
High-Speed Firms Now Oversee Almost All Stocks at NYSE Floor - jackgavigan
http://www.bloomberg.com/news/articles/2016-01-26/high-speed-firms-now-oversee-almost-all-stocks-at-nyse-floor
======
codeshaman
"... millions of trades a day".

What is that ? How can that be the reflection of what's going on in the 'real'
economy ?

I interviewed at an HFT firm once and they were doing kernel-bypass
networking, latency measured in nanoseconds and all kinds of really low level
systems programming tasks.

Interesting technical challenges. Except... what does that have to do with the
economy ? Why is it that I can make money if my algo runs a microsecond faster
than yours ?

Why is that time delta measured in money ? I know there's the very rational
technical explanation of how the first to react executes the trade, but just
step back and look at the bigger picture here - what the fuck are you guys
really doing ?

Are the people writing these algorithms even remotely thinking that the trades
can ruin or starve millions ?

Are you even considering that these high frequency "trading" systems have an
actual impact on the planet, the air, the water, etc ?

Of course no. They don't give a fuck. In fact, you can only survive in this
industry by not giving a single fuck. Otherwise you have to look at yourself
and realize what a parasite you really are.

The stock market made sense when securities actually reflected the "real
world" performance of companies.

Now it's all reversed - price determines company performance - it's like all
companies work for the stock market itself.

I don't like these guys. A bunch of crooks and gamblers who have no idea what
they are doing, while everyone thinks they do.

That's why the prognosis for the world economy is pretty bleak - because the
insanity is institutionalized already and we have no idea how to stop it.

~~~
patio11
Millions of trades a day each contain teensy, tiny little updates about the
state of the economy. Think of them like tweets, not like State of the Union
addresses. This married couple wants to send their daughter to college more
than they want Google. That hedge fund likes Coke more than Apple. This
pension fund doing it's weekly buy of an index to prepare for 2075.

The market is these little packets bouncing off each other and summarized.
High numbers of them are not unhealthy. On the contrary, it means more
information is moving with less overhead loss to middlemen. (By analogy:
What's more expensive, 100k tweets, 10 phone calls, or a FedEx envelope? If
you say "clearly it's the tweets because there are so darn many" that would be
a weird answer for an engineer to believe.)

If you believe the world economy is going to heck in a hand basket, there
exist ways for you to be richly compensated for that expert opinion by sending
your tweets into the machine. (Well, if you're proven right.) HFTs will
happily minimize the transactional costs you incur while making that
statement, as compared to the sweaty, yelling colluding-against-you jocks they
have replaced.

~~~
thewarrior
But what is the social benefit of the stock markets being synced to the state
of the economy at the micro-second / nano-second time scale ?

That's surely taking things a little too far. Nothing in the real economy
changes that fast.

~~~
wcummings
>But what is the social benefit of the stock markets being synced to the state
of the economy at the micro-second / nano-second time scale ?

It's cheaper than people doing it, and the lower the latency, the faster a
trader can move his position to match changes in the market.

What is the social benefit of Twitter loading in 100ms instead of 150ms? Why
is latency important for peoples' stupid mobile apps, but not important for
financial transactions?

>Nothing in the real economy changes that fast.

Sure, but you don't want to have to wait for an earnings report to sell your
shares when you want to buy a house or something. You want people to always be
trading your stock so it's easy to buy and sell. Similarly, when a big pension
fund buys or sells a lot of your stock at once you want "people" trading to
reduce volatility.

~~~
thewarrior
Dude its not 100 ms we're talking 100 microseconds.

------
theunixbeard
For any programmers curious about how HFT __actually __works in practice --- I
recommend checking out our very own patio11 & tptacek's
[https://www.stockfighter.io](https://www.stockfighter.io) [1]

It's a stock market simulator with a websocket API that you can code against
to run your own trading bots in various scenarios.

I am currently on level 3 where the exact goal is to write a profitable market
maker bot. So far my bot is decidedly UN-profitable, but I hope to change that
soon.

[1]: And here is the thread when Stockfighter launched on HN:
[https://news.ycombinator.com/item?id=10724592](https://news.ycombinator.com/item?id=10724592)

~~~
jiniba
Hi, that's a really cool project! However, something I noticed with a lot of
'virtual market' simulations is they never take into account bid-ask volumes
and allow unlimited volume trades at market values. Unfortunately, a lot of
strategies people come up with that are 'profitable' in reality don't work. Do
you guys have some sort of mechanic in place to stop this, or are working on
one in the future?

