If you're wondering what IEX becoming a full blown exchange means to you, well it probably doesn't matter at all.
They have been operating for some time already as an ATS, today they are now part of the RegNMS protected quote, meaning that up until today, brokers did not have to route orders to them.
it also allows them to have companies "list" on their exchange, though I don't know of any companies that are planning on listing with IEX currently.
They bring 4 unique things to the market
- their built in delay of 350 micro seconds on each incoming and out going message, ie they delay order's coming in and they delay fill notifications going out.
- they have a patented dynamic peg algo that will allow a user to place an order that the exchange will dynamically price. This order type was a bit contentious as the exchange doesn't delay quote changes when updating these orders, ie these orders are blessed in the sense that they don't obey the 350 microsecond delay.
> In other words, the objection goes, IEX uses the magic shoebox (and its router's ability to skip the shoebox) to do "latency arbitrage" and trade with stale quotes on other exchanges before traders on those exchanges can update their quotes, just like it accuses high-frequency traders of doing to its own investors. And, the objection goes, if it's unfair for high-frequency traders to do this to IEX's customers, then it's just as unfair for IEX's customers to do it to high-frequency traders.
[but maybe this is just leveling the playing field...]
This is the thing when I see wall street, and specifically high frequency trading vilified. Income inequality, the plight of the middle class, etc has almost nothing to do with that kind of financial maneuvering. Getting rid of high speed trading won't affect the average person really at all - but yet it's constantly vilified.
The technology put a lot of people out of work and at the same time eliminated a loophole that wealthy people had to take advantage of the markets.
That is a recipe for vilification.
Think of the wrath of the unemployed truck and taxi drivers that will be aimed at the evil computer programmers and engineers who perfect self-driving cars and trucks. The headlines will be amazing.
This is true only to a certain extent. Mutual funds have been getting squeezed and the impact, though not immense, trickles down to millions of middle class investors.
No. The opposite is true. Vanguard, one of the largest and beyond a doubt the most trustworthy mutual fund complex, is on the record repeatedly as saying HFTs have lowered their cost of trading.
Where did you get your claim from? I can source mine, if you really need me to.
Vanguard runs etfs mostly, so I'm not sure why they care about support small spreads since they probably do a lot of efp trades (I'm not sure how the underlying prices are determined, but I think they can convert at a set price). The mutual funds and hedge funds who are more fundamental will try and buy or sell large blocks, so they're more affected by adverse market moves from trying to dump $1M of apple. I could see VG's attitude change a little since there are more traders engaged in rebalancing arb. If you know that the S&P index has to allocate more money to a certain stock, you can buy it ahead of time and sell to VG for a slightly higher price. If you're a passive fund with $1B in an etf, everyone knows what you're obligated to do. It's basically stat arb with higher probability. I still buy VG funds though
Vanguard has something like three trillion dollars under management, only 450Bn of which are ETFs. Vanguard is not the largest ETF provider, but has long been the #1 mutual fund provider. Anyone who rebuts an argument about Vanguard's role in the mutual fund industry by saying "Vanguard mostly runs ETFs" doesn't know what Vanguard is.
I think it put several hundred people out of work at nyse and nasdaq who were also charged with colluding for $.50 tick size. They went quietly. The repercussions have come from institutional investors and banks who we're used to putting in 100,000 lot orders without the market moving against them. I do see some wrath coming from drivers too. The companies they're pissed at are too well known though. People will still see google and tesla as inovators and get behind them
As a mostly lay person, for me it's vilified because my understanding of it is that HFT has a significant advantage over my own personal trading, and that through this advantage HFTs are able to make "more" profits than would be possible without HFT. My brain tells me that some of these profits are likely at my own trades' expense, and that while markets and economies rise and fall, my own profits are negatively impacted by HFT.
That may not be accurate, but that's why I personally feel uncomfortable with HFT.
You don't do the kind of trading HFTs do. No matter whether trading is done with hand signals or in FPGAs, you were never going to be making markets.
Meanwhile, cost of trading for normal people like us has gone through the floor. And we're only really looking at the last 15 years when we think about trading costs, but even steeper reductions precede that, and it was all brought about by replacing human market makers --- who are crooked as a barrel of fishhooks --- with automated systems.
Respectfully --- I don't know you, and this isn't a personal comment --- but my guess is that you distrust HFT because you've been told to distrust it. If you do even the most superficial cui bono analysis, you'll see the people most interested in making you believe that are themselves major financial institutions, all of them far larger than the HFTs.
It wasn't HFTs that brought down the economy in '07-'08. It was their adversaries.
The only disagreement I have with Thomas here is the last line. Securitization groups at the large banks and HFTs aren't adversaries -- they don't interact in any meaningful fashion. Large banks, taken as a whole, have some groups which are in competition with HFTs but have other groups which are their happy customers. (If you're a large bank, and you're taking liquidity, you are either astoundingly bad at your job or you actually desire to be buying what HFTs are selling.)
