The debate continues to rage regarding HFT and how to “control” it via minimum order times, transaction taxes, etc… HFT can be controlled simply by controlling the frequency of the market. In a continuous market, infinitely high frequencies are possible. It is worth noting that continuity is actually a mathematical concept, not a physical concept. At what point will we realize that markets are ultimately physical systems rather than abstract mathematical concepts?
To control the frequency, we need to move away from continuous trading and establish a standard frequency of trading. All venues would need to synchronize to this frequency analogous to the way that electrical generation stations all need to synchronize their input power frequencies to the power grid’s frequency.
Establishing a standard frequency of trading would put an end to the technology arms race by removing the marginal benefits of squeezing an extra microsecond of latency out of the process. If the frequency were 1 Hz (i.e. trade matching occurred at 1 second intervals) then participants would be able to use equipment that could process orders within this time window. Synchronizing venues so they were all in “phase” would remove the opportunity for latency arb. The market data explosion could be contained as could quote stuffing. Order could be restored to what has become a chaotic system thereby reducing systemic risk and increasing confidence of investors. The trading field would be leveled.
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84 Comments to "How to Control High Frequency Trading":
daryand
12 September 2012
very interesting approach.... numerous consequences, but innovative approach.
Comments (2)
kurtkujawa
12 September 2012
Chris, i agree with your quote "At what point will we realize that markets are ultimately physical systems rather than abstract mathematical concepts? " very well said. I would only add that along with intervals, I would get rid of all the "for profit exchanges" also. If you want order flow, then be a broker dealer, not an exchange. That would stop all the ridiculous maker taker, rebates, fragmentation, etc... if all orders were posted on 1 exchange, add to that your interval idea allowing the quotes to fill, there would be deeper and larger markets.
Comments (171)
sculldog
12 September 2012
Sounds sensible to me. Surely a prudent man (remember him?) would agree that an auction at 1 second intervals constitutes efficient price discovery for an investor in an asset. I wonder what the counter argument is?
crammond1964
12 September 2012
"how to control for profit exchanges ?" Have we finally found the guilty culprits .
Comments (251)
kurtkujawa
12 September 2012
Crammond, I have been saying for a long time, they are just as bad as the HFT's. The only thing I haven’t figured out about their symbiotic relationship is who the pimp is and who is the whore or who is the dealer and who is the addict.
Comments (171)
Anonymous
12 September 2012
The counter argument is that it will still be possible to write HFT algos to a trading in 1 second intervals. Quote stuffing would still apply, but it would happen the milliseconds just before the matching shall take place. You would also probably see HFT firms trying to get first in line after every match, so milliseconds would still be important. I don't think you would get rid of the arbitrage algos either. They would try to manipulate the price at different venues by placing fake buy/sell pressure and thus creating arbitrage opportunities. The problem we see today is due that HFT algos have developed faster than the rest of the market participants. If the marketplace changes, then my bet would be that the HFT firms again will develops faster to the new environment than the rest of the market participants.
shamlet76
12 September 2012
i think there is a problem with the concept of high frequency trading. it is intended to take someone's $ and put it in the HFT's pocket, whether on the buy side or sell side. and it tries to crowd out other bidders/sellers by offering a very slightly better price. HFT is not offering liquidity. they take liquidity. part of this problem is that brokers have blurred the concept of cash=stock, the concept of portfolio ownership of stock and broker ownership. HFT is a capital outflow from the stock market. HFT is not investing in the capital markets. they are taking $ out of capital markets.
and where did the exchange rebates start? why should an exchange pay for order volume? or even trading volume?
who does order volume benefit? i can tell you that it does not benefit the investor. some might say the investor benefits through lower trading price or deeper markets. investors want a fair market, not necessarily a lower trading price. investors trade a lot less than traders. investors will stay away from trading in markets where they perceive that they have an extreme disadvantage.
when the regulatory hammer comes down, i think it will come down hard. i see no justification for HFT at all.
Comments (149)
kurtkujawa
12 September 2012
Well said!
Comments (171)
csparrow
12 September 2012
don't show quote updates between calls, and remove intra-call time priority.
Comments (37)
kurtkujawa
12 September 2012
still waiting to here the other side! LOL That is because anyone with half a brain realizes there is no argument. All there arguments of liquidity, tighter spreads, lower trading costs, etc... have all been debunked!
