Flash Boys

[Midpack]

And here's another POV which states (among other things) that big mutual fund houses, pensions, endowments, hedge funds get scalped more regularly than the little guy. Imagine that!

Michael Lewis’s flawed new book | Felix Salmon

[NYEXPAT]

I think this guy is a bit late to the party! Back in the 70's/80's when I was a trader,hedge fund operator, front running was the VIG for inside knowledge. The exchanges wised up and instead of the VIG going to the brokers, the exchanges collect big bucks to let the HFT set up their computers right on the floor for first peek. Back in the 50's-70's security analysts for the streets first mutual funds told me they would get fired for not acting on inside information. Nowadays, you have to run for congress.

[Lsbcal]

If you go back to that youtube video posted (above in this thread) today and listen after about 10:30 minutes into the video, Lewis says that

Quote:

the complexity is a source of instability.

Lewis then says that Goldman wanted to get into IEX because the complexity is symptomatic of a worse problem. Goldman did not want to be blamed when there is a BIG flash crash (x10 flash crash as Lewis put it).

So that would be my biggest worry. The flash crash of May 2010 was over in a "flash". I would worry that it could get so bad that it would be a more permanent hit to stocks that could destroy confidence and hurt the real economy.

I'm hoping the fix (IEX type of exchange) is going to snowball in popularity and help us avoid a really bad shock.

[steelyman]

I notice that the HFTH (high frequency talking heads) bunch is going nuts.

Of course. They wouldn't have jobs if things changed.

[Midpack]

Quote:

Originally Posted by Lsbcal I'm hoping the fix (IEX type of exchange) is going to snowball in popularity and help us avoid a really bad shock.

I watched Michael Lewis on Charlie Rose for a full hour. He said new regs aren't the answer, Wall St will quickly find a way around them. Instead he suggested that unless investors in large numbers start demanding changes, nothing will happen. He also said that Goldman Sachs is having internal debates right now considering using IEX to avoid getting smeared if the X hits the fan WRT HFT. He said Goldman can't win the HFT game anyway because they are too big and slow, so they might be wondering if they can come off as the good guys by cutting out the HFT firms.

I'm not smart enough to know, just sharing what Lewis said.

And it's not just equities evidently.

[Lsbcal]

Quote:

Originally Posted by Midpack ... I'm not smart enough to know, just sharing what Lewis said. ...

You have plenty of company.

[clifp]

Quote:

Originally Posted by 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

Lewis is way better than me at making analogies so I'll summarize some of the collusion I read in the book, but watch this interview.

Exchanges Income
Primarily make money by charging a fee for executing a trade.
That fee is passed on to us retail investors above our $8.95 commission fee typical $.50 for sale, same thing for institutional investors.
Connection fee for brokers, whole seller, the faster the connection the fee increases exponentially.
Co-Location fee. They charge high speed trading firm huge bucks to locate their service in the same location as the exchanges servers...
Special order type fee. We are familiar with market,limit order, perhaps you've seen All or None,or Kill or Fill. But the high speed trading firm have paid exchanges to add an addition 150 types of order.
One is example is Hide and Slide which cancel a sell trade (for example) if the is bid size larger than ask size..
Generally speaking these order are only useful for high speed computerized trading.

Exchanges expenses: beside the normal computer office, cost a big expense for exchanges is providing rebates to brokers or banks who route orders their exchange. In many case these rebates make very little economic sense except for they enable the High Speed Trading firms to take advantage of their trading speed to pick off the profitable orders. Buy 1000 shares of UPS at 98.00 because they know they can sell it a few milliseconds later to some else at 98.02.

Brokers make money from collecting the rebates, also some brokers like E-Trade also owned (or use to) exchanges.

Banks: The book listed too many ways that banks hose their customers for me to go over. But the use of dark pool, which in theory are suppose to hide the trade of the large institutional firms but seem like they are really just design scalp them is one of the biggest.

[REWahoo]

Jack Bogle doesn't agree:

Quote:

In an interview with CBS MoneyWatch, the 84-year-old Bogle argued that the claims Lewis makes in his new book, Flash Boys, which he described as "the talk of the town" are "too extreme." Bogle says Lewis also fails to note how investors gain from HFT in the form of lower transaction costs.

Jack Bogle: Michael Lewis is wrong about rigged markets - CBS News

[Running_Man]

Michael Lewis is a gifted writer and a great salesman of his books. But to look at his comment at face value - the stock market is rigged, is simply not true, but just a sales pitch.

Over the past 25 years everything has gotten better for an individual stock investor. Commissions have sunk to record low levels, and all the high level computing being thrown at the stock market makes this possible.

How was my purchase of Microsoft a year ago when I was loving that stock price rigged? What effect did the Flash Boys have on a thousand shares at 28? 2 cents per share? How do the flash boys effect the long term business of Microsoft? They don't. This is a lot to do about nothing, I remember when the bid ask was in 1/8 the and you paid a commission of $49 at a discount broker.

If there is a system that averages an 8 percent annual return and the cost of the transaction includes a HFT that is Malkeiling away a market inefficiency that exists in the short term, I am welcoming those to the party. If the HFT sunk the market so that people lost faith in them and dropped PE's permanently 50% I am all for that as well. I will gladly take a double on my dividend return purchases on all my stocks. If people want to go back to when mutual funds routinely had expenses of 2 percent, well then I guess we better eliminate all but the "necessary" trades.
Other than that something that causes a 0.02% cost to purchasing a stock is not worth wasting time even thinking about.