The industry standard for buying/selling mortgage-backed securities or collateralized debt obligations isn't HFT. It isn't even automated. It is one sweating jock yelling at another sweating jock over a recorded telephone call. You can see this dramatized in The Big Short, where to unwind the shorts that the "good guys" have made they have to get their own not-quite-sweating not-quite-jock played-by-Brad-Pitt to do the phone calls on their behalf.
Yes. No. Maybe. There's a massive push towards exchange trading the more liquid products: traders are expensive, and if you can get a robot to do basic inventory management and market making for you (even with a human in the loop), that's savings for a desk manager looking to cut costs in a highly straightened FI environment.
The highly distressed and/or exotic stuff that people are talking about in the Big Short are still slung by salespeople, with the connivance/approval of traders.
In the pre-HFT era there were manual day traders doing spreading, arbitrage and short-term speculation based on the order book. A famous example would be the SOES bandits of the 90s. They would pick-off slow NASDAQ market makers and offer the shares back out on nascent ECNs like Island to make a few ticks.
Some of them worked for firms as professionals, but many traded on retail platforms similar to what you'd see from Interactive Brokers or TT these days. Still you are right that the average investor never traded in this fashion. At worst, the people HFT put out of work were trading as a profitable hobby similar to playing poker online.
I do not believe DRW is colluding with Virtu to keep spreads wide. In fact, all available evidence overwhelmingly suggests that the opposite is happening.
But human market makers colluded routinely, and in some cases famously.
Do you think when Don Wilson (founder of DRW) was making markets in the pits at the CME in the 80s that he was colluding with anyone is more what I was asking. Does he deserve to be labeled "crooked as a barrel of fishhooks?"
On that case I think I agree with the Matt Levine take that "Back in September I was pretty sympathetic to DRW and after reading the CFTC's complaint. I'll double down on that.†" I guess we'll see what happens.
My only point was that some people think all HFT is bad, and here we have a complaint that actually the situation is reversed and it was actually all human market making that was bad. I don't think either statement is completely true, and I was trying to highlight the contradiction because the human market makers and the HFTs are, in a lot of cases, the same people.
Alright, it's hard for me to explain how sometimes all means all and sometimes it doesn't. But tptacek's comment didn't literally say that every last floor trader was crooked, just that was generally true. And it's easy to see how it could be true. A wink here, etc. The difficulty for anyone to see the size of the order book.
I think it's harder to describe how HFT is bad. Most of the efforts in this thread are, we'll say, only loosely connected to reality.
The best you can say about sweaty men shouting is that if not corrupt, still inefficient. (To say nothing of spreads in eighths.) I think that's a claim that really is true for literally every trader.
I don't think people on the floor were necessarily all crooked or doing something illegal, but that market structure doesn't invite fierce competition. You'd see the same people every day and go to drinks with them. There was a real camaraderie between people on the floor, even if they were ostensibly competitors. Think of any community. Most people would probably work a little harder to have a nicer car than their neighbor, but they wouldn't want to see the neighbor's family starve to death in the process. By undercutting your rivals in the pits, you were literally taking away their mortgage payment, and you had to do it to their face. A lot of the locals in the pits were independent, so it was personal, not just business.
You also could see who was on the other side of your trade. Savvy floor traders would use that information to their advantage. If a sharp broker traded with you, you could hedge more aggressively or speculate in the same direction. Most electronic markets are anonymous these days so there's less information leakage.
HFT is generally considered good for retail traders because spreads tend to be lower. You trade both more cheaply and more quickly.
However, it's generally not good for large institutions (which are more than just 'big evil hedge funds') because markets react very quickly to movements caused by this big firms. If they decide that something is priced wrong, they won't be able to make many trades taking advantage of that.
It limits the ability of value investors who do fundamentals research to profit. Arguably those investors are the ones who actually ensure efficient allocation of capital (the supposed purpose of the market). There's kind of a paradox of efficient markets - the more efficient the market is, the less value can be gained selling information to it.
It does no such thing. Market makers prefer not to interact with people that have a directional view as they may move the market. If a market maker gets caught with inventory and the price is moving they will lose money. Market makers tend to be less involved in price formation then other types of investors.
> It does no such thing. Market makers prefer not to interact with people that have a directional view as they may move the market. If a market maker gets caught with inventory and the price is moving they will lose money.
Are you claiming this doesn't impact the profitability of those people with directional views?
It depends on what you mean by impact. A market makers role is to provide market participants the instantaneous ability to buy or sell a security. They compensated a small amount for providing this service. If someone is using very poor execution techniques the price could worsen, however most large asset managers and brokers that serve them have quite advanced execution technology. The actual impact of modern market making on final execution price is typically positive relative to not having it due to competition and ultimately a tighter spread.
Vanguard invests almost purely passively, and does not generally take directional views. I agree HFT benefits Vanguard but that doesn't contradict my point at all.
Let's not get into a semantic argument. The point is that Vanguard doesn't do fundamentals research or participate in capital allocation (in a meaningful sense; Vanguard does allocate capital but in proportion to existing allocation); they just invest passively and hope to earn the return of the overall market.