Comments (171)
Anonymous
12 September 2012
That sounds like a dark pool to me
csparrow
12 September 2012
show inter-call residual orders
in case there is interest, here is a powerpoint that gives more detail: http://www.bima.ca/Portals/17/2012Conference/Chris%20Sparrow%20-The%20Failure%20of%20Continuous%20Markets%20BIMA.pdf
Comments (37)
shamlet76
12 September 2012
no tinkering. the HFT concept is the problem. there should be NO accommodation to banks and brokers. they have been lying to us. worse, this is the battle of the best and brightest and all they offer is a scam. investors know that. in my opinion, there should be criminal indictments on this. this is armed robbery without the gun. the FINRA/SEC/CFTC approach of sign this and you don't have to admit or deny the allegations, pay a small fine, has been wholly inadequate. it has licensed fraud, set a price that investors do not benefit.
Comments (149)
crammond1964
12 September 2012
the markets will work with HFT ; however the exchanges total failure to both regulate them and admit their errors in encouraging them have to be addressed !
Eventually the independent regulators will reveal the damage they have caused ; sadly I get not glory for saying "told you so !" Just wish someone listened earlier
Comments (251)
Raphael
12 September 2012
The idea is nice. I like it because unlike "short ban" and "Tpbin tax", it doesn't bias the market but prevents instabilities linked to time race.
In this mood my idea is to reintroduce irreducible risk to avoid the technology race, for instance not forcing the time schedule, which is very difficult, but imposing a 1s blackout when an order is placed, so that any decision to place an order is made upon 1s old info. Here it doesn't really matter whether the info is 1s late or 0.99s late.
Other elementary ideas are to act ion the fee structure. The problem is that only one a thousand orders is executed. orders are placed every ms, whereas transactions occur every second or so. Instead of charging for an executed order, one could charge on a placed order and, on the contrary, decrease the fee progressively, until free, when the order remains for some time and isn't cancelled.
Anonymous
12 September 2012
HFTs are criminals that should be jailed to make the world safe again. Come to think about it, the same goes for price-time exchanges that encourage them. And while we are at it, let's also jail the buy-side parties who direct orders to price-time exchanges, thereby encouraging these scoundrels. OK now. There are a great fewer people in the market (because everyone else is in jail) and we can have peace, order and quiet. Very quiet.
Anonymous
12 September 2012
How do you control for the time synch drift between the matching engines on different venues? Even if they all executed in 1 s intervals, not all the matching engines would be synched. So, there would still be an opportunity for arb, correct?
Raphael
12 September 2012
Indeed, excatly like wolves and lions are criminals that should be eliminated, until we get submerged by rabits and antylopes... The ecological balance of a complex system is not an easy thing that can be treated by naive moral considerations. The goal should be a viable and fluid system with as little glitches and other accidents as possible. I'm not sure the financial world was that peaceful, ordered and quiet before HFT existed... How can you imagine making the world "peaceful and quiet" by jailing people?
it's all about incentives.
ltabb
12 September 2012
to all you hft bashers, yes there are challenges. There are challenges with information leakage, there are challenges with flickering quotes, there are challenges with liquidity, that said, the real problem however is that traditionally investors don't quote.
There is no incentive (or little incentive) for investors to put up bids and offers on virtually every stock. So if you want to know what the price of xyz is, someone, or more likely a number of folks, need to quote. The problem du jour is that a) when a buy-side wants to use a market-type order, liquidity disappears, and b) when a buy-side quotes, they are immediately taken advantage of, because they don't have the technology that the HFT guys do. They are disadvantaged on both sides.
So the question is - what happens when you make the penalty of providing liquidity so high that it makes it not worthwhile to provide capital? Will investors step up to quote more often? Or will liquidity thin so much that we wind up triggering more circuit breakers at every turn?
I do like Chris' idea, but i would add that in these one second matching periods that the match is randomized so it no longer becomes a fifo auction. That eliminates the need to be first.
But that said, if you move to this type of auction - then there may not be a need for maker/ taker. Or the maker/taker game changes. You have folks that want to trade at $20 lets say, and folks willing to trade at whatever the prevailing market is. So in that case - what is displayed? and do you need to provide incentives to the guys saying that I will trade at $20? and what happens when there is no liquidity in an auction? Also if you do have displayed orders and there is a randomized auction - then what would be the incentive for providing a quote given the person quoting would have the same chance of matching as someone that didn't quote?
