[001sky]

Author would benefit from a closer reading of the M. Lewis piece. It's well researched far from trivial. What's interesting about it is that it tells the story of how outsiders modeled the various ways to rip off <institutional> traders. They did this first and the empirically pattern-matched observed behaviour. They then did both physical and social market-micro-structure studies.

Lets take a look at this section (From attached article):

The fact of the matter is that HFT’s can’t rip you off. You are never under any obligation to do business with them. In spite of that, lots of sophisticated investors voluntarily pay HFTs every day. An important question for all the critics of HFT to grapple with is, “why do sophisticated investors voluntarily pay for something useless?”

This comes right after the section on why people don't adopt obvious strategies (use limit orders, etc):

Why doesn’t everyone do this?

This is an obvious question to ask. The answer is, quite simply, execution risk. Execution risk is the risk that you place an order but your trade never actually happens.

The Analysis Lewis outlines in his book shows that HFT is specificially engineered <to create execution risk>. It engineers artificial scarcity (the opposite of liquidity). Empirical study from Lewis's book:

Finally [The Trader] complained so loudly that they sent the developers, the guys who came to RBC in the Carlin acquisition. “They told me it was because I was in New York and the markets were in New Jersey and my market data was slow,” Katsuyama says. “Then they said that it was all caused by the fact that there are thousands of people trading in the market. They’d say: ‘You aren’t the only one trying to do what you’re trying to do. There’s other events. There’s news.’ ” <If that was the case, he asked them, why did the market in any given stock dry up only when he was trying to trade in it?> [emphasis added] To make his point, he asked the developers to stand behind him and watch while he traded. “I’d say: ‘Watch closely. I am about to buy 100,000 shares of AMD. I am willing to pay $15 a share. There are currently 100,000 shares of AMD being offered at $15 a share — 10,000 on BATS, 35,000 on the New York Stock Exchange, 30,000 on Nasdaq and 25,000 on Direct Edge.’ You could see it all on the screens. We’d all sit there and stare at the screen, and I’d have my finger over the Enter button. I’d count out loud to five. . . . “ ‘One. . . . “ ‘Two. . . . See, nothing’s happened. “ ‘Three. . . . Offers are still there at 15. . . . “ ‘Four. . . . Still no movement. . . . “ ‘Five.’ Then I’d hit the Enter button, and — boom! — all hell would break loose. The offerings would all disappear, and the stock would pop higher.”

This is why it's being investigated by the FBI, in addition the other issues (front running, NPI, etc).

"There are many people in government who are very focused on this and who are concerned about it and who think it breaks the law," an FBI spokesman said. "There is a big concern that high-frequency traders are getting material nonpublic information ahead of others and trading on it."

[Permit]

Your example does exactly what the author recommends you not to do; cross the order book. In your example, you're supposed to place a limit order at 14.99.

[jcampbell1]

That doesn't do anything. Then you never get any shares, and the market moves higher because there is a 100,000 shares on the order book and the market will move higher for legit reasons.

The way not to get scalped, is to place the order in a way where it arrives at all the exchanges at the same time, that way the HFT guys and their microwave data links can't peek at your order on BATS, and then beat you to the other exchanges.

The accusation is they see the 100,000 share order hit BATS, 10,000 get filed, then the HFT guys buy 90,000 shares on the other exchanges before your order gets forwarded, and you are stuck paying the HFT guys $15.02.

[harryh]

The HFT guys aren't buying 90,000 shares on the other exchanges. They're just updating their ASK price on those exchanges to slightly raise the price to reflect the new information that just hit the market. If someone wants to buy 100,000 shares RIGHT NOW it's a good sign that the price should be going up. Katsuyama/RBC were used to their proprietary information staying a secret that only they knew for longer before the HFTs jumped in and made the market respond faster.

That might be a bummer for Katsuyama/RBC but it's great for everyone else on the market who now benefit from a price that updates faster.

[jcampbell1]

How do you "update" your ASK price? They are either front running by buying the shares at $15.00-$15.01, or, if they are their own orders, then they cancel them. It is the same thing.

If someone wants to buy 100,000 shares, and the market says there are 100,000 shares available at $15, the order should complete at $15.

