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Adaptation From Flash Boys Offers Inside Look at High-Frequency Trading

samzenpus posted about 4 months ago | from the rigged-game dept.

The Almighty Buck 246

Lasrick (2629253) writes "This NYT adaptation from the book provides an in-depth and infuriating look at how the stock market is rigged. Brad Katsuyama of the Royal Bank of Canada couldn't understand why stock he was trying to buy would suddenly vanish: 'Before RBC acquired this supposed state-of-the-art electronic-trading firm, Katsuyama's computers worked as he expected them to. Suddenly they didn't. It used to be that when his trading screens showed 10,000 shares of Intel offered at $22 a share, it meant that he could buy 10,000 shares of Intel for $22 a share. He had only to push a button. By the spring of 2007, however, when he pushed the button to complete a trade, the offers would vanish.' The ensuing investigation by Katsuyama led him to design a program that actually slowed down the trades. But Katsuyama's investigation revealed so much about how the system is rigged."

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Bailouts for them, crumbs for us (-1)

Anonymous Coward | about 4 months ago | (#46623441)

I predict the next big bailout winner: insurance companies.

How else to keep Obamacare rolling given the failures in getting young, healthy persons to foot the bill for everyone else's insurance?

Oh, there haven't been failures in enrollment? Yeah, that's why Obama has never released actual paid enrollment numbers, and he keeps pushing back deadlines.

Government. It's going to fuck you.

Rigged? Heck! It's Replaced Pensions! (1)

Jeremiah Cornelius (137) | about 4 months ago | (#46623545)

"Here, instead of this piece of Real Estate, we in management are following the advice of our financial officer, and matching funds for a trip to Vegas!"
  Capitalism, at its finest.

Re:Rigged? Heck! It's Replaced Pensions! (0)

Anonymous Coward | about 4 months ago | (#46623811)

"Here, instead of this piece of Real Estate, we in management are following the advice of our financial officer, and matching funds for a trip to Vegas!"

  Capitalism, at its finest.

Capitalism it ain't. Look at the revolving door between Wall Street and Washington. At best it's form of crony capitalism or weak fascism.

Re:Bailouts for them, crumbs for us (4, Insightful)

blue trane (110704) | about 4 months ago | (#46623627)

I think corps are fucking us by harping on government debt, which has never mattered and is not the crisis they cynically claim it is, when in private they laugh and tell each other "Reagan proved deficits don't matter" and wait till their party gets in so they can run up the debt to new record levels. Because they know it doesn't matter.

Re:Bailouts for them, crumbs for us (1)

sumdumass (711423) | about 4 months ago | (#46623819)

First, there is already a mechanism built into the ACA that requires the government to bail out participating insurance companies. So this premise is a given considering that quite a few of the uninsured could already afford some sort of insurance but chose to spend the money elsewhere and such a low penalty doesn't provide a significant incentive to change thst.

Second, a little debt on the national level is good. It is a primary function of bonds and how the government funds certain aspects of itself in emergencies.

I do not think there is a clear rule to how much is too much. Currently, the interest paid on the debt alone will be a significant amount of the federal budget. This means either cutting programs, significantly raising taxes, going further into debt, or a combination of that. This is where debt becomes a clear problem. When the majority of the budget is tied up paying interest, the debt can easily run out of control or massive cuts wil be had like in greece where the ability to even pay on the debt and have a functioning government came into question and the amount of lenders dried up drastically.

So the harm is being put into a ditustion where government basically collapses due to needing to borrow and no one to borrow from.

Re:Bailouts for them, crumbs for us (1)

blue trane (110704) | about 4 months ago | (#46624223)

The interest on bonds bought by the Fed is returned to the Treasury. So let the Fed buy T-bills, and fund the government at zero cost.

Re:Bailouts for them, crumbs for us (0)

Anonymous Coward | about 4 months ago | (#46624507)

Magical unicorn moneys! It's a new paradigm. We can do it forever!

Re:Bailouts for them, crumbs for us (0)

Anonymous Coward | about 4 months ago | (#46624679)

Only works if inflation is under control and isn't negative (which is touted as an "advantage" of bitcoin, price deflation, which it ultimately is extremely undesirable.)

In Fiat currency, one must make sure that the inflation rate keeps pace with the interest rate of the government debt, otherwise you can't inflate your way out of debt.

The article itself however is about how HFT front-runs for big investment banks. Basically everyone involved in US stock trading was gaming the system.

Re:Bailouts for them, crumbs for us (0)

Anonymous Coward | about 4 months ago | (#46623857)

wait till their party gets in

Which party is that? The one one with the richest congressmen [rollcall.com] or the one with the wealthiest districts [bloomberg.com] ?

Re:Bailouts for them, crumbs for us (1)

roccomaglio (520780) | about 4 months ago | (#46623935)

If debt and deficits don't matter, then the government should send out a million dollars to every citizen. This would ensure there reelection. Why would they not do this since debt does not matter? If the government did this it would cause massive inflation and all saving would be wiped out. Debt and deficits matter quite significantly, but the real question is how much debt is sustainable. At some point your currency is devalued and you wind up speeding a billion dollars to buy a loaf of bread (a la Zimbabwe).

