Flash Boys

[clifp]

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.

[clifp]

Quote:

Originally Posted by ERD50 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

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.

[kcowan]

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?

[rtroxel]

Quote:

Originally Posted by razztazz +1 But some will argue that if "The Market" is being disorderly that is what "The Market" wants and should be left alone.

Actually, it's certain people in the market who are being "disorderly" and, of course, they want to be left alone.

Roy

[Lsbcal]

There was a nice graphic from Business Week in 2012 here: How Your Buy Order Gets Filled - Businessweek

It shows that limit orders have their own path to public exchanges. Limit orders are recommended for ETF trades.

[Lsbcal]

I don't generally pay attention to CNBC but this 24 minute interview with Lewis Katuyama and a Bats guy was entertaining:
‘Epic’ debate on high-frequency trading between Michael Lewis, Brad Katsuyama and William O’Brien - The Tell - MarketWatch

[imoldernu]

Jon Stewart interviewed Michael Lewis on Tuesday, talking about his new book.
It should be on Utube by tomorrow... High Frequency Trading....

Michael Lewis: Markets are 'rigged' - Mar. 30, 2014
Getting lots of pushback from the business networks and business magazines...

What Michael Lewis Gets Wrong About High-Frequency Trading - Businessweek

Worth watching...

[Onward]

I saw him on CNBC today.

I can see how HFT puts frequent traders at a disadvantage, but I don't see how it affects long-term investors much.

Or am I missing something?

[imoldernu]

This Bloomberg article explains in a little more detail.
High-Speed Traders Rip Investors Off, Michael Lewis Says - Bloomberg

edit to add another fun read from Bloomberg, about the 1880 Dow theory to predict bull/bear markets...(based on new peak market records of the Dow,(Bull) or below the Feb 3 numbers... (Bear).

http://www.bloomberg.com/news/2014-0...-crucible.html

[clifp]

I bought my first bond when in high school, I've been seriously investing/trading for 30 years. During that time I've read about many Wall Street scandal, generally I think the media exaggerates the harm. I bought Lewis book yesterday and finished it today, a great read.

I can say.

I HAVE NEVER BEEN SO %*g@*^) FING PISSED AT THE PARASITIC C@#^@S&* BLOOD-SUCKING LEECHES (WITH APOLOGIES TO LEECHES) OF WALL STREET AS I WAS TODAY.

The 60 Minutes piece was good, and covered most of the main points. But what really got my blood boiling was collusion between the almost all banks and almost all Wall Street firms with the high speed trading firms to scalp their customers. It is is the same thing that guys at Vanguard, and other pension and mutual funds were livid about. The brokers and market market are suppose to try and get us the best price either as individual or when the VTI manager places an order. Instead they went out of their way to screw us.

The one criticism I have off the book is there is very little data about how much this is costing us (I'm sure the only people who know are the HTF firms.) But to use one example one study found there were 55,000 opportunities to front run Apple stock, each and every day. Now sure it is maybe only one or two cent/share. But Apple trades 10+ million shares a day if 50% are high frequency trades the pennies add up.

The cost of this front running/picking off slow exchanges is definitely in the billions (probably in trader bonuses alone for HFT firms) The value of the US market is roughly $20 trillion, so $2 billion in trading cost is the equivalent of one basis point. If the total cost is $10 billion that is the equivalent of doubling the expense ratio of the Vanguard (or Schwab) Total Market Index/Fund or $500/year for $1 million portfolio.

Generally if you look hard at Wall St. scandals you can find a silver lining, e.g. sub-prime mortgage let people buy houses. However, despite what the guy from the BATS exchange say these high frequency trades provide no economic benefit. They provide the illusion of liquidity but no actually liquidity.

By sheer coincidence today, I meet with my Schwab Rep, and one of their managed portfolio advisers. They had to spend the first 10 minutes about me ranting about this and very serious request that Schwab explain in some detail how my order is routed. Ideally I'd like to route every order to IEX. The Schwab adviser was a sharp guy, who's basic strategy was to write covered call or cash secured puts. Realistically I wasn't going to pay ~.75% to an adviser, but after reading Flash Boys, I am done trading options in a rigged system, so his pitch had no appeal.

I'll post more details later on why us option traders get really screwed..

But it is important to note the indexers get screwed. Imagine Vanguard Total Stock Market fund gets a a $50 million deposit from IBMs 401K quarterly contribution, while American Funds get a $50 million redemption request from teacher pension plan. Now ideally those two should meet up and exchange shares of Apple, Walmart, Google for cash etc.. but what actually appears to happen is both Vanguard and American fund get front runned and end paying too much.

[ERD50]

Quote:

Originally Posted by clifp ... But what really got my blood boiling was collusion between the almost all banks and almost all Wall Street firms with the high speed trading firms to scalp their customers. It is is the same thing that guys at Vanguard, and other pension and mutual funds were livid about. The brokers and market market are suppose to try and get us the best price either as individual or when the VTI manager places an order. Instead they went out of their way to screw us. ....

I don't claim to follow all I've read on this, but that apparent collusion thing was weird and upsetting to me also. I've heard about 'dark pools' before, but from what they described in that article, WTF?

There needs to be more transparency here, and there should be no way that one person can see someone else's order before it gets placed. But it seems like these exchanges are getting a benefit from the HFT, so they seem to not be interested in doing anything about it.

So should Vanguard run all trades through the IEX? Are there other added costs associated with that?

