
Is the U.S. stock market rigged? [video] - phsource
http://www.cbsnews.com/news/is-the-us-stock-market-rigged/
======
minimax
I thought this was going to be interesting but it turns out it was just an
advertisement for IEX. They brought out a) guy selling a book about IEX
(Michael Lewis) b) CEO of IEX (Brad Katsuyama) c) Chief Strategy Officer of
IEX (Ronan Ryan) and d) IEX investor (David Einhorn). No shit they are going
to make it sound like the markets are rigged and IEX is the answer.

~~~
xpose2000
As far as I know, IEX is of no use for the average joe investor. We aren't
buying and selling in blocks of 1000 or 10,000.

Believe what you want, but there is a reason companies pay big money for super
low latency.

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kasey_junk
Instead of being angry about hyperbole and ignorance, my new policy for HN
story's touching HFT is to just answer questions. I build HFT systems for a
living. My experience is only in commodities futures but I can try to explain
equities markets as well. Ask away instead of passing on bad info.

~~~
noname123
What language do you write your trading platform in? What FIX engine, if any
do you use?

Do you colo with a broker or go directly to the exchanges?

Do you arbitrage the roll of ETFs that track commodity futures (e.g., VXX,
USO)?

Do you roll your own backtester or use an open-source or off the shelf one?

In general, what is the win/loss and Kelly's expected payoff of your various
strategies? Do you aim for out-of-the-ball-park home run's or consistent
singles? Thanks.

~~~
kasey_junk
My experiences have been in C++, JVM languages and FPGA. I've used proprietary
FIX solutions, Onixs, and QuickFIX.

I've always colo'd with the exchanges I've traded on.

I've never traded a US equity.

I've used both off the shelf analytics solutions and built my own. (I don't
design trades typically, rather I write systems for folks that do).

I don't usually go in for deals that involve expected payouts of PnL. I build
technical solutions for a fixed price for people that have a particular
technical requirements set. I'm not sure I even know what a Kelly's expected
payoff is.

~~~
noname123
Thanks, kasey_junk for your detailed answers. Greatly appreciate it. Not
trying to get any inside or competitive info as I do more options algorithmic
trading on a time frame of weeks and months. But I'm always curious how the
other half live.

Are you using Scala specifically as your JVM language, CUDA for your FPGA?
Also, have you dealt with Complex Event Processing (CEP) as way to combat
stale quotes and feeds that require long time to process? These are area's
that I haven't explored, so curious about your $0.02 if you have any
experience/opinions, thanks.

~~~
kasey_junk
I prefer to work in Scala on the JVM if I can, but Java is still very
prominent. CUDA is most common on FPGA though I haven't worked in it for
awhile. Have not dealt with CPE in trading.

------
drawkbox
Two big problems with the market:

\- Shutting down overnight, lots of schemes happen after hours or pre-market,
why don't we have an always on market?

\- HFT has run amok and they aren't that smart yet or they are too smart:
[http://buzz.money.cnn.com/2014/03/26/whoops-shares-named-
ocu...](http://buzz.money.cnn.com/2014/03/26/whoops-shares-named-oculus-
spike/) \+ [http://kotaku.com/people-are-accidentally-buying-stocks-
with...](http://kotaku.com/people-are-accidentally-buying-stocks-with-the-
name-oc-1552319497) (people aren't buying these, machines did)

It is no longer a market a small investor can make money in except for buying
after bad news and long term. Investors need HFT to compete now.

~~~
QuantumChaos
>It is no longer a market a small investor can make money in except for buying
after bad news and long term. Investors need HFT to compete now.

How is this a bad thing?

A person is still quite able to invest, in the sense of buying an index fund.
Why does it matter if a small investor can't profit by trading on news? Isn't
this a sign that the market is efficient?

~~~
drawkbox
Yes, but most of the fat is trimmed by the HFT hedge funds, even long term
now, the last vestige of growing wealth.

It is a very good thing that there is buying on the dip as a natural force of
the market. The good news market is almost totally owned by HFT and already
pre-baked.

But the speed of the algos trims much of what would go to smaller investors
that really are needed just like consumers. More volume and movement is always
good but being so efficient it takes most of the gains from the support
structure of the market harms confidence.

Lots of the gaming happens pre-market and post-market where small investors
can't always play and where the HFTs own by scraping 80-90% off the top, over
time the delta is big. HFT does have benefits being so efficient though, may
even help prevent bubbles because it can trade without emotion.

------
brianbarker
Hahaha. Yes. When big brokers can peek at trade data before the public and do
HFT before you can even look at a chart and click "buy," it's pretty damn
rigged.