Re:Bailouts for them, crumbs for us (0)

Anonymous Coward | about 4 months ago | (#46624099)

maybe only send the money to people that know the difference between "there" and "their".

you know, FOR THE CHILDREN

Re:Bailouts for them, crumbs for us (2)

blue trane (110704) | about 4 months ago | (#46624625)

In Zimbabwe, as in Venezuela now, they are exchanging their currency for US dollars, because US dollars are the new gold. The demand for dollars far outweighs the supply, so "massive inflation" is not an issue.

Inflation is psychological, not physical. Just because there is more money, why do you have to raise your prices? It is a choice, and a sociopathic one. It is like the head of Carlin Financial, quoted in the article: “It’s not just enough to fly in first class; I have to know my friends are flying in coach.” Or Colbert saying "Everyone knows you can only appreciate what you have by seeing other people that can't have it. That's why I had my wedding banquet in a soup kitchen. Those people across the room eating the thin gruel just made my Rosemary chicken that much more delicious."

One way to deal with inflation is with indexing. Make it seamless, automated, so that it becomes transparent to people.

Re:Bailouts for them, crumbs for us (1)

jythie (914043) | about 4 months ago | (#46624667)

In a case like that, the inflation would help the average citizen and only really hurt the top earners. The money supply would expand by ~350 trillion, but the distribution of that expansion would be very flat, which means the people at the bottom would on average be in better shape then they were.

Read the article yesterday, no suprises (1)

ackthpt (218170) | about 4 months ago | (#46623477)

Honestly, anyone in any position who remains there long enough, starts working the system to their advantage. It's pretty much theft by feat.

Does something need to be done about it? Absolutely!

Will anything be done about it? Yes, furious sweeping of fact beneath the carpet and a complete astroturfing by those who have a vested interest in the status quo.

We'll look into it, Congress. There's nothing to see here. Move along.

USA - Commies and Wall Street country (-1)

Anonymous Coward | about 4 months ago | (#46623515)

USA is the only country where commies and Wall Street hold hands and dance together. Next step will be inviting brothers from North Korea to join them.
This way, regime will have total control over USA, North Korea and Russia. A Big Brotherhood!

I cant turn off beta to read slashdot. How do I g (-1, Offtopic)

Anonymous Coward | about 4 months ago | (#46623519)

This stinks

Re:I cant turn off beta to read slashdot. How do I (3, Informative)

Soulskill (1459) | about 4 months ago | (#46623787)

You can opt out of the beta by hitting the Slashdot Classic link in the footer. Or click this: http://slashdot.org/?nobeta=1 [slashdot.org]

High-Frequncy Trading ?? (0)

Anonymous Coward | about 4 months ago | (#46623553)

Official day of typos / bad grammar

Re:High-Frequncy Trading ?? (1)

ackthpt (218170) | about 4 months ago | (#46623583)

Official day of typos / bad grammar

No, that will be tomorrow. And it will be brutal as it always is.

Re:High-Frequncy Trading ?? (0)

Anonymous Coward | about 4 months ago | (#46623767)

Will there be poniez?

Re:High-Frequncy Trading ?? (1)

ackthpt (218170) | about 4 months ago | (#46623829)

Will there be poniez?

Not only will there be poniez, there will be big fluffy unicorns. shudder Count on it!

Re:High-Frequncy Trading ?? (1)

Overzeetop (214511) | about 4 months ago | (#46623897)

Eating rainbows and pooping butterflies, I hope. At least for a day, then, Beta will look like butterflies.

Re:High-Frequncy Trading ?? (0)

Anonymous Coward | about 4 months ago | (#46624085)

Will there be poniez?

Not only will there be poniez, there will be big fluffy unicorns. shudder Count on it!

Pink fluffy unicorns dancing on rainbows! [youtube.com]

/buck feta!

Re:High-Frequncy Trading ?? (2)

DrJimbo (594231) | about 4 months ago | (#46624249)

Will there be poniez?

No, but there will be plenty of Ponzis.

Re:High-Frequncy Trading ?? (1)

Soulskill (1459) | about 4 months ago | (#46623789)

Updated to fix. Thanks.

FaiXlz0rs! (-1)

Anonymous Coward | about 4 months ago | (#46623619)

Watch the news ... (-1)

Anonymous Coward | about 4 months ago | (#46623623)

A man identified as Brad Katsuyama was found face down in a ditch this morning. Investigators don't suspect foul play as the proper officials were paid off.

Re:Watch the news ... (1)

sumdumass (711423) | about 4 months ago | (#46623887)

Ha.. up date:: face down in a ditch. Hands and feet duct taped behind him. The investigating officer say it is an appearant suicide.

day trader loses to second traders (4, Interesting)

alen (225700) | about 4 months ago | (#46623633)

how exactly is this rigged for the longer term investor?

hedge funds have always been about finding some unknown niche with tiny profit potential and making it up on volume with borrowed money

Re:day trader loses to second traders (5, Insightful)

the eric conspiracy (20178) | about 4 months ago | (#46623749)

> how exactly is this rigged for the longer term investor?

It isn't. Long term investors are looking for price changes from 20-200% between trades. HFT is making money in the .1% range which is basically in the noise band.

Even then a reasonably intelligent investor has some tools he can use to protect himself from the worst front running - pay attention to the spreads and use limit orders.

