So, no? From 2008-2012, if you paid NYSE (one of like 15 different exchanges that trade NYSE-listed stocks) for a proprietary feed --- something that costs more than most idle home day traders can afford, but would be affordable by any YC startup --- you were getting an edge in competing with other electronic trading systems.
If you were a retail investor or a mutual fund, what NYSE was doing probably didn't impact you at all.
That's not true. Even people who don't like Hunsader's analysis (and there are lots of those people) tend to acknowledge that his operation generates good data.
I agree with the previous poster. As someone who works in the field, I find a lot of the analysis very conspiratorial when often the correct explanation is somebody had a bug.
"Never assume bad intentions when assuming stupidity is enough" -- Hanlon's Razor
often the correct explanation is somebody had a bug
That's true in general. But there are literally billions of dollars in play every day on Wall Street. One quip I've heard is IIRC "there are no coincidences on Wall Street".
Never assume bad intentions when assuming stupidity is enough
Wall Street does not, in general, employ stupid people. Stoned, perhaps (c.f. Jimmy Cayne), but not stupid.
I welcome debate over specific topics. I demand specific examples from wild accusations. Since I've published over 3000 pages (and have never had to retract a single page), you have plenty to chose from. BTW, what have you published?
First, HFT firms aren't especially lucrative compared to other finance specialties, so one answer to that question is "nowhere".
Second, HFT firms compete with other finance firms, so what money they do make comes from bidding down the costs those firms were imposing on the rest of the market.
If you're a retail trader, automated electronic traders make money off you by outbidding the markets to quote good prices to you for your dumb market orders, and then pocketing the spread --- in other words, they make money the same way market makers have always made money; they just make less of it at an instant, but at a far larger scale.
The same is true of mutual funds, which is why Vanguard --- the firm most people would say is the most trustworthy in all of finance --- has repeatedly claimed that HFT has lowered their cost of trades.
Because speed is an implicit and intrinsic "figure of merit" in automated market making: if you are faster than other market makers, you outcompete them.
There are two straightforward problems with microsecond-speed electronic trading:
* At very small timescales, possibly as a sort of inevitable consequence of the CAP theorem, correlations between instruments that should trade in lock step start to break down. Since you can make money correcting these mispricings, time and energy gets sunk into doing that, and that imposes costs on the rest of the market. It's uncertain how high those costs are, but they are small, and clearly a pittance compared to non-automated market making.
* Electronic trading provides very nice paychecks for pretty interesting technical work, which means some talent gets attracted to the market that would otherwise get paid less money doing something with more social value. How big a deal this is to you depends a lot on your worldview.
To me, neither of these issues seems worth the galactically high cost of restructuring all the markets in such a way that we'd reliably avoid these problems.
That's circular reasoning: right now speed is a figure of merit because that's how the game has been designed. I'm suggesting to change the game rules.
I don't mean to get rid of automatic market making, I'm saying the exchange could just move to a system where it checkpoints every 10ms or whatever, still much faster than humans can blink, but no detriment to the algorithms. Then everyone has 10ms to come up with orders that make sense in the current market situation, instead of the ridiculous timing game.
You've misunderstood what I'm saying. I agree with you: timescales far below anything that provide any meaningful social value are an intrinsic figure of merit (usual definition: "often arbitrary-seeming number people compete over") of the market microstructure we have now.
I'm not saying the markets must function this way, only that they do, and it's not evidence of a giant conspiracy or grift that they do.
The rest of my comment suggests that while we could potentially quantize the markets, it doesn't seem like we have much to win from doing that, and, further, that it's likely that the problems we're trying to solve by doing that would persist.
You don't actually have 10ms to act in the scenario you describe. Because there is new information entering the world at all times, you would want to wait until the last possible microsecond before the end of the 10ms window before entering any bids.
The window does nothing to remove the need for speed.
The world is a continuous system. No matter how hard you try you can't force it to be discrete.
(There are other problems in your proposed scenario to having to do with mismatched buy vs sell volume, but we'll ignore those for now.)
I think the above poster meant to imply that the 10ms delay would cover all market transactions, so if you put in an order now, then no one knows it till the next 10ms stop post.
Essentially its buffering all the data then releasing it at once, so it's not a truly continuous system anymore.