Its not semantics. You simply don't know much about the asset management business. Vanguard has numerous actively managed offerings. For example Windsor (http://performance.morningstar.com/fund/performance-return.a...). But there are others like the Admiral funds.
A clarification on my other sister post: options allow one to lock in a price for cheap even at large volumes. For example expiring options can be bought for nickels in premium, with each one locking in price for 100 shares.
Expiring options are pretty thinly traded, no? If you're trying to sell 100000 shares, you may have a hard time scrounging up 1000 puts at 3:30 Friday.
Rather than seeing HFTs as competing against you, a more accurate model is to see various firms competing against each other to service your needs at the lowest possible cost. These firms used to be staffed with expensive and slow humans, but by automating they are able to deliver a service to you at a much lower cost than was previously possible.
The story of automation in the financial markets is similar to the story of automation in many other businesses.
How does that really help me if I'm buying/selling a specific stock (vs. being in a larger fund, etc...)? My, again very lay, understanding is that the HFT is likely to push my buy price up slightly and make money in the middle of me a non-HFT seller, and push down the price slightly on the sale side, again making money as a very fast middleman.
1) It reduces the bid/ask spread. There isn't just one price for a stock, there are two. The price at which you can buy and the price at which you can sell. The price at which you can sell is lower. So when you buy a share of stock you are immediately down a little bit. This amount is called the spread. By automating firms can reduce this spread which does the opposite of what your intuition told you. It will bring buy prices down slightly and sell prices up slightly.
2) It helps make sure that prices are as accurate and up to date as possible. When you go to buy a share of $GOOG you probably aren't really sure if it should cost 775.40 or 775.45 or 775.50. You just figure it's a good company and likely to go up in the future. But because there are all these firms working really hard and acting really fast you can be pretty confident that whatever price you buy at at any given time contains the total available knowledge currently available in the world about Google's future potential.
Unless you are exceeding the liquidity on a single exchange HFT will never affect you.
Here how it works... Imagine you want to BUY 10000 MSFT...
You send your order to exchange A, it does a partial fill for 1000 orders, and sends the remainder to exchanges b,c,d. An HFT firm sees your order to exchange A knows its not going to fill and sends its own orders to buy the liquidity on B,C,D and then sends sell orders at a higher price to B,C,D, your order fails to fill and you have to issue a new order at a higher price.
Since retailers will very likely never exceed the liquidity on a single exchange they'll never have any issue with HFT and will just experience increased liquidity and faster fills.
However, if you're a large dinosaur still sending huge orders now you'll need a group of suckers who want to trade only with you, enter IEX, and 'consumer' protection from HFT on their exchanges who now has a large pool of suckers to trade with.
"You send your order to exchange A, it does a partial fill for 1000 orders, and sends the remainder to exchanges b,c,d. An HFT firm sees your order to exchange A knows its not going to fill and sends its own orders to buy the liquidity on B,C,D and then sends sell orders at a higher price to B,C,D, your order fails to fill and you have to issue a new order at a higher price."
Maybe, but that seems like a pretty risky strategy. A simpler and far less risky strategy that would look very similar (admittedly only if you're looking exclusively at orders on the book and not fills) would be for HFT market makers to cancel or reprice their existing resting orders on exchanges B, C, D in response to getting or seeing a large fill on A.
In the strategy described by the parent, in addition to having to cross the spread, the HFT firm would also be at the back of the line at the next price level (unless maybe they already have an order there? but no guarantee that it's the right size, or maybe they have multiple small orders and cancel whatever is in excess of the position..).
So I'm genuinely curious: is what the parent describes something that is really that commonly done? This is one of the things that made me highly skeptical of Flash Boys. It seemed to me they observed a phenomenon, came up with a single explanation for it and never even considered any other possibilities that didn't fit the chosen narrative.
I believe the repricing behavior you describe is far more common now than the more aggressive strategy. Several years ago, before the exchanges got rid of "flash" orders, a variation of the more aggressive strategy was common, but under limited circumstances. The way it worked was that after a limit order was partially filled on exchange A, it would show the remaining size at the limit price very briefly before routing it to the other exchanges (this was the "flash"). If the limit price was a few ticks through the other exchanges best prices, the HFT's would take those prices out and offer at the order's limit price. Less risky because they knew the order would be automatically executed at that price as long as there was an offer there.
I kind of agree with your underlying premise, but when I invest in a mutual fund / ETF, isn't that a giant investor that might be affected by HFT? And if that was costing the fund money, wouldn't that affect me (without me seeing it directly)?
Assuming that hft forms didn't drive other prices down. In particular the costs to trade (in the form of the spread, fees & execution costs) hadn't been decimated by hft firms.
What you are missing is that in the old days, your buy/sell order was probably handled by a human market maker instead of an HFT's algo, who would push up/down the price much more than 'slightly', hence making you pay more in trading costs. The biggest opponents of HFTs are the major financial institutions who used to provide those market making roles.
If you think HFT is going to push up the buy price, set your limit a penny lower and wait a second for the "slow" traders to handle it. (If that's how you think markets work.)
