Flash Boys

Lsbcal

Lsbcal

Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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west coast, hi there!
This is the title of a new book by Michael Lewis coming out soon: Flash Boys: A Wall Street Revolt: Michael Lewis: 9780393244663: Amazon.com: Books
Put my request into our library to get ahead of the expected long queue.

He has been a very good author of financial stuff in the past. Entertaining and informative. Here is a MarketWatch short article:
The U.S. stock market is rigged to hurt the average investor and benefit high frequency traders, stock exchanges and large Wall Street banks, according to the author of the new book Flash Boys: A Wall Street Revolt - The Tell - MarketWatch

I'll be watching the upcoming 60 Minutes show this Sunday interviewing him.
Very short preview here: Stock market rigged, says Michael Lewis in new book - CBS News

Could this start to get ugly? I hope this gets fixed soon. They've been studying this stuff forever. Time to really do something.
 
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I have mixed feelings on this, and I'm also skeptical that 60 Minutes will be able to present it in any meaningful way.

I suppose these computers are looking at the bid/ask prices and volumes, just like I can do (but they can do it faster). Does it hurt? If their action temporarily raises the price a penny, there is a 50/50 chance I would be selling rather than buying.

But I suppose arbitrage is a zero sum game, so if they are able to skim a bit from this, I guess everyone else loses?

But I almost always use limit orders, so they can't affect my price. Though technically they may affect whether I get filled or not, but it appears that normal market volatility is far larger than any micro-swings these guys are creating.

Don't the 'big guys' have an advantage just about everywhere? It's one of the motivations for us all to become 'big guys' in some way. I suppose someone who isn't able to come up with the cash for a membership at Costco could claim the discounts I receive are driving up prices for the little guys outside of Costco. So should Costco be illegal?

-ERD50
 
Michael Lewis should be able to shed some light on this. 60 Minutes will just give him a forum, plus a nice book preview.

When I place a limit order to buy, I always put it 1 cent higher then the ask. Then it always gets filled immediately, usually at 0.0001 below the ask. I cannot split a cent (I've asked) but others can. What's going on there? May not be related to HF trading.

I'm not too worried about the immediate pricing, just about crashes brought about by human error magnified by machines and extremely short time periods. What happens if machines trade, algorithms go haywire, and markets go down in milliseconds? It takes humans a lot more time to fix this. In the mean time all hell breaks loose.
 
I agree that there should be some automatic limit on how much (a % of outstanding shares, average volume?) a trader can (net) buy or sell in a given time frame. A run-away system (intentional or otherwise) can (and has) cause(d) the market to be disrupted and that is not a good thing. We want an 'orderly' market.

-ERD50
 
We want an 'orderly' market.
Click to expand...
+1

But some will argue that if "The Market" is being disorderly that is what "The Market" wants and should be left alone.
 
High frequency trading is a common target of people who are trying to find holes in the efficient market hypothesis, so in this sense Mr. Lewis's new book is nothing new. For an opposite perspective, take a look at #8 on Cliff Asness's list of pet peeves:

High-frequency trading is killing the retail investor. Asness believes that high-frequency trading has actually improved the market: “I believe that most asset managers trade cheaper, and their investors are thus better off, because highly efficient high-frequency traders have largely replaced the traditional high-priced market making of the past.” As a side note, his firm, like HFT, uses algorithmic methods but he holds his positions for longer than an HFT usually does.
Click to expand...

Clifford Asness: Here are the 10 things that make me peeved - The Tell - MarketWatch

I also tend to believe that using highly charged language, such as claiming that the market is "rigged" against small investors, is perhaps a good way to sell books but is not helpful in the ongoing debate about the proper way to regulate computer driven trading. If the market were in any way one-sidedly rigged against retail investors, it would be impossible for Warren Buffet to be way ahead in his ten year million dollar bet of backing the S&P500 index against a basket of hedge funds. The hedge fund managers have technology on their side. If there were any easy way to consistently beat the market averages, they would have found it and be ahead in the bet against Buffet.
 
karluk said:
High frequency trading is a common target of people who are trying to find holes in the efficient market hypothesis, so in this sense Mr. Lewis's new book is nothing new. For an opposite perspective, take a look at #8 on Cliff Asness's list of pet peeves:
...
Click to expand...
Other then the brief exerpt from Lewis, we haven't heard what he really has to say yet. So we don't know if Asness's view is opposite yet. Maybe the Sunday show will tell us why Lewis is saying the headline line is "the stock market is rigged". Or we might have to wait for the book.

Computerized trading has been around decades. Vanguard came out in favor of HF trading. We just don't want to see "flash crashes" or even "flash ups". If things go way up or way down, we want to have this tradeable by everyone in human mind timeframes. Example, after the 1987 crash of 22% down in one day, the stock markets rules were modified. We just need to come up with rules that are timely as tech moves along.
 
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Nice data center. Closest I ever want to be in one again.
MRG
 
ERD50 said:
...
I suppose these computers are looking at the bid/ask prices and volumes, just like I can do (but they can do it faster). Does it hurt? If their action temporarily raises the price a penny, there is a 50/50 chance I would be selling rather than buying.

-ERD50
Click to expand...
The way I understand it, they do this both on the buy and sell side. They see the order coming & jump ahead to raise (or lower) the price.
 
walkin, I just finished that piece from the NY Times. Very interesting. I really enjoy Michael Lewis' writing and I'll look forward to reading the whole book after taking in that excerpt.
 
