Hft

[God the Father]

High Frequency Trading has become a highly-publicized issue this week, owing to "New York Times #1 Bestselling Author" Michael Lewis's appearance on 60 Minutes, plugging his book Flash Boys.

 

http://www.nytimes.com/2014/04/06/magazine/flash-boys-michael-lewis.html

 

HFT is a term that generally refers to large institutional block trades executed automatically by a computer program--sometimes referred to as "algos," short for algorithms. Lewis argues that the practice "rigs" the market in favor of the institutions (including small, boutique trading firms often comprised of foreign savants) that have access to these programs. By consolidating the know-how and processing power to increase the speed of their transactions--including paying money to exchanges to move their processors physically closer to the exchange server at the exchange facility--firms that engage in HFT gain an insider trading advantage on the broad market.

 

Haphazardly explained, the HFT programs respond to minute changes in supply and demand to front-run trades executed conventionally. As the above adaptation describes, a conventional block trader would click a button and make a stock order....but by the time his order reached the exchanges (a matter of milliseconds), High Frequency Trading algorithms knew about his order and bought the stocks before the impact of his demand could register and raise the price (by a few pennies). By the time the conventional trader's page refreshed, the stocks he purchased were no longer available at the listed price.

 

Certain CNBC shills defend the practice as a technological advance in communication, no different than monitoring a Bloomberg ticker for its up-to-the-second tips. It strikes me as uncompetitive though, and even an anarchist ideologue like myself could defend it being regulated away. After all, insider trading rules are (inconsistently) enforced in the interests of a fair market.

 

The bigger issue is the following: Market manipulation in the form of QE-influenced equity bubbles, LIBOR fixing, gold-price monkey hammering, Fannie/Freddie free mortgage giveaways, and the continued zero-interest rate policy of the Federal Reserve has never raised eyebrows in the past ten years. Why is the HFT scam being allowed to float to the surface at this juncture? While Janet Yellen frantically attempts to figure out the controls as the economic space shuttle hurtles toward Earth at lightspeed, the bought-and-paid-for financial media have received word from the top of the pyramid that the HFT expose` is a go.

 

(NB: Alternative media has been monitoring HFT since 2009, when Goldman Sachs's flash-trading advantage was exposed)

 

With demographic/entitlement Armageddon on the horizon, and the end of the Dollar's global reserve status around the corner, is HFT being pitched as the scapegoat that will allow fiscal mismanagement and asinine Federal Reserve policies to escape the public's wrath once again?

Edited April 3, 2014 by God the Father

[Maggyie]

Yes it's clear that they've picked their whipping boy.

[NotreDame]

What is there to debate?  Why Michael Lewis isn't covering QE?  He kind of did in "Boomerang" - good book, btw.  To go more in depth he'll have to wait until "something happens", so I'd expect a book from him post-the-next-crisis.

[God the Father]

Developments today indicate the media swirl around HFT this week might tie into shadowy financial cabal [b]Goldman Sachs[/b]'s vicegrip on the industry, as opposed to a more complicated macropoliticoeconomic diversionary scheme.

 

http://www.cnbc.com/id/101552626

 

ETrade competitor Interactive Brokers is attempting to capitalize on the financial media furor by offering customers a dedicated trade route through IEX--the exchange managed by the heroes of Flash Boys that nerfs HFT formulas. Though the actual benefits customers should realize --the cornerstone of the pro-HFT debate-- by circumventing the penny-skim tactics of HFT are minimal, the iron will certainly never be hotter to commandeer some brokerage market share by offering a bypass.

 

How does lovable Lloyd Blankfein factor into this fairly innocent market move? Goldman endorses and does lots and lots of business on the IEX exchange.

 

http://www.bloomberg.com/news/2014-03-22/goldman-sachs-endorses-iex-stock-market-built-to-fight-predators.html

 

Lewis' book has obviously been in the pipeline for some time, and there's no doubt Lloyd could invoke some of his connections in the Sumner Redstone/Viacom controlled media to keep the spotlight on HFT long enough for the 60 Minutes interview to become a serious business event.

 

The plot thins somewhat as the revelation appears to be a simple attempt to rearrange retail investment power in favor of some old familiar faces. Although where the likes of Blankfein and Dimon show their faces, the odor of Yellen and Obama will likely manifest itself in short order.

[Tab'le De'Bah-Rye]

Only one tenth of the criminals in the world are in jail, the violent ones get caught, the other 90% are ordinary folk doing things like defrauding labourers of there wages. That's all i have to say. :)

Edited April 4, 2014 by Tab'le De'Bah-Rye

[NotreDame]

I ran across the following post on Hacker News:

 

http://scottlocklin.wordpress.com/2014/04/04/michael-lewis-shilling-for-the-buyside/

 

It's an interesting post from someone who has some background in the industry.  I haven't read much on HFT, but if it's just guys using faster connections/algorithms to front run trades then this is all out of proportion. 