Re:day trader loses to second traders (0)

Anonymous Coward | about 4 months ago | (#46623773)

Having an order you place vanish, isn't exactly standard broker behavior and trading. If you think it is, or that day traders aren't aware of slight delays in order processing, you're absolutely nuts. No one is saying being out the outskirts from the exchange will slow you down, but for your broker to downright sabotage your buy order is probably illegal. If it isn't, I'd like to know the SEC rule that allows it.

Re:day trader loses to second traders (2)

Anonymous Coward | about 4 months ago | (#46624125)

you're an idiot. the order didn't vanish... and OFFER was put up and sold before the order to execute the offer as a buy could be placed.

if someone put a Lamborghini on craigslist for $1, and someone else bought it before you, your order didn't vanish... it simply can't be placed. the offer is no longer valid.

if you want to know laws, how about YOU READ THEM [sec.gov]

 

Re:day trader loses to second traders (3, Informative)

m.dillon (147925) | about 4 months ago | (#46624271)

No, you didn't read the article carefully enough (or at all). The order did in fact vanish. The HFT has bids or asks up on all the exchanges. When they see a large order fill on one exchange they front-run the order on all the others (which involves canceling the order on the other exchanges and then taking some other action) before the originators order reaches the other exchanges.

The other point here is that many of these exchanges offer special order types designed to allow HFTs to take advantage of normal investors. For example, orders which either match instantly or auto-cancel if instant execution cannot occur. And many other types beyond the standard market, limit, and split-the-difference orders.

So, yes, the potentially matching orders went poof.

-Matt

Re:day trader loses to second traders (5, Informative)

Minwee (522556) | about 4 months ago | (#46624513)

if someone put a Lamborghini on craigslist for $1, and someone else bought it before you, your order didn't vanish... it simply can't be placed. the offer is no longer valid.

And that's also nothing at all like HFT.

It's more like one person has offered a Lamborghini on craigslist for $300,000, another has offered one on autotrader for $310,000 and a third is on eBay for $325,000. You try to buy all three of them for you client, a legally bind racing enthusiast for whom this is a one week supply. The ads have been up for three days already so you send an offer to each of the sellers confident that you can get all three. A response comes back from eBay and you buy that car for $325,000, but someone else who just happened to be watching eBay at the moment you bought it quickly buys the other two cars in the time between your initial buy and the time that your offers arrive at craigslist and autotrader.

While you are wondering what just happened two new Lamborghinis show up on eBay for $325,000 each. You sigh, buy them, and try to think of a nice way to explain to your client that $935,000 in cars just turned into $975,000 in less than a tenth of a second.

The exploit used by high frequency traders isn't the fact that they are able to buy cars before you can, it's that they can spot your orders going into the market and front run on them before they can execute.

Re:day trader loses to second traders (1)

Actually, I do RTFA (1058596) | about 4 months ago | (#46623899)

how exactly is this rigged for the longer term investor?

Well, it leads to greater price variability, meaning that margin calls are more likely to occur, if you trade on margin. And harder to have pre-programmed sell orders at certain thresholds.

But at a more macro level, the total profit from the trades remain the same. The HFTs are making more money. Therefore, the long-term trader is making less.

Re:day trader loses to second traders (1)

PRMan (959735) | about 4 months ago | (#46624111)

They see your trade request and then buy it out from under you on a faster link. By the time you get to the exchange, the stocks are no longer there because somebody "just bought it". But now they are willing to sell it to you at a slightly higher rate.

Re:day trader loses to second traders (2)

jbmartin6 (1232050) | about 4 months ago | (#46624385)

What you describe is illegal, if you have any evidence of this feel free to forward it to the SEC. Once an order hits the exchange it is on equal footing in regards to being matched with any offers. Some aspects of HFT work by anticipating demand and hitting the exchange before others, this has always been the case since markets were invented.

Re:day trader loses to second traders (1)

Anonymous Coward | about 4 months ago | (#46624721)

Well, it's a new and more modern form of front running.

Maybe it needs it's own name -

Whether or not it should be illegal is an interesting question.

But what's going on is a large place looking to buy or sell sends multiple orders out over slow links, and those buys and sells arrive at exchanges at widely disparate times. Then someone with a fast set of links between all exchanges spots a large buy at one exchange and makes a guess that that same large buy is headed to another exchange in a few moments. The HFT beats them to that exchange, buys in front of them, and has it ready to sell to them immediately at a slightly higher price.

Re:day trader loses to second traders (0)

Anonymous Coward | about 4 months ago | (#46624197)

from TFA, once they figured out how to get around the HFT front-runners:

For instance, they bought 10 million shares of Citigroup, then trading at roughly $4 per share, and saved $29,000 â" or less than 0.1 percent of the total price.

HFT is essentially imposing a 0.1% tax on all trades under the guise of "increasing liquidity." If you're a long-term investor, you may not mind paying an extra 0.1% to buy and sell your stock, but I prefer to keep commissions and fees as small as possible

Re:day trader loses to second traders (1, Insightful)

BradMajors (995624) | about 4 months ago | (#46624319)

High frequency trading is actually good for the small investor and gets them better pricing. What the article is about is the inability of institutional investors to make large trades without moving the market.

Cue HFT apologists. (-1)

Anonymous Coward | about 4 months ago | (#46623659)

There's a thin separation between 'offering services', 'arbitrage befits', 'finding efficiencies' and creative theft hiding as such. Modern HFT smashes through that barrier with an elegant and fascinating high tech brick. Engineered by brilliant people that are too naive to know when they're being used by the crusty old crooks of the financial industry.

