
Traders Profit With Computers Set at High Speed - mjfern
http://www.nytimes.com/2009/07/24/business/24trading.html?_r=1&hp
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ggruschow
_People want to know they have a legitimate shot at getting a fair deal._

Ironically, it's articles like this that give them doubt. They could've just
as easily written an article praising high-frequency trading for getting most
participants a fairer deal.

High-frequency trading has driven down costs. They're the main reason most
people will only pay a 1c bid/ask spread for those Broadcom shares. Before
computerized trading, they would've paid over 12x that. Additionally, as they
push the systems to scale and force competition between markets, the per order
and per share fees are driven down.

They've also made the market more efficient, so most people don't get screwed
by some slime taking them for a quarter to a dollar per share doing arbitrage
against another market, mismarking the trade, or maybe the worst, an order his
friend is holding in their pocket. Those things are now typically limited to
less than a cent. High-frequency traders are usually overjoyed to _average_
1/4 of a cent profit. You'd be amazed at how many losing trades they do. For
most orders, most of the screwing happens between the trader and the broker,
not the trader and other traders.

It's important to remember that there's two parties involved in every trade.
One could easily say the Broadcom buyers described were upset they couldn't
screw the sellers as badly anymore.

If you look at the details of the Broadcom trading given in the article, it's
likely even more simple than what they conjectured. 56,000 shares of Broadcom
really isn't that much. It's only 1/2% of the number of Broadcom shares traded
daily.

The issue the buyers probably had was that MOST bids and offers in such stocks
(>80%) are from computers running high-frequency trading strategies. If the
computers just stop offering to sell more shares (the simplest reason being
they hit their margin limit), you could get the same exact situation
described.. Except now, there's nothing sinister at all going on. You just get
to see how much they're normally helping you, and you'd write an article about
how the SEC should increase the margins for high-frequency traders (which
would be equally silly.. and meaningless since the large firms ignore the
rules on that point anyway).

Disclaimer: I put bread on the table doing this stuff.

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ynniv
I don't understand how high frequency trading could be considered beneficial.
In the article's example, HFT captures some profit from an unknown trend
simply by being faster than the traditional participants. This directly
benefits those who can get their software closest to the servers running the
markets, to which the average person is limited. Insiders like Goldman Sachs
can run their software directly on the routers connecting the markets, and
thus benefit from insider access to a natural monopoly on speed.

To be clear, this has nothing to do with algorithmic trading. Using computers
to detect trends or to plan strategic trades is natural and healthy for the
market. I am also not suggesting that computerized trading and reduced fees
are bad - they have made the market far more efficient.

> One could easily say the Broadcom buyers described were upset they couldn't
> screw the sellers as badly anymore.

But in this case, the Broadcom sellers AND buyers were both screwed by a third
party, who bought at a price that hurt sellers and sold at a price that hurt
buyers, on the order of milliseconds. This third party runs the same scheme
all day, every day, taking money out of everyone's pocket without doing any
real work. This is why people would distrust the market.

~~~
tptacek
It's the same benefit as normal traders provide: by constantly trading, HFT
engines are providing liquidity and cutting the bid/ask spread.

The "unfairness" here is limited to other traders who'd be trying to profit by
selling the same liquidity, and now can't compete. But your occasional market
order benefits.

~~~
ynniv
How does this HFT practice provide additional liquidity? The only time they
purchase shares is right before someone else is going to. It is the ultimate
man in the middle, taking a little bit of every single transaction in an
exchange. It raises the cost of doing business for everyone (except the HFT
trader), and is a net inefficiency in the system, like energy lost to heat in
a poor electrical conductor.

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tptacek
I know a little bit about trading, a decent bit about trading platforms, and
not a lot about HFT in particular, but it was not my impression that HFT algos
can literally MITM the market. They buy when they detect changes in demand.

~~~
paulgb
I'm not sure MITM is accurate, but the article's graphic seems to imply that
the machines have access to the trades before they are executed.

[http://www.nytimes.com/imagepages/2009/07/24/business/0724-w...](http://www.nytimes.com/imagepages/2009/07/24/business/0724-webBIZ-
trading.ready.html)

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joshu
The "slow" traders had off-market places to find liquidity for a long time.
Posit does a block crossing every half hour, with reports back to the
exchenge.

If fairness is such a concern, they should just do a once-a-day crossing.
That'd be much more fair, but much less liquid.

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URSpider94
The part of this article that concerned me is the rapid bid/cancel scheme.
Traditionally, the cost of finding out about price elasticity in the market is
that you have to sell/buy some product and see how the market responds.

This kind of rapid bid/cancel would be the equivalent of placing a bid on Ebay
to see if your competitor's max auto-bid will top it, then retracting your
bid. Do this on a regular basis, and you can figure out exactly how much you'd
have to bid to beat out your opponents, without putting a cent at risk.

A policy that any order must remain in force for at least one full second
(long enough for standard electronic trading services to act on it) would
probably limit this behavior.

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ewjordan
_While markets are supposed to ensure transparency by showing orders to
everyone simultaneously, a loophole in regulations allows marketplaces like
Nasdaq to show traders some orders ahead of everyone else in exchange for a
fee._

That's just wrong, plain and simple, as is the colocation of certain
privileged servers next to (and I mean literally right next to, in the same
rooms, even) exchange computers. The exchanges should not be able to profit by
offering certain customers higher quality access to data that is supposed to
be equally available to all, it seriously raises doubts about the fairness of
the system as a whole.

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EinhornIsFinkle
FWIW, the blog ZeroHedge (www.zerohedge.com) has been following this topic in
much more detail for months.

The fact that some banks like GS are allowed to have their servers and other
equipment co-located at the exchange while most others are prohibited is
suspicious albeit not damning.

I think the bigger issue here are the dark pools that continue to grow largely
due to HFT on the exchanges. When 75%+ of the volume is coming from HFT, a lot
of transaction end up occurring off the map reducing transparency and brining
along its consequences.

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rbanffy
I wonder what the effect of making quick bid/cancel or increasing the cost of
canceling a bid would do to the market. My suspicion is that it would make HFT
less useful, but, as all things in game theory, results can be surprising.

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mhb
Not that this is practical, but I wonder what the effect would be of adding a
random (milliseond scale) delay to the transmission of orders. Maybe that
would force a longer-term outlook (seconds instead of milliseconds).

I suppose the effect would just be for firms to find ways around the delay.

~~~
joezydeco
Wasn't there a proposal floating around to make all orders valid for one
second, effectively killing these types of trades? I'm all for that. No
individual investor can cancel a trade that quickly, how come it's okay for GS
and all the other traders to do it?

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known
Do we need stock exchanges exclusive for Value Investors?