[harryh]

You update your ASK price by canceling your order and submitting a new one with a different price.

> If someone wants to buy 100,000 shares, and the market says there are 100,000 shares available at $15, the order should complete at $15.

As long as they submit their matching order while my bid is still on the books that's fine. But why should I be required to keep my order on the books for any longer than I want to?

[jcampbell1]

You should be able to cancel you order at anytime. What you shouldn't be able to do is to stiff other people's trades, and then use a microwave antenna to change your order before the other person trade arrives.

[rondon]

The person I want to buy the stock from is only offering the shares at 15.00 and I think that is a fair price. Why should someone jump in between the two of us and buy the stock for 15.00 then offer them to me for 15.01.

This would be like going to an open house where you here someone say "I'm going to offer $1,000 over asking" then going to the seller and offering $500 over asking. Then going to the first person and saying you'll take that offer of $1,000 over asking.

You could claim that you provided liquidity and that you helped speed up the transactions but at the end of the day you made $500 for undercutting someone who already intended to make a purchase.

[kasey_junk]

I didn't provide liquidity in that case, I provided risk mitigation. You see the person who said they are going to offer "1000 over asking" hasn't done it yet. Any number of things can happen before they do, and that may not ever happen. My real bid of $500 over asking is a bird in hand.

[rondon]

So who asked you to provide any service of risk-mitigation, liquidity injection,etc..?

This is about 2 parties that are ready to agree to a transaction and a 3rd party injecting themselves into the transaction and taking a penny of the deal.

Imagine that you go to the grocery store to buy some milk and as you are about to checkout someone buys your $5.00 milk and tells you the price is now $5.01. And that the $0.01 increase includes spoilage insurance. Maybe you like that, maybe you don't, the issue is that you had no choice in the matter.

[kasey_junk]

In your original flawed analogy the seller of the house has every right to reject my +500 bid in order to wait for a better deal if they think one is coming along.

In your current flawed analogy you are assuming that there is a fixed price for the things you are buying when there aren't.

Let me offer my own flawed analogy to explain what is actually happening in the latency/venue arbitrage case.

You are a real estate developer who wants to redevelop a block. On that block are 10 relatively equal properties owned by 10 different people. On day 1 you go to the first owner on the block and offer 100K for his shop, he says yes. On day 2 you go to the second owner and offer the same 100k. Again a deal. On day 3 you go to the third but they won't sell for less than 200k because they've been talking with their neighbors and know that someone really wants these properties. On and on until you get to the last owner who won't take anything less than 900K which you pay. Now you can say that you are being taken advantage of but I'd argue that it is just as morally questionable for you to low ball those original property owners when you know their property is worth more than what you bought it for. Conversely, let's say you balk at that 900K and walk away from the deal. Is that last owner "out" 900k? Are they out 100k?

Now lets introduce these nefarious third parties. Let's say I notice that you are buying those properties and while you are negotiating with the third property owner, I offer 200k to all of the remaining owners at once. If they agree and I offer them to you for 300k, I make profit on the deal, you still get what you want (at a cheaper overall price) and the original owners are all paid a consistent amount for equivalent properties. Also, if half way through you decide that this deal is no longer for you and stop buying up properties, I am "stuck" with those properties that are now not worth as much as I paid for them.

[rondon]

" seller of the house has every right to reject my +500 bid in order to wait for a better deal if they think one is coming along"

You know that someone else just said they were going to offer 1000 over asking. The seller doesn't know that. You have an advantage.

" you are assuming that there is a fixed price for the things you are buying when there aren't."

When Bob offers stock X for 5.00 that is fixed until he cancels that order. Just like the milk, it is 5.00 until the store changes the price.

Your analogy implies that I need all the properties on a block. That would be similar to a hostile takeover where someone needs to buy 50+% of a company to take control.

Are you aware that HFT are not making their money by detecting hostile takeovers?

[Sniperfish]

Thus assuming that someone else will always pay the spread. Tragedy of the commons ensues.

But this whole article seems to be written for retail investors. And as much as HFTs may sound scary for retail traders they make their money off institutional trading. So the larger impact to retail flow is from the response Institutional desks are forced to take to ensure they are not disadvantaged by HFTs, which then affects how institutional and retail flows are able to interact.

