10 ms·

Flash Boys a Year Later

69 points by ganeumann 12y ago

gd1 12y ago
"between high-frequency traders, who trade with computer algorithms at nearly light speed" Seriously, why the do we have to put up with this shit? "Google, which returns the results of your search queries over a network at nearly light speed". "Your remote control, which changes the channel on your television at nearly light speed". It is too stupid for words. Old school luddism.
- eli 12y ago
  The point is that this sort of trading involves an algorithm making the "decision" to buy/sell/query trades at an extremely high rate. When I click "market order" on my eTrade screen it's going at nearly light speed too -- but we both know that's not the same thing and not what he meant. I think you're being a bit pedantic.
- harryh 12y ago
  I sent this comment to HackerNews at nearly light speed! I am a god!
- pavlov 12y ago
  Well, it's sort of an awkward way of saying that speed can have downsides. Of course everyone likes fast search results from Google... But how about when junk marketers want to use the same global network to fill people's email inboxes with spam? Most people have a problem with that, and so there's a constant fight against allowing spammers to "send untargeted bulk messages at nearly light speed". I guess that's one way of looking at HFT: is it like email spam in that it hides real market signals under a layer of endless automatic noise? I have no idea. Seems like an interesting question though.
- dreamweapon 12y ago
  To be fair, the potential consequences of a market trade -- or even a feint at a trade, as a certain proportion of HFT trades are widely suspected to be -- can be far greater (and more difficult to predict) than those of doing a Google search, or changing the TV channel from the comfort of your sofa.
- cma 12y ago
  It is actually somewhat meaningful here; the trading decisions are made fast enough that speed of light is the bottleneck and companies pay to be colocated in NASDAQ data centers (paid advantage, "market efficiency"'s invisible hand will probably guide Nasdaq into setting up their next data center on the moon to make the colocated latency sell even easier). Companies also do things like set up microwave relay towers to bypass fiber lines from Chicago to New York, I don't think there are similar stories about TV remotes.
- devingoldfish 12y ago
  The book explains that one company was running their own fiber optic cable between Chicago and New York to shave a handful of milliseconds off the latency. HFT firms also built their trading desks as close as possible to where the fiber terminated in New Jersey. This isn't the speed of your mom's google query, they were literally running up against latency caused by the speed that light travels down a cable.
  - Animats 12y ago
    Right. If you're totally unfamiliar with HFT, you don't realize how far they go to get latency down. Computers are too slow for HFT. There are trading algorithms written in VHDL and loaded into FPGAs which are looking at packets as they come in over gigabit Ethernet.[1] (That description is four years old and out of date.) All this is really to achieve front-running, executing an order after another order has been submitted but before the first order is executed. This is betting on a sure thing. It's also illegal. [1] http://www.wallstreetfpga.com/resources/fix-on-an-fpga/ http://www.wallstreetfpga.com/resources/fix-on-an-fpga/
    - harryh 12y ago
      Your understanding of what defines front running is incorrect. Front running is when your stock broker gets an order from you but then turns around and executes an order on his own behalf before he executes yours. This is illegal because your broker has a fiduciary duty to you, his client. It's not front running when I see an order on one exchange and then, very quickly, go make an order on a different exchange. It's not illegal because I have no fiduciary responsibility to any of the other people involved. You have no right to execute multiple orders on different exchanges atomically.
      - Animats 12y ago
        If someone paid for order flow or fast access so they could do that, it's illegal.
        12y ago
- tdaltonc 12y ago
  It's basic control theory. There's nothing wrong with one way speed (google or my remote), but you can get in to trouble when you have a low level control loop that runs orders of magnitude faster then the hierarchical control loops above it.
dreamweapon 12y ago
"Shook to its core" is more than a bit overstated.
- quanticle 12y ago
  Agreed. We have seen zero regulatory or legislative proposals to limit high frequency trading. Flash Boys didn't shake Wall Street to its core. It didn't even register as a tremor. Arguably (like Michael Lewis' other book, Liar's Poker) it made high frequency trading look sexy, and therefore more attractive.
- Hansi 12y ago
  Haha yes, most people know that Lewis is full of hyperbole and took it as that. It was pub chatting subject in finance for a week or two and then faded away