~~~
patio11
Unlike most simulations [+], we run an actual order book. You can very, very
easily exhaust the shares available at the best bid or offer and experience
price slippage. Avoiding that is literally the goal of level two.

\+ Most investment games generate a spot price by magic and let you transact
at it as much as you want. We have actual counter parties (bots) running their
own strategies, the number, composition, and interaction of which determine
the prices available. This is complicated; most simulations abstract it away
to focus on their particular areas of interest. Having a nice crunchy view of
market microstructure wrapped in an API is our interest; we in turn punted on
a lot of other things. A big one: many people interested in stock markets want
to trade Google; Stockfighter doesn't have Google but might have e.g.
Amalgamated Tree Frog Airlines (ATFA), with a fake-but-almost-plausible market
dynamic to it much of the time.

~~~
jiniba
Sorry for the late reply, but that is incredible! The simulation overall
sounds incredible and I sign up. Thanks for creating something so cool!

------
elecengin
The end of this article hints at the real macro trend here: the NYSE floor is
a glorified TV stage. Compare NYSE to NASDAQ.

First - a quick explanation of what these market makers do. Every security is
primarily listed on a single exchange. In the US, this is dominated by NYSE
and NASDAQ. Any listing exchange assigns market makers to the securities that
it lists - these firms guarantee that they will both offer and buy the stock
within certain limit and pricing restrictions. In return for this
responsibility the market makers get price breaks and other preferential
treatment. NASDAQ never had a floor, so these were just designated firms you
could (in the early days) call. NYSE, on the other hand, assigned this
responsibility to specific individuals from firms - all in one building on a
single trading floor. Once the markets electronified, it was easier for the
NASDAQ market makers to adapt and become electronic and more automated as
well. As NYSE held on to the old model of individuals on the floor, they
attempted to justify it - mostly by spreading distrust of computers. (Distrust
which has proven partially justified - see the Knight Capital meltdown a few
years ago.) Despite their arguments that the humans are adding to the
stability of the market, the reality is the humans are doing less and less.
For the last 5 years at least all floor brokers and market makers are managing
most of their orders electronically with the help of "upstairs" \- other
employees of the markets makers / floor brokers who are upstairs. Furthermore,
the benefits that come with being a market maker apply to some of the firm's
electronic business as well - effectively making the floor presence a cost
that is made up off the floor.

TL;DR - The NYSE floor is a joke. This just proves it.

~~~
veritas20
> mostly by spreading distrust of computers. (Distrust which has proven
> partially justified - see the Knight Capital meltdown a few years ago.)

Computers only do what they're programmed to do by humans. Inherently,
distrust of computers (sans AI) is distrust of humans.

------
Mikeb85
Or, put another way, HFT firms now oversee most market-making. Not surprising
really, that what can be automated is left to the experts in automation and
fast infrastructure.

------
gchokov
That's part of the 4th industrial revolution - automate all the things.

What strikes me is that if automated trading is profitable, then it must be
predictable as well, meaning trading and market direction is more "Non-random
walk" than "Random Walk" ..

~~~
evanpw
Market making is not really like directional trading. When a market-maker
trades, the price is very likely to move against them afterwards. To be
profitable, all that they need is for the price to move against them by
slightly less than the spread (the gap between the price they offer to buy at
and the price they offer to sell at) on average. Something like a random walk
is exactly what a market maker wants; trending prices are bad.

~~~
Ntrails
The price will definitely move by more than you make on the spread - but you
might win or lose on that. In simple terms what you lose on the swings you
gain on the roundabouts.

------
fidget
Seems fairly obvious that market making would become almost full automated
eventually

------
tmaly
market making on the NYSE is not that glamourous. There is an extra set of
rules that have to be followed. The margins are already very thin due to the
increase in competition.

------
lossolo
Pay a small fee for every transaction and here you go, HFT will be over.

~~~
kasey_junk
HFT already pay a small fee for every transaction. Any additional fee they
will just price into the spread like they currently do.

