
Quant turned whistle blower explains how the market is rigged [video] - gpvos
http://tech.fortune.cnn.com/2013/11/11/video-the-wall-street-code/
======
hft_throwaway
What Haim's referring to are a set of order types used on many exchanges to
allow traders to place orders on a level that can't be displayed for
regulatory reasons. There's nothing nefarious about them.

Reg NMS prohibits exchanges from displaying quotes that would lock (bid==ask)
or cross (bid>ask) another marketplace.

As an example, say BATS is 10.01 bid 10.02 offered and the 10.02 offer trades
out completely. Some HFTs want to be the first to form the new 10.02 bid to
earn the spread + liquidity rebate, so they send post-only bids at 10.02. BATS
sees stale 10.02 offers on ARCA, so they re-price the trader's order to 10.01
bid, or reject it (behavior depends on the exchange). In response to this, HFT
algos would repeatedly re-submit their orders until the exchange let them in.
This led to enormous stress on their matching engines during price moves.

In response, exchanges created order types that would let the trader bid
10.02, but only display it once the away markets faded from their point of
view. It's basically like having a callback API rather than a polling one. The
end result is basically the same, except less load is placed on the exchange's
matching engine.

There's nothing "rigged" about this behavior. Traders forming new price levels
on public markets still incur substantial risk that the price will move
against them when filled. There aren't any order types that let you get
execution priority in front of a large queue like he describes.

These order types and their behavior were well-documented on public websites
and anyone concerned with the microstructure of how their trades executed
could easily use them. The game he's describing is of little concern to anyone
other than HFT MMs and execution algos that depend on favorable queue
position. The entire process of a level ticking away and a new price being
formed in liquid tick-wide names plays out in microseconds these days.

~~~
w0utert
I'm not knowledgeble about HFT by any stretch of imagination, but I watched
this epsiode of VPRO Backlight when it aired on dutch TV, and what I got from
it (not just from Bodek himself, but also the Nanex guy) that initially, these
'special' order types had been a close-kept 'secret' only known by insiders.
Maybe not their existence, but how they could be used to 1-up every other HFT
algo that wasn't in on this trick.

The video isn't only interesting because of Haim Bodek's allegations by the
way, there's quite a few fairly high-profile people (formerly) active in the
HFT world commenting on how markets are effectively broken and unstable
because of opaque HFT algorithms, stock exchanges actively promoting HFT to
drive up the volume of trades (and hence their profits), and regulators not
really doing anything to reduce the risk of flash crashes or penalize parties
that completely break the market every once in a while.

~~~
yummyfajitas
I don't know how Hide-not-slide orders could possibly be described as a
"close-kept secret":

[http://bit.ly/17l8djU](http://bit.ly/17l8djU)

Admittedly, just like Haim Bodek, DirectEdge uses an annoying voiceover format
rather than just writing an easily skimmable document.

~~~
strongvigilance
I don't think the actual order type was a secret, just that some HFT firms
figured out a way to use it which gave them an advantage over other HFT firms.
The firms who didn't understand it lost out.

~~~
yummyfajitas
OMFG, people with smarter strategies have an advantage in the marketplace!
Call the SEC!

~~~
jmcmichael
The whole point is that these 'smarter strategies' are only smarter because
they are exploiting arbitrary API conventions, not smarter because they
improve the utility of markets to society in general. Which is a tragedy,
because if all these geniuses were working in the fields they trained in -
computer science, physics, or bioinformatics - they would be contributing to
society on a more fundamental level.

~~~
kasey_junk
There are several fallacies to this sort of argument: 1) The myth of the HFT
geniuses. Like any other industry there are smart people in HFT, there are
also dumb people & bad software developers. In some ways the industry is very
insular and has many bad habits. 2) We could harness all these people to
something that provides more utility. It would be great if that were true, but
how do you do that? Historically, centrally planning what careers people are
required to follow has led to pretty bad outcomes. Conversely, if you think
you can provide more utility by hiring away some of these smart people,
nothing is stopping you.

~~~
wpietri
Your first point isn't a fallacy to the argument. If they are good enough to
to a job there, they're good enough to do a job elsewhere.

Your second point is trivially answered: you let the market decide where they
work.

That's not obvious to you because you conflate "provide utility" with "make
money". There are lots of things that make money that provide no utility. A
large part of the history of business regulation is basically restricting
those so people focus on providing utility rather than making money at things
that provide zero or negative societal value.

The argument you respond to is basically suggesting that HFT is not generating
any value for society. If you want to demonstrate that it's false, you have to
show that HFT creates value in line with its costs.