- Lazare 12y ago
  I was going to say the same thing. My feeling is that "Wall Street" mostly ignored the book, which they expected to have no lasting impact. And even that turned out to be an overestimate. Not only has it had no lasting impact, I wouldn't say it had a fleeting impact either. In fact, I can't think of a single measurable impact the book has had on Wall Street. At most it gave people who already distrusted the financial industry a few more reasons to do it, but it led to no new laws, no new regulations, no prosecutions, no anything really. And if you ignore the headline and look at the article, Lewis's main argument seems to be that he made some very rich people "angry". Which is 1) a far cry from "shaking wall street to its core" 2) something he offers zero evidence—even anecdotally—to support and 3) also not true, as far as I'm aware. Don't get me wrong; I've read several of Lewis's books, I like his writing, and I'm sure he's a great guy. But I kind of doubt even Lewis believes this spin; it's just marketing. Edit: It's also worth remembering that the losers in the rise of HFT are overwhelming the big institutional players in the market. People have this weird idea that HFT is all about big banks victimizing small investors, but in reality the big banks are the losers, and the small investors are the winners. (Yes, really.) Which makes Lewis's claim that he was making the richest people in Wall Street angry so ironic. They were already angry at HFT, and they tried to use Lewis as ammunition in their ongoing fight against HFT. It's a bit like making a movie about how fracking is terrible, then priding yourself about how you must have made the big oil majors very bad...not even realising that they were the ones funding you all along, because fracking is a threat to them, not an opportunity. (And yes, that happened. Matt Damon's film Promised Land turned out to be heavily funded by the UAE, who has a vested interested in discouraging domestic fossil fuel production in the US. I'm sure Damon thought he was standing up to Big Oil, but reality is more complex.)
chollida1 12y ago
I've spent more than a few words bashing Flash boys so I won't try to do it anymore. In a way I feel kind of bad for Michael Lewis. He's had such success with earlier books that it must be hard for him to find a target for each new book. In my opinion this book was his first awful book. Instead of finding data and following it through to reach a conclusion he starts with a trendy conclusion, HFT is bad, and then really contorts and reaches with his data to try and make his case. He was also hit by the issue of HFT starting to wind down around 2010 and really starting to wind down around 2012. Many HFT firms no longer concentrate on the US Equity markets alone, they do alot more volume in the futures, options and bond markets where there are alot more mathematical correlations, and hence more opportunities for mispricings to correct. If you want a sound rebuttal, and in my opinion a better book have a look at this book: https://news.ycombinator.com/item?id=8577237 https://news.ycombinator.com/item?id=8577237 I find it more balanced, better researched and it provides a much better understanding of the HFT industry. Having said that, credit where credit is due, he's a tremendous writer and the book is a fun read that you can consume in 2 days. If you like it then I recommend his entire back catalog, they are all fun and informative reads. EDIT someone asked for an example of why I didn't like the book so.... One of Lewis' biggest issues was what he termed HFT front running. This alone was a pain as front running already had a well understood meaning( it originally was meant for a intermediary who took your order and executed its own order ahead of yours, often buying the stock lower and selling it to you at a slightly higher price). His example was that a HFT system would see an order for say Microsoft trade on the exchange BATS, say a buy of 1000 shares. The HFT system would then run ahead to all the other exchanges and buy up the remaining shares on those other exchanges, an ammount that might be 1000 shares or it might be 100,000 shares, so when the remaining part of the order to buy Microsoft got to those exchanges it would have to buy the shares from eh faster HFT system at a higher price. This is down right silly for a few reasons. 1) it assumes that the order that got filled at BATS was either a market order or a limit order that was priced for more than the fill price, because if it was a limit for the same price as the fill then buying up the remaining shares won't do the HFT firm any good:) 2) it assumes that the order was for more shares than what got filled on BATS, so now the HFT firm is exposing itself by owning shares it's not even sure anyone wants to buy at the price its willing to sell. 3) it assumes that the HFT system can both buy the remaining shares at the original price and get to the top of sell side of the order book to sell those shares back. The HFt firm now has to take the risk that it won't be at the top of the order book and even if it was right about steps one and two, a big if, it might not be able to capitalize on it as it can't jump ahead of anyone who had previous sell limit orders at the price it now wants to sell at. There are just so many unknown factors there that there is almost no way this type of trading system could be profitable. Remember HFT firms worship at the alter of the law of large numbers, they make fractions of a penny per share traded but only do it if they have an edge ie 90% upside to 10% downside. There just isn't any edge to be had in the above scenario, its just a heaping pile of risk.