You're probably correct here. The part people find a little unsavory is not that it's somehow eroding the middle class. It's the idea that HFT can act as an unnecessary intermediary, essentially taxing a transaction that otherwise didn't need to be disrupted and at scale the amount extracted becomes material.
Imagine your neighbor owned a Ferrari and you told him one day you were going to buy a gallon of milk at the store. "On sale for $3.99!" you say to him. Now imagine he sped past you on your way to the store and when you arrived there he had bought all the milk at $3.99 and was selling it in the parking lot for $4.01.
You wouldn't necessarily be ruined financially paying $4.01 instead of $3.99. The cost is negligible. But you would probably think he was kind of a jerk.
That analogy is tempting but inaccurate. Pretty popular with the Mike Lewis "the market is RIGGED against the LITTLE GUY and we're all MAD AS HELL" crowd, but in the end it's hyperbole. IEX is not for the little guy. IEX is for the really big guy. Institutional investors. They are tired of having the market run away from them on large orders.
A closer analogy would be that the neighbor is the owner of the local supermarket and you have recently announced that you were going to buy all the milk in the region. You go to one local supermarket (not his) first and buy out the entire stock of milk. On your way to the next one (his), he raises the price of milk to $4.20, knowing that your increase in demand is going to drive up the price everywhere and he doesn't want to be the idiot that sold you milk at $4.00/gal and will have to resupply at $4.20, losing 20 cents per gallon on that sale. When you get there your realize that the price of milk has gone up, and you yell and scream and stomp your feet, but you buy the milk anyways, because you have high demand for milk. The supermarket owner is not a jerk for responding to the increased demand for milk, but many people see it that way.
So maybe your a really rich guy who can afford a lot of milk, and so you lobby the government to restrict the ability of supermarket owners to talk to each other, maybe they have to wait a day or something. The supermarket owners are just going to respond by increasing the price of milk on average, because there are random milk thirsty people coming through every once in a while buying up all the milk, increasing the price, and they need to increase the milk premium so they can afford to resupply. They need to compensate for that risk. For that reason everybody loses out. Less people are going to buy milk due to increased prices, so that's bad for the store owner, and milk buyers are going to have to pay a higher price.
Same thing is going to happen at IEX. There is simply going to be a wider bid/ask spread.
Yours was the comment that made me understand how the spread economics described elsewhere in this thread worked, thanks for that. The average price increase in the absence of the HFT bids was the part that made it click.
That said, it should be mentioned that the "rich guy"/"institutional investor" includes various pension funds.
"In a letter urging the SEC to approve IEX as a full exchange, the Teacher Retirement System of Texas, a pension fund that manages more than $125 billion, suggested that trading through IEX could save the system millions of dollars a year."
This is not how it works. It's more like he sees you buy one gallon of milk at 399 then decides to go buy others. He has NO idea if you're going to buy it or not. He's taking a risk.
What your described is more like real front-running: A customer places an order, the evil broker sees it and goes out in front to buy for himself then gives the customer a lower price.
Your buddy in the Ferrari reliably making money requires him to be able to properly predict. AND you're missing the other side of the trade! The poor shopkeep that priced at 399 when you were OK paying 401. Why should he lose out?
Your intuition about financial markets does not match reality. In financial markets no one knows that you want to buy a gallon of milk (or a share of stock) until your bid has already been submitted. No matter how fast their Ferrari, there is no way for them to get in line ahead of you at the store.
Well, there is in a matter of speaking. To take the analogy further, imagine not buying a gallon of milk but 100,000 1 gallon can of milk.
The guy with the Ferrari wouldn't be able to get in front of you at the next door target but they'll loot the most convenient Walgreens, Safeway, Walmart, and Amazon Prime.
Of course, the analogy no longer holds for numerous reasons (100000 gallons of milk, driving around, buying from the farms directly) but the point is the Flash Boys work on the likelihood of such an event happening which, believe it or not, is fairly common in the stock markets these days. Think, mutual funds, ETF managers, etc. This is now, largely, considered the cost of doing business.
If you want to by 100,000 gallons of milk you don't have a god given right to do so at the currently posted prices in every grocery store in town. Those grocers are well within their rights to raise prices as soon as they figure out what you're doing.
The grocers' price is irrelevant to the discussion here.
The guy with the Ferrari would still outrun you and offer you a new price, with a margin just enough for them to be profitable, yet not substantially large as to talk you out of the deal altogether.
Yeah, so if you're not a fucking idiot, instead of taking out a front page newspaper ad announcing to the world that you want to buy ALL THE MILK.
You should instead send 4 or 5 trucks to each location and buy the available milk, the guy in the Ferrari cannot outrun you because you're already there, and your order filled before he even got there.
Now imagine that you have at your finger tips a giant constantly updating database to the nearest millisecond about how much milk there is at every grocery store, but you still decide to take out a front page ad and announce your plans in advance, instead of breaking up your order into multiple parts and sending each to its own store. If you did this, everyone would laugh at you like they are at IEX and Capital Group.
