have clients you can't be front running. It is black and white and as simple as that.
      - Retric 12y ago
        Wrong It's also Front running and illegal to pay a Broker for prior knowledge in front of their clients trades. Also, the term may apply to using insider knowledge. Khan & Lu (2008: 1) define front running as "trading by some parties in advance of large trades by other parties, in anticipation of profiting from the price movement that follows the large trade". They find evidence consistent with front-running through short sales ahead of large stock sales by CEOs on the New York Stock Exchange. http://en.wikipedia.org/wiki/Front_running http://en.wikipedia.org/wiki/Front_running " "Front running" is sometimes used informally for a broker's tactics related to trading on proprietary information before its clients have been given the information. For example, analysts and brokers who buy shares in a company just before the brokerage firm is about to recommend the stock as a strong buy, are practising this type of "front running". Brokers have been convicted of securities laws violations in the United States for such behavior. "
encoderer 12y ago
Everybody always cries "front running!" I believe front running is an overblown issue. I also believe that most defenses of HFT as "liquidity providers" overlooks a large share of prop firms and hedge funds using HFT for speculation and are not in fact liquidity providers. But the firms that do play liquidity -- the firms that compete with one another for your order after it comes thru your broker -- aren't hurting anybody by front running. In fact, they value your order flow so much (for their own info) that they price-improve for you so they capture more/all of the order. IIRC over 60% of stock trades are price-improved.
- tptacek 12y ago
  As I understand it: provision of liquidity is not a function of intent. Liquidity is a property of the market, not of a trading strategy. Some strategies (happen to) add (sell) liquidity, and some remove (buy) it. The term "front-running" is terribly misused in these discussions (I can't tell from your short comment if you were, though). You "front-run" someone if they reveal their trading intent to you, and front-running usually involves an agency problem (ie, your broker and their responsibility to you as a client).
  - hnnewguy 12y ago
    >front-running usually involves an agency problem Historically, in the HFT world, it also involved getting ahead of big orders in the order book by taking advantage of how orders are systematically queued or prioritized.
    - tptacek 12y ago
      How does that differ from the way every market maker deals with informed traders? (Serious question, not a challenge.)
      - hnnewguy 12y ago
        Well, this is merely a hobby interest to me, and it's a been a while since I read 'Dark Pools' but: it's less "using information" to front-run, and more "taking advantage of computational glitches" to jump the queue and get higher priority in the order book. I have no idea if this is still an issue (doubt it), but it was in the early days of HFT. Anyway, I'm out of my element...'Dark Pools' is a decent read if you're into this stuff.
jeffreyrogers 12y ago
Managing that much money must be an enormous challenge since there are so few places where you can put a substantial amount of it.
- PhantomGremlin 12y ago
  They could be putting substantially more into real estate. They're at 5% allocation, which seems low to me. I suspect that in the USA, most people are at either 0% (renters) or 50%+ (homeowners).
fleitz 12y ago
“We’re trading less using algorithmic trading now than we did some years ago and are doing much more trading in large block sizes to avoid pattern-reading.” Interesting... given that large blocks are what HFTs feed on. How exactly is a party suppose to drastically increase supply / demand for a stock without impacting price?
- _delirium 12y ago
  It's hard to tell much in detail about their reasons from the article. I read it as just a change in tactics in how they move large blocks of stock. They seem to feel that, currently, moving a large amount of money using their previous algorithmic strategies has become too easy for other traders to read (perhaps also algorithmically), and then interfere with in ways that are detrimental to their trades. And they believe that negotiating large outright block trades is a better strategy in the current market, given their current goals. Maybe true, maybe not; it seems like a very fact-specific decision, hard for someone without the data to evaluate just from general principles of markets.
jrehor 12y ago
I don't understand this article at all. The pension fund uses block trades. Who takes the other side of those trades and how are they compensated? I suspect that an equity desk takes the block, parcels it out into lots of small pieces, and works the market to get it off their books. Of course, they charge for that service, both in commissions and spread. So effectively, instead of paying HFT firms for providing liquidity, they're paying an investment bank equity desk. Does this really save money? If it does, why all the hoopla about HFT if you can avoid them by going through an equity desk? Don't tell me that they just put their block on IEX and the tooth fairy fills it without price impact. That would be some serious magic.
- jim_greco 12y ago
  Very odd indeed. This is a complete regression to how the market was traded 20 years ago when every bank used to have a NASDAQ market making desk that would make a principal market in any security you wanted. Those desks all got wiped out when spreads collapsed because HFT firms could do it for a fraction of the cost.
  - lrm242 12y ago
    They had a big hand in wiping themselves out when they got caught colluding.
- wdewind 12y ago
  I agree with you, and I think the author, like most people who are writing against the "flash boys," fundamentally misunderstands what's going on. I think the "black and white" rule that the large firms who feel they are being hurt by HFT want is the ability to execute a full trade before it impacts the market (since otherwise it's impossible to describe the exact moment they feel their trade is a signal to be traded off of). I think that's highly unreasonable, but if you do believe that I think IEX is probably relatively successful at it. It's totally possible that a block could be fully sold off on IEX before the 350ms latency allows that information to escape to the outside world and be traded against, no? Market impact is ultimately about the same, just delayed enough to allow the seller to escape. I would happily be correct on any of this, since I don't work in finance.
lrm242 12y ago
Look, all this guy is saying is that he is paying someone else to take on the risk of executing his large orders. Block crossing networks and sell-side traders have existed for a long time. Hell, that's what Brad (IEX CEO and Flash Boys protagonist) did prior to starting IEX. This guy is saying: rather than use an order execution algo to get my trade done, I'm just doing a cross upstairs with some sell-side guy, paying them a known amount, and letting them deal w/ how to handle it on their side. They aren't outsmarting anyone. They're simply transferring execution risk, and they pay handsomely for it, trust me.
- wdewind 12y ago
  So why do they care so much? Are they literally paying more because the idea of HFT burns their cookies?
  - lrm242 12y ago
    Because they suck at technology. Its easier and more justifiable to pay someone else to take on the risk and pension fund gets less variance in their execution costs.