stillsut 12y ago
Just finished the book, was not shaken to my core. When 99% of trading became computerized,very few "trading desks" knew anything about the foundation of what they did. They were still trying to be an 80's guy. Not surprising that learning deeply about the electronic system at the basis of trading was lucrative for the few who did,
aswanson 12y ago
The best argument I have heard in favor of HFT was from Jim Simons of Renaissance Technologies. He said that the so-called market-makers would run at the first sign of trouble (as they did in the 1987 crash) and caused prolonged downturns, whereas the algorithms for HFTs were truly liquid market-makers and kicked back in the buying faster once prices got irrationally low.
- thrownawayhft 12y ago
  I worked at a market maker (owned by a bank) that handled around 8-10% of US stock trades. When things like the flash crash happened, the strategy was to stop anything automated, because the simple strategies had no way of knowing the cause. Trading on normal market-microstructure signals, the trading that provides the bulk of liquidity, would just get you creamed. To meet our market maker requirements, which allowed us to do things normal market participants can't do, like naked shorting, we would do things like leave a 1 penny bid and ten-thousand dollar ask and not change them for the entire day. Exchange regulators tried to address this and made market makers quote within some percentage of the bid/ask. Nasdaq literally just created an order type that would automatically reprice itself to always be exactly that percentage away from the bid/ask, so that it could never execute--just like the previous 1-penny bids--but would comply with the regulation. The order type only existed to bypass that regulation and was literally created in response to demand after its passage. Even without that order type we'd just do (and did do, it took them a while after the regulation to add the order type) the same thing in the models' trading logic.
  - thejaredhooper 12y ago
    Do you have any links/resources for the subject matter you're covering in this comment? I'd like to learn more about what you're saying, and I can't seem to wrap my head around what it is you're trying to express with penny bids.
    - harryh 12y ago
      What he's trying to say is that his firm was contractually required to have a bid (an offer to buy) and an ask (an offer to sell) for some set of stocks. But under certain circumstances they didn't really like this requirement so they kind of cheated by changing their bid to 1 penny and their ask to $10,000. For a stock that trades around, say, $100 this means that while they de-facto had a bid and ask in place it wasn't really a real bid or ask as no one else would ever want to trade at those prices.
encoderer 12y ago
HFT is not bad. Technology is democratized now. The best trading tech is available to consumers. The professional edge lies in their unlimited, low-cost leverage not in their technology. As a consumer, HFT is not my competition it is my order facilitator. A huge share of equity trades get their price IMPROVED by the market makers in order to capture the trade flow. I love Michael Lewis. The Big Short was a very enjoyable read. I've read all of his stuff. I've run into the guy at the grocery store. But Flash Boys was just silly. Even if you believe it, the guy getting "disrupted" was not a retail trader but a broker crying that HFT was making it hard for him to dump orders on the market in 10,000 share lots. Edit: I won't respond to every critic, I respect your views but I've given it thought and have reached a different conclusion. You can quantify that orders are filled today more quickly, at better prices, with far lower commissions, and we have tighter bid-ask spreads, more penny-wide markets than ever before, and an explosion of ETFs that give retail traders access to something that they otherwise would need a futures contract ($100k in notional value) to trade. And of course in the world of algorithmic trading, there is technology not available to consumers. But a consumer today can have a setup at home that is as sophisticated as a professional trader's setup. That never used to be the case. But the software is commoditized now. The trading platforms available to consumers, like Thinkorswim and Interactive Brokers, are top-shelf.
- tdaltonc 12y ago
