Talking stocks, trading, and investing in general

Discussion in 'Business, Careers & Education' started by mikeman, Feb 2, 2011.

  1. Cantabrigian

    Cantabrigian Senior member

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    I'm not going to take the time to watch the video but I'm guessing this is the whole Hide or Slide thing the WSJ wrote about a year or so ago. Is that right?

    IIRC the guy who was complaining about it was a dude who ran an, ultimately unsuccessful, HFT firm so maybe not as one-sided as he might possibly make it out to be.

    The SEC approved this stuff. Is there some evidence that they misrepresented it?

    And there's also the bizarre rule that you can have a choice (or I guess equity guys call it locked) market which is what basically allows for something like Hide or Slide.

    I guess at the end of the day I just can't make myself get all scandalized about the fact that exchanges try to draw liquidity providers. There are some nuckleheads who mess with stuff (quote stuffing and all that) but it seems like that mostly hurts other guys (other HFTs) that should be able to defend themselves. And it seems like that's what's happening as HFT revenues have declined considerably in the last 5 years.
     


  2. idfnl

    idfnl Senior member

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    The guy in question discovered why his HFT system was having problems. Characterizing the guy as a "failure" as a justification for an ax to grind is pretty unfair. He's a whistleblower IMO. And I'm very glad he's exposed it.

    Yes, the SEC approved the order types, but they obviously never would have if they had understood that the purpose of that order was to move to the head of the line. Its not a locked market that allows for hide and slide, its the order type that allows for it. Were that order type not present, then the behavior couldn't happen. Its obvious it was misrepresented because it violates SEC rules.

    I have been following this problem in the market for almost a decade, the idea you are spreading that it decreases costs is bullshit, top to bottom. The vast, vast, vast majority of those orders are flash cancelled anyway, so there really is no execution. Look at the data on the number of cancelled orders over the last 20 years... its a massive increase.

    Just today the SEC came down on a phony orders scheme:

    http://www.chicagotribune.com/business/sns-rt-us-sec-enforcement-spoofing-20140404,0,5299376.story

    Lastly, HFT is skimming. Don't rationalize with stuff like "there computer is faster so they win". There is a collusion happening here between exchanges like BATS and HFT sponsors, they intentionally inject slower pricing data in their systems so that the HFT machines can operate within that gap.
     


  3. Cantabrigian

    Cantabrigian Senior member

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    I think this is interest / worth getting into but it doesn't seem like you're really able to discuss it rationally. But we can give it a shot.

    To keep this from getting all jumbled up, why don't we discuss two things first. (1) whether hide not slide orders are or should be illegal and (2) whether or not HFTs lower overall transaction costs for different classes of investors.

    Hide Not Slide

    * You said that the HFTs who used those orders were doing something illegal.
    * But it is pretty clearly not against the law, as determined by the SEC.
    * So you said it should be illegal and that the only reason the SEC approved it was that they were lied to.

    I guess maybe. You don't think much of the SEC since they can pretty much snap their fingers and get all the info they want about this. But there is reason to believe that they aren't exactly...

    But why should HNS be illegal?

    As I understand it (and I could be mistaken) HNS only happens when there'd otherwise be a locked market. (The no locked market rule seems kinda silly but I haven't really thought about it so I don't know.) And that only happens when someone submits an order to only one exchange. Remember, we're talking here about institutional investors - i.e. people who should have the wherewithal to get their stuff routed everywhere.

    So they try to do something they're not allowed to do and get moved back a cent. Which means they could very well get done a penny better if someone wants to hit their bid.

    Having the ability to bid at someone else's offer ahead of someone who could conceivably just lift that offer in the first place doesn't seem like cause for great moral outrage.


    Costs

    Okay, whenever someone says 'just trust me I know all about this' and then doesn't actually make an argument, I tend to believe the opposite of whatever he said. But I'll give you the benefit of the doubt.

    AQR, a company that trades a lot of stock and a company that keeps very close track of stuff, guesses that their transaction costs are lower as a result of HFT.

    For my part, I've glanced at bid-offer spreads from the good ole' floor trading days vs today. And it seems like bid-offer is narrower now.

    To be clear, I have no dog in this fight. I have next to nothing to do with equities and I'm a very human trader whose job will be done by a computer within a few years. If anything, I'm the one who should be really mad about the rise of the machines.

    What makes you think that HFTs have increased transaction costs? I mean aside from the fact that U MAAAD.


    As a somewhat related matter, I'd differentiate between a market maker's price (that he changes frequently to avoid getting picked off) and spoof orders to create the illusion of demand.
     


  4. idfnl

    idfnl Senior member

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    Suggesting someone is irrational is a pretty old debate tactic. If you really believed that, you wouldn't respond.

    SEC rules stipulate that trades have to be executed in the order that they are received. I didn't say is "should" be illegal. HNS is illegal since it clearly violates the SEC rule about execution order. Is it prosecutable? I don't know since the SEC jumped their own shark by approving these order types. But this is clearly against the spirit of order execution rules.

    And you're right, I don't think much of the SEC. They had all the info they needed on Madoff and did nothing.

