
Raging Bulls: How Wall Street Got Addicted to Light-Speed Trading - Rexxar
http://www.wired.com/business/2012/08/ff_wallstreet_trading/all/1?viewall=true
======
reverend_gonzo
Disclaimer: I am a developer in the HFT space.

This is utter crap.

As long as there has been a transfer of money, there has always been a market
for faster access to information and faster use of that information. Its only
in the last ten years that the speed is so fast it has to be done
electronically.

There's a autobiography of a stock trader written in the early 1900s called
Reminiscence of a Stock Operator where, in 1907/1908, the author is
complaining that the time to execute a trade is too long. Specifically, he
would notice a price movement on the tape, tell his runner to go (for example)
buy 100 at $60, but by the time the runner was actually able to execute, the
price was at $80, hence he's getting a worse price. The solution back then was
faster runners, then faster communication (such as hand signals), then
computers, etc.

Wall Street is not just HFT. Different firms have different ways of trying to
make money. Some are speculators, some are value investors, some are
arbitrageurs, some are market makers. Some companies trade to hedge risk in,
for example, commodities that they expect to buy in the future. Others trade
to hedge currency risk against countries they do business with.

To claim that Wall Street used to bet on companies that build things but now
only bet on companies that make money is terrible mass-market journalism at
best.

~~~
wtvanhest
I know a lot of people at major investment firms and not one of them trades
HFT. I'd assume HFT is an extremely small percentage of the overall market in
terms of average position size.

~~~
theorique
If they are trading any stocks at all, they will be using essentially the same
systems as HF traders. Any big broker-dealer ('big' in terms of quantity of
orders processed) will be a high frequency trader by definition, because they
aggregate large quantities of customer order flow, process it rapidly, and
send the orders out in rapid succession.

------
wmeredith
I'm going to go ahead and qualify this next statement by saying that I know
little to nothing about high frequency trading and little about finance in
general, but when Wired covers technology subjects I do have in depth
knowledge about it's riddled with sloppy reporting and sensationalism. This
has happened enough times that I usually skip their coverage entirely and when
I do read their stories I do so with a very skeptical eye.

This piece may be different, but I would have know way to know since it's
outside my field. It just makes me sad that I can no longer give them the
benefit of the doubt. I used to love Wired. However, as I've become more and
more knowledgeable about web technology and marketing over the course of my
career, the more I see them as one more sensationalistic rag doing bad science
and technology reporting for the mainstream.

------
nanex
The problem isn't trading fast, it's trading unfairly. Not following
regulations. Heaping the costs of speed on others, while reaping the benefits.
We have documented hundreds of examples of clear rule violations.
<http://www.nanex.net/aqck/aqckIndex.html>

Did you know that in 1999, during the internet bull market, the system
processed just 1000 quotes/second, and today it's 1.5 million/second? Guess
who pays for that? Guess who benefits? <http://www.nanex.net/aqck2/3528.html>

Did you know that your orders to ETrade and other retail brokers are tagged as
"dumb" and sold to the highest bidder like Knight, UBS, Citadel, who then
internally match your order (it never goes to the exchange, except during the
flash crash). They give you the price from the slower system, but buy/sell
from the faster one. The incentive to skew the two is irresistible.
<http://www.nanex.net/aqck2/3519.html>

When you get a price-improvement of a penny on a 100 share $60,000 apple
trade, they steal 99 cents - and front run some other investor, who's order is
left hanging (sometimes forever). It happens in Apple more than 2,000 times a
day. <http://www.nanex.net/aqck2/3520.html>

When you offer to buy something at a price, then yank that price before the
other party can see it (speed of light), is that fair? It happens millions of
times a day. <http://www.nanex.net/Research/bloodbot/bloodbot.html>

I could go on and on.

~~~
paperwork
Great to have nanex here. I am very interested in hearing why you (and
surprising number of other vendors) support windows, but not unix. I don't
mean that in an accusatory sense, I'm genuinely curious if there are that many
people who run automated trading models on a windows machine.

Regarding the topic on hand. When e-trade sells their order flow, aren't they
obligated to provide 'best execution?' You are speaking of rebate for
liquidity, correct? If NITE and BATS are both quoting the same price, then
e-trade has the choice of sending to either, but if NITE has better price,
they e-trade has no choice but to route the order to NITE, correct?