  It's absolutely not democratized. The opaqueness of the trades and the fact that the vast majority of trade volume passes through pools with centralized (and again opaque) rule-writing means that the those centralized authorities can and do write the rules to privilege insiders.
  - tptacek 12y ago
    What "opaqueness" are you talking about? What kinds of "trades"? What are you referring to when you talk about "trade volume"? What "pools" are you talking about? By the technical definition of the term --- and the context of your subsequent words --- you could (validly) be referring to the major exchanges as "pools"; they are, after all, centralized and responsible for their own rule-writing.
lordnacho 12y ago
I read the book a few weeks ago, and I was somewhat disappointed. He focusses way too much on the IEX gang, and in a way that is puts the team members on a pedestal. Something about it made it sound like he spent a lot of time with this gang and not so much with others. I'm sure they're smart guys, but I just don't like the style and it seemed overdone to me. This is having worked in finance for 12 years and met loads of smart people with credentials and interesting stories. Anyway, aside from the style I thought there was a lack of real investigation. There was one interesting strategy mentioned, the BATS front-run. Superficially, it sounds like it might work. You see a trade on BATS, you pull and reverse. Okay. But what exactly is wrong with that? There's a number of market makers who collectively make the market. A big fish comes in, scares away the minnows. Is that wrong? If there's a big buyer, shouldn't the price be higher? That discussion didn't seem to be there. Another interesting story is the Spread Networks line. Now, what exactly is being arbed between Chicago and New York? The S&P Future vs ETFs in NYC? Vs the basket? Can that really support a dozen or so firms paying tens of millions each? Maybe it can, let us see the data. A recent conversation with an HFT friend did not reveal the answer. And what happened when the microwave towers came in? Is the line useless now? At the end, I wasn't satisfied I knew WHY the speed was necessary. All I can think of is that there's some very obvious trade that can't lose money if you're the fastest. What is it, and why is it a no-brainer? Is is anything untoward happening? And then there was the funny order types. How about giving us a concrete example? Use such-and-such an order, cause the market to cross, end up at the front of the queue, profit. There was some mention of the multitude of order types, but the case isn't made until you bring something concrete. Someone like Nanex might have data showing these shenanigans. I picked up another book by Tabb, who was mentioned, that has some more detail.
- infecto 12y ago
  I really enjoyed Dark Pools. Of course it also focused on a side but it was more enjoyable to see how things came to be, the creation of Island and how seemingly good intentions created the market we have today.
  - ethbro 12y ago
    > how seemingly good intentions created the market we have today. It's been a bit since I read Flash Boys [edit: didn't realize you were talking about a different book], but from memory dark pools were never created with good intentions. At best, they were created with the intention of enabling cheaper trades by not having to route orders to the broader public market (just like a colo CDN)? And dark pool owners had all the information needed to gather real-time reporting on the prices predatory dark pools were trading normal investors' orders at vs. the broader market price. Which is to say, they absolutely knew they were screwing someone.
mrdrozdov 12y ago
More of a question than a comment, but how do Trading Fees [1] effect HFT and the market? I suspect that high volume trades over time could be seriously effected by the trends in these fees. [1] e.g. NYSE Trading Fees, https://www.nyse.com/markets/nyse/trading-info#trading-fees https://www.nyse.com/markets/nyse/trading-info#trading-fees
- inspectahdeck 12y ago
  Most HFT players are market makers, not market takers. If you take a look at the fees in that link, the fees for liquidity taking are positive, i.e. $0.0027, whereas the fees for liquidity providing are negative, i.e. $(0.00150). Exchanges offer rebates to market makers to incentivize market activity on their platform.
itschaffey 12y ago
I read the book the week it came out and it felt like watching a gripping thriller. I think the reaction/ debate to his book was a (welcomed) distraction for the Wall Street bankers. His book left much unanswered, inevitably, but I fail to see any progress/ change since he published it. His debate on Bloomberg with William O'Brien (BATS Global Markets Presidents) was legendary and great viewing. But ultimately Brad Katsuyama came out as the hero of the book and it would be interesting to know how the IEX Group are doing now... I hear there are plans to make it in to a movie? Perhaps I will be able to watch it as a gripping thriller...

