

High-Frequency Programmers Revolt Over Pay - nsoonhui
http://www.forbes.com/2010/07/28/high-frequency-trading-personal-finance-programmer-pay.html

======
jacquesm
The value created by the work that you did for hire does not have to translate
in to your salary at all, just like you're not going to have to share in the
losses if the project turns out to be a dud.

When a welder helps to put together an oil rig that then either makes millions
of dollars or explodes, sinks and causes billions in damage the fact that he
did it as a salaried employee shields him from the damage just as much as it
will insulate him from taking a share in the profits.

That's why it's work for hire. You get to decide up-front if that sort of
thing is what you want.

So if someone offers you the opportunity to program a computer and make that
company millions of dollars you are being compensated for your time, _not_ for
how much money your software will make.

The shareholders of the investment bank and the people that thought up the
spec for the thing that you are building will have a much bigger claim to the
profits than the guy that codes it up, and not surprising, they're the ones
that will eventually make more money on it than you.

Why programmers should be different in this way from welders is not clear to
me. Everybody that works for 'big-corp' makes the same kind of deal, and if
you didn't make more money for the company than you cost you probably wouldn't
have a job to begin with.

~~~
msy
You clearly haven't worked in finance. The traders get a percentage cut, as do
the quants, it's only reasonable the hackers started asking where their cut
was. However they are conflating programmers and quants here, the guy who puts
together a FIX interface is a pretty replaceable cog, the guys who develop
algorithms and their implementations are quite literally worth their weight in
gold if they're good. The thing with the serious high-freq stuff is the line
between implementation and algorithm really starts to blur, you need people
who can write seriously fast code that's also bulletproof _and_ can be turned
around fast. You need a deep understand of how markets work, how feeds work,
how to handle everything from fast market conditions to managing latency
issues in multi-venue trade distribution setups.

~~~
jacquesm
> You clearly haven't worked in finance.

Chase Manhattan bank, the Netherlands branch, formerly the Nederlandse Crediet
bank, about 3 years from when I was 19 to when I was 21, both as a systems
level programmer as well as an application programmer.

> However they are conflating programmers and quants here

Yes, but I didn't, I only spoke about the programmers. They do not come up
with the models, they just lay the bricks.

The algorithm developer has a different role here and is more than likely not
the same guy as the one that codes it up.

~~~
sfk
Please refrain from using the bricklayer image here. It is demeaning, silly
and wrong. In order to implement a mathematical model, a programmer has to:

    
    
      a) Understand the model.
    
      b) Come up with a fast algorithm for the specification.
    
      c) Prove the algorithm correct.
    
      d) Make no mistakes implementing the algorithm.
    
    

All of this has _nothing_ to do with bricklaying. Moreover, it's quite ironic
that the geniuses who come up with the models often "forget" point c) for
their own work.

~~~
jacquesm
Try putting up a brick wall before you class the comparison as demeaning.

~~~
sfk
You were the one who said _just lay the bricks_. This clearly implies that
laying bricks is an inferior task compared to coming up with models.

EDIT:jacquesm, do you have a voting ring or why are your posts at 2 points
(and mine at 0) the instant you post?

~~~
jacquesm
Why should I have a voting ring? If the situation would have been reversed
would it be ok with you if I accused you of having a voting ring? I don't
think so.

If there is anybody on HN that has an aversion against voting rings it
probably is me, and I wouldn't ever stoop so low as to cheat on something as
silly as a conversation on a website (or anywhere else for that matter).