~~~
kasey_junk
Fine, but why doesn't every new industry have to make this same argument?

It's pretty obvious to me that social networks have some pretty dangerous
attributes (decrease in privacy & personal securty, etc) to them. Do these
dangerous attributes outweigh the value that twitter provides? Who decides and
why?

~~~
erichocean
_Fine, but why doesn 't every new industry have to make this same argument?_

Because most new industries aren't within the financial industry, messing with
the fundamental operation of markets. Those that are have to make that
argument.

------
ddeck
It's a long video (with an agenda), but despite the somewhat conspiratorial
tone, there's some really interesting stuff in there.

For example, Thomas Peterffy (founder of Interactive Brokers) talking about
how they built a robot typist during the 80's to get around NASDAQ rules that
required all orders to be entered via the keyboard (14:25).

From another interview [1]:

 _" Q: What did that thing sound like when it was running?"_

 _" A: Like a machine gun. Brrrrr. Because it was typing so fast."_

[1]
[http://m.npr.org/story/159992076?url=/blogs/money/2012/08/27...](http://m.npr.org/story/159992076?url=/blogs/money/2012/08/27/159992076/a-father-
of-high-speed-trading-thinks-we-should-slow-down)

~~~
agravier
That is sort of awesome. Developments in robotics not to overcome physics, but
to overcome arbitrary man-made rules (outside of a robotics competition). I'd
like to see more of that as long as it's not military or violent.

~~~
grandalf
Arguably assembly plant robots exist to overcome arbitrary man-made rules
(labor laws)...

edit: not sure why this was downvoted.

~~~
tbrownaw
I thought they existed to overcome the limits of what humans are capable of.
People are only able to move so fast, are only able to lift so much, become
less mentally present after so long, etc.

~~~
grandalf
That's not generally true. In some cases robots offer improved precision, but
in many cases a robotics-oriented factory takes a tremendous amount of capital
to design/create and there would rarely be a business case to build it if
human labor weren't so costly (due to labor laws).

------
yummyfajitas
Is there a text explanation of this? I'm curious to learn what the allegation
is, but I don't have 50 minutes to spend on what is likely a silly conspiracy
theory.

The small amount of text present suggests someone is being allowed to jump the
queue. Is that the allegation, or does it go beyond that?

~~~
siegecraft
I can't speak to the specifics in this video, but if you want a detailed,
text-based explanantion of HFT shenanigans, there's tons of technical details
at
[http://www.nanex.net/flashcrash/ongoingresearch.html](http://www.nanex.net/flashcrash/ongoingresearch.html)
(algos crashing exchanges, running wild and losing insane amounts of money
only to have those losses rolled back [sometimes], algos reacting to news a
few seconds before it's officially released, etc).

~~~
yummyfajitas
I've seen Nanex's pretty graphs, but I've never seen an explanation from them.
All they do is highlight graphs with wild oscillations and then declare "ooh,
evil!"

~~~
smcl
Me too, the graphs are impressive but hard to digest. The explanations are
often very good, however.

------
svantana
It disgusts me how much talent is wasted on nonsense like this. Like Haim is
alluding to in the documentary, imagine if all these smart people focused on
real problems instead. If this isn't a good argument for a transaction tax, I
don't know what is. Say all you want about increasing efficiencies etc, but
it's pretty clear to me that what the world needs is investors, not day
traders.

~~~
grandalf
Who should decide what is a "real problem" and what is "nonsense"? Simply
being indignant about it does little to further the discussion.

~~~
AkimChristine
Human beings with a brain, in discussion with other humans, creating the kind
of world they want to live in. Just like everything else in the world is
decided.

It makes no sense at all to pretend that humans are too stupid to understand
what is and is not good for our planet. The whole point of having language and
intelligence is that it should be used, not just discarded with some
discredited hand wave that "if we just do nothing, everything will work out
for the best!"

~~~
lmm
> It makes no sense at all to pretend that humans are too stupid to understand
> what is and is not good for our planet. The whole point of having language
> and intelligence is that it should be used, not just discarded with some
> discredited hand wave that "if we just do nothing, everything will work out
> for the best!"

Centrally planned economies have been tried. The Soviet Union discouraged a
lot of research into areas like psychology that they saw as pointless; artists
had to conform to traditional styles. It didn't turn out very well. Letting
the market allocate resources has a lot of inefficiencies, but it works better
than any alternative that has been tried.