69 points by ganeumann 12y ago

gd1 12y ago

"between high-frequency traders, who trade with computer algorithms at nearly light speed" Seriously, why the do we have to put up with this shit? "Google, which returns the results of your search queries over a network at nearly light speed". "Your remote control, which changes the channel on your television at nearly light speed". It is too stupid for words. Old school luddism.

eli 12y ago
The point is that this sort of trading involves an algorithm making the "decision" to buy/sell/query trades at an extremely high rate. When I click "market order" on my eTrade screen it's going at nearly light speed too -- but we both know that's not the same thing and not what he meant. I think you're being a bit pedantic.
harryh 12y ago
I sent this comment to HackerNews at nearly light speed! I am a god!
pavlov 12y ago
Well, it's sort of an awkward way of saying that speed can have downsides. Of course everyone likes fast search results from Google... But how about when junk marketers want to use the same global network to fill people's email inboxes with spam? Most people have a problem with that, and so there's a constant fight against allowing spammers to "send untargeted bulk messages at nearly light speed". I guess that's one way of looking at HFT: is it like email spam in that it hides real market signals under a layer of endless automatic noise? I have no idea. Seems like an interesting question though.
dreamweapon 12y ago
To be fair, the potential consequences of a market trade -- or even a feint at a trade, as a certain proportion of HFT trades are widely suspected to be -- can be far greater (and more difficult to predict) than those of doing a Google search, or changing the TV channel from the comfort of your sofa.
cma 12y ago
It is actually somewhat meaningful here; the trading decisions are made fast enough that speed of light is the bottleneck and companies pay to be colocated in NASDAQ data centers (paid advantage, "market efficiency"'s invisible hand will probably guide Nasdaq into setting up their next data center on the moon to make the colocated latency sell even easier). Companies also do things like set up microwave relay towers to bypass fiber lines from Chicago to New York, I don't think there are similar stories about TV remotes.
devingoldfish 12y ago
The book explains that one company was running their own fiber optic cable between Chicago and New York to shave a handful of milliseconds off the latency. HFT firms also built their trading desks as close as possible to where the fiber terminated in New Jersey. This isn't the speed of your mom's google query, they were literally running up against latency caused by the speed that light travels down a cable.
- Animats 12y ago
  Right. If you're totally unfamiliar with HFT, you don't realize how far they go to get latency down. Computers are too slow for HFT. There are trading algorithms written in VHDL and loaded into FPGAs which are looking at packets as they come in over gigabit Ethernet.[1] (That description is four years old and out of date.) All this is really to achieve front-running, executing an order after another order has been submitted but before the first order is executed. This is betting on a sure thing. It's also illegal. [1] http://www.wallstreetfpga.com/resources/fix-on-an-fpga/ http://www.wallstreetfpga.com/resources/fix-on-an-fpga/
  - harryh 12y ago
    Your understanding of what defines front running is incorrect. Front running is when your stock broker gets an order from you but then turns around and executes an order on his own behalf before he executes yours. This is illegal because your broker has a fiduciary duty to you, his client. It's not front running when I see an order on one exchange and then, very quickly, go make an order on a different exchange. It's not illegal because I have no fiduciary responsibility to any of the other people involved. You have no right to execute multiple orders on different exchanges atomically.
    - Animats 12y ago
      If someone paid for order flow or fast access so they could do that, it's illegal.
      - 12y ago
tdaltonc 12y ago
It's basic control theory. There's nothing wrong with one way speed (google or my remote), but you can get in to trouble when you have a low level control loop that runs orders of magnitude faster then the hierarchical control loops above it.

dreamweapon 12y ago

"Shook to its core" is more than a bit overstated.