All interesting questions.
That said - most of the auction systems that we have developed overtime have not been tremendously successful. there was Arizona, Instinet Cross, & Posit Cross. While Arizona failed, and Instinet Cross and Posit Cross I believe are still around - certainly Instinet and Posit are still around - neither crossing model every gave a major exchange a run for their money. Now that may have been then and this is now - and the AX auction model is getting some traction - the question is do we really want to trade in auctions or do we want to trade continuously? And do we really need liquidity providers / market makers?
In large cap / highly liquid names - maybe not. In smaller cap and less liquid names - we probably do.
The question is how do we do this so that everyone is happy? and I am not sure that that is possible. If we ban the HFTs - then someone else will move in to provide liquidity (or not) and the spread will probably widen. If no one provides liquidity - will less liquid names even trade? or will we need to migrate to a different type of liquidity model - and spreads will probably widen as well? Do we want to go back to a real otc market where banks and market makers provide liquidity over the phone? not sure those days will every come back.
I think the best thing we can hope for (given that technology doesn't go backward), is some sort of way to de-fragment the market, a widening of tick sizes for less liquid securities (to pool liquidity), an elimination of order types that do not benefit investors (defeat time priority), and possibly a movement toward mini-auctions (and removing time priority within these mini auctions) - which should probably be carefully tested before implemented.
Liquidity is hard enough to find today, especially given the risk on/risk off macro environment where no one is looking at fundamentals and everyone is looking at central banks and governments, and the lack of institutional and retail volumes. You really had better be careful of what you wish for if you do more to hurt liquidity providers. Any while no one wants to pay a mark up, generally folks do want to see a price before they determine whether they want to buy or sell and if we screw up the liquidity provisioning model too much - liquidity could be an unintended casualty.
Comments (303)
Anonymous
12 September 2012
Raphael, I was speaking in jest, of course. My point was that you need to understand what drives the buy side to direct orders to price-time exchanges before you advocate the removal of such features.
shamlet76
12 September 2012
investors provide cash liquidity. there is too high of a cost for brokers to provide stock liquidity, in that they have been cheating on settlement, cheating on order type. investors don't want to be able to buy an IOU. this is not providing "liquidity".
without investors, where is the liquidity?
HFT can go ahead and trade with other HFT systems, as far as i'm concerned, until the fat lady sings.
Comments (149)
kurtkujawa
12 September 2012
Larry,
1st, as for there is no incentive for investors to put up b/o’s on virtually every stock, when was the last time you traded stocks? I have an incentive every day to buy and sell stocks. My incentive is to find the contra, if that means posting a b/o so be it, if that means making a phone call so be it, I’m not sure what your point is, not every stock needs to have a penny spread and quoted by a market maker. Trust me at a price you will find the other side, and it will be a natural. I don’t need anyone some made up “liquidity” which we all know is your code for HFT, polluting the market.
2nd, as for investors stepping up? Let me give you a history lesson. NYSE vs. NASDAQ. NYSE one venue with multiple buyers and sellers equaled large deep markets. NASDAQ multiple venues with multiple buyers and sellers and anonymity equaled fragmentation 100 share markets and SOES bandits (precursor to the HFT’s of today) The moral to the story, one place with multiple buyers and sellers creates larger deeper and more transparent markets. Multiple venues create fragmentation, smaller markets and more predatory practices.
3rd, What if one guy wants to trade at 20 and others want a different price, the that would be the market, duh! Just because I want to buy AAPL at $100 doesn’t mean that is where it will trade. If there is no liquidity at an auction, apparently the price is wrong for what ever reason, that is what makes a market, why do you think stocks need to trade just because one party wants to trade it at a price. Buyers and sellers will adjust their prices based on their own priorities and/or valuations.
4thas for your most auction systems haven’t been successful. NYSE is/was the most successful market ever. The problem with all the others is that it was electronically based and was just another fragmented venue.
5th, we don’t need to make everyone here happy, this is not summer camp where everyone sits around singing Kum Bi Ya! And once again, PLEASE stop referring to the HFT’s as providing liquidity, which has been debunked by everyone except the HFT community and their surrogates.
6thwe do not need liquidity providers, you have 2 options, pick a price and hope someone is willing to take the other side or move your price to where the other side is, its that simple, period.