Trades occurring at other locations. Even if the other location are operating in discretized time, there's going to be variability in how fast different market participants can transmit information from one location to another. From Wolfram Alpha, Tokyo to NYC is 36ms at speed of light in vacuum and 51ms at speed of light in fiber, so someone with a faster network could be multiple discretized ticks ahead.
Ah, that's why I wanted an example. Your answer is fairly obvious, but it's pretty absolute too so there's no way to ask questions like "is this information actually going to affect the bid size or price of a bidder?" or "is this event important but infrequent, like quarterly reporting?"
For example, infrequent important events will result in a race for people to submit at the last microsecond, but because they're infrequent 99% of the time the 10ms buffering will effectively change the behaviour of market participants.
At the level of a penny, which is what the minimum price change is on most US stocks, almost anything can affect a sophisticated market-maker or proprietary trader's pricing: information in the stock's own order book, the price of related securities globally like the same stock trading in foreign markets, prices of correlated stocks, index futures prices around the world, his or her risk exposure in that stock and others in a portfolio, foreign exchange and interest rate market shifts, news feeds, sentiment analysis of online sources like twitter, company exposure to oil or other commodity price changes, etc. etc.
That's silly, because it's an universal truth. Yet they still close the exchange and the dumb traders go home to sleep.
You can design the rules to optimize for one thing or another, continuous world notwithstanding. I'm suggesting a way to optimize for something more useful.
Let's say that happens. The system checkpoints and everyone orders off those checkpoints.
What changes? What's the end result? How do normal people or society benefit? What would have to happen for the change to be declared a success. Conversely, what would have to happen for the change to be declared a failure?
The benefit? People don't have their order front runned by algorithm which will sell it back to them at a slightly higher price, skimming money off the top to no one's benefit.
Can you explain in as much detail as possible exactly how algorithms are front-running people's orders? Can you do it with an example of a specific kind of order, preferably down to where exactly the order is being placed? Then we can dig into the specifics and evaluate the claim being made here.
Exotic quote types and being paid for making the cross is where this explanation seems to hit market realities. HFTs are able to make money on fees by having special access not only in terms of latency but in terms of ordering.
1) It is a common fallacy that there is "the exchange" or "the market". The market is an aggregation of exchanges (and non-exchange traded instruments) across a wide variety of jurisdictions and localities. But even though there is no central coordination between all that jumble, the instruments are correlated. That is, the change in price, demand, or availability of one is a signal about the pice, demand and availability of the others.
2) The market is made up of participants who exist on a band of price/time sensitivity. That is, someone like a retail trader doesn't have extreme price sensitivity but may have time requirements. In trading that style of participant is known as "dumb" (oh traders, you so PC).
3) Market makers make all their money trading spread for time but thats not where the latency games come into play. The latency is because...
4) Smart money is price sensitive (or price informed) and they tend to be where market makers lose money. Smart money tends to be either prop traders with particular algos, large block hedge funds or other market makers. Those are the people who cause market makers to play latency games, because its a vector a market maker can control that keeps them smart. They will never be smarter than the hedge fund that knows its going to buy a bunch of shares and therefore drive up the price, but they can at least jump out of the way quicker than the other smart money.
It is a common fallacy that retail orders ever go to stock exchanges. This is a good way to determine someone telling the truth. Here's proof: http://www.nanex.net/aqck2/4704.html
If you're doing market making, note that you're more likely to get a buy order filled when the market is going down, and more likely to get a sell order filled when the market is going up. This is the flip side of getting to "capture the spread".
So in order to be successful, especially when your margins are razor thin (and they pretty much always are), you have to be very, very good at canceling your orders as quickly as possible any time it looks like the market is likely to move against you.
Actual results for 2015. Your numbers are a fair bit off of those. What you can see from the results is that their revenue/profit numbers are small in real terms, but their margins are big compared to other businesses, even technology ones.
Personally, I'm not offended by that and think that the entire conversation about HFT is funny given how little money is actually involved, but if you view profitability in any context as evil or rent seeking, then you have ammunition for that argument with Virtu.
Had a much better year last year vs the previous 2 and it still was a fundamentally little amount of money.
[edit again]
That Knight statement is very interesting because it shows that the vast amount of their profit came from execution services and that their market making business was very low margin. Now that could be because their market making business is taking the full shot of the infrastructure accounting that enables the execution services business, but its interesting none the less.
He edited it down an order of magnitude (and rightly so, it was clearly a typo).
That said, whenever any trading entity talks about their trading income, be suspicious, because that is usually just the difference between bought/sold (and fees) and doesn't account for the infrastructure costs of trading.