quanticle 12y ago
Agreed. We have seen zero regulatory or legislative proposals to limit high frequency trading. Flash Boys didn't shake Wall Street to its core. It didn't even register as a tremor. Arguably (like Michael Lewis' other book, Liar's Poker) it made high frequency trading look sexy, and therefore more attractive.
Hansi 12y ago
Haha yes, most people know that Lewis is full of hyperbole and took it as that. It was pub chatting subject in finance for a week or two and then faded away
Lazare 12y ago
I was going to say the same thing. My feeling is that "Wall Street" mostly ignored the book, which they expected to have no lasting impact. And even that turned out to be an overestimate. Not only has it had no lasting impact, I wouldn't say it had a fleeting impact either. In fact, I can't think of a single measurable impact the book has had on Wall Street. At most it gave people who already distrusted the financial industry a few more reasons to do it, but it led to no new laws, no new regulations, no prosecutions, no anything really. And if you ignore the headline and look at the article, Lewis's main argument seems to be that he made some very rich people "angry". Which is 1) a far cry from "shaking wall street to its core" 2) something he offers zero evidence—even anecdotally—to support and 3) also not true, as far as I'm aware. Don't get me wrong; I've read several of Lewis's books, I like his writing, and I'm sure he's a great guy. But I kind of doubt even Lewis believes this spin; it's just marketing. Edit: It's also worth remembering that the losers in the rise of HFT are overwhelming the big institutional players in the market. People have this weird idea that HFT is all about big banks victimizing small investors, but in reality the big banks are the losers, and the small investors are the winners. (Yes, really.) Which makes Lewis's claim that he was making the richest people in Wall Street angry so ironic. They were already angry at HFT, and they tried to use Lewis as ammunition in their ongoing fight against HFT. It's a bit like making a movie about how fracking is terrible, then priding yourself about how you must have made the big oil majors very bad...not even realising that they were the ones funding you all along, because fracking is a threat to them, not an opportunity. (And yes, that happened. Matt Damon's film Promised Land turned out to be heavily funded by the UAE, who has a vested interested in discouraging domestic fossil fuel production in the US. I'm sure Damon thought he was standing up to Big Oil, but reality is more complex.)

chollida1 12y ago

I've spent more than a few words bashing Flash boys so I won't try to do it anymore. In a way I feel kind of bad for Michael Lewis. He's had such success with earlier books that it must be hard for him to find a target for each new book. In my opinion this book was his first awful book. Instead of finding data and following it through to reach a conclusion he starts with a trendy conclusion, HFT is bad, and then really contorts and reaches with his data to try and make his case. He was also hit by the issue of HFT starting to wind down around 2010 and really starting to wind down around 2012. Many HFT firms no longer concentrate on the US Equity markets alone, they do alot more volume in the futures, options and bond markets where there are alot more mathematical correlations, and hence more opportunities for mispricings to correct. If you want a sound rebuttal, and in my opinion a better book have a look at this book: https://news.ycombinator.com/item?id=8577237 https://news.ycombinator.com/item?id=8577237 I find it more balanced, better researched and it provides a much better understanding of the HFT industry. Having said that, credit where credit is due, he's a tremendous writer and the book is a fun read that you can consume in 2 days. If you like it then I recommend his entire back catalog, they are all fun and informative reads. EDIT someone asked for an example of why I didn't like the book so.... One of Lewis' biggest issues was what he termed HFT front running. This alone was a pain as front running already had a well understood meaning( it originally was meant for a intermediary who took your order and executed its own order ahead of yours, often buying the stock lower and selling it to you at a slightly higher price). His example was that a HFT system would see an order for say Microsoft trade on the exchange BATS, say a buy of 1000 shares. The HFT system would then run ahead to all the other exchanges and buy up the remaining shares on those other exchanges, an ammount that might be 1000 shares or it might be 100,000 shares, so when the remaining part of the order to buy Microsoft got to those exchanges it would have to buy the shares from eh faster HFT system at a higher price. This is down right silly for a few reasons. 1) it assumes that the order that got filled at BATS was either a market order or a limit order that was priced for more than the fill price, because if it was a limit for the same price as the fill then buying up the remaining shares won't do the HFT firm any good:) 2) it assumes that the order was for more shares than what got filled on BATS, so now the HFT firm is exposing itself by owning shares it's not even sure anyone wants to buy at the price its willing to sell. 3) it assumes that the HFT system can both buy the remaining shares at the original price and get to the top of sell side of the order book to sell those shares back. The HFt firm now has to take the risk that it won't be at the top of the order book and even if it was right about steps one and two, a big if, it might not be able to capitalize on it as it can't jump ahead of anyone who had previous sell limit orders at the price it now wants to sell at. There are just so many unknown factors there that there is almost no way this type of trading system could be profitable. Remember HFT firms worship at the alter of the law of large numbers, they make fractions of a penny per share traded but only do it if they have an edge ie 90% upside to 10% downside. There just isn't any edge to be had in the above scenario, its just a heaping pile of risk.