Whoever voted for me is free to step forward, I swear I haven't a clue who
voted me up and you down.

edit: This sort of ticks me off by the way, within two days I first get this
character calling me a troll: <http://news.ycombinator.com/item?id=1556756> ,
now I have a voting ring? Way to go).

edit2: and if I had a voting ring my posting
<http://news.ycombinator.com/item?id=1560732> would not be stuck at 3 votes ;)

~~~
JoachimSchipper
It wasn't me, but if you up-/downvote because you agree/disagree with someone,
it's hardly surprising that you'd upvote one guy's posts and downvote the
other. Really, there's no need to stipulate a voting ring here. (And adding
one point to a comment is pointless, anyway; you'd use a voting ring to get
submissions to the front page.)

------
patio11
I think financial industry programmers are at the leading edge of this
phenomenon (much like quants were the leading edge of programmers being paid
for value rather than for hours), because they're the programmers who can most
easily demonstrate that their code directly made a company millions. They're
not the end of it by a long shot.

Take A/B testing, analytics, conversion optimization, etc. If you are good at
these, you can generate several million dollars of value over the course of a
week. If you can credibly offer the prospect of results like that, some
companies will pay you very well indeed.

~~~
tom_b
I'd actually love to see more jobs that offered the opportunity to work with a
small base salary but increased compensation levels based on measurable
results.

I'm really curious about non-startup work models that would encourage this. So
far, the easiest path would seem to be via consulting, where you sold your
services as business services that happened to be software-based rather than
as a "warm body" to staff some open slot somewhere.

It seems that overall, startups are probably lower expected value to the early
employees in pure financial terms than having compensation tied to measured
results for work done for some other company.

I remember essays by both PG and Joel that mentioned the "value effect", PG
talking about a "monster of productivity" hacker who added a bunch of value to
Viaweb in a single day and in Joel's case, a summer intern who (I vaguely
recall) suggested and then built the joelonsoftware jobs board.

I think fogcreek offered the intern some type of stock option bonus for
joining fulltime. I don't remember if the Viaweb hacker got something or
already had equity of some sort.

~~~
GBond
>I'd actually love to see more jobs that offered the opportunity to work with
a small base salary but increased compensation levels based on measurable
results.

Many sales positions are like this (eg. Enterprise Software).

The key of such pay model is being easily measured down to the individual
(which sales is). It doesn't apply to most cases because it is hard to
accurately measure contributions of individual's performance of a
product/result that is comprise of a team of peers.

The "body shop" biz model is also easily measured (sit on seat 1 hr = pay for
1 hr).

~~~
matwood
"Sales" isn't that easy to measure. Sure, the sales person might have been the
face to the other company, but were they the real reason the sale closed? I've
written a bunch of small pieces of software for my current company and many
new clients have said the only reason they picked my company over a competitor
was my value add software. Did I see any of the sale commission? Nope.

------
kingcub
I'm Jeff's business partner / fellow programmer. We do both algorithms and
infrastructure. The markets continuously adapt. It's a constant balance
between writing the code you need right now, managing the code you wrote a bit
ago, tweaking your existing strategies / finding new ones. We have to know how
to trade, come up with new strategies, and write fast solid software that can
adapt to get a new strategy to market in very little time. After that we have
to analyze our trades constantly to stay in the competition.

We are market-makers (MM), so we don't care all that much about forecasting /
direction. We want to fill order flow at the cheapest price that we can make a
profit on. All the competition in our little MM niche of High Frequency (HF)
trading revolves around a fight amongst market makers to give the best price
possible to customer orders. This leads to very tight markets. That works out
very well for customers.

I don't fault previous employers for paying us what they did as the article
mentioned. It's a lot more than I ever expected to make coming out of college.
The article seemed to have a programmers versus industry slant that I don't
quite agree with. In my opinion industry is being taken over by programmers.
Companies have a natural upper bound they can pay any employee.

After that, and I have been on both sides of this, either you can accept the
comfort of a regular paycheck or you can throw that all away to take a risk
and grow in a different way. If you take the risk you're throwing away a sure
thing for upside. I don't have a family yet so to me it was the right time to
do this.

The `programmers revolt` has been over for years. Programmer's won. Markets
are all electronic or will be soon. It is inevitable and good that this
happens, in the same sense it is good that we put robots into factories, use
statistics to optimize business processes, etc etc.