Comments (171)
csparrow
12 September 2012
@ Anonymous re: sync'ing, this is a key point. Time should be sync'ed to a common standard (with venues claiming microsecond latencies, this shouldn't bee too hard). Additionally there should be windows of time between when order entry session closes and matching begins. In my mind, venues would co-ordinate with each other to stay in sync - staying in sync would be a requirement of running a venue. This sync'ing would also allow cross-venue trades to execute if venues agreed to do this. See http://www.bima.ca/Portals/17/2012Conference/Chris%20Sparrow%20-The%20Failure%20of%20Continuous%20Markets%20BIMA.pdf for additional detail and a schematic
Comments (37)
mrmedia
12 September 2012
re:"SEC and CFTC have clarified that forex contracts will be determined to be swaps, they will become part of the centrally cleared instrument pool"
Look, i don't know how this compares to Europe rest of world but .........
Boooooo !!!!!!!!!! I like the idea that a trail of gunpowder will splutter along. If part dies out it will reignite again. I saw this unique design as being an advantage.
Maybe something's coming - is it protectionism?
Comments (1)
anonymole
12 September 2012
Chris, face it. HFT, UHFT is not on any regulator's chopping block. We all know that the revolving door between the SEC, CFTC, FINRA, etc. and the transnational, institutional banks and funds spins so fast as to keep a constant stream of "regulators" feeding back and forth that it creates a vortex of wealth between NewYork and Washington. These proletariat investor posts and comments make us feel like we have a voice, but the reality is, we do not. HFT will not get throttled or curtailed in any way. New Atlantic and Chicago fiber funded by the behemoths of finance are evidence of this. HFT is here to stay.
Do you think any GS, Citadel, MS, JPM, Citi, BlackRock, et al members ever frequent these forums? Why would they? They're the ones writing the rules, not those, like us, fighting them. Only a serious boycott of retail investing would give pause to the SEC's continued acquiescence to the Goldman way. And we know that won't happen. This is not like combating Citizens United and the expansion of CorpGov. This is people trying to rake in vast returns in preparation for a broken retirement. That is, people making money, legally, don't really care about the bigger picture addressed by the elimination of HFT in creating a continuous auction market. Not at least until it really truly impacts their bottom line. Right now HFT represents the disgusting expansion of the finance industry's power over the world at large. But HFT's impact on the retail long term investor is slight. It's not enough to engender the hatred required to instigate a boycott.
Comments (83)
shamlet76
12 September 2012
oh, no, there is something happening in the HFT/market structure world.
To be sure, Australia doesn’t have some of the broader market structure problems that have become particularly harmful in the U.S. So-called “maker-taker” pricing, where exchanges offer rebates to firms that provide liquidity, doesn’t exist in the country, according to Funke Kupper. That reduces the incentive to trade purely for those rebates, which can impact pricing across market venues.
In addition, the execution fees charged by Australian exchanges are based on orders and not merely on executed trades as they are in the U.S.
The proposals from the ASX are self-serving in that limiting competition in trading would naturally drive more action to the exchange, which still handles more than 95% of all trades. But after the technical problems in the U.S., Funke Kupper said there is increasing support for the proposals from the regulator, government and fund managers.
“Think of real liquidity as a bucket of water. High-frequency is just a sheet of water, it’s simply not there when you put your hand through it,” he said.
http://blogs.wsj.com/marketbeat/2012/09/10/want-to-blunt-high-frequency-trading-australia-has-a-plan/?mod=yahoo_hs
Comments (149)
csparrow
12 September 2012
@anonymole, you will not likely be surprised when I tell you that one of my most vivid recollections of Shakespeare is King Lear yelling at the storm.
Comments (37)
Anonymous
13 September 2012
@shamlet76. The Australian market are at least 5 years behind the american market. It opened up for competition in last year, and they only have 1 other alternative venue (Chi-X). ASX can control the fees as all trades still needs to be cleared through their clearing house, i.e. they can control how much money they should make on the Chi-X trades. I would say that Australia still has a semi-monopoly and before they have multiple venues and an independant clearing alternative a comparison with the american market doesn't make sense at all.
jricher
13 September 2012
As a senior, I have the privilege to remember the time (up to the beginning of the nineties) when financial markets where cleared once a day and nobody suffered from lack of continuous pricing and transactions. This was indeed a physical market mostly held without IT.