stillsut 12y ago

Just finished the book, was not shaken to my core. When 99% of trading became computerized,very few "trading desks" knew anything about the foundation of what they did. They were still trying to be an 80's guy. Not surprising that learning deeply about the electronic system at the basis of trading was lucrative for the few who did,

aswanson 12y ago

The best argument I have heard in favor of HFT was from Jim Simons of Renaissance Technologies. He said that the so-called market-makers would run at the first sign of trouble (as they did in the 1987 crash) and caused prolonged downturns, whereas the algorithms for HFTs were truly liquid market-makers and kicked back in the buying faster once prices got irrationally low.

thrownawayhft 12y ago
I worked at a market maker (owned by a bank) that handled around 8-10% of US stock trades. When things like the flash crash happened, the strategy was to stop anything automated, because the simple strategies had no way of knowing the cause. Trading on normal market-microstructure signals, the trading that provides the bulk of liquidity, would just get you creamed. To meet our market maker requirements, which allowed us to do things normal market participants can't do, like naked shorting, we would do things like leave a 1 penny bid and ten-thousand dollar ask and not change them for the entire day. Exchange regulators tried to address this and made market makers quote within some percentage of the bid/ask. Nasdaq literally just created an order type that would automatically reprice itself to always be exactly that percentage away from the bid/ask, so that it could never execute--just like the previous 1-penny bids--but would comply with the regulation. The order type only existed to bypass that regulation and was literally created in response to demand after its passage. Even without that order type we'd just do (and did do, it took them a while after the regulation to add the order type) the same thing in the models' trading logic.
- thejaredhooper 12y ago
  Do you have any links/resources for the subject matter you're covering in this comment? I'd like to learn more about what you're saying, and I can't seem to wrap my head around what it is you're trying to express with penny bids.
  - harryh 12y ago
    What he's trying to say is that his firm was contractually required to have a bid (an offer to buy) and an ask (an offer to sell) for some set of stocks. But under certain circumstances they didn't really like this requirement so they kind of cheated by changing their bid to 1 penny and their ask to $10,000. For a stock that trades around, say, $100 this means that while they de-facto had a bid and ask in place it wasn't really a real bid or ask as no one else would ever want to trade at those prices.

encoderer 12y ago

HFT is not bad. Technology is democratized now. The best trading tech is available to consumers. The professional edge lies in their unlimited, low-cost leverage not in their technology. As a consumer, HFT is not my competition it is my order facilitator. A huge share of equity trades get their price IMPROVED by the market makers in order to capture the trade flow. I love Michael Lewis. The Big Short was a very enjoyable read. I've read all of his stuff. I've run into the guy at the grocery store. But Flash Boys was just silly. Even if you believe it, the guy getting "disrupted" was not a retail trader but a broker crying that HFT was making it hard for him to dump orders on the market in 10,000 share lots. Edit: I won't respond to every critic, I respect your views but I've given it thought and have reached a different conclusion. You can quantify that orders are filled today more quickly, at better prices, with far lower commissions, and we have tighter bid-ask spreads, more penny-wide markets than ever before, and an explosion of ETFs that give retail traders access to something that they otherwise would need a futures contract ($100k in notional value) to trade. And of course in the world of algorithmic trading, there is technology not available to consumers. But a consumer today can have a setup at home that is as sophisticated as a professional trader's setup. That never used to be the case. But the software is commoditized now. The trading platforms available to consumers, like Thinkorswim and Interactive Brokers, are top-shelf.

