
 Daniel's review of Flash Boys: A Wall Street Revolt - wglb
http://www.amazon.com/review/R3PJO6KJGRMWUE/ref%3Dcm_cr_pr_viewpnt#R3PJO6KJGRMWUE
======
mathcop
I work directly on this at the SEC and as such cannot comment on the matter
publicly. I post here only due to the correlation between people who would
read the comments of this post and those who might be interested in getting
involved... because we are hiring.

Specifically, we're looking for 1-2 core devs (hacker/generalist types
honestly). Python's our main language now & I'm trying to incorporate Haskell
as well. Green card/Citizen required + NYC only (sorry, not up to me), salary
120k-190k/yr, 40hr/wk, awesome team run like a research arm.

martinow at SEC dot gov.

------
dodyg
Felix Salmon from FT wrote this review and has similar criticism about the
book

[http://www.slate.com/articles/business/books/2014/04/michael...](http://www.slate.com/articles/business/books/2014/04/michael_lewis_s_flash_boys_about_high_frequency_trading_reviewed.html)

------
girvo
Most of the complaints I've seen are to do with the fact that HFT is t "fair"
to Mr. Joe Trader, in terms of them having an advantage. My argument is that
Mr. Joe Trader is at a disadvantage compared to professional traders,
regardless of trading mechanism...

~~~
glesica
Just because the game was rigged already doesn't mean that rigging it even
more doesn't make a difference.

~~~
tptacek
No, but when the new "rigging" actually improves the situation for retail
investors at the expense of increased costs for hedge funds, it becomes hard
to make simplistic comparisons.

The public markets are a series of zero-sum games. When you fully understand
this, it becomes apparent that almost any profit-making strategy for engaging
with them can be described as a form of "rigging". Every dollar Virtu makes
has to come out of someone else's pockets.

The important thing to know is "whose pocket".

People on HN love to play six-degrees-of-Mom's-retirement about this issue.
That game doesn't actually work. Consider two scenarios:

(a) By increasing the cost for billion-dollar broker/dealers to shop blocks,
electronic trading systems are making it more expensive for mutual funds to
trade and thus extracting rents from the hides of pension funds; the pockets
picked are ultimately those of ordinary Americans.

(b) By preying on naive market-making strategies, electronic trading systems
are disrupting an entrenched cartel of billion-dollar market players, and in
the process driving trading spreads to historic lows without measurably
impacting volatility in the market; the pockets picked are those of other,
more brazen pickpockets.

The difference between (a) and (b) is _crucially important_. If the status quo
ante is bad, and the new situation is better, then organizing against that
change is a positive action taken in favor of unfairness.

Significant evidence points to (b).

~~~
tom_b
Since I noticed previously you were also reading Dark Pools (commented in
another thread), I found that book to pile up evidence for (b) as well. Do you
have similar takeaway from Dark Pools? In particular, in the early days of
electronic trading, that book clearly makes the case that the hackers (or
maybe mainly Josh Levine) were completely focused on disrupting a corrupt and
"good old boy" network driven trading system.

But (and I say this after having read both the Lewis book and Dark Pools), I'm
not entirely sure what to think about HFT (or more broadly, electronic trading
in general) and market volatility.

It kind of seems like there is going to be some popularly accepted government
regulation of electronic trading that my gut tells me will be more acceptable
for the "other, more brazen pickpockets" than the new, despite the fact that
we think choice (b) is better for investors.

~~~
tptacek
The best thing about Dark Pools is the narrative about the creation of Island
and Archipelago and the regs changes that led to the NASDAQ ECNs. There's
definitely a clearer "good guy" and "bad guy" in the ECN story: the human
market makers are the bad guys in that story, as you can see by their refusal
to quote in odd eighths.

HFT is complicated in large part because it's not one thing. The best response
to criticisms of HFT is to be wary of anyone who would try to lump a bunch of
different entities with different motivations and different business models
together based solely on the technology they're using.

Unfortunately, that is in a nutshell what Lewis' book tries to do.

------
ccurtsinger
Daniel claims that volatility is actually lower with HFT when you look at
implied volatility, a predictive measure of volatility. Lewis uses actual
historical volatility in his argument. You shouldn't use a predictive measure
when analyzing past performance:

Implied volatility is computed base on the difference between an option's
selling price and an algorithmically-determined price. That's exactly the sort
of information any trader would rely on to place bets. When the calculated
value is higher than the price, there is profit to be made. Any decrease in
trading latency will allow traders to buy up instruments selling below their
estimated value a bit quicker, driving these numbers closer together.

~~~
tptacek
That's not the only distinction being made here; the other argument is that
Lewis is capturing a lot of factors other than HFT when considering
volatility; for instance, the collapse of the collateralized debt market.

------
williamcotton
I'm always told that HFT makes the bid/ask spread go from 0.25 to 0.01. I'm
always told this is a good thing... But why is that?

Let's say we didn't have HFT and we had a larger spread... That means that one
of the parties is overpaying, right?

But, aside from the burdens of the individual overpayer, doesn't it make more
sense for the overall ecosystem to at least keep that money in the pockets of
people who are interested in the long term value of the equity?

What are the overall economic marginal returns on squeezing the spread so
thin? Is it possible that it might make more macroeconomic sense to NOT have
some other entity profiting off of having created a minutely more liquid
marketplace?

~~~
tptacek
The spread is a fee charged by liquidity providers (market makers) to traders.
Whether you trade every day or only once a year, the spread is effectively
money taken from the trader and put in the pockets of market-makers.