The question I would like to ask is consequently : why was it ever felt necessary to run continuous markets (whatever frequency is implied) ? The drawback on fairness between traders is clear. Another one is the volatility of prices following the lack of continuous liquidity. What is the benefit and to whom ? I was never given a solid answer to that question. I am still looking for it.
Comments (3)
shamlet76
13 September 2012
@anonymous: i predict that the SEC will be forced to take measures against HFT because of the SEC mission statement. while you say that australia and singapore and japan measures restrict shortselling and HFT does not apply, i think that internationally the HFT movement can look forward to the time that the market regulation will make HFT and shortselling disallowed by the regulations. what you miss is that HFT and shortselling create artificial market conditions to the disadvantage of all other investors.
Comments (149)
kurtkujawa
13 September 2012
Shamlet76, I wouldnt say short selling alonedoes not create artificial market conditions, but I would say when you couple that with UNRESTRICTED and NAKED short selling by the HFT's, THAT DOES create artificial market conditions
Comments (171)
shamlet76
13 September 2012
kurt, i agree. i should have noted that.
Comments (149)
Anonymous
13 September 2012
Kurtkujawa,
Naked short selling is disallowed and is audited for very closely by US regulatory bodies. Most electronic trading firms have at least a few audits a year to make sure that they do not engage in naked short selling. In addition, these firms are also audited for their market access risk controls, one of which would be a requirement to block naked short sale orders before they are sent to the market.
kurtkujawa
13 September 2012
Anonymous, don't be so niave, there is no way with there millisecond trading that they have secured the borrow prior to shorting. That is why they try and label themselves as "market Makers" so they can avoid the borrow and are allowed to sort on down ticks. So for all prctile purposes they are shorting naked
Comments (171)
shamlet76
13 September 2012
yeah, that's why the royal bank of canada put trades into subaccounts outside of the chart of accounts. they were caught. yeah, that's why most of the FINRA disciplinary actions cite failure to deliver, mismarking orders long instead of short, mismarking orders so that they do not settle, keep orders incompatible with the FINRA reporting systems. yeah, that's why some brokers are putting equities in swaps to avoid market deadlines to settle and keep them off-balance sheet. all of these are intended to fund and perpetuate illegal naked shortselling. all of these schemes produce a double set of books, which is fraudulent and already illegal. just because something is illegal doesn't mean that there have been meaningful prosecutions because of it.
in addition, companies have to fear whistleblowing, the SEC says that they take in about 7 cases per week. the FBI had 2,500 open cases as of the end of last year.
of course it is illegal. but do you see anyone actually meaningfully prosecuted for it? no. they pay a small fine and continue doing what they are doing. will we see compliance people and CEOs and settlement back office personnel and traders going to jail? i don't know.
but the interest payments paid weekly on the swaps might take brokers and banks down. the SEC might not act, but the counterparty risk and interest payments might cause a problem enough to stop the cheating. a flash crash could happen, and HFT trading systems trying to get other HFT to make mistakes increases the likelihood of a flash crash.
the marketmaker benefits will be decreasing. there will be requirements for marketmakers to meet, such as proving that both sides of the trade are taken. margin requirements will increase. settlement dates will be shortened and enforced. if someone can buy within a millisecond, they should be able to settle within 3 days. settlement days globally are getting shorter.
something will happen. we can count on it. either the market or the regulatory system will cause a change.
Comments (149)
kurtkujawa
13 September 2012
very well stated shamlet76
Comments (171)
jhumpherys
13 September 2012
kurtkujawa,
Experience, not naivety, triggered my response. Most HFT firms are not market makers and therefore can't rely on the locate exemption for purposes of short selling. Any HFT firm that is not a registered broker dealer (all the hedge funds) would be required by its clearing firm to obtain a locate prior to entering a short sale. Any firm that is a broker dealer, has to have a locate for every short sale order (milliseconds don't matter).
Comments (1)
kurtkujawa
13 September 2012
jhumpherys,
Sorry but that is just not reality, not to mention that some market makers ARE HF's Citadel? Please refer to shamlet76. There is no possible way to get a locate prior to making the short sale when it is instantaneous. Being in cahoots with their prime broker or another greedy custodian and having a blanket locate is nothing more than a way to skirt the intent of the law.