tdaltonc 12y ago
It's absolutely not democratized. The opaqueness of the trades and the fact that the vast majority of trade volume passes through pools with centralized (and again opaque) rule-writing means that the those centralized authorities can and do write the rules to privilege insiders.
- tptacek 12y ago
  What "opaqueness" are you talking about? What kinds of "trades"? What are you referring to when you talk about "trade volume"? What "pools" are you talking about? By the technical definition of the term --- and the context of your subsequent words --- you could (validly) be referring to the major exchanges as "pools"; they are, after all, centralized and responsible for their own rule-writing.

lordnacho 12y ago

I read the book a few weeks ago, and I was somewhat disappointed. He focusses way too much on the IEX gang, and in a way that is puts the team members on a pedestal. Something about it made it sound like he spent a lot of time with this gang and not so much with others. I'm sure they're smart guys, but I just don't like the style and it seemed overdone to me. This is having worked in finance for 12 years and met loads of smart people with credentials and interesting stories. Anyway, aside from the style I thought there was a lack of real investigation. There was one interesting strategy mentioned, the BATS front-run. Superficially, it sounds like it might work. You see a trade on BATS, you pull and reverse. Okay. But what exactly is wrong with that? There's a number of market makers who collectively make the market. A big fish comes in, scares away the minnows. Is that wrong? If there's a big buyer, shouldn't the price be higher? That discussion didn't seem to be there. Another interesting story is the Spread Networks line. Now, what exactly is being arbed between Chicago and New York? The S&P Future vs ETFs in NYC? Vs the basket? Can that really support a dozen or so firms paying tens of millions each? Maybe it can, let us see the data. A recent conversation with an HFT friend did not reveal the answer. And what happened when the microwave towers came in? Is the line useless now? At the end, I wasn't satisfied I knew WHY the speed was necessary. All I can think of is that there's some very obvious trade that can't lose money if you're the fastest. What is it, and why is it a no-brainer? Is is anything untoward happening? And then there was the funny order types. How about giving us a concrete example? Use such-and-such an order, cause the market to cross, end up at the front of the queue, profit. There was some mention of the multitude of order types, but the case isn't made until you bring something concrete. Someone like Nanex might have data showing these shenanigans. I picked up another book by Tabb, who was mentioned, that has some more detail.

infecto 12y ago
I really enjoyed Dark Pools. Of course it also focused on a side but it was more enjoyable to see how things came to be, the creation of Island and how seemingly good intentions created the market we have today.
- ethbro 12y ago
  > how seemingly good intentions created the market we have today. It's been a bit since I read Flash Boys [edit: didn't realize you were talking about a different book], but from memory dark pools were never created with good intentions. At best, they were created with the intention of enabling cheaper trades by not having to route orders to the broader public market (just like a colo CDN)? And dark pool owners had all the information needed to gather real-time reporting on the prices predatory dark pools were trading normal investors' orders at vs. the broader market price. Which is to say, they absolutely knew they were screwing someone.

mrdrozdov 12y ago

More of a question than a comment, but how do Trading Fees [1] effect HFT and the market? I suspect that high volume trades over time could be seriously effected by the trends in these fees. [1] e.g. NYSE Trading Fees, https://www.nyse.com/markets/nyse/trading-info#trading-fees https://www.nyse.com/markets/nyse/trading-info#trading-fees

inspectahdeck 12y ago
Most HFT players are market makers, not market takers. If you take a look at the fees in that link, the fees for liquidity taking are positive, i.e. $0.0027, whereas the fees for liquidity providing are negative, i.e. $(0.00150). Exchanges offer rebates to market makers to incentivize market activity on their platform.

itschaffey 12y ago

I read the book the week it came out and it felt like watching a gripping thriller. I think the reaction/ debate to his book was a (welcomed) distraction for the Wall Street bankers. His book left much unanswered, inevitably, but I fail to see any progress/ change since he published it. His debate on Bloomberg with William O'Brien (BATS Global Markets Presidents) was legendary and great viewing. But ultimately Brad Katsuyama came out as the hero of the book and it would be interesting to know how the IEX Group are doing now... I hear there are plans to make it in to a movie? Perhaps I will be able to watch it as a gripping thriller...