-ERD50

[Lsbcal]

This is a good 13 minute interview with Michael Lewis today. Very easy to understand I think.

One thing I Lewis says again is if you are buying stocks or ETF's, use limit orders not market orders. I've always used limit orders but didn't know they went a separate way into the system.

Link:

https://www.youtube.com/watch?v=I0Yx7RnHAcw

[easysurfer]

Guess the moral of the story is the market is more like Vegas than we thought

Sometimes I think buying at Amazon is rigged. Browse an item, put that in my cart..take out of cart, then see the price increase

[kcowan]

Make sure to join the earlier conversation on this subject: Flash Boys...

[MichaelB]

Quote:

Originally Posted by kcowan Make sure to join the earlier conversation on this subject: Flash Boys...

Right. To make sure things stay in sync I'll merge the threads.

[Midpack]

Quote:

Originally Posted by Texas Proud As for me.... I do not trade, so a penny or less per share is not going to sway my decision....

I am still making sure I fully understand, still studying the topic.

But if you hold mutual funds, even index funds, they trade stocks on your behalf and probably get clipped by HFT, so it does affect every investor whether you trade directly or not. Someone correct me if that's wrong.

[haha]

Last week I went to a seminar at Fidelity on ETFs. The presenter from a Fido regional office began by explaining the role of "authorized participants" in creating and redeeming etf shares. But it soon became clear that he had no clue. He asserted that whatever firm did this needed no capital, and took no risk, because they never owned anything. Huh? I realize that the goal of this kind of arbitrage is to buy the components and sell the package as near to contemporaneously as possible, but no period of ownership and no capital or borrowing needed? If this is true, I really wish he had explained how to enter this wonderful business. Soon enough people asked questions and he had to punt and say not that he really didn't know, but that it was just a detail and really didn't matter. Well. that's like saying it really doesn't matter how these MBS come into being, just know that they are wonderful and buy them! I don't see how this is materially different from investing while being front run. It is too opaque for us to take any protective steps except don't trade and also don't invest in funds that do .

Just take a seat, ladies and gentlemen, and put your money on the wheel of fortune.

Whenever I go to one of these things I ask how does Fidelity get paid, when the customer does not pay them? Blank stares, and "that's above my pay grade." Well, Fidelity is getting paid for sure, and it's customers are doing the paying either directly or indirectly. What really annoyed me was that this was treated as if it were a meaningless or immaterial question.

When I was 8 years old my mother sent me to buy some meat at an old fashioned butcher shop. I realized that I was a mark for them, but couldn't figure out what to do about it. When I got home and was told how I had been cheated, I vowed that that was very unlikely to happen again. Of course it did happen, the world is full of sharpies. It cant be prevented, but it can be minimized by having the courage to say bulls*t or walk away when some slicks are trying to get one past you. Just 2 weeks ago a clerk in downtown coffee house took my $50 and rang up the sale against a $10.
When I gave him the note I said this is a fifty. I told him again and he was about to close he drawer without correcting it, so I called out loudly, "Don't close the till, I gave you a fifty and you rang up a ten!" The manager walked over and made correct change, but no comment was made or explanation offered. Too bad, because the coffee was good and the place well located for my downtown errands but they have seen the last of me

Interesting thing about the Michael Lewis CNBC interview today is that the CNBC guys essentially were arguing big deal, the insiders are supposed to fleece the sheep as long as not too many of them are killed in the process.

Like Carl Perkins sang:

Well, you can knock me down,
Step in my face,
Slander my name
All over the place.

Do anything that you want to do, but uh-uh,
Honey, lay off of my shoes
Don't you step on my blue suede shoes.
You can do anything but lay off of my blue suede shoes.

Substitute being cheated for blue suede shoes, and this is how I feel.



Ha

[haha]

Quote:

Originally Posted by Midpack I am still making sure I fully understand, still studying the topic. But if you hold mutual funds, even index funds, they trade stocks on your behalf and probably get clipped by HFT, so it does affect every investor whether you trade directly or not. Someone correct me if that's wrong.

Today Michael Lewis explicitly said that this is correct.


Ha

[Midpack]

Quote:

As of 2009, studies suggested HFT firms accounted for 60-73% of all US equity trading volume, with that number falling to approximately 50% in 2012.

And if your AA includes equities in any form, you're not immune?

Quote:

Originally Posted by Texas Proud As for me.... I do not trade, so a penny or less per share is not going to sway my decision.... Quote: Originally Posted by Midpack But if you hold mutual funds, even index funds, they trade stocks on your behalf and probably get clipped by HFT, so it does affect every investor whether you trade directly or not. Someone correct me if that's wrong. Quote: Originally Posted by haha Today Michael Lewis explicitly said that this is correct.

So does High-frequency trading - Wikipedia, the free encyclopedia - especially index funds since their rebalancing trades are predictable well in advance. Hmmmmmmmm...

And if Wall Street runs true to form, shouldn't we expect once they've exploited HFT as widely as possible, they will start to increase their cut more and more to keep the merry-go-round spinning? And they'll be the first to know when to get off. Sounds almost bubbleish...

[imoldernu]

Mike Lewis and Jon Stewart

Watch Michael Lewis Explain 'Flash Boys' with Jon Stewart on 'The Daily Show,' CNBC and '60 Minutes' - Speakeasy - WSJ

An easy explanation....
Part 3, was not on the air... an extended part of the interview kinda directed toward morality. Some comparisons to the Canadian ethos and the way US media treats Wall Street.