~~~
wdewind
Ok, but this shouldn't really affect anyone but other HFTs, right? Maybe you
get a very slightly different price but that shouldn't matter if you are
holding investments long enough. If you are trying to outtrade HFTs and
losing, I'm not sure that shows the stock market is rigged.

~~~
rosser
Are you saying you're okay with the price at which you're purchasing a
security being driven up (if infinitesimally), _at your expense_ , so that
someone else can pocket the delta?

~~~
wdewind
I guess specifically I didn't like the way he phrased it, as if they are
stealing data somehow. In fact they bought the access. Other than a clock rate
(or 60km limiting box, as shown in the video) I'm not sure how you would
create rules against HFT. I'm also not convinced if HFT is a net win or loss
for economy, I'm not even sure how to consider it.

~~~
brianbarker
How does buying access matter? It's like giving access to see other player's
cards in poker (because you're a high roller) and then making bets based on
it. The rest of the players only see their cards and the river. That's not a
fair game.

------
Aqueous
Their solution at IEX was to coil a bunch of fiber so that high speed traders'
orders get slowed down...I'd have to know more about why they thought that was
necessary, but on its face this seems like complete overkill. Obviously there
are probably reasons that I don't understand but it seems like this problem
would be really easy to solve in software. For instance, I don't see why they
don't just trade on a step interval. Basically everyone who arrives within 1
second of each other should have their trades executed simultaneously. Thus
you have step of 1 second - nobody can get ahead of you because the travelling
time between any two exchanges for even the slowest person is much, much less
than 1 second. Does this make the market too slow? Just make the step interval
whatever the slowest latency is for any given round trip at any given moment.
That would still be on the order of milliseconds but nobody would be able to
front-run you because any trade you make will be ahead of theirs or at the
very worst at the same time as theirs.

~~~
kasey_junk
Discrete time matching always forgets about the case when there are more
buyers than sellers (or vice versa). If 2 people are buying at price X and 3
people are selling at price X, which 2 sellers get "filled"?

In most markets currently that is done in FIFO order. Discrete time values do
not eliminate the race into/out of a level.

~~~
dredmorbius
A fair lottery would solve that.

~~~
kasey_junk
There is a pretty serious bias in the markets against non-repeatable matching
algorithms. Explaining to the rest of the market participants why a given
trader (or group) had better than average luck is not something that most
exchanges are interested in doing.

~~~
Aqueous
I suppose by repeatable you mean that if you replayed the sequence of orders -
both buy and sell - the matching algorithm would match them the exact same way
as it did originally?

I understand the desire to have deterministic trading algorithms, but they're
already in the unenviable position of having to explain why some traders get
information faster than others, which seems like it's even harder to explain.

Plus, the algorithm could be repeatable if you just replay the sequence of
random numbers that led to that order - i.e. if the sequence of numbers were
made public along with the executed transactions.

You can measure the randomness of a random number generator, so it would be
easy to demonstrate the the orders were picked in a perfectly or near-
perfectly random way. You could even hook the random generator up to a quantum
event like a decaying atom to get even more evenly distributed randomness. I'm
sure for something as important as fair market conditions the institutions in
question would spare no expense - neither to have the trades executed randomly
but to prove to the public that they are generated randomly.

~~~
kasey_junk
So, A) you are making assumptions about fairness that no trader would ever
make. There is literally no argument, mathematical or otherwise that you can
create that would explain to them why the idiot in the desk next to them gets
a bigger bonus than they do based on trade execution.

B) You are making assumptions about market information "fairness" that no
trader would ever make. The exchanges have no problem explaining why some
folks have faster information than others because they always have.

Pit traders had an advantage over phone brokers. Phone brokers had an
advantage over which ever poor slobs they could get on the hook. No one on the
exchange side of things thinks people all have the same information at the
same time, if that was a requirement how would you time coffee breaks?

~~~
dredmorbius
_if that was a requirement how would you time coffee breaks?_

A fair lottery would solve that.

You're using an interesting sense of bias, where a fair lottery is in fact
perfectly _unbiased_.

There are lots of things which can cause an arbitrary assignment of winnings
to a given trader. Go back and re-read _A Random Walk Down Wall Street_ if
you've forgotten. The _problem_ isn't the randomness, it's the bias,
particularly to those with an inside advantage and edge.

------
aspensmonster
Question for kasey_junk, seeing as s/he is taking questions :D

Lewis: "This form of front running is legal. It's legalized front running. It
is crazy that it's legal for some people to get advance news on prices and
other --[information on] what other investors are doing. It's just nuts. It
shouldn't happen."

Do you agree or disagree with Lewis' assessment of the state of HFT?