If I was the prez, I would start taxing individual transactions, put a stop to all the excessive trading, and everybody hates wall st
 
So the answer is to create a 350 microsecond delay in the network. As technology gets faster is 350 microseconds the correct number? We know the speed of light is (hopefully:sly:) constant, chip speed not so, code optimization changes as well. I've seen so many code timing loops go haywire as processors speed up.

Maybe I'm missing the point? Perhaps I'm too cynical.

MRG
 
The NY Times preview book article was quite good. Just what I expected from Lewis.

I think the big issue for most may be market liquidity. Part of the HFT argument was how good the liquidity would be but apparently this dries up when markets dive. There is liquidity to promote tight bid/ask spreads and liquidity to allow markets to function in crashes.

Will be interesting to see if Lewis's book discusses this.

I bought the Kindle version for $9 available today rather then wait for the library request.
 
Saw the 60 minute piece last night. He got my attention when he noted than Fidelity and Vanguard have been bambuzled by this.

If it's not illegal, who are the brilliant folks who have thought this up and developed the plan to execute it?

That would be a better 60 minutes story.
 
I like the idea of taxing transactions. While it will take some liquidity out of the market, it will also take some speculative trading out and hopefully those left will be investors rather than traders.

Or traders who really believe they can pay the tax and still make a decent profit.
 
The video seemed vague, ~ 8:20 they got into some meat.

Between that and the article, it seems that this is all due to having multiple exchanges, and apparently (if I followed this) that an order shows up on one exchange before it actually gets to the other exchange (the front running). And by being fast enough to see that order, and then place/pull an order on that further out exchange before the original order can get there. But then I thought he said that plain old high speed arbitrage (slow trading?) was how most money can be made.

So far, I don't see how his example of the offers of INTC @ 15 drying up when he would place his buy order does anything for them. So they pull their orders? Do they expect he got 'drawn in' at $15, and will change it to $15.01 after they pull? Then why have the offers at $15 in the first place?


At any rate, it seems the fix is easy. There is no way an order should be visible to anyone until it hits the exchange it is being traded at. Or merge these exchanges into one virtual exchange.

Or as someone mentioned, add a small transaction tax for every order placed (even if not executed), small enough to be inconsequential to anyone actually buying/selling, but would add up for someone just fishing.

That would have also eliminated email spam, or phone spammers. These fixes are so simple that I'm pretty sure there are people in power who do not want it fixed.

-ERD50
 
I don't expect to follow all the details as the examples are probably simplified. Still it is interesting to see how hard very smart people work to make a lot of money. Many who deride the practices would secretly like to do the same thing and make a killing. It's often just a game.

I knew of a guy who left Silicon Valley after doing CAD software to head to NY as some sort of software guy for trading algorithm writing. Always wondered how he did.

A lot of this is loosely described as arbitrage. Was it unfair to learn what the pricing is in one market and drive the other market to equalize? Or were the arbitragers providing a useful function to improve the market's health?

The main thing to me is to be able trade one ETF for another in short order and not be taken to the cleaners. Also those flash crashes have to be eliminated. Too much volatility makes me worry.
 
I was watching Cramer tonight and he said that HFT IS making a lot of money... and it is a zero sum game, so they are taking a little from everybody... no small retail investor has to pay a lot, but a small 'tax' on everybody can and does make big money...


This 'news' is not new... I had read about it years ago when some people put their networks next to the exchanges so they could get that speed advantage... I think that new exchange they mentioned will help if it takes off.... and the guy also said that they could correct the problem with staggering their order by the few milliseconds so all orders reach their destination at the same time....

The big boys should fix their problem (Fidelity and Vanguard et al).... this would take most of the money out of the system...



As for me.... I do not trade, so a penny or less per share is not going to sway my decision....
 
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Well between the 60 minutes segment, and the NY Times article, Mr Lewis sold another book to me..

Brad Katsuyama seems like really nice and honorable guy.. I wonder if I can route my orders to IEX via Schwab.. I think there is way.
 
ERD50 said:
The video seemed vague, ~ 8:20 they got into some meat.

Between that and the article, it seems that this is all due to having multiple exchanges, and apparently (if I followed this) that an order shows up on one exchange before it actually gets to the other exchange (the front running). And by being fast enough to see that order, and then place/pull an order on that further out exchange before the original order can get there. But then I thought he said that plain old high speed arbitrage (slow trading?) was how most money can be made.

So far, I don't see how his example of the offers of INTC @ 15 drying up when he would place his buy order does anything for them. So they pull their orders? Do they expect he got 'drawn in' at $15, and will change it to $15.01 after they pull? Then why have the offers at $15 in the first place?


At any rate, it seems the fix is easy. There is no way an order should be visible to anyone until it hits the exchange it is being traded at. Or merge these exchanges into one virtual exchange.
.

-ERD50
Click to expand...

I think what happens is they want to buy 100,000 share of INTC @15 (I hope that never happens :) since it is at 25) and there is say 120,000 share available at the price across all exchanges. The first exchange the order reaches has 5000 available at $15.00. The high frequency traders immediately buy all the Intel available at $15.00 and then immediately offer to sell the shares at $15.01. So now the institutional investor submits a new order for 95,000 shares at 15.01... the cycle repeats.

The problem with transaction tax even a small one of $.005/share is that all of the trading would suddenly be happening on the London exchange or Hong Kong Exchange and the Goldman Sachs trading jobs would be located in those cities.
 
What amazed me was how much study was required by these great minds to detect the problem and devise a solution. The solution is easy conceptually: don't let the front runners see your order before it gets filled! In practice it is very elegant.

It will be interesting to see if the front runners find another way to beat IEX?
 
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