Stop feeding us the above buzzword bullshit. We know middle men when we see them. These middle men just use really fast computers to insert themselves where they're not wanted.

Re:Cue HFT apologists. (2)

alen (225700) | about 4 months ago | (#46623715)

you missed the article
these aren't the old guard doing HFT, but the younger people starting up their own hedge funds and taking the stock purchases away from the bigger banks

ACM issue on HFT (4, Informative)

peter303 (12292) | about 4 months ago | (#46623681)

Last August the ACM had a whole issue [acm.org] on detailed technical aspects of all parts of trading. I dont recall talk a part on front-trading. But how to shave off yet another few microseconds. Fascinating.

this will certainly lead to a cure for cancer. (4, Insightful)

Thud457 (234763) | about 4 months ago | (#46623877)

I sure am proud that our country's best and brightest are focusing their efforts on optimization of moving around virtual little green pieces of paper.
It's not like we have real problems that need to be addressed.

Re:this will certainly lead to a cure for cancer. (0, Flamebait)

Anonymous Coward | about 4 months ago | (#46624135)

I sure am proud that our country's best and brightest are focusing their efforts on optimization of moving around virtual little green pieces of paper.
It's not like we have real problems that need to be addressed.

So you have devoted your life to curing cancer? I am pleased that you have sacrificed your earning potential and the well being of your family to make this world a better place. But in all seriousness, get off slashdot and go back to curing cancer for us.

Re:this will certainly lead to a cure for cancer. (0)

Anonymous Coward | about 4 months ago | (#46624181)

sorry, I limit my charity work to working for Google.

Re:this will certainly lead to a cure for cancer. (1)

Anonymous Coward | about 4 months ago | (#46624295)

I agree. We should also ban people from working at Zynga or Facebook. Those companies are worthless to society. Who else wants to suggest companies that should be banned?

Forbit all HFT (3, Interesting)

photonic (584757) | about 4 months ago | (#46623691)

HFT should be banned, there is nothing these robo-traders contribute to society except for profit for themselves. The argument that they provide for liquidity of the market, or whatever, would not change if everyone would be trading at second scale instead of microsecond scale. My proposal (as someone how knows nothing about stock markets): make it a level playing field and only allow trading at say exact 30 second intervals or so, which should be synced world-wide. In this way, the big firms would only have an advantage over the small guy when new information becomes available in the last half second before the deadline, instead of on every instance of new information. After everyone has placed their orders for the current round, the stock market then takes a few seconds to update all stock prizes, after which everyone has 'infinite time' to compute his action for the next round.

Re:Forbit all HFT (1)

ArcadeMan (2766669) | about 4 months ago | (#46623771)

Thirty seconds is too generous, if such a system would be implemented it should be sixty seconds.

Re:Forbit all HFT (1)

wonkey_monkey (2592601) | about 4 months ago | (#46623827)

Why sixty and not thirty? Why not 120?

Re:Forbit all HFT (1)

ArcadeMan (2766669) | about 4 months ago | (#46623945)

Thirty seconds is too short and would open the doors for debate, just like we're doing now. Why not 15 seconds? Or how about 45?

By setting it at one minute, there's less chance of arguing about it. And in our modern, Internet time, two minutes is just too long.

Re:Forbit all HFT (0)

Anonymous Coward | about 4 months ago | (#46624113)

Indeed. I recall seeing graphs from Nanex. Even milliseconds are long there.

Just a taste
http://www.nanex.net/StrangeDays/12092011.html

Re:Forbit all HFT (1)

JWW (79176) | about 4 months ago | (#46624173)

If you read the article, they leveled the playing field by adding just a 350 microsecond delay.

Re:Forbit all HFT (3, Insightful)

stewsters (1406737) | about 4 months ago | (#46623805)

That sounds good, but what will happen is that the big trading firms will build software to give each other hints as to when they will be buying and selling the the next 30 seconds. There will still be algorithmic trading, it will just have to move toward out of channel cooperation rather than pure speed.

Re:Forbit all HFT (1)

Anonymous Coward | about 4 months ago | (#46623815)

read the article, they are doing this by delaying all communications to the exchange. without
any easy-to-get-wrong-and-difficult-to-enforce dictats

the mechanism they are using is really cute too, its a spool of fiber in a box

and the claim the resulting market does a better job of setting a fair price

for once capitalism actually starts shuffling towards the path of greater efficiency and transparency
instead of greater opacity and corruption.

its a really good article, you should read it

Re:Forbit all HFT (0)

Anonymous Coward | about 4 months ago | (#46623825)

But without HFT, the Republicans wouldn't be able to steal as much money from middle class retirement funds. While most people may think of a few high profile stock traders when thinking of stocks, the real money is in retirement funds. The Republicans have been unable to outlaw them so instead they are taking money out of these funds by decreasing their profits. They are stealing from nearly everyone with this scam.

Re:Forbit all HFT (4, Interesting)

NoNonAlphaCharsHere (2201864) | about 4 months ago | (#46623837)

Better yet, how about a tiny tiny tax on each trade? We bitch and moan about deficit this and tax-the-rich that, how about we tax the fuckers who are causing the problem for the behavior that's causing the problem? If financial markets weren't such a short-term crapshoot, and we really DID care about "long-term" capital gains, we wouldn't have the boom-and-bust economy we've been living in.