Ultimately a 1000 APPL.US order will get filled and who pays the $0.01 spread is largely academic as it is an inconsequentially small part of the total settlement $ paid.

[fr0sty]

> It's well researched.

On what basis do you make that assertion? Just curious...

[001sky]

There is a 10,000 word excerpt in the NYT. Read it and if you have a specific comment or critique on methodology, come back and update this thread. They may or may not be useful comments. There's enough orthogonal variation in the approaches (in terms of data collection, observed reactions of market participants, and analytic consistentcy) to not dimsiss the narrative as "trivial". But YMMV.

[fr0sty]

So "Because it is on the NYT website" is your answer?

The excerpt from the book is largely the story from a single point of view, I don't see a lot of corroborating quotes, zero footnotes, and the facts are too convenient to the narrative to be the whole of the story.

Pulling one paragraph:

> As it happened, at almost exactly the moment Carlin Financial entered Brad Katsuyama’s life, the U.S. stock market began to behave oddly. Before RBC acquired this supposed state-of-the-art electronic-trading firm, Katsuyama’s computers worked as he expected them to. Suddenly they didn’t. It used to be that when his trading screens showed 10,000 shares of Intel offered at $22 a share, it meant that he could buy 10,000 shares of Intel for $22 a share. He had only to push a button. By the spring of 2007, however, when he pushed the button to complete a trade, the offers would vanish. In his seven years as a trader, he had always been able to look at the screens on his desk and see the stock market. Now the market as it appeared on his screens was an illusion.

His trading problems coincide with changing to a new technology platform and he blames the market and not the new software? Did anyone else experience a severe degredation in their trading performance? Did Lewis even ask anyone else?

[001sky]

NYT isn't the author. Anyway, who would believe and RBC guy? That's why he went to SAC for a quick sanity check.

But as he talked to Wall Street investors, he came to realize that they were dealing with the same problem. He had a good friend who traded stocks at a big-time hedge fund in Stamford, Conn., called SAC Capital, which was famous (and soon to be infamous) for being one step ahead of the U.S. stock market. If anyone was going to know something about the market that Katsuyama didn’t know, he figured, it would be someone there. One spring morning, he took the train up to Stamford and spent the day watching his friend trade. Right away he saw that, even though his friend was using software supplied to him by Goldman Sachs and Morgan Stanley and the other big firms, he was experiencing exactly the same problem as RBC: He would hit a button to buy or sell a stock, and the market would move away from him. “When I see this guy trading, and he was getting screwed — I now see that it isn’t just me. My frustration is the market’s frustration. And I was like, ‘Whoa, this is serious.’ ”

This dispels (according to the story) the notion that it was a firm specific or SW specific issue. Of course you could assume this is fabricated (for convenience). But the next step is harder to fabricate:

He hired Rob Park, a gifted technologist, to explain to him what actually happened inside all these new Wall Street black boxes, and together they set out to assemble a team to investigate the U.S. stock market. Once he had a team in place, Katsuyama persuaded his superiors at RBC to conduct what amounted to a series of experiments. For the next several months, he and his people would trade stocks not to make money but to test theories. RBC agreed to let his team lose up to $10,000 a day to figure out why the market in any given stock vanished the moment RBC tried to trade in it. Katsuyama asked Park to come up with some theories.

This could easily be verified independent of Katsuyama (eg, by talking to either the other principals and/or 3rd parties as RBC management). What is important, however, it it is orthogonal to anecdote. And by putting capital at risk and testing ex-ante theories, not only are they getting on firmer epistemic grounds, but they are leaving paper trails internally and externally.

As they worked through the order types, the Puzzle Masters created a taxonomy of predatory behavior in the stock market. Broadly speaking, it appeared as if there were three activities that led to a vast amount of grotesquely unfair trading.

Of course you could object to this as "fabrication". But there is evidence that they tested SW products to defeat these various strategies. These products were later bought and then spun out and backed by third party customers & investors.

Again, this could all be fabricated. But you would need elaborate conspiracy theories to explain the lack of due dilligence by the investors (not to mention Lewis).