
High-Speed Traders Rip Investors Off, Michael Lewis Says - pierrealexandre
http://www.bloomberg.com/news/2014-03-30/high-frequency-traders-ripping-off-investors-michael-lewis-says.html
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kasey_junk
Analogies with stores/checkers/soda etc. are all flawed because they are based
on something that does not exist in the markets, that is a fixed price. When
you buy a physical good in a store they have a published price that you can
trust to be what you will pay (in western countries that is the norm, not so
in many other places.)

Conversely, when talking about equities markets there is no such thing as the
stock "price". This is a short hand that is used. In reality, there are groups
of people, some willing to buy shares at a variety of prices, and some willing
to sell shares at a variety of prices. The job of the exchange is to match
these 2 groups when the buy/sell prices intersect or cross. This gets
complicated when there is more quantity on 1 side of the buy/sell than the
other. Exchanges have rules how this imbalance will get resolved, most of the
time it is based on who has been at that price point the longest.

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unreal37
The argument in favor of HFT is that it both increases liquidity of markets
and reduces the spread - both favorable to most investors.

But they can actually see you attempting to buy stock, step in front of you,
buy it before you, and then try to resell it to you for a higher price? That's
bad behavior and reduces confidence in the free market. There needs to be
regulation around things like that.

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kasey_junk
The idea that an HFT can see you attempt to buy stock before it goes to the
market is not true and would be against the law if it happened.

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michaelt

      Katsuyama realized that his orders traveled along fiber 
      optic lines and hit the closest exchange first, where high 
      frequency traders would get a glimpse, and then use their 
      speed advantage to beat him to the other 12 U.S. public 
      exchanges and 45 private trading venues. HFT algorithms 
      could then buy the shares Katsuyama wanted, and then sell 
      them to him at a slightly higher price. [1]
    

I don't know if this is illegal or not, but I'll eat my hat if anyone gets
prosecuted.

[1] [http://www.reuters.com/article/2014/03/31/us-markets-hft-
fla...](http://www.reuters.com/article/2014/03/31/us-markets-hft-flashboys-
idUSBREA2U03D20140331)

~~~
kasey_junk
What is being described in this article is latency arbitrage and is not
illegal. You will notice it specifically mentions that his order was changing
the price on other exchanges, not on the exchange he submitted his order to.

He was taking advantage of multiple exchanges in order to hide his order flow,
because as a natural consequence of market laws large orders move prices. He
is just upset that other folks were better at finding his order flow than he
was at hiding it.

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001sky
_What is being described in this article is [regulatory] arbitrage and is not
illegal_

FTFY

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andylei
no, its not regulatory arbitrage. its latency arbitrage.

~~~
001sky
"A practice whereby firms capitalize on loopholes in regulatory systems in
order to circumvent unfavorable regulation."

Same shit.

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badman_ting
I work for a financial services company and I still don't invest in stocks.
Not that high-freq trading is specifically the problem (maybe it is, maybe it
isn't, I dunno) -- retail investing just seems like a sucker's game, though
admittedly that leaves me a little stumped as to how a schmuck like me is
supposed to grow his money.

~~~
harryh
Historically the stock market has returned about 10% a year. You should be
investing in stocks if you're investing over the long term.

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keithwarren
I don't like taxes in general but wouldn't a small tax per share (pennies
even) pretty much end HFT?

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icebraining
But why should we care? The thing I don't understand about the whole debate
is, even if the HFTs are milking investors, so what? We're not talking about
powerless individuals versus giant companies that we might need to protect,
why not just let the investors deal with it by pressuring the exchanges into
banning HFTs, or making new exchanges where HFTs aren't allowed? Is it just
moral outrage because the HFTs are perceived to profit from "doing nothing"?
Frankly, I'm at a loss why do so many people feel bad for the "poor"
investors.

~~~
keithwarren
My outrage (not sure you could really call it that) is not some moral thing or
based on a perception that they are doing nothing.