~~~
RodericDay
I don't understand how you can think this is the be-all-and-end-all of
economic thought. You are literally regurgitating a line ("Letting the market
allocate resources has a lot of inefficiencies, but it works better than any
alternative that has been tried.") you were probably taught in middle school
without the slightest hint of irony.

I'm not saying it's untrue because it's taught early, but I _am_ saying that
it seems you haven't done much due diligence beyond that.

~~~
lmm
I was a communist until age 20 or so, but keep beating up that strawman.

------
rlwolfcastle
_Bodek ... is famous among traders for having broken the Street 's omertà and
complained to the Securities Exchange Commission in 2011 -- after his own HFT
firm, Trading Machines, crashed and burned_

More disgruntled trader than whistleblower?

------
kumarm
Golden at 13:00. The dude brings up iPad like device he invented in 1980
(Touch screen none the less). Says he doesn't believe in patenting as it will
stop other people from inventing.

~~~
csmuk
Everyone has invented an iPad. This is not news. Even with ARM CPUs and touch
screens...
[http://acorn.chriswhy.co.uk/Computers/NC.html#NewsPAD](http://acorn.chriswhy.co.uk/Computers/NC.html#NewsPAD)

------
strongvigilance
Like many vocal HFT critics, he was trying to play the same game, and was
outcompeted.

------
willvarfar
Early on in the video there is mention of Haim Bodek's first speech where the
audience was astounded.

Does anyone have a link/vid for this speech? I've googled and youtubed without
luck.

~~~
hft_throwaway
[http://showyou.com/v/y-ItfAKguEdAE/haim-bodek-hft-is-an-
arti...](http://showyou.com/v/y-ItfAKguEdAE/haim-bodek-hft-is-an-artificial-
industry-tradetech-2013?u=jhcrater) \- this possibly?

Take it with a grain of salt. He claims one can just use these order types and
be fast to basically print money, but glosses over the important parts like
deciding how to price a market, when to add or remove liquidity, etc. When he
says things like "HFTs use resting orders as insurance to exit at zero-risk",
ask yourself how they make those decisions without having some kind of
predictive abilities.

------
snarfy
Can someone explain to me how HFT is different than front running? I fail to
see the difference.

------
6thSigma
> If Haim Bodek couldn’t beat the system, what chance do ordinary Apple
> investors have?

Trading != investing

~~~
jaynos
Ordinary Apple investor beating the system? Not sure what that would entail,
but I do know that if you invested in Apple in 10 years ago, your investment
would be worth a lot more today.

~~~
tedunangst
If you bought AAPL at $10.45 ten years ago, you'd have made $511 today. That's
with one trade.

But in 10 years of 252 trading days of 6.5 trading hours, there are 58968000
seconds. If you'd traded AAPL a million times every second, you'd have made
$30132648000000000. That's a lot more money. See how unfair it is?

~~~
onebaddude
> _But in 10 years of 252 trading days of 6.5 trading hours, there are
> 58968000 seconds. If you 'd traded AAPL a million times every second, you'd
> have made $30132648000000000_

This makes no sense whatsoever.

~~~
tedunangst
Indeed.

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augustuz
See this: [http://tabbforum.com/opinions/the-secret-world-of-algos-a-
hi...](http://tabbforum.com/opinions/the-secret-world-of-algos-a-high-
frequency-developer's-story)

------
newsmaster
Is it possible for a non-finance orientated coder to get into the industry? Or
does one need to be a math genius as well as a coder?

~~~
ollieglass
Related, what's the fin-tech equivalent of Hacker News? Is there one?

~~~
guiomie
zerohedge maybe ? It is not really tech, but a blog on economy and finance,
and it does talk about HFT often.

~~~
kasey_junk
Maybe if hacker news thought everything wrong with the technology industry is
due to startups.

Hacker news is essentially the dailywtf for traders. Most of the people there
have an ax to grind and/or no experience in real markets.

~~~
angersock
Do you mean zerohedge is the dailywtf for traders?

~~~
kasey_junk
yes sorry

------
ffrryuu
The age of heroes.