Having a blanket locate is nothing more than a way of skirting the intent of the law is not the same and is skirting the intent of the lawaaa
Comments (171)
ltabb
13 September 2012
Most hft folks use bulk locates and not on a trade by trade basis. So I get a 100k locate for the day and as long as my short position doesn't exceed 100k I am good.
Comments (303)
kurtkujawa
13 September 2012
Larry,
that is exactly my point, that blank locates are BS. I've said befor many times getting rid of that is the 1st step in combating HFT
Comments (171)
shamlet76
13 September 2012
locates are not borrowing. locates are just one of the ways to naked shortsell.
Comments (149)
shamlet76
13 September 2012
Washington, D.C., Nov. 10, 2011 – The Securities and Exchange Commission today charged UBS Securities LLC for inaccurate recording practices when providing and recording “locates” to customers seeking to execute short sales. UBS settled the enforcement action by agreeing to pay an $8 million penalty and retain an independent consultant.Washington, D.C., Nov. 10, 2011 – The Securities and Exchange Commission today charged UBS Securities LLC for inaccurate recording practices when providing and recording “locates” to customers seeking to execute short sales. UBS settled the enforcement action by agreeing to pay an $8 million penalty and retain an independent consultant.
http://www.sec.gov/news/press/2011/2011-240.htm
locates allow naked shortsellers to increase the outstanding stock by their naked shortselling. locates do not borrow stock.
anytime you increase the float by naked shortselling, you are doing so to manipulate the price. the supply and demand curve affects price.
Comments (149)
Anonymous
13 September 2012
Shamlet76 - I agree with you that there are still people out there who try to get around the short sale requirements. There have been some big cases from 2008 just now boiling to the top. I agree that in most cases, the fines are relatively meaningless. It is refreshing to see some suspensions accompanying some fines--especially when the regulators can show there is an intent to evade regulatory requirements. Those generally hurt much more than fines.
If an HFT strategy is designed to trade flat, do you think there are settlement concerns at that point? Canada doesn't require pre-borrow arrangements (locates) or even order marking for strategies that trade net flat.
Also, LTabb is correct in how he describes the locate process at most firms. On the other hand, these locates given to firms are not blanket locates. A strategy will generally be disallowed from sending short sales if it runs out of locates.
kurtkujawa
13 September 2012
anonymus, if most HFT strategies are a net flat strategy, which i agree they are, that also proves the point that they do not provide liquidity. Also, just because they go home flat, does not make the argument that they should be allowed to naked short or short on downticks, those rules are inplace to help market stability. If the HFT's weren't allowed to short at free will, there wouldn't have been a flash crash, cuz they wouldn't have been able to locate as fast as they were shorting.
Comments (171)
shamlet76
13 September 2012
this is basic math.
if there was a stock with 1 million shares.
40 people wanted to short the stock. they all located 500,000 shares but did not borrow those shares.
they all shorted 500,000 shares.
how short is the stock at the end of the day?
let's say the next day, the price went up because 10 people bought in at a higher price.
but most shortsellers decided to borrow those 500,000 shares again to try to get the price down again.
so, on the second day, how short is the stock?
now, on the third day, the broker realizes that their customers cannot settle and make a profit, so the broker creates an IOU called a swap, and the buying broker accepts it. the selling broker pays interest and hopes that other shortsellers will continue to sell into the price so the selling broker pays weekly interest in the meantime. this perpetuates the shortselling. the selling broker charges interest to the shortseller.
both brokers agree to do this because they are loyal to each other and have IOU's between them, but they are not acting in the buying customer's best interest.
in other words, the buying broker is breaching their fiduciary duty to the buying customer and the selling broker is illegally maintaining naked shortselling.
this will work while markets trend downward. but when markets get traction, this will stop working: profits from illegal naked shortselling can no longer maintain the interest payments between brokers.
why do you think the banks were advised to get their financial books in line? because there is an end to this cheating.
as of 6/30/2012, there were $800 trillion in swaps, figures from the international bank of settlements. swaps grew $100 trillion from 11/30/2011, but world GDP is only $65 trillion/year. so while world GDP was $9.3 trillion in 7 months, swaps grew $100 trillion.
do you think those $100 trillion were all mortgages? no. banks were not lending very much $. were they derivatives? were they equities? whatever mix it was, someone is gonna suffer because of counterparty risk. if one major bank goes down, what happens to their swaps?