It's been a longer road to getting to this point than the article mentions, my
first bit advice for someone who in the trading industry and wants to branch
out on their own, is it's going to be hard, just like any startup. The money
you see the company you are working for making is the result of a lot of work,
that you just can't appreciate until you have to do it all yourself from
scratch. Which we have, twice. The article was a bit off on this, we already
had our first `failure` and are trying again. This time we learned to keep our
IP.

With a startup, we've had to wear all the hats that as employee we didn't have
to think about at all ourselves. It's a combination of awesome, daunting,
miserable and satisfying, like any challenging endeavor. Personally I find
creating something from the bottom up a lot more rewarding than grinding out a
paycheck.

~~~
starkfist
If you're a good C++ programmer with a mathematics degree, what else do you
need to know to get into work like this?

Is it worth taking "MFE" style classes, like the ones offered at Baruch and
NYU? Are the systems Windows or Unix? How much "advanced" math do you need to
know? How much high performance infrastructure do you need to know?
(networking, specialized storage & I/O, etc.) Is there a way to go directly to
a startup firm, rather than first working at a bank or larger hedge fund? Are
languages other than C++ used? Is it easier to do this in New York or Chicago?
What bars should I hang out at in order to bullshit my way into an interview
or partnership?

~~~
kingcub
Personally, I started in 03 programming C++ for an, at the time, small Chicago
Prop trading firm. Prop firms tend to be in smaller than larger banks / hedge
funds and that is the route I would try to take. There are several of them
around the Chicago area.

I never took an "MFE" class in college. I graduated with a CompE degree,
taking most of my electives in CS. Math is important, primarily statistics.
Being a good coder and loving to program more so. Having a natural analytical
bent, and being able to wade through data / formulate then test conjectures,
and appreciating how markets will never stop surprising you, even more.

A lot of companies use C++. I don't like it myself, & we use Scala, as
functional programming + oo works really well for trading specific coding.
Also our last place was Java based, so we have a lot of experience with that.
However there are plenty of opportunities no matter what language you use. I
know of firms using Python, C++, Java, C#, OCaml. So it's pretty wide open.

Speed is important, but usually not machine level instruction important as
people often think. Usually it's more about understand big O and not
overwhelming your critical paths / pushing things off to other threads.

As for finding a job doing this stuff, google "Chicago Prop Trading firms".
The first result lists a ton. Goto their websites and apply. Or you can use a
head-hunter.

I have no experience with the New York part of things, but it's probably
similar. Chicago does seem to be a good incubator for starting up a trading
company though as the CME is located here and it's a great place for big and
small companies to trade (IMHO/YMMV).

As for going directly to a startup, it's tricky, we don't have the budget to
pay for more employees at the moment, and I know a lot of start ups are in
similar situations. If we do hire someone it is usually below what a prop firm
would pay them and they have to be extremely experienced in the area we hire
them for.

So, I would suggest prop firm first route, it worked for me and I wouldn't be
where I am now had I not gone that route.

~~~
starkfist
Thanks for the insight.

I have an interview at one of the NYC prop shops, but it's for something more
back office-y. Would it be a mistake to take this job, thinking I could move
into something closer to the trading later? I've got mixed advice. Some people
say it isn't too hard to shift, others say it's impossible.

~~~
kingcub
It's really hard to say without knowing the position. I've seen it go both
ways. Some places it's the entry level get in the door while we evaluate you
position and if you're good we'll move you over to trading. Some places it's
all they ever want you to do with no opportunity to move to the trading side.

~~~
adn37
Interesting thread, thanks.

As a Direct Market Access developer myself, I wonder what is your environment
(target exchange(s), api/transport/codec stack, market data provider) and how
time-costly it is for you to 'just connect' to the market (aka, having a
platform ready to trade, without the algo stuff).

Could you elaborate a little please?

~~~
kingcub
Currently just the CME, all of it was written in house, with the exception of
Quickfix for Java for sending orders and OpenFast for CME marketdata. We'd
like to replace Quickfix in the near future as it has too much static
singleton state for our liking. It takes a few months to a year to write the
exchange connectivity pieces depending on how many times you've done it
before. We've done it several times so we are pretty comfortable in that area.
Subsequent exchanges are a lot easier once you have the basic infrastructure
in place.