Like I said in the original comment, it is pointless to get bogged down in the analogy because it doesn't reflect the truth accurately. However, you guys are continuing down the path an down-voting a perfectly legit argument.
The purpose of an analogy is not to maintain fidelity to the original scenario but to simplify it to convey the point of author (otherwise it ends up getting as complicated as the scenario). The analogy is only a coarse approximation of the actual scenario, a best-effort attempt to drive the point across.
I'm disappointed with the unreasonable down-votes and the explanation provided.
On the contrary, the grocers' prices are the very heart of the matter. You see, the Ferrari neighbor may be HFT, but so are the grocers. And every grocer wants to sell their goods at a newly-higher price if they get wind of a big buyer, because it will cost them more to restock if you buy everything. So they will naturally raise their prices. If you buy from the grocers one at a time, expect them to call the other stores (ok it's a chain grocery) to alert them. You will pay a lot for your last milk purchase, unless you stop buying because the asking price has gone too high. If you instead have milk trucks make synchronized purchases across town, you will pay the same price everywhere, and all of the grocers will be upset once they realize what happened. If you do the synchronized milk truck plan enough, the grocers may permanently raise their milk prices at the expense of losing a few other price-conscience buyers.
In reality, this occurs i the stock market because the "national market" consists of something like 15 different exchanges in a big distributed system, so there are race conditions. HFT market makers trade on all of the exchanges, and adjust their prices based on trading demand seen from other exchanges. They spend a lot of money on fast networks between the exchanges, so that they can be/beat the proverbial ferarri. But synchronized trades a la tgemilk trucks or Katsayuma's "Thor" cannot be raced against.
IEX is intended to partially commoditize the Thor approach: take the advantage away from the grocers (HFT, market makers) and give it to the big milk buyers (institutions like hedge funds and pension funds). Retail trading is not affected one way or another.
There is still a margin if the intended buyer was willing to pay more or would just want to buy the milk at whatever price offered. Of course, the grocers could keep raising the price arbitrarily but there is still a delta that the guy in the Ferrari could overcharge.
I think you understand the point we are trying to get across but just trolling it. I'd have appreciated an honest discussion rather than a trolling attitude.
The situation I'm describing is literally what happens in the real world. If a large trader wants to buy a big block of stock such that he can't fulfill the order on a single exchange he has to be pretty careful about how he executes the trade or the market will move against him. As soon as he purchases all the stock at the market price on a single exchange those selling stock on other exchanges will raise their prices.
It's very important to understand this. The price doesn't (generally) rise on other exchanges because someone swoops in and buys up all the supply. It rises because the people who were selling in the first place change their offers.
Ohh there is a way to do it, and it is a show on 60/60. I think to be specific, there is a delay between NJ switch to Wall st, so some ppl tap in the switch in NJ, know what you plan on to order, then make their order use a different route to wall st... this was well documented. I dont know if it still exist though.
This is the complete opposite of what is happening.
What you're describing is straight up hacking, and if there was as clear of a breach of the law like that, we wouldn't be having civil discussions about whether HFT is good or not.
Besides, almost nothing routes to Wall Street anymore. Especially not for stocks.
NASDAQ's trading platform is in Carteret, NJ.
NYSE's trading platform is in Mahwah, NJ.
Most HFT firms, if they're not already colocated in Carteret or Mahwah, are located in Secaucus, NJ.
Maybe you should read "Flash Boys" then.
They can and do.
Orders start at one place, and by regulation then can get sent to many other markets. If you can go to those next markets a little faster, you can front run the order.
Flash Boys uses a totally fabricated use of "front running". It's worse than people that call copyright infringement "theft". That book is probably one of the worst books I've read as far as accuracy goes. At least that I'm aware of.
Seriously, at one point, Lewis suggests that the trading station of some big trader is hacked. That just by typing numbers without submitting an order, stuff jumps. This should send huge red flags off on anyone that's even remotely familiar with anything similar to a computer. But it's another "see how rigged it all is?" anecdote blended in with his nonsense.
Some programmers don't understand latency, so there's no hope for anyone who's not familiar with software development to wrap their head around the concept of "yes, things happen in milliseconds".
Which makes it all the more easier to get away with anything that sounds as sensational as this.
I think it's vilified because for some reason people think that the HFTraders are "stealing" from them in the form of tax avoidance and their exorbitant incomes.
Even more than that. Going by their 2015 reports, KCG made $885M in revenue, and Virtu made $757M. JPMorgan made $93,543M. If you look at net income, it's even more dramatic since HFT firms generally run on tighter margins.
I've never quite understood the amount of HFT hate here. God's work it ain't, but it's a bunch of nerds using bleeding-edge technology and machine learning to break into and (dare I say) disrupt an industry whose avarice and sense of entitlement is perhaps unparalleled in modern history. It's tailor-made for this crowd, but somehow still gets a bad rap. I truly fail to see how that's less exciting than anything else anyone here gets worked up about.
I'm not generally a fan of viewing the world in terms of an extended version of the social struggle from high school, but given that this actually does do a reasonably accurate caricature of human market makers versus HFT firms, this has always confused me regarding HN's reaction to HFT.
