
One Way to Unrig Stock Trading - henrik_w
http://www.nytimes.com/2015/12/24/opinion/one-way-to-unrig-stock-trading.html
======
codeismightier
This NYT piece is heavy on moralizing rhetoric and light on technical details.
The BloombergView piece by Matt Levine [1] is much better:

"It's important to realize that slowing everyone down by 350 microseconds
can't possibly help anyone. As Hudson River Trading said in its comment
letter: "Similar to a 100-meter sprint, if you simply add 350 microseconds to
each participant’s time, neither the order in which they finish nor their time
differentials will change.""

It would indeed be pointless if everything was slowed down by 350μs, which is
why that is not the case. IEX lets its own "pegged orders" and "routable
orders" cut the line, picking off liquidity at the other exchanges. If IEX is
approved, there will be an arms race, with other exchanges inserting their own
similar delays. Even worse, because of Reg NMS you can't legally avoid trading
on IEX even if you wanted to. If the price of a stock is falling rapidly and
you wanted to sell, IEX will always have the best price since it is stale by
350μs. Everyone will be forced to send their orders to IEX, even if everyone
knows that the bid there is illusory.

The Matt Levine piece is very good. Do please read the whole thing.

[1] [http://www.bloombergview.com/articles/2015-12-22/the-
flash-b...](http://www.bloombergview.com/articles/2015-12-22/the-flash-boys-
exchange-is-still-controversial)

~~~
msellout
A delay of 350 microseconds may very well make the market less turbulent and
reduce the prevalence of "flash" crashes. Though the method of implementing
the delay might not succeed, a forced delay would alleviate the arms race to
lower latency algorithms. Lower latency means fewer computations and less
memory, which means the strategy space is smaller. With enough players crowded
into a small strategy space, the market becomes more frothy as periodically
too many players collide on the same strategy.

Placing a lower limit on latency allows a better balance between algorithmic
complexity and latency. The strategy space will be larger and hopefully will
be large enough that there's room for most everyone to try different
strategies, making the market calmer.

To get a sense for the mechanism of this phenomenon, check out the El Farol
Bar Problem
([https://en.wikipedia.org/wiki/El_Farol_Bar_problem](https://en.wikipedia.org/wiki/El_Farol_Bar_problem)).

Unfortunately, IEX's proposed implementation of a delay is probably not as
good as simply changing the precision of the exchange's clocks. If the
exchange decided it would measure time only to the nearest second and orders
occurring at the same second would be processed in random order, I expect that
would be a better solution. Adding some randomness to the processing order at
the 100s of milliseconds scale would go a long way to reducing front-running
and overly simplistic momentum strategies. The latter are the main cause of
market turbulence.

~~~
yummyfajitas
Why would adding delays make the market less turbulent? The standard dynamical
systems intuition says that adding delays creates instability. Think about how
many stable ODEs have wildly unstable numerical solvers, at least when the
step sizes are too high.

Or in terms of project planning, if you have 2 day sprints, you can course
correct every 2 days and rapidly approach a usable product. If you have 3
month sprints, you might spend 2.9 months building something totally wrong.
2.9 months of moving the wrong way will get you a LOT further off course than
a badly planned 2 day sprint.

~~~
msellout
Enforcing a delay may reduce the incentive to increase speed at the cost of
strategic complexity. If the turbulence is caused by the interactions of
overly-simplistic momentum agents, then increasing the complexity of the
agents will stabilize the market. This should hold to the extend that
increased strategy complexity also increases the variety of strategies in the
market.

Think of the market as a liquid near boiling point. If the energy of the
system increases too much, it makes a phase transition. To raise the boiling
point, add impurities. This is a flawed metaphor in many ways, but it might
offer a new intuition for you. Unfortunately, in the case of the market (and
many systems) efficiency is the enemy of stability.

If you prefer a project-planning metaphor: BigCo executives have caught Agile
fever. They see that 2-month sprints are more effective than 2-year project
plans and they've heard their competitors are finding great benefit from
2-week sprints. BigCo decides to leapfrog the competition and goes straight to
2-minute sprints. They've tested their engineers and found that 2-minutes
seems to be a lower bound on writing a chunk of useful code. The executives
declare that all engineers must report accomplishments and re-plan their next
activities every 2 minutes in accordance with proper Agile workflow.

Obviously, extreme speed is disastrous. I'm not saying to slow down the market
to making an order once monthly. Just slow down from nanoseconds.

If in doubt, build a small simulation. Simple agent-based models can produce
very interesting phenomena.

~~~
yummyfajitas
Efficiency in the "efficient markets" sense is not instability - it is by
definition perfect incorporation of all information into the price.

Fast adjustments are not "energy" in any sense, and smaller but more rapid
adjustments are in fact considered to be properties of an "orderly market" (to
borrow SEC terminology). Your 2 minute sprint example has a problem with
transaction costs, not rapid iteration.