------
jmillerinc
I have a feeling this article confused the creators of the trading algorithms,
which is what makes the money, with pure programmers, who are hired to
implement someone else's pre-existing algorithms.

Sometimes these are the same person, but in those cases that person almost
always has a profit sharing contract, not only a base salary. (And if they
don't, they're crazy.) The fact that the programmers in the article only had
base salaries leads me to believe that they weren't the actual creators of the
trading algorithms, so they don't really deserve a slice of the profits
anyway, because someone else a) created the profit machine and b) is taking
all the risks of running it.

What really happens is that these programmer guys learn the trading secrets
after a few years on the job, then depart to a different firm to recreate the
machine themselves. There's no oppression or revolts here.

~~~
ryoshu
That's an easy problem to solve. The people with the trading algorithms can
just learn to program. No worries about programmers stealing trading secrets
that way.

~~~
mahmud
HFT financial engineers can not necessarily learn software engineering in
their operating time-frames. There is no "High Frequency Learning"; by the
time they learn to configure a development environment they could have lost
the edge.

~~~
kingcub
It's a lot easier for a good programmer to learn how to trade than for a good
trader to learn how to be a programmer. Though most programmers make terrible
traders and most traders make terrible programmers. A lot of depends on the
company you are at, the more foresighted ones, were grooming guys for this
role 5-10 years ago. And more importantly establishing a tradition of `trade
developers.` Typically though the traders that become good enough programmers
took an engineering discipline in college. Also, some of them are just so
smart / driven that coding something good enough to make money is something
they trudge through, but their code usually the ugliest thing you'd ever see
this side of php.

------
drx
This is an extreme example of why you don't screw people over, even if you
lack empathy.

Nobody likes to be screwed over, but most people take it in exchange for other
perks (job security, for one). But people have a screw threshold, and if you
cross it, this is what happens.

Now, this is not the main reason not be a jackass -- on the other side of the
spectrum, you usually get much in return for being nice (if only for just
differentiating yourself from everyone else) -- but that's another story.

------
nphase
_When they do, the security of their old, relatively low-paying gigs might
start to look pretty good._

The condescending tone of this line _really_ bugs me.

~~~
SwellJoe
Exactly! My immediate thought was, "You smug bastard."

 _This_ is why I would never take a job as a programmer in the trading
industry working for the big firms. I have dignity, and it would never cross
my mind to put up with smug bastards taking this attitude with me all day, no
matter how high the salary. It's not that the software is making people tons
of money, it's that nobody _respects_ that the software is making people tons
of money (the side effect of respect, of course, would be fair compensation).

~~~
VolatileVoid
Excuse me. I work as a programmer for a large investment bank, have dignity,
and am respected by my users (commodities trading, sales and operations). I am
also respected. However, I also took the time to learn my users' business and
product-lines. One major problem that software developers have is that they
don't take the time to learn their users' product. If you don't take the time
to learn about what they do, why should they take the time to learn about what
you do?

~~~
SwellJoe
It goes both ways, I suppose. But, the description of the situations in this
article sounded pretty much inexcusable and intolerable. And, specifically,
the tone of the author was downright infuriating.

Honestly, I do know several people working in finance (Perl is apparently
heavily used in that industry, and we're a Perl shop, so we meet folks in that
industry quite often at conferences), and they generally seem happy with their
work and their jobs. It's certainly an interesting field, and one in which
you'd get to work on a massive scale, which is usually fun. I worked in the
oil and gas industry for a while, and they've got big data (terabytes of it
for a single well, for example). It's definitely interesting.

But, the big money guys do have a reputation for supreme arrogance, and recent
events in our economy have not made them seem any less so.

------
endtime
>He says one group was generating $100,000 a day from his high-frequency
trading software and paying him $150,000 a year.