My issue comes from the fact that securities trading is based on the idea that
we buy and sell parts of these securities under the idea we see value in the
company. This fits best with a long term hold position but is not really that
divergent with a day trader who buys AAPL today because he thinks news later
today about some new product will cause the price to go up thus increasing the
value of the company. He will sell later in the day because he thinks that it
may drop later.

My issue with HFT is that these trades (well most of them) are not based on
the value of the security but rather on the act of buying and selling itself.
It is meta in a sense.

That in my mind creates a fundamental flaw in the marketplace around the true
purpose of a securities exchange.

~~~
harryh
Do you like the fact that you are able to buy any stock you want pretty much
whenever you want? And also can sell any stock you want pretty much whenever
you want?

That's a service provided to you by market makers. And it's a service for
which they get paid.

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fauigerzigerk
Can someone help me understand this beyond analogies please?

If I submit a buy order for 10 shares of GOOG with a limit of $1134 that order
is going to show up in the data stream of HFTs only after it has become a
valid open order on the exchange, right?

If at that time there is a sufficient volume of open sell orders at or below
my limit, does my order go through or is there a way for an HFT to overtake my
order?

The only way I can see how an HFT could possibly overtake my order is by
offering to buy at a higher price than me before my order goes through, hoping
that he could sell the shares to me later on for an even higher price.

But that's a pretty risky bet for the HFT assuming he needs to be out of the
market before the market closes. It seems to me that the most likely victims
are other HFTs because they are the ones who will quickly raise their limits
when they see the price go up.

A low frequency trader like myself can just sit there and wait until the price
comes down again or just walk away. Is there something I misunderstand?

[Edit]:

So, summing up the replies I got here, the only problem seems to be that my
broker is allowed to send my order to HFTs before it goes live on the
exchange. Wouldn't it be incredibly simple to ban this practice? If it's that
simple to solve, why all the fuss about HFT?

~~~
adambratt
> If I submit a buy order for 10 shares of GOOG with a limit of $1134 that
> order is going to show up in the data stream of HFTs only after it has
> become a valid open order on the exchange, right?

False.

HFTs and other trading firms actually buy up the order flow from brokerages.
In fact, retail investors making trades in their brokerage accounts are
actually referred to as "dumb flow". Having access to the order flow and
controlling the routing of it can allow them to jump in front of your trade.

For example, they could see that your limit order of $1134 came in when the
lowest ask price was $1133.90. They could buy that for $1133.90 and sell it
back to you at $1134 for a 10 cent profit.

It's not too much different than in the old days when the market makers would
delay buy/sells calls to their pits to their own advantage in order to scrape
a small profit on the spread.

~~~
foobarqux
> For example, they could see that your limit order of $1134 came in when the
> lowest ask price was $1133.90. They could buy that for $1133.90 and sell it
> back to you at $1134 for a 10 cent profit.

They cannot do that. They can't fill you at a worse price than NBBO.

~~~
adambratt
In my example, they buy before the execute your trade, thus shoving the lowest
ask price up to $1134 and fulfilling NBBO.

~~~
foobarqux
You said best offer was 1133.90. If buy order is placed at $1134 with HFT firm
they must either fill the order at 1133.90 (the NBBO) or pass it on to an
exchange that has NBBO.

If you are arguing something else happens then you need to explain it clearly
step by step in a timeline.

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adambratt
1\. You send a trade to your brokerage for GOOG

2\. Trade gets routed to an HFT who will fill the trade

3\. HFT notices a spike in GOOG interest over a few seconds and starts buying
at 1133.90 driving the price up to 1134

4\. HFT fills your limit order at the best price of 1134 which they themselves
hold.

Despite what the other commentators here have said, limit orders are less safe
than market orders to market manipulation. HFT's will buy up all that dumb
flow with limit orders and then essentially run the prices to the limit orders
in their favor.

