1. Welcome to SportsJournalists.com, a friendly forum for discussing all things sports and journalism.

    Your voice is missing! You will need to register for a free account to get access to the following site features:
    • Reply to discussions and create your own threads.
    • Access to private conversations with other members.
    • Fewer ads.

    We hope to see you as a part of our community soon!

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

    Oh yeah. It was Katsuyama. They were cheering him and booing O'Brien. Katsuyama left the floor to handshakes and pats on the back.
     
  2. 93Devil

    93Devil Well-Known Member

    So for every winner there is a loser. Of course these people want day traders because the vast majority of them will lose in the long run to the mire skilled traders with more resources.

    This is almost like some schlub from Iowa walking into a Vegas casino thinking he is going to beat the house. He might hit a few times, but in most cases the guy from Iowa is going back with less money than he started with.
     
  3. RickStain

    RickStain Well-Known Member

    Not an expert or anything, but I'm pretty sure dividends makes this incorrect.
     
  4. The Big Ragu

    The Big Ragu Moderator Staff Member

    This has nothing to do with "winners" and "losers." Yes, trading is a zero sum game. That isn't what this is about.

    What they are doing that everyone is talking about is front running or scalping. When you show your intention to buy or sell a stock or buy or sell a futures contract, before your order can be routed to all of the exchanges, they have an advantage that allows them to step in milliseconds ahead of you and buy or sell it ahead of you. That allows them to then sell it to you at a higher (or lower if you are selling) price locking in a guaranteed profit for themselves.

    The question then becomes WHY do they have this advantage? In the case of Michael Lewis, it seems that the his POV is, "They are robbing people," and in the case of Brad Katsuyama it seems to be more of a, "What they are doing is legal, but how can we neutralize their speed advantage"?
     
  5. RickStain

    RickStain Well-Known Member

    It can be legal and still, in a colloquial sense, robbing people.
     
  6. ThomsonONE

    ThomsonONE Member

    Exchanges sell access to the HFT firms, to allow them to get the information earlier than others. If this wasn't valuable, the HFTs wouldn't pay for it, and the exchanges wouldn't be able to find firms willing to pay for it. The idea that this practice is necessary for market liquidity is laughable. If the HFT is flipping the trade in milliseconds, the liquidity is there without them. One of the purposes of the exchanges is to gather the buyers and sellers so they can interact with each other. The HFTs in this case are simply middlemen being allowed to squeeze a vig from the trading volume (and kicking back a taste to the exchanges themselves), very similar to the mafia tax on garbage hauling, concrete etc. You could stop this practice tomorrow and there wouldn't be any market impact.
     
  7. The Big Ragu

    The Big Ragu Moderator Staff Member

    That isn't really correct. There would be a huge impact. You can't separate out HFT scalping from computerized trading in general. Because if you have computerized trading and ECNs, you open the door for companies to set up microwave towers and high-speed laser networks right next door to the exchanges, hooked up to servers running sophsiticated scanning software. And they can use their technology to decrease latency and get a few millisecond jump on your orders if you are not competing technologically.

    You either allow technology or you don't. With that technology, you get things that people think are benefits to everyone and you get things that people think are robbing others -- such as the debate going on now.

    The main benefit people like IS the added liquidity HFTs have created -- which means tighter bid and ask spreads and increased transparency. This number is dropping, because they are losing their speed advantage and high frequency trading is slowly going away on its own, but HFT firms account for approximately half of all US equity trading volume right now. At its peak in 2008-2009, after Regulation NMS established this game in 2007, HFT firms accounted for somewhere between 60 and 80 percent of all stock volume. That is liquidity.

    That liquidity means much tighter spreads, which means investors as a whole do better than they used to. With the technology that has made HFTs possible, it has also made the ECNs transparent to anyone with a small brokerage account and a computer, so they can get really good price execution. And it has lowered transaction costs dramatically. That is technology making things cheaper for everyone.

    The flip side is that you have people who have figured out how to game the transparency the system introduced by using better technology. They can write computer programs that can scan the different exchanges and create arbitrage and scalping opportunities for themselves. If you try to regulate away their ability to do that, you regulate away the transparency that also serves people.

    The typical person with a brokerage account or a few mutual funds or a 401(K) plan is still paying less than he or she used to in transaction and execution costs -- by a lot. And most of that is due to the volumes the computers have created which has added a ton of volume to the markets (I see a flip side to that which is dangerous -- and I posted about it -- but that is another discussion).

    The part I agree with you about is the role of the exchanges. Yes, they do sell proximity. And it has an inherent sliminess to it. But their businesses depend on the people they are selling proximity to, not just in terms of the revenue. BATS, NYSE, ARCA, NASDAQ, etc. rely on those HFTs to provide them volume. That volume creates a tighter market. In turn, they sell tight bid and ask spreads to retail investors -- who really want those tighter spreads. HFTs are the cost of those spreads, in a lot of ways.