I'm not saying I don't want the guy to have a higher salary, but there's an
implied fallacy here. It seems he should be paid relative not to how much
value his code generates, but to how hard it would be to replace him.

~~~
patio11
When you say "should", are you making a positive observation or a normative
claim? My positive observation is that people get paid whatever amount they
can successfully negotiate, and a programmer at the very top of a field with
ungodly amounts of cash money flowing around is in a good position to
negotiate lots, because their BATNA is "I walk one block out of this office,
have coffee with someone, and a week from now I'm making seven figures and
you're competing against my algorithms."

~~~
roel_v
It's a positive observation in the sense that one's actual market value is
equal to the cost of replacement. The price discovery method (negotiation) is
imperfect, causing the discrepancy between the market value and the actual
paid price, but the point of the grandparent would still hold.

------
takrupp
The article is only looking at a few of the shops. The good ones pay their
developers based on performance with some tied directly in to their group's
PnL (top firms like Getco, Goldman [on their HFT platform only], Jump, etc)
pay their experienced guys over $500k, with some of those guys on over $1MM.
The Sergey A. case, where a guy makes over $1MM guaranteed, is not that
uncommon. Of course, right out of school they pay low 6-figures, but after 4-5
years of proven track record, if the firm doesn't want to pay $300k+ in
compensation, their competitors will. Then its the developer's fault for not
making sure they are in the market and getting compensated market rate.

------
gary201147
Today's financial mathematicians are equally adept at programming and
computational science. It seems unlikely that these guys are your run of the
mill programmers.

~~~
adn37
Sure they are smart. Question is: do they want to invest time to master the
internals, needed to achieve high performance? Takes years to get there.

------
parallax7d
A market for trading perception of value should be regulated to increments of
days or weeks, not minutes.

The current structure for valuating securities does absolutely no good for our
society. Not that it's overly evil or anything, it's just pointless, a massive
waste of time and money, and is a cancer on our economic system. It's got to
be a thrilling thing to code for though.

~~~
drx
Minute trading introduces very high levels of liquidity to the market.

Your thinking represents a common fallacy: "I cannot immediately see any
benefit to X, therefore X is pointless / should be abolished".

~~~
neilk
I'm not an expert, but how does HFT increase liquidity?

One definition of liquidity is when you can sell something without affecting
the price much. Most people on Wall Street will tell you their job somehow
increases liquidity -- connecting buyers and sellers in more and more
efficient ways.

HFT seems different. It is comparable to front-running other people's orders.
Someone tries to buy an item for $1.00, and the HFT algorithm tries to grab
the item first and resell it to our original buyer (and other people in the
market) for just a tiny bit more.

From my perspective it's effectively a sort of tax, like a bridge toll. It
seems to me like this has to make every transaction affect the price _more_ ,
not less. How does this increase efficiency or liquidity?

~~~
yummyfajitas
_Someone tries to buy an item for $1.00, and the HFT algorithm tries to grab
the item first and resell it to our original buyer (and other people in the
market) for just a tiny bit more._

No. The matching engine will match first the highest priced order, and in the
case of orders at the same price, whichever order was placed first. You can't
jump ahead in the queue, no matter how fast your algorithm is [1].

[1] This statement only applies to US equities/futures/derivatives markets. I
think it might be possible in Canadian markets under some limited
circumstances.

~~~
anonymousDan
Can I ask you how this is physically laid out? Is there just a big centralized
computer at the exchange with two input queues, one for buys and one for
sells? What if I want to place an order at the best price across multiple
different exchanges?

~~~
yummyfajitas
It's basically what you think; a computer system keeps a queue of buy and sell
orders, sorted by price/time (i.e., best price wins, if prices is equal,
earliest order wins). It then matches trades by popping the top of the queue.
If you place an order on INET which can be filled at a better price on ARCA,
then INET routes your order to ARCA and you are charged a small routing fee.
This is required by RegNMS.