If you want to disincentivize active trading (more than the market already
does, by awarding outsized returns to funds that don't rely on active
trading), a tax on trades performs this function more effectively than high
spreads do.

Worth noting: during the times when spreads were as high as 0.25, that was in
large part the result of collusion between the market makers, who were
eventually taken to court over it.

~~~
ubernostrum
The thing I consistently don't see addressed whenever HFTs are advanced as
market makers is the fact that HFTs seem not to actually fulfill one important
responsibility -- market makers typically operate under an obligation to
provide liquidity, but HFTs seem to have a history of bailing out at times
when liquidity is actually needed.

~~~
tptacek
I'm not sure I understand what this means. If the HFTs "took their balls and
went home", there would be that much less liquidity available as a certainty.
The fact that some electronic orders get cancelled doesn't subtract from the
orders that don't get cancelled. In other words: the average spread is the
average spread regardless of how many "probing" orders are cancelled, and
lower spreads are better.

From what I can tell, these issues come into play primarily in two scenarios:

(a) market orders with traders demanding immediate liquidity at the expense of
optimal pricing, and

(b) complicated hedged trades in which traders are depending on the
synchronization of two different sets of correlated limit orders.

~~~
ubernostrum
Well, as I understand it sort of the whole point of a market maker is that you
_don 't_ "take your ball and go home". Traditional market makers are obligated
not to do that.

If HFTs want to be hailed as more efficient market makers, they should operate
under the same obligation.

~~~
tptacek
Market markets (human, mechanical, hydraulic, electronic) are obligated _to
trade_ , but they are not obligated to trade _at any particular price_. They
survive by constantly repricing their best bid/ask. They do that by... wait
for it... canceling resting limit orders, and replacing them with orders at
different prices.

------
vishaldpatel
On Canadian Household debt (as of July 16th, 2013):
[http://www.td.com/document/PDF/economics/special/CanadianHou...](http://www.td.com/document/PDF/economics/special/CanadianHouseholdDebt.pdf)

"• However, the most commonly cited debt-to-income statistics in Canada and
the U.S. are not directly comparable. There are differences in the
methodologies used to calculate both debt and income. There are also
differences in how health care is funded in Canada and the U.S. that should be
fac \- tored into the amount of personal disposable income households have to
help service their debt. "

------
Bootvis
Who is this mister Daniel?

~~~
omonra
That's exactly what I thought. Why should I care what some random guy called
Danny thinks about a clearly controversial issue (and it only seems
controversial to those who have a vested interest in this business).

~~~
tptacek
You shouldn't care about Daniel. You should evaluate the content on its own
merits. Have you done that? What is your response?

~~~
Bootvis
I do, I was just confused by the title. With that out of the way: not reading
this book. Any critique should at least get its facts right and if I want to
be entertained I prefer other authors.

~~~
tptacek
Oh! The reason this was submitted was that someone found it during a previous
discussion of Lewis' book, and then 'yummyfajitas (a long-time HN contributor
and former HFT person) wrote a comment about how good the review was. It was
submitted to keep it from being lost in the shuffle of a long, noisy thread.

~~~
Bootvis
Which leads me to that thread, thanks :)

------
Tycho
Can anyone elaborate on the secret bail out of Canadian banks ?

~~~
lingben
[http://www.cbc.ca/news/business/banks-got-114b-from-
governme...](http://www.cbc.ca/news/business/banks-got-114b-from-governments-
during-recession-1.1145997)

~~~
unreal37
I wondered that as well, so thanks for posting this link.

This claim seems dubious. This CCPA report is saying the majority of the "bail
out" was from the CMHC (our FNMA) buying mortgages (which were already insured
by them) from banks. Thus, assets were exchanged for cash at a fair market
value. Is that a bail out?

A fishy anti-business report quoted by a supposed wall-street trader. Michael
Lewis' book has brought some strange groups on the same side of the issue I
guess.

------
igl
Pity, it is a bad book. Im still very much against HFT.

~~~
aet
There is no point to being "against HFT" \-- you need to support an
alternative market design and explain why it would be better.

~~~
fsk
The best proposal I've heard: Instead of continuous trading, have an auction
every 1-60 seconds. One trade per minute is plenty.

~~~
kasey_junk
A couple of issues with this:

1) most of the arguments for call auctions instead of continuous trading
assume a centralized call auction that in and of itself adds no cost above our
current decentralized exchanges. This seems like an extremely troublesome
assumption given that we have seen the negative impact of centralized monopoly
exchanges.

2) If it isn't a centralized auction there needs to be some price sync.
mechanism. The most obvious one seems to be either latency arbitraging HFT
(which for some reason people don't like) or a governmental central auction
block the type of which is already causing legislative arbitration in the
current markets.

3) Call auctions in and of them selves do not solve the major issue with our
current prioritization system. If the auction algorithm has several prices
that match the same amount of participants, or if the price it determines has
an uneven number of buyers & sellers, who gets priority?

4) Price discovery is currently harder in call auction instruments. That could
be because they are only done in illiquid markets and liquidity itself will
fix that, but it is an issue with the current examples of this style of
trading.

5) "Market" order mechanism. Many, many market participants are more worried
about making sure they buy/sell than about high fidelity price fairness. If I
say, "I want out of Goog no matter what", that complicates any auction
methodology and introduces opportunities for gaming.

At the end of the day, I can't figure out who will actually be protected in
this style of market and to whose disadvantage. That is a lot of added
complexity for a very vague benefit.