In one corner, we have sweaty alpha male jocks [+]. In the other corner, we have geeks with computers. The geeks ran the table on the jocks primarily because the geeks can do math faster. The jocks complain that the geeks are cheating, because how can they be expected to out-math a computer and, also, isn't math just a little suspicious? And HN sides with the jocks?
[+] People might think I'm exaggerating. Videos exist of the daily life of a market maker. Here's a representative day at the office, circa 2000, in Chicago's open outcry options pit: https://www.youtube.com/watch?v=mvx3xM02iUs In stocks and bonds, you generally got to be sweaty in your own office (open plan, frequently) and yell at someone over the telephone rather than straight to their face.
I thought about your question on my walk home from work today. I decided that as much as jocks vs geeks is a powerful force, a more powerful force is people's distrust of middlemen. People don't really understand that liquidity provisioning is a service that needs to be paid for. They think that if we could just wipe all middlemen off the face of the planet that buyers could just trade with sellers and we'd all save a little bit of money on trading fees.
So it's not so much that HN has sided with the jocks over the geeks. It's that (some portion of) HN dislikes both of them. And since the geeks killed the jocks the geeks are all there is left to dislike.
We're paying entirely too much for liquidity that value investors don't need. If my holding period was less than a day, that's a buyer and seller who would have found each other without my "help", and I didn't contribute any insight about the company's value, just about flaws in the marketplace.
It's not so much distrust of middlemen, as it is distrust of anonymous middlemen. And also automated middlemen. People are happier getting shafted by a person they can see than a bot they can't. Otherwise, they would be hurling abuse at Apu down at the Kwik-e-mart when he charges them 30% extra for a quart of milk just because he bridges time (11pm) and space (down on the corner) to provide liquidity and make it convenient for them.
Part of this is also algorithm aversion (even here on HN) - watch how people are reacting to Tesla autopilot crashes. There is a lot of tin foil stuff about 'algos gone haywire', but I can tell you now that humans fat fingering in the market were both more common and more deadly.
I agree about distrust of middlemen. The analogy that i would go with is that the biggest HFT firms are like big-box retailers. Not glamorous at all (despite the math), and most of the hard work is in automation/process to manage the storefronts and inventory at scale. HFT becomes comparable to walmart, which does not engender much love.
HFT costs 'everyone' that uses the stock market though an intermediary money so it really does cause income inequality. To suggest otherwise is to suggest they can somehow increase the value of stocks on average when they don't increase dividends and profit from the stock market. AKA money magically appears from nothing without costing anyone anything.
Which is not to say every single person is worse off just that this does not increase the long term value created by the companies who's profit makes the stock market a positive sum game.
I've read both sides of the argument about the IEX delay, and my common sense tells me you cannot try and put the genie back in the bottle.
If technology exists, has been discovered, you cannot thwart it by trying to mask it by retarding it.
It think it is ironic that an exchange, IEX, founded with one of its aims being to level the playing field by calling out HFT as 'wrong' or 'unfair', and yet allow for their dynamic trades to bypass their 350 us delay is an example of we don't need it/we do need it.
People cry out about HFT being a game for the super players only, but out of it comes innovation - faster switches, well-honed programming tricks, hardware and software that eventually make their way to other uses. Sort of how the military and porn industry pushed a lot of tech we take for granted today.
I am not a trader, only an observer of technology. I do play with time series data processing, not networking, which is why I find HFT one of things I try to tap for tips and tricks. After all, a lot of very smart physicists and mathematicians being paid to work 40+ hours a week on it, does produce something worthy of study. A lot of optimizations that sometimes find use in other areas.
That was my comparison to the porn industry with online payment systems, and the military with DARPA projects and the early days of funding for what was the nascent Internet.
The crazy speculation that goes on in the minds of the 'quants' that work on these issues has no bounds, as brainstorming should before the realization stage. They are looking into quantum computing and using custom boards (FPGAs, ASICS and GPGPU) that find use eventually in things like bioinformatics, visualizations, big data processing and huge neural nets.
I program in J, and with Jd, which is similar to k in the APL family, you can process billion rows of data better than some of the systems built by the big money players in tech. k/qdb is mainly used in the financial sector, in which I have never worked.
My point was that it seemed kind of silly to put cable in a box to make a 'speed bump' to sort of negate something everyone already knows or has, and then still have to process their dynamic orders without the delay. I understand the intention, and I am not technical enough to suss it out, but it just seemed to go against common sense. That is all.
I think it's inaccurate to put hft in the future tech division with darpa or porn. Maybe it will lead to fpga's/c++/microwaves being widely used for ML, but it seems unlikely that the low latency and minimal cross country transmission has has much value. If you're building a system to process lots of data quickly transmitting a few bytes between the UK and Belgium slightly faster than a wire won't be a constraint. Maybe it will lead to real time instance based learning, but I'm not aware of anyone going in that direction
Algorithms are also worked on, not just transmission or switching. And speed is always needed by some field or another, so I would argue it has its fruits beyond what you may have posited.