Re:Forbit all HFT (2)

Overzeetop (214511) | about 4 months ago | (#46623923)

Gross receipts tax. 2% on any receipts - profit/loss/gain - doesn't matter.

Re:Forbit all HFT (0)

Anonymous Coward | about 4 months ago | (#46624699)

Or:
Long term capital gains tax (>1 year): 15-20%
Short term capital gains tax (1 sec-1 year): 25-35% (or the going income tax rate)
Ultrashort capital gains tax (1 sec): 75-90%

Re:Forbit all HFT (4, Insightful)

Soulskill (1459) | about 4 months ago | (#46623895)

Every time I learn more about HFT, I become more convinced that it has to be regulated, and soon. They're only going to get more efficient at extracting money out of these markets without introducing any actual value, and that can't be sustainable in the long run.

Re:Forbit all HFT (1)

photonic (584757) | about 4 months ago | (#46623959)

The question is if it is not too late to introduce regulations. These leeches probably made enough money to corrupt Congress for the next 100 years.

Re:Forbit all HFT (1)

Anonymous Coward | about 4 months ago | (#46624139)

HFTs don't extract money from the market, they take profit from large banks. An HFT isn't going to screw you over. In fact, they help you, by lowering spreads.

Imagine a bank buying 10,000 shares at $1.00. Before HFT, the price after the transaction might jump to $1.05, with the bank making a $0.05 paper profit.

With an HFT, the bank tries to buy 10,000 shares at $1.00, but the HFT beats him to the punch. Then he sells those shares to the bank at $1.01. Afterward, the price will still be $1.05 for you & me, but the bank has only banked a profit of $0.04 while the HFT siphoned off a penny of profit.

So how do HFT lower spreads? One way is by forcing banks to make many, smaller trades. More smaller trades means buyers and sellers will narrow their asking prices because they don't expect large jumps in prices as there are fewer large transactions. In other words, the bank might make 10 x 1000 trades over some period, and the price of the stock will slowly climb to $1.05. That creates more opportunity for people to cash in on whatever secret information the big bank had that caused them to want to buy 10,000 shares.

In the grand scheme of thing, it's not _that_ important. And feels like a waste of resources. But modern society is full of extremely intelligent people doing seemingly unproductive tasks. I mean, we're not all farmers anymore. More and more effort will continue to be expended in esoteric pursuits. I would think that Slashdotters could appreciate that.

Re:Forbit all HFT (2)

jbmartin6 (1232050) | about 4 months ago | (#46624409)

Without introducing any value? According to whose opinion, yours? We are very fortunate (in the US at least) that we are not yet entirely enslaved to one person's opinion as to what is valuable. Obviously, the exchanges see value in it or they wouldn't be supporting it.

Re:Forbit all HFT (1)

Overzeetop (214511) | about 4 months ago | (#46623953)

30 seconds?

Twice a day batch matching of buyers and sellers. You put in your offer, and if it matches at noon or 4 PM you get the trade. Offers are time-stamped and processed in order for priority.

Re:Forbit all HFT (1)

blue9steel (2758287) | about 4 months ago | (#46624189)

That would have all kinds of side effects beyond just making HFT unworkable. I suggest a much more modest restriction. All traders with direct access must be treated equally, and the barrier to entry for direct access must be set low enough that some guy in his home office can reasonably afford/qualify for that. So, the access time for the folks with the co-located servers can't be any better than that of the home trader in Alaska. Classic leveling of the playing field, it's what government regulation is supposed to do.

Re:Forbit all HFT (0)

Anonymous Coward | about 4 months ago | (#46624495)

I'm OK with variable lenghts around one second BUT when the orders come in they are randomized in the batch they came in with a real hardware based RNG.
It's a lot harder to game the system when the evaluation order isn't known.

Re:Forbit all HFT (2)

squiggleslash (241428) | about 4 months ago | (#46623955)

Sounds, from TFA, like IEX already has a working system built by building in delays into their system between making a trade order and its actual execution. The delay is still a few milliseconds, but it's enough for HFT to be pretty much dead as a concept with their clients.

Their problem is that banks are hesitant to give up what was a lucrative source of revenue and use the system, but those same banks are finding it increasingly harder to resist pressure to clean up their acts and do it.

Re:Forbit all HFT (0)

Anonymous Coward | about 4 months ago | (#46624305)

The IEX delay, between order entry and execution, is 350 microseconds, calculated to be long enough for their orders to forward to their most-distant partner before delivering confirmation of the locally-executed trade.

To me, that's the amazing point: the HFT are front-running the latency of a 50-mile packet transmission. To combat that, you don't need to slow trading down to any kind of a human timescale. You only need a millisecond, maybe 2.

Re:Forbit all HFT (0)

Anonymous Coward | about 4 months ago | (#46624013)

There is no need to ban it. Put a micro-tax on transactions. It would make HFT prohibitively expensive, and have little to no effect on honest traders. Problem solved.

Re:Forbit all HFT (0)

Anonymous Coward | about 4 months ago | (#46624067)

How do we decide what is contributing to society? And should anything that is not contributing to society be banned? That is a very slippery slope. Maybe I think that alcohol doesn't contribute to society. So we all try prohibition again?