45 points by dataminer 12y ago

Since Flash Boys keeps coming up in these threads I want to provide an alternate reference for those curious. A recent rebuttal has been published called "Flash Boys Not So Fast". If you're interested in the topic, I highly suggest you pick it up. http://www.amazon.com/Flash-Boys-Insiders-Perspective-High-Frequency-ebook/dp/B00P0QI2M2 http://www.amazon.com/Flash-Boys-Insiders-Perspective-High-F...

chollida1 12y ago
I posted that book awhile ago. https://news.ycombinator.com/item?id=8577237 https://news.ycombinator.com/item?id=8577237 It didn't really get any attention.

phaefele 12y ago

Content free - there is really no information in this article outside of the fact they say Norway's Sovereign fund use "Block Trades" which is really what dark-pools are supposed to be all about. Dark pools and block networks have been around for at least the last 5 years, and introduce their own set of issues (not getting your orders filled, showing Goldman Sachs your order on their promise that they won't don't anything with that information :-)

tptacek 12y ago
A block trade is simply a large coherent set of orders; it's the purchase or sale of a big number of tradable instruments, which usually requires a lot of little orders to execute. This is pure pedantry on my part, but I wouldn't want the thread to leave the impression that "block trades" are some technological feature of electronic markets. They're a fundamental problem of trading.
yummyfajitas 12y ago
Well, they do point out why you don't want to be a little player on IEX: “Trying to find liquidity without having an impact when you’re doing it is an over-arching challenge we will always have,” Huge players don't want to have a price impact before they trade - they want the price impact to happen after. I.e., it'll happen to the little guy rather than to them.

tptacek 12y ago

Galactically enormous state-sponsored buy-side firm thwarts tiny sell-side firms. Implications for broader market contemplated.

jellicle 12y ago

"But flash trading isn't about front-running" -- standard HN apologist

tedunangst 12y ago
"I have no idea what front running actually is" -- standard HN complainer
- TrainedMonkey 12y ago
  When a large buy order comes in price rises. Front running would be buying before that large order can execute, and selling immediately after it completed and moved market price up.
  - lrm242 12y ago
    Wrong. Front running has a very specific definition and requires a broker to be acting on behalf of a client. 1. Broker takes client order. 2. broker trades his own account first (with knowledge of client order) 3. Broker executes client order. If you don't have clients you can't be front running. It is black and white and as simple as that.
    - Retric 12y ago
      Wrong It's also Front running and illegal to pay a Broker for prior knowledge in front of their clients trades. Also, the term may apply to using insider knowledge. Khan & Lu (2008: 1) define front running as "trading by some parties in advance of large trades by other parties, in anticipation of profiting from the price movement that follows the large trade". They find evidence consistent with front-running through short sales ahead of large stock sales by CEOs on the New York Stock Exchange. http://en.wikipedia.org/wiki/Front_running http://en.wikipedia.org/wiki/Front_running " "Front running" is sometimes used informally for a broker's tactics related to trading on proprietary information before its clients have been given the information. For example, analysts and brokers who buy shares in a company just before the brokerage firm is about to recommend the stock as a strong buy, are practising this type of "front running". Brokers have been convicted of securities laws violations in the United States for such behavior. "

encoderer 12y ago

Everybody always cries "front running!" I believe front running is an overblown issue. I also believe that most defenses of HFT as "liquidity providers" overlooks a large share of prop firms and hedge funds using HFT for speculation and are not in fact liquidity providers. But the firms that do play liquidity -- the firms that compete with one another for your order after it comes thru your broker -- aren't hurting anybody by front running. In fact, they value your order flow so much (for their own info) that they price-improve for you so they capture more/all of the order. IIRC over 60% of stock trades are price-improved.