Rather than analogies, can you just state directly how adding latency will
stabilize things?

~~~
msellout
I meant efficiency as in low spreads, not as in Fama.

I tried to state the mechanism directly, but apparently didn't do so very
well. I could try again, but I think it'd be more effective to appeal to
authority. Check out "The Race to Zero" by Andrew Haldane at the Bank of
England
([http://www.bankofengland.co.uk/archive/Documents/historicpub...](http://www.bankofengland.co.uk/archive/Documents/historicpubs/speeches/2011/speech509.pdf)).
It appears that the presence of too many low latency / high frequency players
puts the market in a state where it can phase shift, crossing from normal
"stable" dynamics to a dramatic spiking dynamic. In normal times, "HFT"
increases liquidity and reduces spreads. Every so often those HFT players
leave the market suddenly, nearly simultaneously, causing a liquidity crisis.

Note that many exchanges enforce a short pause in trading when the market
seems to be going crazy. The delay appears to help, so long as traders don't
move to a different exchange.

~~~
yummyfajitas
HFT has clearly lowered spreads. This isn't even in dispute.

The issue of market makers pulling out during a crisis is a regulatory issue;
an market maker might do the right thing and push the market back towards
where it should be and then be punished by a regulator who breaks the buy
trade. If this behavior is undesirable then eliminate the "clearly erroneous
trade" rules.

Your citation also doesn't address any specific mechanism by which a delay
would improve things. All it does is speculate that speed might be bad due to
fat tails and handwaving.

~~~
msellout
If we hypothesize that speed might be bad, shouldn't we do an experiment to
decrease speeds?

You also haven't addressed the point that many exchanges currently implement
delays in times of crisis.

------
yummyfajitas
This article is pretty terrible. First it talks about high cancel rates
(95-97%), as if this is somehow evidence of bad behavior. It isn't. Matt
Levine has a nice article with simple math showing that a 95% cancel rate is
unavoidable.

[http://www.bloombergview.com/articles/2015-10-08/why-do-
high...](http://www.bloombergview.com/articles/2015-10-08/why-do-high-
frequency-traders-cancel-so-many-orders-)

Then it talks about selling order flow to HFTs as if this somehow harms the
little guy. It doesn't - it lets HFTs offer liquidity (potentially at better
prices, and never at worse prices) to the little guy that they would be too
scared to offer to big guys.

[https://www.chrisstucchio.com/blog/2014/fervent_defense_of_f...](https://www.chrisstucchio.com/blog/2014/fervent_defense_of_frontrunning_hfts.html)

Following all this FUD is a bit of shilling for IEX. Why is this nonsense
here?

~~~
lotsoflumens
The very first assertion in the article is "AMERICA’S equity markets are
broken."

Do you think that's false? I trade the "markets" every day and I think they
are almost completely broken. If HFTs supply liquidity, what do you think
happened during the flash crashes of recent history?

Hint: they stopped supplying liquidity. That's why Virtu can make 2 years of
trades with only one negative day - a feat that is almost impossible without
the front-running advantage that they have.

~~~
deadgrey19
Front running is a technical term. It means to take orders from clients, and
then make trades in front of the clients orders, using the information
obtained to trade against the client. It's a very quick way to make a profit.
It is also illegal. If you have any evidence that Virtu is front running, then
you should report them to the SEC to be investigated.

~~~
lotsoflumens
That's why I said I agree that the markets are broken. The SEC already knows
that this occurs but chooses to not stop it.

~~~
yummyfajitas
Virtu cannot front run; they are not a brokerage.

Folks like E-Trade are the ones who could potentially front-run. Do you have
any evidence that they are?