(There is a "don't route me" flag if you don't want to be routed. In that
case, your order will simply go unfilled - exchanges can't match you at a
price worse than the best price available on all exchanges.)

~~~
anonymousDan
But how are prices synchronized between exchanges (if at all)? i.e. say the
best chance for my order being filled is at ARCA, but I submit it at INET.
Does the fact that it will most likely get routed to ARCA via INET imply there
is a greater chance of the order not filling than if the order had been
submitted to ARCA directly?

------
beloch
High frequency trading is under pretty high powered scrutiny at present. I
fully expect legislation implementing trade reforms that will render the
practice worthless in the very near future, whether it's frequency limits or
per-transaction fees/taxes.

If these guys want to spend money and time on start-ups that will likely be
out of business before they come online, that's no skin off my nose. In fact,
please excuse me while I laugh. These guys are basically the last players in
on the ponzi scheme.

~~~
noname123
Nah. Not going to happen. They introduced a bunch of legislation already in
congress trying to tax per per share per transaction, all got killed very
quickly; offends the All-American capitalism sensibilities too much.

While I agree with you that HFT is a scam, I disagree with you that it's a
ponzi scheme. It's more like ticket-scalping, so the scheme is going to go on
forever, as long as SEC allows it (which they will because the sell-side lobby
groups will label themselves as liquidity providers that tighten the spread)
and normal people are trading.

What amuses me about Main Street's outrage on HFT is that they suddenly take
this expose as a new revelation that Wall Street is screwing with retail
investors when the big prop shops/broker-dealers have been raping retail
investors and pension plans/retirement mutual funds for decades. HFT is just
the latest instrument of exploitations.

~~~
cturner
What's wrong with ticket scalping?

Anti-scalping laws are a good example of the government intervening in a
market to prevent natural price discovery, and to hand advantage to the sell-
side.

~~~
barrkel
It reduces the size of the market for related goods, such as record sales,
clothing, TV subscriptions, etc. by alienating poorer consumers. It hurts the
brand, basically.

~~~
cturner
As I see it, I disagree that it alienates poorer consumers.

Perhaps you were thinking along this line: that it discourages venues from
offering coupon clipping discounts. It won't though: a venue has a fixed
number of seats available, and will attempt to maximise its profit for this
available volume of seats. If they're going to have leftovers, they'll find
ways to discount out what's left.

Scalping works against a venue practice where they charge higher prices for
last-minute tickets with an intent of selling less-than-all the available
tickets but netting more profit due to the high charges. With scalping, they
compete with the guys out the front gates and last-minute sites on the
internet. It now becomes more attractive for them to try and sell all the
seats, rather than charging a lot for just a few. Hence, scalping is helping
reduce prices, and creates more places at the venue.

Separately, if you got into a situation where you had to choose between seeing
Madonna on stage and eating you can sell your ticket and buy food with what
you get.

Interesting: scalping becomes less lucrative when it's legal because venues
know they are unlike to get away with things that they will do well on when
it's banned. As a result, the market won't exist.

Perhaps you have other scenarios I haven't thought of though, if so I'm
interested to hear.

~~~
barrkel
You're just focused on ticketing for a single event. What I'm saying is that
it's about more than just tickets, and for more than just a single event.

I'm suggesting fans will be turned off of performers / entertainers / sports
teams / etc. by the perception that they (the performers) are overcharging for
their performance, and that will hurt the longevity of the brand, and the
sales performance of related products.

Similarly, if you drive out youth and cater for wealthier older people in the
interests of maximizing short-term revenue, you endanger brand engagement 10
or 20 years down the line - this is particularly important for sports clubs.

------
Sukotto
I'm interested in playing with algorithmic (maybe even HF) trading to see if
it's fun.

