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New book from Michael Lewis on High Frequency Trading

Discussion in 'Sports and News' started by lcjjdnh, Mar 29, 2014.

  1. The Big Ragu

    The Big Ragu Moderator Staff Member

    The way I see it, they shouldn't receive praise or criticism. As someone who I would guess does more actual trading than any other regular on here, I know they cost me (although I have one example a few years ago in which HFT trading inadvertently made me a really nice and lucky profit in a matter of seconds because of a still unexplained flash crash someone caused -- if anyone wants to know the story).

    I personally find the whole thing kind of slimy -- not so much because there are some guys with math PhDs who have figured out an advantage than I will never have; they are just doing what anyone with the ability should do. My problem is more with the exchanges, which talk out of both sides of their mouths. They are the big winners here, because they make a ridiculous amount of money selling better access to those HFTs. Which again would be fine -- you could always negotiate pricing with volume, as I said. But they don't publicly represent themselves that way. They sell their price executions, without telling people that the same time they may be driving up prices on you by also selling someone else the ability to front run you. That is kind of slimy.

    I really love what Katsuyama is doing. I really hope EIX continues to grow and is successful -- and I think it will be. He already has Einhorn / Greenlight as a major investor and has RBC and Goldman Sachs (which generates more from equity trading than anyone else) routing at least some orders his way. It's just really new.
     
  2. lcjjdnh

    lcjjdnh Well-Known Member

    Some early critiques:

    http://blogs.reuters.com/felix-salmon/2014/03/31/michael-lewiss-flawed-new-book/
    http://www.bloombergview.com/articles/2014-03-31/michael-lewis-doesn-t-like-high-frequency-traders

    And Point 8 here, although not directly referencing the book (since this article predates it):
    http://www.cfapubs.org/doi/sum/10.2469/faj.v70.n1.2
     
  3. YankeeFan

    YankeeFan Well-Known Member

    Pretty good take Andrew Ross Sorkin:

     
  4. YankeeFan

    YankeeFan Well-Known Member

    From the NYT Magazine:

    The Wolf Hunters of Wall Street

    An Adaptation From ‘Flash Boys: A Wall Street Revolt,’ by Michael Lewis

    http://www.nytimes.com/2014/04/06/magazine/flash-boys-michael-lewis.html?smid=tw-nytimes
     
  5. The Big Ragu

    The Big Ragu Moderator Staff Member

    Back in 2007, 2008, 2009 or so, Goldman was probably profiting more than anyone else from HFT algorithims. It had that scandal in 2009 that ended up in court, in which a computer programmer stole their computer codes, and it came out that Goldman was front running orders via automated computerized trading. It was the first a lot of people even heard of high frequency trading. And with Goldman being the vampire squid at the time, everyone was crying foul.

    Now Goldman, according to things like what Andrew wrote, is leading the charge against HFT trading. It's not that Goldman got religion. It's that the playing field has leveled and Goldman doesn't have an advantage anymore, the way it did 6 or 7 years ago.

    That is what happens when you just let these things take care of themselves. In Felix Salmon's piece that lcjjdnh linked to, he points out that: "The scale of the HFT problem — and the amount of money being made by the HFT industry — is in sharp decline: there was big money to be made once upon a time, but nowadays it’s not really there anymore."

    Salmon -- who is pretty spot on most of the time -- points out the real danger of HFT algorithims and that is that the flip side to the liquidity they provided (and they really do), they can add volatility in times of stress and take down markets. You saw a preview of the worst thing that could happen during the flash crash in 2010. And I expect that eventually we will see something drastic happen, in which a stock selling panic turns into a disaster because of the computers. If not that, I think that if the Chinese or Russians ever decide to wage war on the U.S., their weapons won't be nuclear, they will be hackers who reak havoc on our stock exchanges, which is the key to our fragile economy because of what the Federal Reserve has done to prop up financial assets. In fact, this is why I am 99 percent sure we didn't go any tougher with the financial sanctions against Russia -- which were a show. If we want to wage that kind of war, it can hurt us back just as bad as we can hurt them. And everyone knows it. They have the same computers, and tricks and algorithims that can do what the HFTs are capable of doing, except trying to intentionally do harm.
     
  6. YankeeFan

    YankeeFan Well-Known Member

    Exactly. This is why I have so little sympathy for them, or anyone else in regards to this problem.
     
  7. The Big Ragu

    The Big Ragu Moderator Staff Member

    I don't think Goldman has ever asked anyone for sympathy. To them, this is just a very small game within the bigger game that Goldman wins at. Goldman is so busy front running its own clients -- the old-fashioned way, and in the way that is actually technically illegal (even though I don't think it should be) -- for a lot more money than the HFT industry is netting as a whole. Whining about tighter bid/asks -- which are actually really good for markets at the end of the day -- would be ridiculous, and might take away their own golden goose.

    The whole "Heard in the Elevator" thing, in which Goldman salesmen call their own clients muppets may have turned out to be false. But Goldman frontrunning its clients is true. Everyone knows it. If you need to unload something esoteric and you route it to your friendly Goldman salesperson, you can be sure that their prop desk is getting a phone call first. Who needs fiber optics?

    I don't have "sympathy" for the client either, as you put it, because they know the game, and they still choose to be front run, because the transaction is cheaper than any alternative. To me, it's not much different than any other business in which your best way to buy or sell something is to work with a wholesaler that has the power to get you pricing -- you still get a better price, even if the wholesaler makes money on the transaction. In this case, the mechanism is a bit different, but is it really all that different?
     
  8. trifectarich

    trifectarich Well-Known Member

    The SEC needs to put the brakes on this and do it now. But we need not worry; these weasels undoubtedly have another scheme in their back pocket, ready to go.
     
  9. The Big Ragu

    The Big Ragu Moderator Staff Member

    http://video.cnbc.com/gallery/?video=3000263252

    This was really good TV for anyone interested in this thread. ... CNBC put Brad Katsuyama and Bill O'Brien, the head of the BATS exchange on the air side by side and had Michael Lewis sitting there via remote.

    If there is any villain in all of this, in my opinion -- as I said earlier -- it is the exchanges, such as BATS. O'Brien came out swinging, the gloves came off and Katsuyama hit him with a "you wanna do this, let's do this!"

    Notice the floor traders (they were at the NYSE) in the background all watching it on TV and cheering a few times.
     
  10. The Big Ragu

    The Big Ragu Moderator Staff Member

    Put the brakes on what?

    HFTs, and the current market environment that encourages front running, exists in the first place because of the Reg NMS system the SEC put in place in 2007!

    Every time idiots try to regulate things in the name of "competition," they create an UNFAIR competitive environment. The SEC has creates all of this gaming of things by mucking up things it should stay out of, and then we get attitudes such as "We need the SEC to do something about it," which gets the regulators back in there to screw it up even worse.

    What the SEC needs to do, is realize it is feckless and stand aside and let actual competition take place without them tipping the scales in favor of one thing or another.
     
  11. 93Devil

    93Devil Well-Known Member

    Is it safe to say for everyone that earns $1 on the stock market that another person loses $1? If 1:1 is not the ratio, what is it?
     
  12. Inky_Wretch

    Inky_Wretch Well-Known Member

    Given the delay, who were they cheering? Katsuyama?
     
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