
Norway Wealth Fund Outsmarts Flash Boys as Algorithms Abandoned - dataminer
http://www.bloomberg.com/news/2014-11-16/norway-wealth-fund-outsmarts-flash-boys-as-algorithms-abandoned.html
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jrehor
I don't understand this article at all. The pension fund uses block trades.
Who takes the other side of those trades and how are they compensated?

I suspect that an equity desk takes the block, parcels it out into lots of
small pieces, and works the market to get it off their books. Of course, they
charge for that service, both in commissions and spread. So effectively,
instead of paying HFT firms for providing liquidity, they're paying an
investment bank equity desk. Does this really save money? If it does, why all
the hoopla about HFT if you can avoid them by going through an equity desk?

Don't tell me that they just put their block on IEX and the tooth fairy fills
it without price impact. That would be some serious magic.

~~~
wdewind
I agree with you, and I think the author, like most people who are writing
against the "flash boys," fundamentally misunderstands what's going on.

I think the "black and white" rule that the large firms who feel they are
being hurt by HFT want is the ability to execute a full trade before it
impacts the market (since otherwise it's impossible to describe the exact
moment they feel their trade is a signal to be traded off of). I think that's
highly unreasonable, but if you do believe that I think IEX is probably
relatively successful at it. It's totally possible that a block could be fully
sold off on IEX before the 350ms latency allows that information to escape to
the outside world and be traded against, no? Market impact is ultimately about
the same, just delayed enough to allow the seller to escape.

I would happily be correct on any of this, since I don't work in finance.

~~~
lrm242
IEX only delays the order entry side of the system. Market data (they are dark
atm so no quotes/book feed of course) and trade reporting is not delayed. The
magic shoe box is there to stop a very specific situation from occuring: IEX
pricing pegged orders against stale market data.

~~~
wdewind
So I don't fully understand what IEX does then. Let's say A puts 500 shares of
AAPL onto IEX at $100/share, and B puts a buy order in for 500 shares at
$100/share, but in between posting the BUY and the order executing (in that
350ms), they get more information, and decide they actually want to pull out,
are they unable to?

Let's say B instead only buys 250 shares, what happens to the remaining 250
shares?

~~~
lrm242
They are unable to do so. It is a queued system with a fixed transit latency
through the queue of 350us. Any remaining un-executed of A is left on the IEX
book.

IEX has this transit latency because they have order types that offer pegged
execution, i.e. midpoints. A midpoint order is executed at the midpoint of the
prevailing NBBO. The data required to build a view of the prevailing NBBO
comes in from all other lit venues.

IEX has a 350us delay because they want to slow down the order entry side to
give themselves enough time to make sure they are not pricing their pegged
orders using stale market data. Simple as that.

------
tptacek
Galactically enormous state-sponsored buy-side firm thwarts tiny sell-side
firms. Implications for broader market contemplated.

------
lrm242
Look, all this guy is saying is that he is paying someone else to take on the
risk of executing his large orders. Block crossing networks and sell-side
traders have existed for a long time. Hell, that's what Brad (IEX CEO and
Flash Boys protagonist) did prior to starting IEX. This guy is saying: rather
than use an order execution algo to get my trade done, I'm just doing a cross
upstairs with some sell-side guy, paying them a known amount, and letting them
deal w/ how to handle it on their side.

They aren't outsmarting anyone. They're simply transferring execution risk,
and they pay handsomely for it, trust me.

~~~
wdewind
So why do they care so much? Are they literally paying more because the idea
of HFT burns their cookies?

~~~
lrm242
Because they suck at technology. Its easier and more justifiable to pay
someone else to take on the risk and pension fund gets less variance in their
execution costs.

------
encoderer
Everybody always cries "front running!" I believe front running is an
overblown issue. I also believe that most defenses of HFT as "liquidity
providers" overlooks a large share of prop firms and hedge funds using HFT for
speculation and are not in fact liquidity providers.