In terms of reducing the ability of speedy traders to gain an advantage in a continuous time market, how does IEX's fixed time delay compare to discretizing the timesteps, so all the trades within some finite interval [t, t+e] are treated as if they came at the same time?
The IEX delay and batch auctions are really two completely different things.
IEX delays almost all messages in and out by a small amount.
They don't delay messages for orders that their own router modifies, their discretionary peg order. This lets their peg orders update before any one, ie HFTs, can update their own resting orders on IEX or at other exchanges in the case of a fill at IEX.
It's important to note that even with the IEX design, speed is still very important as its still a price time priority queue for order placement and cancelling. An analogy would be if all 100 meter sprinters reaction times were delayed by 1 second from hearing the starters pistol. The fastest runner still wins, its just that all reactions times are delayed evenly.
Batch auctions are a whole different animal, and to be honest, one I'm not very familiar with. Their greatest weakness is that they don't operate in a stand alone environment, ie the rest of the world continues to trade around them which eliminates most of their advantage.
Do you mind expanding on that last point? I'm interested in your take on how/why a batch auction's advantage is eliminated by the rest of the world trading around them.
Largely because the entirety of latency arb has to do with taking advantage of price differences between exchanges. How those differences are created is largely immaterial.
As long as you have multiple exchanges that are not perfectly syncd (a distributed systems problem!) There will be time based arbitrage opportunities.
Not exactly in all products. US equities exchanges have to comply with the nbbo (national best bid offer), so they're required to forward an order to the exchange with the best price. This isn't true for futures, but there aren't any fungible futures in the US. This means that latency arb in US equities isn't true arbitrage. If you see a price level get sweeped at one exchange, you may guess that the others will follow, but it's no guarantee and most sophisticated traders who trade the volume to do this will trade in a dark pool or block trade, so the opportunities are close to non existent. The intent for equities market making is to trade retail orders with the assumption that they they're placed with no knowledge of a true price and won't move the market. The true arb opportunities today are reserved to minis vs futures or cross exchange futures vs indexes
I think the point Kasey is hinting at is that the functionality you claim RegNMS requires exchanges to implement is not, due to the CAP theorem, actually possible to do reliably.
An interesting data point in the hft rigged market debate I never see is, what do the insiders do with their money? I work at an electronic market maker that trades on colocated servers with fpgas and rents bandwidth on microwaves, so we without a doubt fall under the hft umbrella. My 401k is 100% invested in index funds and my personal brokerage account is split between 80% vanguard index etfs and a few stocks (that I probably shouldn't have invested in, but I didn't know what I was doing when I got started). This is similar to my coworkers and people I know at other firms. Why would we do this if we were knowingly rigging the market against retail investors? To answer my own question, if you're an investor, the microstructure of the exchanges is irrelevant. When I put in an order to by 100 shares of VTI, I'll put in a limit order after the close a half percent above the closing price knowing that it will be sold to citadel or another internalizer who will fill the order at a good price (nbbo, debatable since they're being investigated currently) and take the penny or two spread. I could put in a limit for the close, but either I wouldn't get filled or if I did, it would only be due to the market moving against me and honestly the difference doesn't matter. I have no intent to sell at a particular profit point or watch a screen all day to find some imagined perfect entry point which I wouldn't even know if I saw it. I'm interested to hear if opponents of hft have considered this or think insiders are behaving differently. I won't make the argument that we're looking out for the little guy or we have some mission to benefit society through price discovery. We basically print money when the market goes down, but we're so far removed from the average person that I can only assume that the hatred is based on marketing and false perception.
For those who haven't read "Flash Boys", this a synopsis of the book:
Canadian banker Brad Katsuyama notices prices for stocks he is buying change price almost the instant he places his order to purchase them.
Turns out that this happens when he places a larger order than can be filled at a single exchange. After some investigation he determines that HFT traders "see" his trade on the local NJ exchange and buy up stock at other (further away) exchanges before said banker can fill his order at the original (lower) price.
His solution: Send orders to multiple exchanges but delay the orders to the closest ones so orders arrive at exchanges more or less simultaneously thus defeating that particular HFT strategy. The coil of fiber is the method used to achieve that delay.
The book picks up in the middle of the story after the first step in electronic trading has started, but before all participants are on a level playing field.
Human market makers at those exchanges are entering their quotes(by hand even). And Brad Katsuyama uses new electronic technology to crush them. Taking their entire inventories and moving the markets against them.
The human market makers fight back and make their computers do the market making for them and Brad is hurt because his technology is no longer the best way to trade.
My understanding was that they had a software called Thor to generate the artificial delay in sending their trades to the different exchanges.
This new exchange uses the long coil of fiber to enable all traders from around the world to benefit from that protection. I'm wondering if they really had to go to that extent to get the speed bump. But hey since shame has yet to force formally verified software on anyone's radar, the long coil will certainly do.
The long coil is a hardware solution that keeps everyone honest. I have a suspicion that the financial incentives offered to the exchange to bypass a software delay would be too great to turn down -- especially years from now if the original players are gone.