Re:Forbit all HFT (1)

RightSaidFred99 (874576) | about 4 months ago | (#46624143)

This is a philosophy fail. Someone or something need not "contribute to society". You aren't the "societal contribution police", bro.

I'm not a "no government, maaan!" guy but I believe there should be a fairly high burden of proof for government intervention in any part of our lives. For example, I have no problem with single payer health insurance - to me there is a massive reason for it in terms of our standard of living.

HFT? Good luck finding the massive damage it does that would justify arbitrary limits on it such as you propose.

Re:Forbit all HFT (1)

Krishnoid (984597) | about 4 months ago | (#46624297)

The argument that they provide for liquidity of the market, or whatever, would not change if everyone would be trading at second scale instead of microsecond scale.

Let's even say that high-frequency trading does provide liquidity. From my incomplete understanding of this, all you have are offers on a screen which are withdrawn before anyone can execute on them. It seems more like high-frequency "neener-too-slow" without any actual trades taking place.

Don't ban it, just tax it (1)

DrJimbo (594231) | about 4 months ago | (#46624391)

HFT should be banned, there is nothing these robo-traders contribute to society except for profit for themselves.

Exactly! But instead of banning, it should just be taxed. They are basically imposing a tax on society that makes them filthy rich while providing no benefit to society. Yet these are the same people who scream bloody murder whenever someone proposes a bona fide tax on stock transactions. If they insist on acting like spoiled young brats then we need to treat them as such.

At its heart, this corruption is similar to the *IAA corruption. In both cases technological advances that should have made the middle-men obsolete are flipped around to provide a disservice to society while enriching the unscrupulous.

Re:Forbit all HFT (1)

Tom (822) | about 4 months ago | (#46624579)

I'm with you on the basic principle.

I don't think yours or any simple solution will work. The reason is that the markets are largely controlled by people who are interested mostly in exploiting the rules, so they will find ways to do it, because it's a multi-billion dollar industry.

Basically, the casino is being controlled by the cheaters, not the honest gamblers.

Re:Forbit all HFT (1)

jbmartin6 (1232050) | about 4 months ago | (#46624643)

contribute to society except for profit for themselves

Your opinion, fortunately we aren't slaves to one person's opinion as to what is valuable "to society". I am sure all the employees, their families, children, dogs, etc. of the HFTs, producers of all the networking and computing gear they use, the buildings and home they inhabit, the doctors they visit, and so on, might disagree with you about the lack of contribution to society.

yuo faEil it!! (-1)

Anonymous Coward | about 4 months ago | (#46623693)

USA - Top Communist Country (-1)

Anonymous Coward | about 4 months ago | (#46623809)

USA needs stop pretending. This is a fucking communist regime waiting for Russian and North Korea brothers.

duh. (4, Interesting)

Anonymous Coward | about 4 months ago | (#46623841)

The stock market long ago ceased being about owning pieces companies with companies paying out dividends. It's the same bet that prices are going up that it was in 1929, the HFT's have just figured out how to micro-jack the prices. There is a simple simple fix. Stocks are made non-fungible and you must own for 24 hours before you can trade. This puts pricing back onto a time scale over which the actual productivity or fickle fortunes of a company can change. The economic production of a real company doesn't change on the millisecond time scale.

Russians control Wall Street (-1)

Anonymous Coward | about 4 months ago | (#46623917)

So many Russians are programmers at Wall Street. Putin and his brother Obama control two brotherhood countries.
It is time they join their forces and announce one big united federation Soviet State of USA.
Republicans and comrades will cry, hug and dance together. This is a ultimate dream of Republicans, become part of Big Russia.

Limit order? (5, Insightful)

jgotts (2785) | about 4 months ago | (#46623933)

Nobody trades like this, and nobody traded like this in the early 2000s. That trading style has been obsolete for 20 years, and predates HFT. You don't see something, decide you want that, and then hit Enter or click your mouse button.

In this example, you decide the maximum price you want to pay in advance, and you enter a limit order. If you're selling you decide upon your minimum selling price, and in the same way you enter a limit order. You've locked in your profit, regardless of timing.

If you're setting up some sort of combination, you enter the triggering parameters in advance, and you don't even need to see what was being done on screen.

People say that computers are trading with each other. That is false. That's like saying that Microsoft Word writes documents. Trading companies, their traders, and their programmers write trading software and adjust parameters. 30 years ago, the "software" was held in the traders' minds, and the execution was done via outcry. The underlying mathematics is the same, and traders don't have to hold these calculations in their minds.

The problem here is this. Extremely rich companies can have the fastest links to the exchanges, but this is no different from the olden days where the oldest and richest companies had the smartest and most well-connected traders. The tools of the trade are slightly different, but rich and successful companies will leverage their money to be the most successful, or else they will be replaced by somebody else.

My own background is that I wrote a derivative trading system between 1999-2006 for a tiny company that ultimately didn't make it because we couldn't compete against the big boys. This angst about HFT is largely technophobia. The traders trade, they learn the software, and they often don't understand how it works. To programmers like me, the algorithms are a black box, but the traders do understand the mathematics pretty well. When you have traders coming out against HFT, you have traders who couldn't understand the software or were burned because their companies weren't rich enough.

People who have never worked in this field who are against HFT really don't understand computer-based trading very well, from either a programmer's perspective or a trader's perspective. Keep in mind that the job of a computer is to make mundane things happen more quickly, so we can focus on more human things. You want your 401K to execute as accurately-priced trades as possible. HFT ensures that both styles of trading benefit.