Can anyone recommend a source of data on the cheap so I can papertrade?
Clearly realtime data feeds are going to cost... but isn't there some public
repository of historical data someplace?

~~~
jamii
We are actively looking for market makers for smarkets.com . No fees and very
little competition, it may be worth checking out if you want somewhere easy to
get started.

We just released a public API:
<http://apidocs.s3-external-3.amazonaws.com/index.html>

~~~
paulgb
Looks fun. What's the daily trading volume like?

~~~
jamii
Since we launched in February:

6085.51 | 2010-2

6375.40 | 2010-3

51072.15 | 2010-4

194208.93 | 2010-5

111775.68 | 2010-6

65577.25 | 2010-7

The spike is from the world cup. We will probably see a similar spike in
August when the premier league starts.

------
ssp
Can someone explain in simple terms why high-frequency trading actually works?
I can't understand how trading at a high frequency provides any advantage at
all, except in a Martingale-fallacy way.

~~~
Dilpil
Certain trades are obvious winners- index funds available for less than the
sum of their component parts for example. Everyone on the street knows they
are obvious winners, so usually the trade isn't available for long. Firms have
computers set up to constantly scan the markets for these opportunities.
Whoever sees the trade first and gets to the exchange first ends up making all
the money.

~~~
anonymousDan
But that sounds to me like it should be called low-latency trading, not high
frequency?

~~~
sp332
Right so far :-) But the HFTs are not in the game for the long haul; they will
immediately sell the stock to another investor, at a price between what the
HFT paid for it and what the stock is worth to the other investors. That's why
it's _high-frequency_ trading. The buy and sell are almost synchronous.

------
TGJ
It is the same for every company. Employee says I do 'x' and without me, the
company would not be able to operate therefore I deserve part of the profit.
Thing is, the employee was hired on and agreed to do 'x' and so they do not
have a right to claim any more. As such, they can strike out on their own and
as the article says, learn that there is great risk to be had and choose
between large risk and making millions or little risk and a small salary.

~~~
thijsterlouw
I don't think those bosses have so much more risk than the programmers, yet
they earn substantially more than the programmers according to the article.

------
inboulder
Would anyone else like to see mandatory random delays added to markets just to
put these window-breaking rent seekers out of business?

------
known
Isn't it obvious that employers prefer to hire wage slaves.

~~~
redrobot5050
You don't get wealthy working for other people. Unless you're in finance.

------
nivertech
The most interesting part of this Forbes article, is that it mentions Serge
Aleynikov. Erlang hacker contributing to many open source Erlang projects.

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guelo
These are leeches stealing money from 401k's and pensions.

~~~
patio11
I would have agreed with you prior to hearing this argument: if someone's
pension fund wants to trade 10,000 shares of a stock with a 2 cent spread,
then in the next few seconds market makers are going to make $200, guaranteed.
The only thing HFT changes is who the marketmaker that pockets the $200 is
going to be: some day trader in the bathrobe, market maker at the exchange,
automated proptrading strategy, or a sickeningly optimized HFT bot which
measures execution times in nanoseconds. Either way, the pension fund is going
to transfer $200 to marketmakers.

What you should be worried about is your pension fund actively trading, which
it is doing because it is being managed by someone who takes ~2% off the top
every year and who has to justify this by showing they can beat all these
damnfangled machines at stock selection. They'll almost certainly underperform
the index over time and overcharge index funds by about, oh, 180 basis points
or so, precisely because they insist on conveying your wealth to marketmakers
every time they trade.

~~~
noname123
Umm, yes and no.

Example, I'm Fidelity Bob Fund Manager; after extensive research, I decide to
make a decision to buy 200,000 shares of AAPL. So I enter my buy order into my
OMS screen, which slices and dices these 200,000 shares into blocks of 100
shares (as for traders not to front-run me, because a naked buy order of
200,000 shares will drive the price up and I'll overpay long after my
transaction is completed).

HFT program meanwhile is actively scanning the quote book on all market
centers for patterns of such a huge "whale order". Bob Fund may leave
discriminating traces of evidence, such as executing the same blocks of buy
order under my unique MPID multiple times. Or the HFT program is hooked up to
a dark pool where it's constantly sending out small sell orders for 1 share to
try to sniff out and match Bob Fund's huge buy order. Or it just might be that
the HFT program has reverse-engineered the Bob Fund's VWAP algorithm for
slicing/dicing orders and can detect how the orders are being sliced/diced
under any given market conditions.