~~~
nanex
Rebate for liquidity is entirely different. So is retail price improvement
(aka sub-penny pricing).

Retail order flow is sold to a wholesaler like Nite who matches it internally.
They are allowed (best execution) to give you the price at the NBBO during a 1
second window. For less active stocks, the NBBO price can change 1,000/second
or more. For all stocks, the NBBO price will be slower than the direct feed
price. This latency and differential makes it a risk free trade (so long as
you don't accidentally release your test code into production: see
<http://www.nanex.net/aqck2/3525.html>)

There is no way to prove what prices existed on all markets at the time your
trade was executed, meaning it's on the honor system. So this depends on your
trust in Wall Street to give you the best deal.

BTW, we recently added support for linux.

------
TimGebhardt
One of the dirty little secrets is that a lot of all the easy money was made a
while ago. The media's just kinda catching up now. The increased cost of
playing this game means fewer and fewer firms are able to chase fewer and
fewer dollars.

They're squeezing themselves out of the market. It's like any other thing in
the market: as people see profits they get into a market and accept a lower
profit target until the market stabilizes on the marginal cost to produce the
good. In this case the good is liquidity for the market.

Just give it time to play out. The "problem", if there is one, is kind of
taking care of itself. If you want to direct your energy at a real problem,
focus on the old-boys-network of getting stuff done in banking: commoditize
the crap out of the financial sector's business by breaking down the moats and
walls that allow high finance to run scams like the dotcom bubble, the housing
bubble, and manipulating the LIBOR.

------
JumpCrisscross
Note that Knight has clarified that it lost closer to $270 million rather than
the $440 million it originally estimated [1].

[1] [http://www.bloomberg.com/news/2012-08-08/joyce-tells-
clients...](http://www.bloomberg.com/news/2012-08-08/joyce-tells-clients-
knight-in-good-standing-with-clearing-firms.html)

~~~
fr0sty
It still was a $440M pre-tax loss. The $270M figures is post-tax.

------
cs702
Wall Street firms are not "addicted" to faster trading: they NEED faster
trading to keep up with the competition. That's not news. For as long as
financial markets have existed, market players have been in a never-ending
technological arms race, constantly seeking to get information and execute
trades faster, hopefully gaining a temporary advantage until the competition
catches up.

Leaving aside the hyped-up nature of this Wired article, there is a legitimate
debate, ongoing, as to whether automated high-frequency trading is beneficial
or detrimental to society. On one side of the debate, there are economists,
regulators, and market participants who sincerely believe markets normally
are, or otherwise tend toward, equilibrium, so allowing more trading motivated
by profit, regardless of whether it's automated or not, makes markets more
efficient and stable, which in their view is beneficial to society.

On the other side of the debate, there are many critics (e.g., the late Benoit
Mandlebrot, Nassim Nicholas Taleb, economist Steve Keen, Keynes biographer
Lord Skidlesky, etc.) who believe markets are never in equilibrium, and can
unexpectedly 'spin out of control' just like other highly complex, dynamic
systems, so it's a _terrible idea_ to have market stability relying on the
second-to-second behavior of automated trading systems that can make decisions
and act on them much, much faster than humans could ever react to a market
debacle.

In my view, the second group is right, but if anyone here disagrees, I'd love
to hear their thoughts.

~~~
beagle3
I do not agree with either view.

Crashes happened in 1929, when everything was done on paper, and even long
before that, when transactions took even longer to complete. Everything is
faster these days, but it is not qualitatively different.

"Benefit to society" is not, and never was, an optimization criterion to how
markets are being run. Forget the rose tinted economics text books. The way
markets have been run in the last 200 years or so (at least) is to benefit the
big players. There are some benefits to society, such as a standardized way of
raising money by companies that lets the investors remain liquid, as well as
some standard forms of insurance (all derivatives are, one way or another, a
form of insurance and COMPLETELY EQUIVALENTLY, a gamble, depending on how you
view life).