 

I had plenty of friends that used to work in pits (back when there were pits) and front running trades in the pit was regular behavior even if some of it was against the rules.  I'd assume taking the exchanges electronic compresses spreads and ultimately gives better prices/value back to all buyside participants.  If that's not happening, then I'd raise an eyebrow, but if spreads have compressed and commissions have come down, then what's the problem?

 

I've liked Lewis since I first read Liar's Poker 15 years ago.  I just listened to his new book Boomerang a month ago.  He's an entertaining writer and obviously understands finance better than most journalists, but he certainly spins things and is careful to straddle ideological lines so as not to alienate any segment of potential readers.  However I am a bit troubled given the polemic nature of this book (and Lewis' interviews) on something that is so relatively benign combined with the big PR push and the fact that some friends of his stand to benefit. 

[NotreDame]

I'd assume taking the exchanges electronic compresses spreads and ultimately gives better prices/value back to all buyside participants. 

 

So something else just rolled across my feed and it looks like this ^^^ is what's happening.  HFT helps compress the spread making it cheaper to buy/sell stocks:

 

In April 2012 they limited the activity of high-frequency traders by increasing the fees on market messages sent by all broker-dealers, such as trades, order submissions and cancellations. This affected high-frequency traders the most, since they issue many more messages than other traders.

The effect, as measured by a group of Canadian academics, was swift and startling. The number of messages sent to the Toronto Stock Exchange dropped by 30 percent, and the bid-ask spread rose by 9 percent, an indicator of lower liquidity and higher transaction costs.

 

http://marginalrevolution.com/marginalrevolution/2014/04/a-study-of-limiting-hft.html

 

If you follow the link you'll see that it's the retail trades that reap the most advantage from HFT (based on the study at least.)

Edited April 5, 2014 by NotreDame

[God the Father]

I ran across the following post on Hacker News:

 

http://scottlocklin.wordpress.com/2014/04/04/michael-lewis-shilling-for-the-buyside/

 

It's an interesting post from someone who has some background in the industry.  I haven't read much on HFT, but if it's just guys using faster connections/algorithms to front run trades then this is all out of proportion. 

 

I had plenty of friends that used to work in pits (back when there were pits) and front running trades in the pit was regular behavior even if some of it was against the rules.  I'd assume taking the exchanges electronic compresses spreads and ultimately gives better prices/value back to all buyside participants.  If that's not happening, then I'd raise an eyebrow, but if spreads have compressed and commissions have come down, then what's the problem?

 

I've liked Lewis since I first read Liar's Poker 15 years ago.  I just listened to his new book Boomerang a month ago.  He's an entertaining writer and obviously understands finance better than most journalists, but he certainly spins things and is careful to straddle ideological lines so as not to alienate any segment of potential readers.  However I am a bit troubled given the polemic nature of this book (and Lewis' interviews) on something that is so relatively benign combined with the big PR push and the fact that some friends of his stand to benefit. 

 

 

That's an argument I've seen, and a lot of the "pro" HFT buzz is really just pointing out (accurately, it would seem) that it's simply a technological advance that contributes to market efficiency. The profits scored by the "high freaks" are miniscule on a trade-by-trade basis. Like the Office Space scheme that takes from the penny tray a million times.

 

Today was an interesting day for this episode. Insane Shark Tank contributor Mark Cuban penned some thoughts on HFT:

 

http://blogmaverick.com/2014/04/03/the-idiots-guide-to-high-frequency-trading/?utm_source=feedburner&utm_medium=twitter&utm_campaign=Feed%3A+blogmaverick%2FtyiP+%28blog+maverick%29

 

 

If you know that by getting to the front of the line  you are able to see or anticipate some material number of  the trades that are about to happen, you are GUARANTEED to make a profit.  What is the definition of a rigged market ? When you are guaranteed to make a profit.  In casino terms, the trader who owns the front of the line is the house. The house always wins.

 

 

Mark has an issue with the fact that HFT guys are able to see a queue of trades lining up, analyze it, and then cut to the front of the line to earn the money from the trades they know are coming.  He also says that the HFT desks are building decoy algorithms to combat algorithms from competing HFT desks, generating a lot of dummy orders on the exchanges that influence prices unfairly. What you just read is a clueless interpretation of Cuban's clueless interpretation, so dip that in some saline.

 

Also today, Eric Holder lent some credence to Illuminati conspiracy theorists suggesting that recent HFT coverage ties into some kind of governmental diversionary tactic this afternoon, when he took a break from ignoring racially motivated violence against whites to formally announce a DOJ investigation into high frequency trading.

 

http://online.wsj.com/news/articles/SB10001424052702303532704579481232323439224?KEYWORDS=Eric+Holder&mg=reno64-wsj&url=http%3A%2F%2Fonline.wsj.com%2Farticle%2FSB10001424052702303532704579481232323439224.html%3FKEYWORDS%3DEric%2BHolder

(Article is useless premium content but there's the headline so you know I'm not making it up)

 

 

MEANWHILE the SEC opened an investigation of its own against a specific firm with ties to the market tactic.

 

http://www.reuters.com/article/2014/04/04/us-sec-enforcement-spoofing-idUSBREA331DD20140404?feedType=RSS&feedName=businessNews