
How to disrupt Wall Street - zackattack
http://cdixon.org/2010/01/23/how-to-disrupt-wall-street/?utm_source=twitterfeed&utm_medium=twitter
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Imprecate
Technology has been disrupting Wall Street for years. Look at the NYSE /
Archipelago reverse merger where a young, tech-savvy upstart ECN essentially
took over the iconic New York bourse.

"In the old days, short-term liquidity was provided by specialists or floor-
traders. In the past 10 years, their role has largely been replaced by
sophisticated high-speed computer models. CNBC still reports live from the
floor of the NYSE to preserve an outdated illusion for the public - the
reality is the vast majority of the trading is now done by computers."

From Tradebot Systems' homepage (<http://www.tradebotsystems.com/>) - a
proprietary trading group out of Kansas City that competes with major
investment banks.

I disagree with the author's characterization of market-making as predatory.
There are risks involved in providing liquidity, so there should be some cost,
and as a purely competitive enterprise with many players, the costs will be
very low. All brokerage houses allow you to submit your own limit orders if
you don't want to pay the spread. I fail to see how a bunch of computer
market-makers competing with one another to offer spreads tight as 1 cent are
worse than the old monopolist NYSE specialist quoting in $1/16ths while seeing
all order flow.

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yummyfajitas
Why would you want to disrupt prop trading? Prop trading is about allocating
resources to their most productive use. High frequency trading is a
particularly stupid target; high frequency traders provide liquidity. Without
them, you might place an order that goes unfilled. Is that a good thing?

Regarding mutual funds, you can get better (and more volatile) returns with an
index fund. No one disputes this. But what if you want a tuned investment
strategy? A mutual fund I'm invested in tries to make large profits right now
(while I'm young) from high risk investments, and over time transitions into
low risk investments (to protect my retirement). It won't beat the market, and
it isn't meant to.

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prodigal_erik
No high frequency trader wants to provide liquidity by filling an order that
would otherwise go unfilled. Their goal is to find orders that would otherwise
be filled _within milliseconds_ , take on a completely superfluous middleman
role, and steal most of the spread from the real buyer and seller.

[http://seekingalpha.com/article/151173-hft-the-high-
frequenc...](http://seekingalpha.com/article/151173-hft-the-high-frequency-
trading-scam)

~~~
Imprecate
If the person believed a natural counterparty would come along within
milliseconds, why would he or she enter a market order rather than a passive
limit order?

There are many high-frequency strategies, and front-running/manipulating
markets might be one that unscrupulous firms engage in, but most would rather
make legal money. The linked article doesn't make a lot of sense. For one,
flash orders are no longer available on major exchanges, and secondly it's
very difficult (and costly) to push most stocks 30 cents away from their fair
value.

Most of the anti-HFT things I read are pushed by buy-side traders who have a
hard time tricking the market into executing huge orders without moving the
price, as if they ever had some natural right to do so. Trading is a
competitive endeavor. If your poor execution algorithm shows your hand and
someone more sophisticated notices, it's fair play for them to use that public
information.

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prodigal_erik
How can HFT serve any purpose other than front-running a trade that was about
to happen anyway? Is there any other reason latency matters? The correct
allocation of society's resources did not actually change within those few
milliseconds, so their profits can only come from exploiting some flaw in the
way the market clears.

~~~
Imprecate
Front-running is knowing an order is going to be inserted into an exchange's
book, and sending your order before it; an example would be if a broker saw a
client making a big trade and sent his order before the client's, hoping to
profit when the market moved.

In most modern stock markets there is not tiered access. My order is just as
good as anyone else's, and no participants are given unfair notice of
another's orders. Firms can spend money and be more competitive in these
markets (e.g. better analysts, faster systems, co-location), but anyone has a
fair shot at competing. If an order is public, there's nothing wrong with me
taking action based on it before you if my only advantage is superior
technology.

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rdtsc
> In most modern stock markets there is not tiered access.

It seems if you are the broker and also trade for your own company, you would
see your clients' orders before they go in. You can send in your order before
theirs, thus creating a tiered access.

~~~
Imprecate
That's called dual trading and there are already regulations in place that
prohibit the scenario you described. A broker must execute his clients' orders
before his own.

In any case, most high-frequency operations are only trading for themselves.