tptacek 12y ago
As I understand it: provision of liquidity is not a function of intent. Liquidity is a property of the market, not of a trading strategy. Some strategies (happen to) add (sell) liquidity, and some remove (buy) it. The term "front-running" is terribly misused in these discussions (I can't tell from your short comment if you were, though). You "front-run" someone if they reveal their trading intent to you, and front-running usually involves an agency problem (ie, your broker and their responsibility to you as a client).
- hnnewguy 12y ago
  >front-running usually involves an agency problem Historically, in the HFT world, it also involved getting ahead of big orders in the order book by taking advantage of how orders are systematically queued or prioritized.
  - tptacek 12y ago
    How does that differ from the way every market maker deals with informed traders? (Serious question, not a challenge.)
    - hnnewguy 12y ago
      Well, this is merely a hobby interest to me, and it's a been a while since I read 'Dark Pools' but: it's less "using information" to front-run, and more "taking advantage of computational glitches" to jump the queue and get higher priority in the order book. I have no idea if this is still an issue (doubt it), but it was in the early days of HFT. Anyway, I'm out of my element...'Dark Pools' is a decent read if you're into this stuff.

jeffreyrogers 12y ago

Managing that much money must be an enormous challenge since there are so few places where you can put a substantial amount of it.

PhantomGremlin 12y ago
They could be putting substantially more into real estate. They're at 5% allocation, which seems low to me. I suspect that in the USA, most people are at either 0% (renters) or 50%+ (homeowners).

fleitz 12y ago

“We’re trading less using algorithmic trading now than we did some years ago and are doing much more trading in large block sizes to avoid pattern-reading.” Interesting... given that large blocks are what HFTs feed on. How exactly is a party suppose to drastically increase supply / demand for a stock without impacting price?

_delirium 12y ago
It's hard to tell much in detail about their reasons from the article. I read it as just a change in tactics in how they move large blocks of stock. They seem to feel that, currently, moving a large amount of money using their previous algorithmic strategies has become too easy for other traders to read (perhaps also algorithmically), and then interfere with in ways that are detrimental to their trades. And they believe that negotiating large outright block trades is a better strategy in the current market, given their current goals. Maybe true, maybe not; it seems like a very fact-specific decision, hard for someone without the data to evaluate just from general principles of markets.

jrehor 12y ago

I don't understand this article at all. The pension fund uses block trades. Who takes the other side of those trades and how are they compensated? I suspect that an equity desk takes the block, parcels it out into lots of small pieces, and works the market to get it off their books. Of course, they charge for that service, both in commissions and spread. So effectively, instead of paying HFT firms for providing liquidity, they're paying an investment bank equity desk. Does this really save money? If it does, why all the hoopla about HFT if you can avoid them by going through an equity desk? Don't tell me that they just put their block on IEX and the tooth fairy fills it without price impact. That would be some serious magic.

jim_greco 12y ago
Very odd indeed. This is a complete regression to how the market was traded 20 years ago when every bank used to have a NASDAQ market making desk that would make a principal market in any security you wanted. Those desks all got wiped out when spreads collapsed because HFT firms could do it for a fraction of the cost.
- lrm242 12y ago
  They had a big hand in wiping themselves out when they got caught colluding.
wdewind 12y ago
I agree with you, and I think the author, like most people who are writing against the "flash boys," fundamentally misunderstands what's going on. I think the "black and white" rule that the large firms who feel they are being hurt by HFT want is the ability to execute a full trade before it impacts the market (since otherwise it's impossible to describe the exact moment they feel their trade is a signal to be traded off of). I think that's highly unreasonable, but if you do believe that I think IEX is probably relatively successful at it. It's totally possible that a block could be fully sold off on IEX before the 350ms latency allows that information to escape to the outside world and be traded against, no? Market impact is ultimately about the same, just delayed enough to allow the seller to escape. I would happily be correct on any of this, since I don't work in finance.

lrm242 12y ago

Look, all this guy is saying is that he is paying someone else to take on the risk of executing his large orders. Block crossing networks and sell-side traders have existed for a long time. Hell, that's what Brad (IEX CEO and Flash Boys protagonist) did prior to starting IEX. This guy is saying: rather than use an order execution algo to get my trade done, I'm just doing a cross upstairs with some sell-side guy, paying them a known amount, and letting them deal w/ how to handle it on their side. They aren't outsmarting anyone. They're simply transferring execution risk, and they pay handsomely for it, trust me.

wdewind 12y ago
So why do they care so much? Are they literally paying more because the idea of HFT burns their cookies?
- lrm242 12y ago
  Because they suck at technology. Its easier and more justifiable to pay someone else to take on the risk and pension fund gets less variance in their execution costs.