Thats why I like these public SEC documents so much, because they have to use GAAP so you know exactly what they mean.
Does that list include the HFT arms of the bigger traditional firms? Goldman bought into Perseus[1], so I assume if Perseus counts for them, but I imagine there may be some larger firms with HFT divisions that don't report separately.
> First, HFT firms aren't especially lucrative compared to other finance specialties, so one answer to that question is "nowhere".
Total bullshit. If there was so little money to be made why is every exchange catering to high frequency traders? Why was the building across from the NYSE hollowed out to become a data center? Why are custom fiber optic cables being layed down specifically for it?
> If you're a retail trader, automated electronic traders make money off you by outbidding the markets to quote good prices to you for your dumb market orders, and then pocketing the spread --- in other words, they make money the same way market makers have always made money; they just make less of it at an instant, but at a far larger scale.
This seems to be typical of HFT apologists. They start to use terms that are defined in other terms that they've essentially made up, much like trying to get to the first principles of a religion. There are no 'market makers', there are people selling with a miminum price and people buying with a maximum price. They aren't outbidding the markets, they are front running by seeing an order, buying it, and then selling it to the original buyer. Everything else is there to obscure the truth. I've seen so many of these posts here and none of them has ever approached any sort of justification or validity.
First, let me gingerly remind you that strong arguments don't appear stronger when they include things like "total bullshit" and name-calling.
Second: I didn't say HFT wasn't lucrative at all. I said it wasn't lucrative compared to other finance specialties. I would feel worse about this misunderstanding if the thread you were commenting on didn't include actual numbers backing this up.
Third: the ultimate reason exchanges "cater" to "HFT" is that they get paid based on order volume. That's what it means to be an exchange. Exchanges compete with each other. If nobody trades on your exchange, you don't make much money with it. Exchanges would rather you do business with them than not. It's not complicated.
Fourth: if you're in the normal demographic of HN (age 20-35 or so), you've never bought or sold a share of stock that went through a human market maker. Market-making is automated now and has been for something like two decades.
Fifth: if you're an individual buying and selling stocks for your own account by clicking buttons in an online brokerage, you are placing market orders. There aren't "minimum" and "maximum" prices. There's a current best bid, and a current best offer, and a gap between those two prices. We have decades worth of research on what automated trading is doing to that gap: it is slashing it from dollars to pennies.
Sixth: if you are placing limit orders, there is nothing an HFT or anyone else can do to "front-run" you to cheat on your order limit. Incoming orders are priced according to the price on the order resting on the book. When you place a limit order that doesn't immediately execute (in other words: when you place a limit order that is actually meaningful), that's the price your order is going to trade for, if it ever trades.
If you disagree with any of this, it would be helpful if you could lay out a hypothetical sequence of events in which this "front-running" is actually occurring. I place a LIMIT SELL order for 1000 CSCO on BATS at $27.90. An HFT decides to front-run me. What exactly happens next?
He's right - if you weren't part of the group that was paying them over $100M/year in fees for "real-time" data and you weren't buying or selling stock in 2008, 2009, 2010 and 2011, it probably didn't impact you at all.
In 2010, internalizers ABSOLUTELY, WITHOUT QUESTION, priced retail investor orders with SIP prices (the feed that got way behind). What the NYSE was doing:
ABSOLUTELY. POSITIVELY. Impacted retail investors and mutual funds.
Shouldn't internalizers be required to use direct feeds instead of the SIP? The SIP, by construction, will always be lagging the 'real' (if that even means anything) NBBO.
Internalizers use both. The give retail the slower price, and buy and sell on their own account at the faster price. Nanex has uncovered a document from the NYSE stating that this is the case.
Let me be more clear -- if internalizers are regulated to use anything, why aren't they regulated to use the direct feeds specifically? If the regulation specifically allows them to use the SIP, that seems to be a failure of the regulation itself.
What NYSE was doing seems to have increased frothiness of the markets. Your median individual investor might not pay a direct price for this, but it certainly could increase costs in subtle ways. Or simply make the market more frothy in the macro view as well as the micro (nano?) view.
Further, some whales (pension funds) might get hurt and that hurts your median citizen. Many hedge funds seem to have a strategy of whale-hunting. Thus dark pools and all that.
If you were a retail investor or a mutual fund, what NYSE was doing probably didn't impact you at all.