    Without high frequency trading, we can go back to the days of just floor trading, in which spreads were priced in 12.5 cent increments, instead of the fractions of a penny they are priced in today. The problem I have with the exchanges isn't that I think they are doing anything immoral with their business models. They are certainly not doing anything illegal. They do, however, talk out of both sides of their mouths, which is the part I find kind of slimy -- as the BATS president was yesterday during that CNBC segment. Instead of going into attack mode, he should just be honest about what his business is. He will sell a fiber optic IV -- for a price -- to companies looking for a speed advantage. In return, those HFTs throw a ton of volume at his exchange, which makes a market for non-computerized traders who are getting spreads and executions that were unthinkable 20 years ago.
     
  8. YankeeFan

    YankeeFan Well-Known Member

    Ragu has it right. Spreads are tighter than ever, and raising transaction costs would diminish liquidity/volume, and open the spreads back up.
     
  9. ThomsonONE

    ThomsonONE Member

    The scalping/frontrunning by HFTs does not reduce the spreads, or add liquidity. This is a myth that the exchanges and HFTs want you to believe so the gravy train is not shut down. In the pre-computer days, scalpers did add liquidity by taking on big blocks and breaking them up so the original seller could move them immediately. The scalper was taking on risk by holding the remaining shares for as long as it took to move the entire block lot by lot. This was a valuable service for which the scalpers deserved compensation.

    Today the HFTs are holding the lots for milliseconds, which means that the willing buyers were already available to the sellers. The HFTs are simply inserting themselves into the transaction while performing no benefit to the other parties. The 60% - 80% figure quoted by Ragu just shows how prevalent this practice is. If the HFTs weren't there the trades would be executed in a few extra milliseconds. That is NOT providing liquidity, that is exacting a toll on 60%-80% of the traffic for no benefit.

    The HFTs aren't holding the positions long enough to be taking on market risk from either the buyer or seller, which is what the pre-computer scalpers did. The market shouldn't be forced to pay a party that takes on no risk.

    This could all be stopped and liquidity wouldn't dry up at all. The exchanges themselves are fully capable of routing and matching these trades without the HFTs. But then they wouldn't receive their cut of the tax, so it is in their best interest to allow this to continue.

    The tightening of spreads has come about through technology, and the computerization of the entire order matching and fulfillment process. The HFTs have nothing to do with any of that.
     
  10. YankeeFan

    YankeeFan Well-Known Member

    Lets say the HFTs don't add liquidity.

    The fixes to this "problem" would likely hit other traders, which would lessen liquidity.
     
  11. The Big Ragu

    The Big Ragu Moderator Staff Member

    Computerized trading adds liquidity. With computerized trading --really ECNs -- you get high frequency trading. If you don't want high frequency trading, you have to get rid of the technology. And with that, goes the liquidity that has tightened spreads. You can't decide these are the "good traders" and those are the "bad traders." It's arbitrary.

    Nobody is trying to convince anyone of any myths. Before computerized trading and ECNs, you could drive a truck through spreads. Specialists or market makers were the only scalpers then, and they were "robbing" people way worse than the fractions of a cent we are talking about today. The spreads were 1/8 of a dollar, or in 12.5 cent increments. They had to be to guarantee a scalping profit to the market makers, to give them to incentive to make the markets liquid enough to meet any order. In effect, they were getting a guaranteed profit to provide liquidity. What is happening with HFTs is not nearly as egregious. It's actually more efficient, if you look at it on a results basis.

    This is not really an argument. The first day that Facebook traded two years ago there was more volume just in that one stock than there was in the entire stock market on Black Monday in 1987, when volume went haywire. That every day volume leads to much tighter spreads today than in the past. You don't get that liquidity without ECNs. And you can't separate high frequency traders from ECNs.

    If you have ECNs, you are going to have people trying to shave off miliseconds with strategically-placed microwave towers and laser networks and by blasting through mountains to lay their own fiber optic cable or spending billions to run that cable across oceans. And they will hire math wizzes to write the computer programs that can arbitrage orders. You have a problem with those people. But when someone routes something through an exchange, you can't arbitrarily decide that their motive is one you like, as opposed to someone else's. I mean you can, but you won't stop what you are complaining about. In a world of ECNs, somebody will always be able to use technology better than the next guy. It's beyond regulation without getting rid of ECNs. And if you do that, you lose the liquidity and tighter spreads that has saved people a ton.
     
  12. The Big Ragu

    The Big Ragu Moderator Staff Member

    http://blogs.wSportsJournalists.com/moneybeat/2014/04/03/bats-forced-to-correct-statements-by-president-obrien-on-how-its-exchanges-work/

    BATS got a call from the NY Attorney General, strong-arming them to correct one piece of O'Brien's bullshit. When Katsuyama asked him what BATS uses to price trades in its matching engine, O'Brien said they use the direct feeds -- when Katsuyama knew that the exchange largely uses NASDAQ's SIP processor, which is slow and can be gamed by someone with direct access. O'Brien either doesn't know his business or he wasn't telling the truth.

    It's a small part of how the HFT game works -- or worked before institutional traders started to catch up. The HFT firms use direct access to get a jump on others who rely on what the exchanges feed them via slower feeds, such as SIP.
     
Draft saved Draft deleted

Share This Page