~~~
foobarqux
At the beginning of 3. does the HFT have your order or are you saying that the
market moves before the HFT receives the order?

As far as I know the first case is prohibited (actual front running). I don't
see an obvious problem with the second case though there might be subtlety
that I am missing.

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001sky
The original# piece somehow made it through the cracks at HN.

[https://news.ycombinator.com/item?id=7500426](https://news.ycombinator.com/item?id=7500426)

6 points by dcaisen 4 hours ago | flag | discuss [no comments]

__________

# By Michael Lewis, published in the NYT today

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josephlord
NYT => paywall (maybe a weak one but there nevertheless and I don't read
rather than working around it).

Also I suspect (note I have read the NYT piece) that this is an equally
original piece and the Michael Lewis with a book to sell has done similar
interviews (or other PR such as press releases) with as many relevant
publications as possible.

~~~
001sky
The actual Michael Lewis article (linked above) is 10,000 words. It's not (the
expected) fluff piece for PR purposes. More reminiscent of how books used to
be serialized/published in the press before going to print.

Definitely worth reading.

The piece here is fine for promting discussion but the info in the original
work would make that discussion better. Its simple to Delete your cookies
and/or just use incognito if the NYT is being a PITA.

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skybrian
It seems like the problem is executing a trade when the first buyer (or
seller) comes along to take the other side of the trade, rather than waiting a
bit to see if someone else will give you an even better price. That is, trades
shouldn't execute immediately when prices cross. Instead it should start an
auction.

If you're more interested in getting out a few milliseconds sooner than in
getting a better price then the front-runner is doing you a service.
Otherwise, it seems like the time needed to run a brief auction would be well-
spent.

~~~
harryh
There already is an auction. It happens once per stock market tick.

You don't trade with the first buyer or seller that comes along you trade with
the buyer or seller that submits the best price. If a whole bunch of them
submit the same price you trade with the one that does it first (hence all the
effort HFTs put into moving faster).

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skybrian
Okay, how does the front-running work then? Are ticks too frequent?

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harryh
Front-running is something that a lot of people accuse HFTers of doing that
they don't actually do.

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foobarqux
Can anyone explain how IEX is supposed to be a better exchange?

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notastartup
I thought free market meant equal playing field for all.

From what I read, HFT is limited to people with large amount of money both to
start and put their money in.

I think 30 years ago, HFT traders would've spent jail time.

~~~
harryh
Lot's of things are limited to people who have (or can raise) a large amount
of startup capital. Go try to start a company to compete with Boeing!

There's nothing illegal about an industry with high capital costs.

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skywhopper
My understanding of high speed trading is that this has always been the point.
I have to assume there's so much money in it that the obvious move to outlaw
it as soon as it was devised was already pre-paid off.

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rayiner
Its like saying computerized grocery checkout machines rip off cashiers.

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er35826
If computerized grocery checkout machines would stop halfway through the 10
cases of discount soda you bought to raise the price on the remaining 5 cases,
then this analogy would be what the article is talking about.

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dsjoerg
It's like saying Wal-Mart rips off its customers, because they use computers
and their market power to buy stuff cheaply, and then they turn right around
and sell it to their customers for more, making a profit 100% of the time.

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er35826
The problem is not the HFT firms buying stock cheaply and reselling it for a
profit. As the article points out the problem is investors placing a buy
order, and the HFT firms seeing this buy order and snapping up the remaining
stocks before the original buy order is fully completed.

This has the negative side effect of essentially making it impossible to buy
for the listed price, even when there are supposedly enough shares available
for purchase at that price.

As I pointed out in another comment, it's not just buying low and selling
high; it's like Walmart interrupting a customer to jack up the prices on a
purchase in the middle of that purchse, _precisely because that customer is
buying that specific item._

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harryh
Your understanding of what HFTs do is factually incorrect. They can't see buy
orders before they hit the market.

~~~
foobarqux
They sort of can with flashed orders.