~~~
lotsoflumens
Do you understand the purpose of paying for order flow?

~~~
yummyfajitas
Yes - you get to trade with uninformed guys making small trades (i.e., folks
too small to front-run) rather than informed traders with large amounts of
adverse selection.

Do you understand the _mechanics_ of paying for order flow? could you state
explicitly (i.e., a sequence of trades) how you believe paying for order flow
allows you to "front-run"?

------
radikalus
There's so many small sub-problems here that it's hopelessly naive to think
there's a silver bullet. There are however lots of GOOD ideas. (See CME price
band style mini auctions aka restricting dPrice/dt -- I forget what they call
them)

I'll not so briefly add:

\- Stochastic delays have many externalities; people consuming liquidity will
simply send many orders hoping to "win the dice roll" on your stochastic time
noise system

\- Stochastic delays plus limiting orders per day etc doesn't "easily" work
because enforcement is tough when people trade on your exchange as multiple
entities, multiple trading desks/groups etc (Huge pita for everyone involved)

\- Stochastic delays plus pay per order doesn't consistently work well as
value of orders is highly variant and there's no single magic # to make this
economically optimal

\- Fixed delays are pretty similar to the geo location of the exchange just
moving. It effects the external RV situations but I don't feel does much
internally except poison market data with more "not-really-there" stuff.
(Because MD state is increasingly out of state with in-flight orders)
Recognize that stale MD compounds issues as more people send orders at
opportunities not really there and this is largely what leads to MD delay
spikes etc and is generally destabilizing.

\- Selling order flow is 100% bullshit. I wish all that crap was illegal --
this is where retail gets their faces most ripped off and how lots of chumps
get to make hundreds of millions for no reason. Building models that tell you
which customers in your captive flow to piggyback in which products is super
disgusting to me. Anyone who trades with their flows exposed is surrendering
alpha to parasites.

------
tptacek
_Individual investors, trading through brokers like Charles Schwab, E-Trade
and TD Ameritrade, suffer first as the brokers profit by hundreds of millions
of dollars from selling their retail orders to high-frequency traders and
again as those traders take advantage of the orders they bought._

What's the argument here? Retail order flow is sold to HFT shops because it's
assumed all around that retail flow is uninformed. HFT shops are incentivized
to compete for those orders, because no matter who gets them, they're assumed
to be lucrative to trade against. Things wouldn't be any better for retail
investors if their orders made it all the way to "the exchange".

------
ikeboy
Most orders are cancelled:
[http://www.bloombergview.com/articles/2015-10-08/why-do-
high...](http://www.bloombergview.com/articles/2015-10-08/why-do-high-
frequency-traders-cancel-so-many-orders-)

>Exchanges advance the interests of traders by sponsoring esoteric order
types, which for hard-to-understand reasons receive the approval of the S.E.C.
An example is the New York Stock Exchange Day Intermarket Sweep Add Liquidity
Only Order. Regular investors have no idea such an order type exists or what
it means.

Then they have no need to use it. Does anyone think we should cut out little
used parts of programming languages, because "regular programmers" have little
need for them? When did "it's complicated, therefore it's unethical" become a
valid argument?

------
alkonaut
Assuming that extreme HFT and massive amounts of cancelled orders are BAD
(there are people who argue that market liquidity etc. outweighs the drawbacks
of short-term focus and billions spent on making algoritms ever faster and
moving datacenters ever closer to markets. Let's assume they are wrong).

How does one change the rules to promote longer term investment and promote
quality in trading algos over speed? How do we putting data centers where it's
cost effective rather than across the street from the market?

Adding a _random_ delay to orders which will execute it some time in the next
few _minutes_ is one alternative.

Having a mandated minimum transaction fee/tax is another. What if it's 1% (and
a nonzero amount for cancelled orders)?

Changing the tax structure so that profits from instruments held for less than
say a few hours or days are taxed at nearly 100% and then slopes down to a
much lower floor for longer term investments (months or years).

Obviously any measure has to have wide international support, no market wants
to scare the money across the border.

~~~
yummyfajitas
Canada tried the transaction tax - it was a loser, and resulted in retail
investors paying 9% more to trade.

[http://qed.econ.queensu.ca/pub/faculty/milne/322/IIROC_FeeCh...](http://qed.econ.queensu.ca/pub/faculty/milne/322/IIROC_FeeChange_submission_KM_AP3.pdf)

Most of your other suggestions would probably have the same effect.

------
consz
>Its exchange competitors, which include the New York Stock Exchange, Nasdaq
and BATS, cater to the interests of high-frequency traders, which typically
provide more than 50 percent of all trading volume.

This is true for IEX -- the top volume participants there are _all_ HFT firms.

Also, I don't see how IEX's claim of improving price discovery meshes with
their 350us delay. Are they not locking the NBBO on basically every single
price flip because they are delaying updating their quotes? In what world is
this more fair?

>An example is the New York Stock Exchange Day Intermarket Sweep Add Liquidity
Only Order.

This isn't even a thing -- what would an ALO ISO even mean?

>High-frequency traders pay to locate their computer servers inside of
exchanges’ order execution centers, where they get early access to trade
information that they use to jump in front of — front run — other clients.

Okay now he's just either misinformed or lying. Who wrote this article?

~~~
ikeboy
[https://www.nyse.com/publicdocs/nyse/markets/nyse/ALO_Custom...](https://www.nyse.com/publicdocs/nyse/markets/nyse/ALO_Customer_Notice_Final.pdf)
mentions that order type.

------
randomname2
Just out of interest, why all the negativity towards IEX here on HN?

Wouldn't it be a good thing for them to compete with the other exchanges?

~~~
kasey_junk
I won't speak for all of HN, but what bugs me about them is that they are
using scare tactics & misleading story telling to position themselves as the
"good guys" in a fight with the "bad" HFT.

In reality their business model is to drive uninformed order flow to highly
sophisticated hedge funds & to let those hedge funds deny the rest of us price
discovery.

That said, I don't mind that they exist, I just wish they'd stop acting like
they are doing it for the good of the "average" investor (whatever that is).

------
paulpauper
People lose money in the market because of bad timing (buying high selling
low) and poor strategy (buying energy stocks in 2014, for eample), not because
of dark polls and stuff like that.

------
mschuster91
How about imposing a minimum holding time for a stock? Like, a year? Or
putting dividends, sale profits, bonuses and manager payments on hold for this
time?

At the moment, the stock system massively rewards short-term speculation and
companies only focus on quarter gains instead of long-term profitability/the
company future. For example, reducing head count might improve this quarters'
bottom line, but one year in the future the lack of heads will be problematic
because the company is unable to keep innovating. But investors (and managers
alike) don't care about the future because they already realized and pocketed
the profit and move to the next company.