The problem is that it's a wild west now. There are a lot of laws on the books
that are not being observed, or are being observed only against some players,
but not others.

There's a regulation that says any order you put into the market must have
behind it the intention to execute. Now, please tell me how 10,000
order/cancel/order/cancel events per second (often with the same price but
different quantities) can satisfy that regulation? I had been in algo trading
for 7 years, and I'm not aware of a single plausible explanation, let alone
one that would work for 50 firms, 250 days a year, 4 hours a day.

Modern trading is a wild west casino. Regulators have been long ago captured,
and the few that weren't appear to be either powerless, incompetent, corrupt
or worse. (see: madoff w.r.t markopolos, the total lack of action against
mfg/corzine - there are hundreds of examples; read zerohedge or denninger for
new examples daily)

~~~
cs702
beagle3: you make several great points, all of which, AFAICT, are in agreement
with the second view: financial markets are inherently unstable -- and yes,
regulatory capture, rampant fraud, and 'wild west casino' behavior are all
factors contributing to instability -- _speed just magnifies their impact._
Many of the people in the second camp have made the same points as you in
their calls for increased regulatory supervision and enforcement.

Note that the years preceding the Crash of 1929, commonly referred to as the
"Roaring 20's," were also years of 'wild west' behavior. Consider that the CEO
of Chase National Bank, one Albert Wiggin, was caught secretly selling short
his bank's stock in 1929, at the same time he was committing his bank's money
to buying the bank's shares, and he did this through a Canadian shell company
to avoid US taxes.[1] Or consider that the Chairman of the NY Stock Exchange,
one Richard Whitney, was sent to jail at Sing-Sing for embezzlement in
1938.[2]

The forced separation of commercial and investment banks by Glass-Steagall in
1933, the creation of the SEC in 1934, and the enactment of many investor- and
market-protection laws and regulations via the Investment Company act of 1940,
were all a response to the Crash of 1929 and the resulting Great Depression.
The underlying assumption behind all these efforts was that Wall Street could
not be left to its own devices.

The country subsequently had decades of relative financial market stability:
there were no crashes like 1929 until the regulatory apparatus was dismantled
in the 1980's and 1990's, leading to the crisis of 2008.

\--

[1] <http://en.wikipedia.org/wiki/Albert_Wiggin>

[2] <http://en.wikipedia.org/wiki/Richard_Whitney_%28financier%29>

~~~
beagle3
> all of which, AFAICT, are in agreement with the second view:

As you presented it, the speed is an important factor in the second view - I
disagree. Proper regulations (assuming they are observed and diligently
enforced) should be time-scale independent.

Glass Steagall kept the system-as-a-whole safe -- e.g., it would have greatly
reduced the effect of the "subprime" crisis (though sadly, blame lays just as
much with the Clinton administration, which means GlassSteagall might not have
helped). But is mostly unrelated to HFT - e.g. Knight Capital, which lost
$440M million in the course of 45 minutes last week, would not have been
subject to Glass Steagall.

The fact that everything seemed stable does not indicate everything was indeed
stable - e.g. Madoff was doing his thing for the last 17 years, and things
blew up only because many people wanted to get their money back in the same
time (as a result of their losses in other places).

There is an interesting result from complex system theory, which is that when
such a system breaks down, it always looks like there is a specific culprit /
event, but the truth is that any one of hundreds of qualitatively different
events would have started the ball rolling.

All of the big banks (and most governments, including the US, Japan, UK) are
bankrupt - or at least would be, if they were run like a business, no one
dares admit it (although greece and ireland were already forced to, spain
italy and portugal will need to admit that sooner than later).