~~~
kasey_junk
I completely disagree. First as a caveat, I've never traded US equities. That
said, the idea that all participants in the markets have the exact same access
to information that every other participant has is ludicrous. That has never
been the case, and can never be the case.

Trading costs as a whole are lower now than they have ever been. Is that
entirely due to HFT? No, of course not, but any "fix" you could put in place
would most likely have huge negative unintended consequences. Let's all take
our cheap investments to the bank and be happy that we don't have to pay 6'8"
gorilla's to make our trades.

------
outside1234
tl;dr If you are buying stocks as an individual for less than 10 years, don't:
you are going to get killed.

see also: buy index funds

~~~
dferlemann
don't write programs if you have less than 10 years of programming experience;
your horrible code will make programmers all look bad. BTW. no one's gonna
hire you if you have less than 10 years of programming experience in a
specific language.

I always enjoy people's weird logic.

~~~
wdewind
No, I think this is more "don't show up at NFL games expecting the coach to
throw you on the field because you play in a weekend league."

------
andrewtbham
the thing i like about this story is that they found a problem (front running)
and are trying to create a better company. rather than trying to get the
government involved.

~~~
sseveran
They are not front running. Look up what it actually means.

~~~
andrewtbham
Yeh you're right. It's similar to front running, but not illegal.

------
cperciva
Please add "[Autoplaying video w/ audio]" to the submission title.

~~~
dang
We usually just add "[video]" when a video autoplays, even when there's an
accompanying text article as well.

Do I detect an annoyance with autoplaying videos with accompanying audio in
your suggestion? If so, I share it.

~~~
cperciva
_We usually just add "[video]" when a video autoplays_

Fair enough, I couldn't remember if the usual tag for this was "video", "audio
warning" or something else.

 _Do I detect an annoyance with autoplaying videos with accompanying audio in
your suggestion?_

Indeed. I don't care about silent video, but when I've scrolled halfway down
the page and then the video at the top of the page starts making noise...

------
ktusznio
Why is it that the intermediate exchange in NJ is able to see the desired
trade? Shouldn't that information be encrypted?

------
cavilling_elite
I always thought that the digital stock market should take a page from the
cryptocurrencies and add a digital proof-of-work that will cap the speed of a
transition. A "temporal tax" would keep the system from wild swings and
reactions, similar to what we saw a few months back.

~~~
Houshalter
What's the point? The first person to get the transaction still makes money,
so there is still an incentive to get the information first. Everything will
just be on an arbitrary delay. And what's wrong with swings and reactions?
That's supposed to happen as new information comes in which changes things. If
the people reacting are wrong, they lose money and the people who see it make
money.

------
stcredzero
Don't senators and congressperson's portfolios do a whole lot better than the
S&P 500?

------
lukeqsee
I understand how HFTs are making their money; however, how does this drive up
market? Would they not be able to make the same money in a downmarket (a delta
is a delta, whether you are going up or down)? All I can see this affecting is
the billions (trillions?) of dollars in HFTs amplifying whatever the market is
doing.

~~~
jjoonathan
That was an oversimplification done for the audience's benefit. If the video
were a math class, he would have said "without loss of generality, assume that
the market is going up."

------
avaku
Katsuyama says: "When I'm trying to place a large order, the price goes up!"
So, what's wrong with that? Have we cancelled the laws of supply and demand
now? Let's beat up Adam Smith now!

~~~
dredmorbius
The explicit problem is that when Katsuyama changed its strategy to time
arrival of trades to all exchanges simultaneously, the effect vanished.

This isn't a supply and demand issue, it's HFT being able to detect an
impending large movement and explicitly front-run it, at other exchanges.

------
sixQuarks
Is the US Stock market rigged? Were you born yesterday? Of course it's rigged.
The entire world is rigged.

~~~
dang
This is a vacuous statement of indignation. We don't want those on Hacker
News. Please don't post them, even when the sentiment itself is justified.

Re-read what you've posted and, if it mostly just expresses indignation,
delete it. Then feel happy: you just put the signal/noise ratio up a tick for
all of us.

Not picking on one commenter—this is for everybody.