Edit: Oops. Maybe they can bypass the coil for certain orders. Well that doesn't make sense...
As long as they don't install a second shorter cable, and have the software route to the second cable. The entire thing is a dog and pony show for retail investors who are even bigger suckers than the idiots running IEX. If the speed bump is for everyone and can't be removed then how do PEG orders bypass it? Are PEG orders some kind of magic that travels faster than light?
Pro Tip: If a large financial institution tells you they are protecting you, they are bald faced lying to you and you are about to get a serious lesson in business.
The same idiots who tell you that IEX is a good thing will also sell you actively managed mutual funds that A) under perform vanguard and B) seriously under perform once you subtract fees.
If I recall correctly, doing this through code would trip up on financial regulations. The idea for the 30 miles of cable came from hypothesising/imagining/being somewhere in New Jersey.
Rough recollection of a couple of paragraphs in the book. Someone else please add if recalled incorrectly.
Reg NMS says you cannot code a system or intentional device to delay access to a quotation. Nasdaq had tried doing this on one of their smaller markets in software many years ago, but the SEC did not approve their proposal. Geographic or network latency is not regulated by Reg NMS. For example, there is a very small stock exchange that operates out of Chicago, which is many milliseconds away even by microwave vs. New Jersey where most of the equities market trades.
There are a lot of SEC comment letters claiming IEX's delay coil is an "intentional device"[1][2] but the SEC approved their exchange application because they consider the delay to be "de minimis." One area where the IEX delay differs from simple geographic latency is that IEX delays incoming orders, outgoing fills, and outgoing market data, but they do not delay market data from other exchanges. That difference makes it more difficult to "pick off" a stale order on IEX, but on the flip-side, it also means IEX orders get to free ride the price discovery happening on other markets without taking risk.
This delay also raises issues because under Reg NMS, brokers have to route orders to exchanges with the best price when trading through an entire price. Since IEX's data is lagged, it may be showing a quote that is no longer accessible. Brokers would face additional slippage/execution uncertainty if they need to route at this phantom quote and wait 700 microseconds to find out it wasn't there. Canada has exchanges with delays similar to IEX, but IIROC ruled that they are not "protected" quotes so brokers have discretion not to route there if they feel it would harm their execution quality.
I wonder if they're using some kind of EDFA or other amplifier for that delay spool. For 350µsec we're talking at least 14.3dB of loss going through that thing, in other words, only 3.7% of the signal is coming out the end in the best case scenario.
On the same topic, I've actually set aside a down payment for a house, but I probably won't be buying for another year or so. I'm wondering what is a good way to invest this money since leaving it in the bank at less than 1% interest really isn't doing much.
My recommendation is to put it in something like the Vanguard REIT ETF. So if real estate is up by the time you are ready to buy your house your investment will likely be up proportionally. In the event you get a negative return it is very likely your down payment might be lower as well.
Alternatively if you want to lower your risk (which also lowers your expected reward) you may invest half in REIT ETFs and the other half in an uncorrelated sector. Think of what sector goes up when real estate goes down.
DISCLAIMERS of course: This is not professional advice. Invest at your own risk.
It might even be better to think about an investment vehicle more closely correlated with housing costs. The main Vanguard REIT is mostly commercial property I believe which could be somewhat uncorrelated with residential property.
If this is money that you don't want to risk at all (because if you lose some you won't be able to buy the house you want) it's gonna be tough to earn all that much interest in just a year. As lbotos says, you might do a bit better with a CD than your bank account but not by all that much.
If you can stomach a bit of risk you might consider buying something like Vanguard's Total Bond Market ETF.
How comfortable are you seeing the value of your investment decline?
Edit: WTF, downvoter: that's entirely what his question comes down to. If he's cool with it, then maybe something riskier might be warranted. If not, then 'sitting in the bank' might be ok.
It's easy to become resigned to finance being an insiders game. But the efficient allocation of capital is to important to leave to "the professionals."
People are looking forward. How much money individual startups can raise (or established companies when increasing capital) depends on their expectations of future prices on the exchanges.
They have been operating for some time already as an ATS, today they are now part of the RegNMS protected quote, meaning that up until today, brokers did not have to route orders to them.
it also allows them to have companies "list" on their exchange, though I don't know of any companies that are planning on listing with IEX currently.
They bring 4 unique things to the market
- their built in delay of 350 micro seconds on each incoming and out going message, ie they delay order's coming in and they delay fill notifications going out.
- they have a patented dynamic peg algo that will allow a user to place an order that the exchange will dynamically price. This order type was a bit contentious as the exchange doesn't delay quote changes when updating these orders, ie these orders are blessed in the sense that they don't obey the 350 microsecond delay.
https://www.iextrading.com/trading/dpeg/
- they aren't currently allowing co-location
- they don't participate in the maker taker model. They charge, I think, 9 cents on dark orders and nothing for lit orders.
Maybe the most interesting thing that IEX has brought to the US market is that the NYSE is now filing to add their own discretionary PEG order.
https://www.nyse.com/network/article/nyse-order-types