
Michael Lewis: The Wolf Hunters of Wall Street - yarapavan
http://www.nytimes.com/2014/04/06/magazine/flash-boys-michael-lewis.html?_r=0
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lmg643
Not sure why this is getting resubmitted as a front page article.

Having read the book and most of the coverage of "flash boys", I'm surprised
and disappointed by the complete lack of any statistics to prove the assertion
that the market is rigged, or even statistics that show how investor orders
are disadvantaged.

Describing certain aspects of the market that appear to be unfair and then
making it seem as if the entire market is "rigged" is a big leap.

I'm amazed that they have gotten such a free pass from the press on this. I
guess people are suckers for stories that play on people's fears about
malfeasance by the wealthy and powerful.

~~~
leverage
Agreed. ML is the "Wolf Hunter", but in this case, he was hunting sheep. I am
astonished by the press's reaction to this. I think a lot of it has to do with
the relatively small and obscure HFT industry - it is not well understood, and
it is easier to believe it is rigged than to understand what it is.

To even call it "high frequency trading" is not fair - this implied large
volumes throughout the day by continuously providing quotes on both sides of a
given security. Their PnL comes from the bid/ask spread and rebates for
providing liquidity. They are primarily market makers. This is 99.99% of the
HFT industry.

Instead, ML and IEX are talking about "speed trading" or, as the press has
coined it, "latency arbitrage" \- they take advantage of their speed to reach
exchanges (2 milliseconds vs. 20 milliseconds) to front-run orders and react
quicker to new information. These types of trades only happen at points during
the day when signals are met, and they do not provide liquidity but rather
cross existing orders (often times before the exchange receives the cancel
message from the participant) and TAKE OUT liquidity. I would say less than 1%
of HFT firms engage in this type of unethical activity.

An example: Imagine it's 9:29am and the Dept of Labor Statistics is going to
release the monthly unemployment numbers. There is a positive expectation, and
so before market open there are a lot of buy SPY (S&P 500 ETF) orders queued.
The report comes out at 9:30am as the markets open, and the numbers are bad.
Now, a rational investor would immediately attempt to cancel his order for SPX
as the market is going to move downward. Imagine at the same EXACT time, a
speed trader see's this investors buy order on the book and decided to cross
him and sell. Due to his speed advantage, the exchange receives his message to
cross before the investors message to cancel. The investor loses out, SPX
invariably moves down, and the speed trader then buys everything he just sold
for an essentially risk-less profit.

A final point is this: for any buy-side market participant (anything from a
mutual fund to a "Average joe"), transaction costs are much lower due to the
much higher liquidity and tightened spreads that high frequency trading has
brought to the markets. HFT is making the markets more efficient. Cliff Asness
(Founder, AQR Capital Mgmt) wrote a piece in WSJ talking about this:
[http://online.wsj.com/news/articles/SB1000142405270230397830...](http://online.wsj.com/news/articles/SB10001424052702303978304579475102237652362)

~~~
minimax
SPX is the index. SPY is the ETF. Also the idea that you can rest an order
with an expectation that if the news is good you profit but at worst you lose
nothing is ridiculous. That would be a free option. If you want that kind of
optionality you have to pay for it. If you rest an order, especially before a
big news event, you are taking a risk that you'll get hit and the market will
move against you. That's how markets work and there isn't anything wrong with
that.

~~~
leverage
I think you missed my point: if people are reacting to info at the same time
(e.g. clicking at the same time) the exchange should receive the message at
the same time. Similarly, market data should be transmitted at the same speed,
and exchanges should not offer co-location to give one participant faster data
than another - This is how they front-run.

~~~
minimax
I didn't miss your point and you don't have any idea what front running is.
Front running is when your broker, your agent who has a legal responsibility
to seek the best execution for your order, trades in front of your order. If
someone who you have no relationship with manages to react to a news event
faster than you do, that's not front running.

If you took away exchange colocation, you'd just have a boom in property
values around the exchange as automated traders would still try to get on the
shortest network path to the exchange. Exchange colocation is actually a way
to level that playing field. Everyone who is colocated has exactly the same
network delay to the matching engine as everyone else who is colocated.

~~~
rondon2
Lewis is not saying that all investors should be given the exact same access
to the exchanges. He is saying that some traders are extracting money from the
market simply because they have a faster route to the exchange and they are
buying/selling ahead of other investors. They are not buying/selling based on
market fundamentals, speculation, research.

Millions of Americans invest a large percentage of their retirement money in
401ks because they believe that the US Stock Market is a relatively good place
to make long term investments.

When we see examples of people skimming money off of the market it makes us
lose faith in the market. That is why this practice should be banned.

~~~
kasey_junk
The problem is that Lewis either through misunderstanding, narrative purposes,
or due to a conflict of interest is implying "buying/selling ahead of other
investors". But that is not what is actually happening in the latency
arbitrage case. In the latency arbitrage case a HFT uses trade information
from one exchange, to update their own prices on other exchanges.

~~~
rondon2
I find it fascinating that once people that understand the details they feel
that nothing is wrong with this, and the people that stand back and look at
the big picture see a rigged market.

It is Heisenberg morality. Once you look at it, there is nothing wrong with
it. They are just updating prices to reflect demand, but at the same time they
are extracting money from the market just because their data center is
physically closer to the exchange.

~~~
kasey_junk
" at the same time they are extracting money from the market" This is the
sentiment I don't understand. They aren't extracting any money. HFT market
makers provide a service in the form of liquidity. It is natural and expected
for the price of liquidity to go up as demand for it rises. There are
liquidity purchasers that want to minimize the price of liquidity and
therefore obscure their demand. This is also natural and expected. These are
the forces that drive price discovery, this is what we want the markets to do.

Computers have made this process extremely fast and efficient to the benefit
of nearly every market participant.

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darky2005
Well, here is the opposing opinion I'd like to share:
[http://scottlocklin.wordpress.com/2014/04/04/michael-
lewis-s...](http://scottlocklin.wordpress.com/2014/04/04/michael-lewis-
shilling-for-the-buyside/)

And I think it is closer to reality

~~~
mmaldacker
Excellent article! People should keep in mind when saying that HFT is
siphoning money out of markets that their revenue is much, much smaller than
hedge funds and investment banks.

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plg
So now NY Times is in the business of publishing "teasers" to incite people to
buy this guy's book? I hope he is giving them a royalty on future sales.

~~~
jimhart3000
This is long established practice in the publishing business - publications
getting exclusive excerpting rights to upcoming big books. Lewis's name can
help move some issues of the Times, and the exposure there helps move some
books. Lewis also has a long history with the Times magazine, so it's
unsurprising to see them get excerpt rights.

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lotsofmangos
Without meaning to cast aspersions, I often find it hard to trust technical
commentary on the potential effects of controversial aspects of markets as
anyone who really knows what they are talking about is very likely to have a
financial incentive influencing what they are saying, no matter which side
they are on or how level headed they try to be.

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HockeyPlayer
I just talked to a couple of people who trade options in the pits, and it is
amazing how much cleaner and fairer the electronic markets are than the old
system.

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

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brazzy
God, I _hate_ this kind of long-form article that constantly interrupts the
main story with jazzed-up mini-biopics of the next person they're going to
introduce... Very irritating to read.