But the firms that do play liquidity -- the firms that compete with one
another for your order after it comes thru your broker -- aren't hurting
anybody by front running. In fact, they value your order flow so much (for
their own info) that they price-improve for you so they capture more/all of
the order. IIRC over 60% of stock trades are price-improved.

~~~
tptacek
As I understand it: provision of liquidity is not a function of intent.
Liquidity is a property of the market, not of a trading strategy. Some
strategies (happen to) add (sell) liquidity, and some remove (buy) it.

The term "front-running" is terribly misused in these discussions (I can't
tell from your short comment if you were, though). You "front-run" someone if
they reveal their trading intent to you, and front-running usually involves an
agency problem (ie, your broker and their responsibility to you as a client).

~~~
encoderer
The point about "front running" being misused correlates with my point that
every time HFT gets discussed, ppl cry "front running" and blame HFT for
various ills.

About liquidity providing... brokers don't generally route orders directly to
an exchange. In most cases your order will get routed to a 3rd party liquidity
provider, a firm who agrees to buy at the bid and sell at the ask and do so
quickly. Often, these guys will pay the broker for order flow or price-improve
your order to capture all of it, or both. Competition between these firms goes
a long way towards guaranteeing the NBBO price that your broker is obligated
to provide.

Connecting the dots leads you to a conclusion that the order flow is valuable
enough to them (for purposes of their own prop trading, strategic option
selling, etc) that they act as market makers.

~~~
chollida1
Some of this seems wrong.

> In most cases your order will get routed to a 3rd party liquidity provider,

This is only true if you are a regular person, ie using IB to buy in your rrsp
or ira account. Almost exclusively, anyone who is a professional will go
direct to market( DMA). They will never go through Citadel or some other
liquidity provider.

> Often, these guys will pay the broker for order flow

Not often, always. They always pay for this, there are no freebies:)

> a firm who agrees to buy at the bid and sell at the ask and do so quickly.

If you can find someone who will guarentee that they will fill my buy orders
at the bid and sell orders at the ask, please let me know and I'll give them
all my flow:)

> Competition between these firms goes a long way towards guaranteeing the
> NBBO price that your broker is obligated to provide.

What does this even mean, even without someone buying your flow you are still
guaranteed to get the NBBO price, RegNMS says this is the law. Let me be
clear, 3rd party brokers have no part in guaranteeing you get the NBBO price.
The law says if your order can trade at the NBBO, it must.

~~~
encoderer
I'm not a fan of the point-by-point redressing so I'll just say a few things
and leave you the last word if you want it. And I'm sure that there are some
fascinating differences when trading as a hedge fund, and maybe you can share
more about them. The process I laid out is generally "how orders get filled"
for just about everybody reading this. If you know enough about how your
specific orders get filled, I suppose you're not the audience I was writing
for.

1\. Brokers don't only send orders to 3rd party market makers because they're
being paid for order flow. You're right, they won't get order flow for free,
but I didn't mean to imply that they did.

2\. Quoting and buying at their published bid/ask is precisely their function.
Possibly we're just disagreeing on terms. The SEC's website is fairly good at
explaining this flow.
[http://www.sec.gov/investor/pubs/tradexec.htm](http://www.sec.gov/investor/pubs/tradexec.htm)

3\. What I'm discussing is the actual mechanism for HOW nbbo is fulfilled.
Competition in the marketplace -- third party market makers and arb firms --
absolutely play a role in ensuring the efficiency of the market. If brokers
had to run this infrastructure themselves, it would be non-trivial and without
any financial incentives that I can think of.

~~~
PhantomGremlin
> Quoting and buying at their published bid/ask is precisely their function

I think he was making a little joke about this. He said:

    
    
       fill my buy orders at the bid
       and sell orders at the ask
    

I'm with him, I'd give all my business to someone who could do that. I could
retire in one trading day if I could find someone to do that for me. This was
exactly the downfall of Knight Capital Group. It only took about 45 minutes
for them to lose $440 million.[1]

Of course, that _wasn 't_ what you originally said, which was

    
    
       a firm who agrees to buy at the bid
       and sell at the ask
    

hence the smiley at the end of his comment. There's a difference between "buy
at the bid" and "fill my buy orders at the bid". :)

[1]
[http://en.wikipedia.org/wiki/Knight_Capital_Group#2012_stock...](http://en.wikipedia.org/wiki/Knight_Capital_Group#2012_stock_trading_disruption)

------
lrm242
Since Flash Boys keeps coming up in these threads I want to provide an
alternate reference for those curious. A recent rebuttal has been published
called "Flash Boys Not So Fast". If you're interested in the topic, I highly
suggest you pick it up. [http://www.amazon.com/Flash-Boys-Insiders-
Perspective-High-F...](http://www.amazon.com/Flash-Boys-Insiders-Perspective-
High-Frequency-ebook/dp/B00P0QI2M2)

~~~
chollida1
I posted that book awhile ago.