~~~
lossolo
Add 1 dolar for every trade. Good luck with adding this to spread. They are
making money on small differences, ultra short investments. Then ultra short
will not be an option. If you make 1 million transactions then you pay 1
million for transactions. How much do they actually make on this?

~~~
kasey_junk
Some commodities and options exchanges already have fee ranges of that order
of magnitude. They can get away with it because the leverage of the
derivatives means the spread is bigger than that.

On the equities side, if you went to a dollar per trade it would be priced
into the spread one way or the other. My suspicion would be with decreased
liquidity due to participants moving to derivatives that allow for ownership
in fractional components of large transactions that make the tax more
bearable.

Either that, or you wouldn't have market makers and the equities market would
grind to a halt and things like index funds, etfs, etc would no longer be
economically viable.

------
jagtesh
HFT mocks the true essence of trading. That of buying or selling goods or
stocks because you see the intrinsic value and care to "invest" in them. This
used to give us a real picture of the public sentiment for those companies or
commodities.

HFT on the other hand is the brutal unempathetic cousin of intra-day trading
that completely takes the human element out of the picture. Stocks are bought
and sold in micro seconds, creating an unsustainable and unlevel playing field
for the real humans in markets.

To this day, I fail to see how was this even allowed by regulators. HFT
systems should be pitted against other HFT systems on newly created indexes or
an alternative system, where humans are not allowed to trade for their own
benefit. The current ecosystem is just unsustainable.

~~~
ctlby
> HFT mocks the true essence of trading

HFT is the true essence of trading--predicting short-term changes in supply
and demand and acting accordingly.

> This used to give us a real picture of the public sentiment for those
> companies or commodities.

Can you pinpoint some moment when it stopped?

> Stocks are bought and sold in micro seconds

Most HFT strategies don't actually do this. Buying and selling in such a short
period implies a pure arbitrage, of which there are very few. The ones that do
exist are generally fully exploited by the single fastest participant.

> creating an unsustainable and unlevel playing field for the real humans in
> markets.

Depends on your investment horizon. The statement is nonsense for all but the
shortest timeframes. In particular, the fundamental finance guys (the
"investors") are in no danger from the machines.

> The current ecosystem is just unsustainable.

Why? Automated market-makers are a middle-man that temporally bridge supply
and demand between "real" buyers and sellers. Kind of like a grocery store
temporally bridges supply and demand between consumers and farmers. Kind of
like a car dealer temporally bridges supply and demand between consumers and
manufacturers. Kind of like... you get the idea. Why are equity markets
different?

~~~
jagtesh
> Most HFT strategies don't actually do this. Buying and selling in such a
> short period implies a pure arbitrage, of which there are very few. The ones
> that do exist are generally fully exploited by the single fastest
> participant.

I assumed most were of that sort. I still fail to understand what does being
one millionth of a second faster accomplish if you're going to hold your
position longer than that. It still triggers a competition for being the
fastest participant that makes the transaction right after an event.

>Why? Automated market-makers are a middle-man that temporally bridge supply
and demand between "real" buyers and sellers. Kind of like a grocery store
temporally bridges supply and demand between consumers and farmers. Kind of
like a car dealer temporally bridges supply and demand between consumers and
manufacturers. Kind of like... you get the idea. Why are equity markets
different?

That's an interesting thought. It may just be that the subject has a lot more
elements that I haven't considered yet.

Here's something for you to consider and I would love to hear your POV on
this. What if the regulators decided to ban all HFTs. Transactions had to rate
limited by 300ms or more. In your opinion, would the markets behave any
differently from now? If not, then what is being gained by all the major
investments in HFT systems and platforms? If yes, then what do the markets
gain?

~~~
ctlby
> I still fail to understand what does being one millionth of a second faster
> accomplish.

A simple example: suppose AAPL is currently quoted $95.00 x $96.00. A
reasonable estimate for the "fair value" is the midpoint, $95.50. Now, a new
sell order for $95.01 arrives at the market. AAPL is now quoted at $95.00 x
$95.01. In the absence of other signals, a trader might reason that there's
something wrong with the guy selling at $95.01 when everyone else thinks fair
value is ~$95.50. If so, he'll rush to trade against the new order. First one
to get there gets shares cheap; everyone else gets nothing. Hold the position
for as long as you like.

There are a lot of details to get right, but this is an actual HFT strategy,
not a toy example. Note that your speed matters only insofar as it lets you
trade ahead of everyone else. All the infrastructure investment is required to
stay ahead of other participants, but it does not confer a durable advantage:
the arms race will quickly erode the edge. The investment is best-viewed as a
tax imposed by other HFT firms, paid to technology vendors and exchanges. The
big winners are those who sell the equipment and fast lines that certain HFTs
desperately need.

> What if the regulators decided to ban all HFTs. The market would look pretty
> similar to how it does today. The big change would be somewhat wider
> spreads: market makers need to compensate for the additional risk they take
> on by leaving their orders out. Any other traders here have an opinion?