Re:Limit order? (1)

Anonymous Coward | about 4 months ago | (#46624015)

I agree with what you said, except people with higher speeds were monitoring large blocks and putting in a buy before then transaction was complete. The original order would either:

1. Only get a partial with a limit
2. Get a partial and then pay more for the rest.

The people with the HFT systems bought only based on what other institutions bought and only because they could buy between the time the order was place and was executed.

It's the equivalent to insider trading, or in the old days, bugging your competition's phones, both which are illegal.

Re:Limit order? (1)

rahvin112 (446269) | about 4 months ago | (#46624239)

What you are describing isn't insider trading, it has a name called front running. And it's been happening since the market existed. It used to be domain of "market makers" who followed a stock and bought and purchased that stock to provide the market (ie to ensure there is always a buyer and seller). These market makers made a margin on each transaction of anywhere from 10%-0% depending on the number of market makers on that particular stock. The more heavily traded the thinner the margins but even stocks you might consider reasonable traded (a million shares a day) had market makers taking 3% off every single transaction by being the buyer or seller on every transaction. Without a limit order in those days your trade would execute at 3% less than the going rate. Most people never knew why.

HFT has eliminated the market makers and has driven down the margin made on each transaction to a millionth of a percent as each HFT system tries to undercut the other and reap the margin. HFT has made it possible to trade even thinly traded pink sheet stocks and make reasonable returns without the market maker eating the whole pie. HFT has made it significantly easier to get returns as a small investor. It's now possible to make market orders and get the price on the ticker.

I don't disagree that front running could be a problem, BUT HFT has made the system far better than it used to be and front running could be easily regulated by the SEC.

Re:Limit order? (2)

jbmartin6 (1232050) | about 4 months ago | (#46624521)

Frontrunning in the sense of seeing an order before it hits an exchange, and then trading in front of it, is illegal. This could happen in a trading house that also handles large institutional orders, and the in house HFT business could illegally trade against that.

Re:Limit order? (3, Informative)

gurps_npc (621217) | about 4 months ago | (#46624251)

Did you read the article? It doesn't sound like you did?

Because nothing you said focused on the problems the article discussed.

One of them was the ability for people to see your trade and then cancel their own order, all before your trade was executed. All made possible because the HFTers were located fiber-optic-distance closer to the exchange servers

Limit orders work fine for small investors, but don't work on high trade situations - you end up ensuring that you get the worst possible price. That is, you only get executed after the price has moved in the wrong direction.

Re:Limit order? (1)

m.dillon (147925) | about 4 months ago | (#46624407)

Ah, you don't understand the scale. Yes, people still do trade like this (manually, that is, though with some computer support for convenience). For very large orders it's still highly effective.

Small orders you can just throw onto an exchange because it's hard to front-run a small order. Large orders... you can't do that without seriously compromising your trade.

-Matt

Re:Limit order? (2)

TubeSteak (669689) | about 4 months ago | (#46624467)

The problem here is this. Extremely rich companies can have the fastest links to the exchanges, but this is no different from the olden days where the oldest and richest companies had the smartest and most well-connected traders.

You couldn't be more wrong.
Buying the fastest link is an exploit in the trading system.
Having traders (smart or not) is part of the trading system.

People who have never worked in this field who are against HFT really don't understand computer-based trading very well, from either a programmer's perspective or a trader's perspective.

With all due respect, why should we care about "a programmer's perspective or a trader's perspective."

I care about competitive markets.
Without competitive markets, it's just more of the shitty behavior we've been trying to eliminate through regulation.
Consider that many big trading houses have never lost money.
Does that strike you as something that happens in a competitive market?

Wouldn't it be fucking fantastic if the "free" market actually moved itself towards a place of honest competition?
That's what these guys are trying to do and I applaud them.

You want your 401K to execute as accurately-priced trades as possible. HFT ensures that both styles of trading benefit.

What's the point of accurately priced trades if my orders disappear into an in-house dark pool where [who knows]?
You can't have a free market without transparency and the biggest market makers have a profit motive to avoid transparency.

Re:Limit order? (1)

CaptainLard (1902452) | about 4 months ago | (#46624531)

If you're setting up some sort of combination, you enter the triggering parameters in advance, and you don't even need to see what was being done on screen

But I would certainly like to know if the stock was selling for less than my buying price or more than my selling price...or if the price of the stock changed halfway through execution of my carefully planned order which is what is happening here. People who make tons of money doing that see all sorts of benefits from it, everyone else who's not in on the take rightfully considers it a scam.

HFT ensures that both styles of trading benefit.

...for a small fee...that no one asked for.

Front Running is not HFT (2)

ggraham412 (1492023) | about 4 months ago | (#46623957)

Before you post an anti-HFT screed to Slashdot, ponder the question: Does the speed or frequency of the trading affect whether or not somebody is front running you? If the problem is that someone saw your order and acted on it before it went to execution, then the issue is with the absolute ordering of the events and not with the speed or frequency. There were front runners in the market long before electronic HFT trading came along.

A better term for what you're probably outraged about is flash trading [wikipedia.org] .