[frayne]

I too, saw Lewis on Charlie Rose last night. I think he does a good job of pointing out one nuance of the market (HFT front running) that may not be illegal but sure as hell is unethical.

[Midpack]

Quote:

Originally Posted by frayne I too, saw Lewis on Charlie Rose last night. I think he does a good job of pointing out one nuance of the market (HFT front running) that may not be illegal but sure as hell is unethical.

I am surprised that exchanges can legally sell order info to an HFT computer-firm before passing the order to another exchange or executing the order for the buyer. That seems beyond unethical to me, that should be illegal, but I'm naive. Who else can an exchange sell order info to before execution?

[Lsbcal]

Quote:

Originally Posted by REWahoo Jack Bogle doesn't agree: Jack Bogle: Michael Lewis is wrong about rigged markets - CBS News

But Bogle hasn't read the book. And Bogle also says in that article:

Quote:

Referring to the Flash Crash," Bogle said, "all this technology is fragile ... and can break down at a moment's notice. There is a lot of stuff that's going on behind the scenes that shouldn't be going on."

I think Lewis's "rigged" remark is a way of getting our attention. But he does seem to have some good points, together with research.

I still have not finished the book myself.

[rayvt]

Quote:

Originally Posted by ERD50 there should be no way that one person can see someone else's order before it gets placed.

From what the 60 Minutes hit piece said, they didn't. The HFT-ers saw a large order on one exchange and inferred that there would be other similar orders hitting other exchanges momentarily. They didn't "know" anything, they just made an educated guess.

Katsuyama himself said that his problem went away when he limited his orders to only one exchange. It also didn't occur when he staggered the timing so that all his orders hit multiple exchanges at the same time.

What is most astonishing to me is that after all this time and all the known & proven fake stories, going back 10+ years, that anybody pays any credence to 60 Minutes.

[Midpack]

Quote:

Originally Posted by rayvt From what the 60 Minutes hit piece said, they didn't. The HFT-ers saw a large order on one exchange and inferred that there would be other similar orders hitting other exchanges momentarily. They didn't "know" anything, they just made an educated guess. Katsuyama himself said that his problem went away when he limited his orders to only one exchange. It also didn't occur when he staggered the timing so that all his orders hit multiple exchanges at the same time. What is most astonishing to me is that after all this time and all the known & proven fake stories, going back 10+ years, that anybody pays any credence to 60 Minutes.

Lewis has appeared on every possible forum lately including Charlie Rose, Jon Stewart and others, so this has little to do with 60 Minutes - they didn't report anything different than many other sources. He's selling a book, like every other author is required to do by the publisher. Same thing actors, musicians, etc. do every day.

And other than getting duped by a source on the Benghazi piece and the Bush Natl Guard story 10 years ago, what are the other mistakes that constitute "all the known & proven fake stories?"

[Running_Man]

They just apologized for duping large audio bites of an engine that don't exist in a tesla. They were roundly criticized for not commenting on successful new energy companies on their green energy is dead piece.

[Chuckanut]

Quote:

Originally Posted by Midpack Lewis has appeared on every possible forum lately including Charlie Rose, Jon Stewart and others, so this has little to do with 60 Minutes - they didn't report anything different than many other sources. He's selling a book, like every other author is required to do by the publisher. Same thing actors, musicians, etc. do every day. And other than getting duped by a source on the Benghazi piece and the Bush Natl Guard story 10 years ago, what are the other mistakes that constitute "all the known & proven fake stories?"

Well, there was the kerfuffle with General Westmoreland back in the 80's.

Westmoreland V. CBS: Information from Answers.com

Quote:

Burton Benjamin, longtime CBS News executive, was also asked to produce an internal evaluation. After an exhaustive investigation, he concluded the program was “seriously flawed”: it was out of balance; “conspiracy” had not been proven; friendly witnesses had been coddled and those opposing the thesis treated harshly. Mike Wallace stood by the program, but later said that it took him two years to get his confidence back.

[Lsbcal]

This thread isn't about 60 Minutes. It's about Lewis's book.

[W2R]

Quote:

Originally Posted by Lsbcal This thread isn't about 60 Minutes. It's about Lewis's book.

You're right, of course. I just started the book late this afternoon. Guess I am late to the party! All I can add to the discussion so far, is that (as usual) Lewis's writing is intriguing and grips the reader right from the start..

[clifp]

Quote:

Originally Posted by Midpack I am surprised that exchanges can legally sell order info to an HFT computer-firm before passing the order to another exchange or executing the order for the buyer. That seems beyond unethical to me, that should be illegal, but I'm naive. Who else can an exchange sell order info to before execution?

Well technically they are not selling order information. They are simply selling the right for a HFT firm to build their server in the same building as the exchange 's service. Of course as practical matter it is the exact same thing, and if it was done by by exchange employee to another human both would go to jail...

[george76]

Quote:

Originally Posted by pb4uski 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.

Why should traders/investors who have done nothing wrong have to now pay an additional tax? There are other ways to get rid of HFT.

BTW - We had a transaction tax back in 1929...