[https://news.ycombinator.com/item?id=8577237](https://news.ycombinator.com/item?id=8577237)

It didn't really get any attention.

------
fleitz
“We’re trading less using algorithmic trading now than we did some years ago
and are doing much more trading in large block sizes to avoid pattern-
reading.”

Interesting... given that large blocks are what HFTs feed on.

How exactly is a party suppose to drastically increase supply / demand for a
stock without impacting price?

~~~
_delirium
It's hard to tell much in detail about their reasons from the article. I read
it as just a change in tactics in how they move large blocks of stock. They
seem to feel that, currently, moving a large amount of money using their
previous algorithmic strategies has become too easy for other traders to read
(perhaps also algorithmically), and then interfere with in ways that are
detrimental to their trades. And they believe that negotiating large outright
block trades is a better strategy in the current market, given their current
goals. Maybe true, maybe not; it seems like a very fact-specific decision,
hard for someone without the data to evaluate just from general principles of
markets.

------
jeffreyrogers
Managing that much money must be an enormous challenge since there are so few
places where you can put a substantial amount of it.

~~~
PhantomGremlin
They could be putting substantially more into real estate. They're at 5%
allocation, which seems low to me. I suspect that in the USA, most people are
at either 0% (renters) or 50%+ (homeowners).

------
phaefele
Content free - there is really no information in this article outside of the
fact they say Norway's Sovereign fund use "Block Trades" which is really what
dark-pools are supposed to be all about. Dark pools and block networks have
been around for at least the last 5 years, and introduce their own set of
issues (not getting your orders filled, showing Goldman Sachs your order on
their promise that they won't don't anything with that information :-)

~~~
yummyfajitas
Well, they do point out why you don't want to be a little player on IEX:

 _“Trying to find liquidity without having an impact when you’re doing it is
an over-arching challenge we will always have,”_

Huge players don't want to have a price impact before they trade - they want
the price impact to happen after. I.e., it'll happen to the little guy rather
than to them.

------
jellicle
"But flash trading isn't about front-running" \-- standard HN apologist

~~~
tedunangst
"I have no idea what front running actually is" \-- standard HN complainer

~~~
TrainedMonkey
When a large buy order comes in price rises. Front running would be buying
before that large order can execute, and selling immediately after it
completed and moved market price up.

~~~
lrm242
Wrong. Front running has a very specific definition and requires a broker to
be acting on behalf of a client.

1\. Broker takes client order.

2\. broker trades his own account first (with knowledge of client order)

3\. Broker executes client order.

If you don't have clients you can't be front running. It is black and white
and as simple as that.

~~~
Retric
_Wrong_

It's also Front running and illegal to pay a Broker for prior knowledge in
front of their clients trades.

Also, the term may apply to using insider knowledge. _Khan & Lu (2008: 1)
define front running as "trading by some parties in advance of large trades by
other parties, in anticipation of profiting from the price movement that
follows the large trade". They find evidence consistent with front-running
through short sales ahead of large stock sales by CEOs on the New York Stock
Exchange._
[http://en.wikipedia.org/wiki/Front_running](http://en.wikipedia.org/wiki/Front_running)

" _" Front running" is sometimes used informally for a broker's tactics
related to trading on proprietary information before its clients have been
given the information.

For example, analysts and brokers who buy shares in a company just before the
brokerage firm is about to recommend the stock as a strong buy, are practising
this type of "front running"._ Brokers have been convicted of securities laws
violations in the United States for such behavior. "

~~~
tedunangst
Calling all insider trading "front running" does nothing but muddy the waters.

~~~
Retric
Not all insider information, just insider information about large pending
trades.