Re:Front Running is not HFT (0)

Anonymous Coward | about 4 months ago | (#46624339)

Even outrage for "flash trading" is silly. In order for there to be a flash trade, the submitter HAD TO REQUEST THAT TYPE OF ROUTING. It was a price improvement mechanism. If users thought they were getting worse prices, they should have stopped selecting the box to allow for a price improvement auction.
BTW, there is a very clear public record of all the trades that occur. No one EVER demonstrated an instance where someone put in a flash order and was front run. If it was happening, show me a single instance where it actually occurred. I asked numerous critics who have access to the "tape" and no one ever showed me an example.

Re:Front Running is not HFT (0)

Anonymous Coward | about 4 months ago | (#46624455)

The trouble is, and TFA makes this quite clear, that the profitable form of HFT is "slow market arbitrage," wherein an HFT sees an order arrive at one market, and places exactly the same order at a second, more distant market, before the original order propagates to the second market. This is exactly what I would call "front running," and they claim it accounts for the vast majority of high frequency trading. No one has ever considered front-runners part of an efficient market, and the fact that HFT, in practice, does little more than facilitate front-running or "slow market arbitrage" is exactly what outrages us little guys.

Re:Front Running is not HFT (0)

Anonymous Coward | about 4 months ago | (#46624459)

Trading using non-pubic information is illegal. Why pretend it isn't, if it's renamed HFT?

Re:Front Running is not HFT (1)

tacokill (531275) | about 4 months ago | (#46624525)

If the problem is that someone saw your order and acted on it before it went to execution...
I am not sure where you get your information but the above is exactly what front running is. It's taking knowledge of the book of orders and using it as an advantage to middle your way between a buy/sell. Charlie wants to buy from Alice at $1.00. Bob overhears Charlie's intentions, rushes to buy the stock from Alice at $1.00 and then promptly tries to resell it to Charlie for $1.01. That's front running.

However, you are right that front running have been around forever. The difference is that we used to manage that conflict of interest and now....not only is it not being discouraged, it's being actively promoted.

What the hell is a millisecond? (0)

Anonymous Coward | about 4 months ago | (#46624065)

Regarding Ronan Ryan in the story, I do not understand how you can be considered an "expert at moving financial data from one place to another" the say something like "What the hell is a millisecond?".

I've worked in financial firms for my entire life. (4, Interesting)

HerculesMO (693085) | about 4 months ago | (#46624109)

In IT, of course...

And one thing I've learned is that financial firms generally speaking, don't beat the market. If you look at the S&P 500 as a baseline index for the health of the economy (and it might not be perfect, but it's a good measure), 80% of firms CANNOT beat the S&P in the same timeframe. If the S&P loses, those private firms lose too.

And even if they did... maybe 1-2% over? Which you won't get, because that's what they charge in FEES to manage their funds.

So basically HFT exists, because people still have the idea that investing with Morgan Stanley or somebody is a great idea, and so MS have a huge amount of equity to derive ridiculous profits on for who else -- themselves. Add to that the fees they charge to manage the funds they offer, and the marginal rates of return that investors get well... you know how it goes.

Hopefully my job interviews pending will pan out and I'll get out of finance for good; but sadly the money is what has kept me there, especially with the student loans... yet another benefit from our wonderful financial industry.

Pretty damn good article (4, Interesting)

m.dillon (147925) | about 4 months ago | (#46624187)

Best article on HFT that I've ever read. Explains in fine detail how institutional players get fleeced by high frequency traders. Took a while to read the whole thing, but well worth the time.

One thing to note to all of us retail investors, though... our tiny orders aren't really getting fleeced, and with spreads on most stocks of only $0.01 our trading overheads are miniscule compared to 20 years ago. Standard brokerage fees trump (by several orders of magnitude) HFT losses for people like us.

-Matt

Re:Pretty damn good article (2)

BradMajors (995624) | about 4 months ago | (#46624405)

Finally, someone who actually read the article. The article is about the problem of doing large block trades.

Small investors are not getting fleeced. HFT helps them get better prices.

Lets call it what it is..... (1)

tacokill (531275) | about 4 months ago | (#46624335)

The word we are looking for is: front-running.

When HFT firms get a look at the order book prior to the orders being executed and then go out and buy the order book only to turn around and sell it to the original buyer for a penny more......that's front-running. The technology and algorithms are incidental. It's been going on as long as there have been brokers and people buying/selling stock on behalf of other people. The difference this time is that this shit is being encouraged instead of discouraged. It hides behind opaque language and scary computers to dazzle and wow you into not noticing.

This is how it should work (0)

jdavidb (449077) | about 4 months ago | (#46624449)

It used to be that when his trading screens showed 10,000 shares of Intel offered at $22 a share, it meant that he could buy 10,000 shares of Intel for $22 a share. He had only to push a button. By the spring of 2007, however, when he pushed the button to complete a trade, the offers would vanish.

I have traded bitcoin and other cryptocurrencies, and this makes perfect sense to me. Between the time you see the price and the time your order goes through, someone else may have already bought what was for sale. I don't see what the big deal is. This is exactly the way it should work. Maybe there's more in the article.

Re:This is how it should work (1, Funny)

jdavidb (449077) | about 4 months ago | (#46624585)

Maybe there's more in the article.

Update: I've read about half of it so far, and I think there actually is more to this than the blurb at the top.

Tax every trade (4, Interesting)

Squidlips (1206004) | about 4 months ago | (#46624589)

That will slow down the trading and encourage long-term investment....
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