    From what I understand that locked market condition is a question of timing. That order is being submitted to all the exchanges but not reaching them all at the same moment. And because of the frequency of trading the locked market condition at a micro level is happening often. I've read HFT machines are working together to generate the condition so they can trigger a HNS.

    There is also the PostOnlyDayISO order type which is creating queue jumping conditions for limit orders too.

    One thing we can agree on, the SEC created its own problem with the way the locked market rules were implemented.


    _____________

    I never said HFT increases transaction costs. I said they skim. Net result is the same, but I think you're talking about the spreads. To my previous point, the vast majority of HFT orders are spoofs designed to either get lucky and catch a move or create a phony sense of price movement to skim. Or they are doing rapid fire place and cancel to uncover info about an investors position.

    The move to decimalization is what is mostly responsible for lower transaction costs. The institutional investor is the one hurt most by HFT, since they do a lot more market orders and that's where HFT machines can climb all over their trades. If you setup limit orders you are more protected. Its not really possible to say transaction costs are lower. Perhaps the spreads are lower, but by the point your order executes, you've already been skimmed so you are not accounting for this in the cost calculation.


    ___________

    I don't have a dog in this fight either. I almost always do limit orders and don't trade enough volume to really make a claim I'm being gouged. I don't represent an institution and don't professionally trade otherwise. I just have a sense of right and wrong.

    Anyone who invests (especially in funds) is getting skimmed, however small it may be. While there is nothing inherently illegal about speed, there are systems in place that are not just based on speed but loopholes and collusion between exchanges and HFT sponsors to provide fast and slow market data in a way that can be gamed. In my view, the market is "rigged" because you have a group of people out there exploiting the system to take our collective wealth away.
     


  5. seeldoger47

    seeldoger47 Senior member

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    I'm pretty sure that, in finance, there is no such thing as right or wrong.

    Also some might find this useful.
     
    Last edited: Apr 5, 2014


  6. idfnl

    idfnl Senior member

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    I happen to believe ethics trumps profits. Some may not, and we each make decisions based on our beliefs.

    That article's selectively choosing facts is wildly off the mark.
     
    Last edited: Apr 5, 2014


  7. SkinnyGoomba

    SkinnyGoomba Senior member

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    I believe that ethics are necessary in order to have confidence in the system and thus confidence in the markets. I don't believe something to be inherently unethical because it is un-policed, but certainly believe that things like that should be defined and policed as soon as they are discovered and capable of being defined and policed.
     


  8. lawyerdad

    lawyerdad Senior member

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    I agree that calling it "front-running" is stupid and lazy, because (as you note) that's a term of art generally understood to describe an entirely different practice.

    NM on the rest of it.
     
    Last edited: Apr 6, 2014


  9. indesertum

    indesertum Senior member

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    I don't think front running can only be done by brokers. The first front runners were probably CEOs and people around CEOs that made shorts ahead of large stock orders by companies.

    Seems like a very small thing to nitpick. What seems unethical is the concept of taking advantage of private knowledge of a clients order in order to gain financially and in the process decreasing the clients gain by a very small amount
     
    Last edited: Apr 6, 2014


  10. idfnl

    idfnl Senior member

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    Front running does have a meaning understood by the investment community. I would suggest the folks against the HFT excesses are looking to extend the definition into a practice we see in HFT that seems to be virtually the same thing save the minute times involved and actors being different. A broker at G Sachs may place an order for a client in which a G Sachs HFT machine skims its trade. How is it really any different? The client loses out just the same.

    In fact, and to Indescertum's point, isn't insider trading the illegal practice of trading on the basis of access to private information others don't have? Well, the HFT machines are actively trading on information that the rest of the market doesn't have access to. They have knowledge of a trade on the way and trade ahead of it to profit. While the lingua franca definition of insider trading may be one thing, I have trouble differentiating how this practice is not also illegal and insider trading using millisecond windows into other peoples trades.
     
    Last edited: Apr 6, 2014


  11. GreenFrog

    GreenFrog Senior member

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    Getting slaughtered.
     


  12. jbarwick

    jbarwick Senior member

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    Debating on throwing some money to work today.
     


  13. lawyerdad

    lawyerdad Senior member

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    Obviously, there are applicable laws, regulations, and contractual and professional ethical obligations. If you mean no such thing as right or wrong that can be reliably judged without reference to those standards, you may have a viable argument.
     


  14. GreenFrog

    GreenFrog Senior member

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    With earnings coming up, betting that they're underwhelming, I'm getting a very strong gut feeling that this is the beginning of the correction we've been anticipating for awhile.
     


  15. lawyerdad

    lawyerdad Senior member

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    I haven't paid enough attention to the HFT stuff to have an informed opinion on whether or not what you're discussing constitutes insider trading.

    But for what it's worth, the legal definition of insider trading is a bit narrower than how you phrased it (I recognize your were just speaking generally, not trying to give a precise legal definition).

    One essential element of insider trading is that the material nonpublic information being traded upon have been obtained in violation of a fiduciary duty or other special relationship giving rise to an obligation to keep the information confidential. (Simplistic illustrative example: taxi driver who trades on basis of conversation overheard in the back of his cab is not guilty of insider trading) In some factual situations that's obvious. In others it isn't.

    That requirement may or may not be meaningful in the situation you guys are discussing -- just throwing it out there in case it is.
     


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