We will hopefully know the truth about this crisis in the future. It is
unlikely that we will have a reasonable idea before 20 more years have passed
(and especially the statute of criminal violations....), though.

~~~
cs702
beagle3: yes, in an ideal world, regulations should be time-scale independent,
and they should be observed and diligently enforced. The problem is that
_human judgment -- which is still necessary for enforcing regulations in the
face of market participants who're constantly trying to game them -- is not
time-scale independent._

As I presented it in my first comment above, the second side believes "it's a
terrible idea to have market stability relying on the second-to-second
behavior of automated trading systems that can make decisions and act on them
_much, much faster than humans could ever react to a market debacle._ "
(Emphasis added.)

As I see it, we're largely in agreement.

------
vegasbrianc
Very interesting animated chart showing what HFT has done to the different
markets <http://imgur.com/DxWer>

------
gergles
Here, let me save the HFT apologists from their post:

liquidity market-makers benefits retail investors handwave handwave march of
technology fat guy in a suit waving his fingers around liquidity liquidity
liquidity paying 1/8 of a cent for a trade obviously harms the retail investor
more than the entire market crashing when algorithms fight with each other
handwave handwave market making you don't understand the importance of
liquidity market maker liquidity liquidity no fat guys in suits.

------
shalmanese
There's nothing intrinsic about markets that says they have to move towards
faster and faster trading. For example, markets could decide that they now
want to clear every second, on the second. That's larger than the RTT around
the globe and so global markets could remain in sync.

The spread would increase marginally but the upside is that PhDs could focus
on making their algorithms smarter, not just faster.

------
wglb
This article is bad on so many levels. I am about to vote for leaving out
wired from HN.

~~~
daimyoyo
As someone who knows just about nothing about HFT(theoretically this article's
target market) I don't see anything wrong with it. Care to elaborate about why
its "bad on so many levels"?

~~~
wglb
They conflate algo trading with high frequency trading among other things.

This post <http://www.chrisstucchio.com/blog/2012/hft_apology.html> will
explain it better than I can.

------
nirvana
tl;dr: We missed out on Facebook because of regulation. regulation lowers
market efficiency, markets have always evolved, HFT improves pricing and order
fulfillment

Like seemingly everything wired writes these days this article is nonsense,
written from the perspective of an agenda. Wired regularly comes out with
these neo-luddite articles. The reality is, software bugs cause money. Knight
was punished for their "sins".

Meanwhile I profit because HFT makes the market more efficient for me. I know
this with certainty because I trade derivatives (options spreads) and I've
done so in areas where there is no HFT and where there is a lot of HFT. My
orders go better at closer prices when there's HFT going on. I've experienced
the additional market liquidity first hand, and the underlying is shockingly
stable for the nature of the business, so I don't think anyone could say that
HFT is destabilizing the stock price.

At this point people might be tempted to shout "anecdote" but the thing is,
economics and reason also support this view. Thinly traded markets are simply
less price efficient because there are less people analyzing price and thus
willing to buy or sell at a little better price. Computers are efficient at
this (I know almost all the counter parties to my trades are computers, it is
really easy to see because they react instantaneously to my actions.)

Finally let me point something out. Facebooks IPO has been pretty poor, while
Google's was great. Google was able to go public when it was still in its high
growth phase. This meant that the public was able to invest in google and make
very high returns. Facebook, however, grew up in a different regulatory
environment, especially after 2008 (Which was itself a result of regulation in
the first place, though for political reasons we're fed a constant stream of
lies to the contrary) ... in this regulatory environment going public is much
more difficult.

Thus, instead of you and me profiting from buying facebook stock in 2006,
where we would be up 100-fold by now, only venture capitalists and large
companies were allowed to participate in that. This is really a shame. In the
1990s a company like facebook would have gone public much earlier. People seem
to think that because there was a bubble (again government created) and some
companies went bust that somehow magically "regulation" will "protect" people.
It doesn't, it just hurts people. We all missed out on Facebook, and now
facebook was forced into a situation where its stock is going to suck wind for
awhile-- hurting the entire startup sector.

But it always starts with articles like this-- nonsense to scare people about
HFT, this creates the political support for legislation (which always favors
certain interests, not the least of which are the politicians who wouldn't do
it otherwise) at the expense of society.

~~~
ceph_
>Meanwhile I profit because HFT makes the market more efficient for me.

High frequency trading does not increase liquidity in a way that directly
benefits anyone but high frequency traders. Being able to liquidate assets in
a fraction of a second less does not benefit the normal investor. Not even
getting into the volatility it adds.