Once the HFT algorithm is certain of a "whale order." It'll actively go out to
every single market center, buy up all of the remaining AAPL liquidity on
those markets and then present it to Bob Fund (voila! I'm providing you with
liquidity at artificially inflated price!). Mr.Bob has no choice but to buy
AAPL at a maybe a penny or two higher than what he could have paid for without
HFT.

The flip-side of the argument for HFT traders are that perhaps, they are
better dealers than traditional dealers. For all we know, there might not be
any interested retail investors who are willing to trade with Bob Fund; so
Mr.Bob ends up trading with traditional dealers which have traditionally
higher spread on the price of their stock, as they take on more risk as a
dealer because they don't have the same execution speed and high-turnover rate
as a HFT dealer. Also, HFT increases nominally execution speed and brings all
market center's prices in line, as if there is a NBBO on ARCA and Bob Fund's
order is on BATS, HFT will essentially act as the middle-man to match the true
best bid and offer together, in the quickest time.

However, the other counter argument against HFT is that it actually doesn't
really provide liquidity to the market, as evident by the June flash-crash.
During a situation such as this, broker-dealers are suppose to step during
irrational exuberance and depression and trade with irrational investors and
put a stop to the crash/rise. But HFT dealers stopped trading that day,
triggering a lot of people's stop-market orders and hence we saw ridiculous
sell orders of Accenture at $0.01.

So I'd say, HFT is a mix-bag.

~~~
Nwallins
> _However, the other counter argument against HFT is that it actually doesn't
> really provide liquidity to the market, as evident by the June flash-crash._

As far as I can tell, this is the _only_ argument presented against HFT.

> _But HFT dealers stopped trading that day, triggering a lot of people's
> stop-market orders_

Are there other factors involved in this outcome, or is this a canonical HFT
failure?

~~~
noname123
> As far as I can tell, this is the only argument presented against HFT.

The argument is that HFT provides liquidity _precisely when_ traders don't
need it. You need broker/dealer to step in and take the other side of the
trade when someone wants to trade and there _isn't anyone else_ willing to
trade. The issue with HFT is that, as the predatory example provided above,
that HFT is actually buying up your liquidity in the market and selling it
back to you at a higher price. Specifically, most HFT prop shops deals in ETB
(easy to borrow) stocks such as GOOG, AAPL, & BAC where tens of millions of
shares are traded daily. These securities don't need liquidity broker/dealers,
as there are already tons of true buyers and sellers out there. Are there any
HFT dealers in penny stocks or small caps where some liquidity would be much
needed? Nope.

> Are there other factors involved in this outcome, or is this a canonical HFT
> failure?

Nope. The reason a lot of dealers stopped trading that day were tactical. A
lot of stat-arb prop shops got burned during when Bear collapsed, one black
box decided to sell everything which cascaded another black box to sell
everything, which cascaded to everyone wanting to dump everything. So from
that experience, HFT shops decided to not hold any positions beyond seconds
and shut down everything when market crashes seriously. So they provide
liquidity when the market is doing well, but when the shit hits the fan, self-
interests also hits in and the "liquidity-providers" head for the hills.

~~~
yummyfajitas
_Are there any HFT dealers in penny stocks or small caps where some liquidity
would be much needed?_

False. There are long tail funds, I believe tradebot works on the long tail
(among many others).

The thinly traded stocks have better spreads and less competition, which means
there is money to be made.

Incidentally, most HFT firms stopped trading on may 6 due to a fear of broken
orders. If you buy at 5, sell at 10, and the market goes up to 15, you could
wind up losing $5 on a short position if your buy order is broken.
Unfortunately, broken orders are impossible to predict algorithmically, since
humans came up with the criteria for order breaks hours later.