Comments (149)
Anonymous
13 September 2012
Shamlet76 - I hope you don't put your money in a savings account at a bank because isn't that the same sort of "basic math" you are talking about? For example, the bank gets $100 deposit and turns around and loans $300. Let's go get those dang banks! They just lent more than they really have!
Shamlet76, do you trade on margin? I certainly hope not because that would also violate all your notions of fairness and basic math principles.
Is your hypothetical short sale manipulator really a strawman? I don't know of any HFT firms that trade flat but also actually trade directionally (with swaps, etc) to drive prices down. Inherent in trading flat is that you buy as much as you sell. If short sales create downward pressure, wouldn't buying also create upward pressure? Plus, I think you've totally left out the downward pressure from good old fashioned sell orders--seemed to be a lot of those in the market in 2008 and the flash crash.
kurtkujawa
13 September 2012
Anonymous,
WTF are you talking about, nobody said anything is wrong with shorting stocks, all that was said is there are rules in place and that they are being skirted, manipulated, broken, how ever you want to state it. That is what we are talking about. You are like a liberal, you get your talking points from the master planner and just keep spewing them, once you get refuted you either change the subject or try and spin the facts. LOL
Comments (171)
shamlet76
13 September 2012
1) does not apply to naked shortselling.
2) i am a cash investor. i do not have a margin account. i do not want a margin account. i do not want any loan from a broker.
3) your argument is a strawman. someone else is addressing "flat". however, regardless of what the HFT trader is doing, the HFT trader has a broker that has a proprietary desk. if you buy a short share, are you really buying in? you are just buying an IOU. HFT and their agent brokers are two different entities and they make different decisions, no matter if an HFT continues the short or buys in.
4) you didn't address my basic math question at all. you appear to be just ticked off about the scenario, yet that very scenario is the predominant situation in shortselling. shortsellers do not want to be the only shortseller in a stock. they want a conspiracy of shortsellers, like a pack of wolves.
someone else is posting about net flat trading. i am not. i could post about that, because i have some other information about that but i am primarily posting about HFT and naked shortselling and their effects on the market. i consider them two different strategies. HFT can naked shortsell or might not. HFT and shortsellers do cooperate and appreciate each other. there are various HFT strategies, various ways they profit. HFT do not all adopt the same strategy. however HFT sucks the demand out of stock and the shortsellers just love that. this way naked shortsellers and shortsellers can sell into the bid and decrease the price and the investor is trapped at a higher price.
markets do trend upward, if there is no disturbance. naked shortselling is a disturbance, for instance. this is the consequence of more $ going into the market. 401K $ has been going into the market monthly, annually for many years. this means that people have been taking $ out of the market faster than others can put it in because the market has been trending downward. now, who do you think has been taking $ out of the market? the investors that put it in? that would be a net 0 to prices. supply=demand at the price equilibrium. this subject is covered in microeconomics, introductory class.
banks and brokers need to be regulated.
Comments (149)
Anonymous
13 September 2012
Sorry, Shamlet76 and Kurtkujawa. I don't have time to respond--I am busy taking direction from the master planner.
anonymole
13 September 2012
Don't think this qualifies as a boycott yet... But:
http://www.securitiestechnologymonitor.com/news/sifma-august-exchange-stats-bad-31296-1.html
Explanation? Darkpools? Private exchanges? Blackmarket trading? Stocks for Drugs program? Or just lack of confidence or disdain for the whole industry?
Comments (83)
shamlet76
13 September 2012
that's great, good article. volume is down because there are fewer retail investors in the market, many institutional buyers are standing on the sideline waiting to see the trend. so, HFT and shortsellers and marketmakers (and some parties that are two or three of these three at one time) can only trade with themselves.
do traders, brokers, exchanges, and clearinghouses like that? NO.
but i see no reason to get into the market right now because i think the traders want to take my $. i might see something to invest in and invest. but right now, i am holding with what i have. investors do not need to trade to make $. our stock market relationship is very different than traders.
i think more investors are coming to the conclusion that i have. the markets are not fair to the investor, i don't have to trade, professionals have better information than i do about the stock market. i think there are too many cheaters in the market. as far as i am concerned, market participants can trade with each other.
Comments (149)
Anonymous
14 September 2012
Loosers complain and winners finds opportunities, it's quite obvious in today's market who's who.
crammond1964
14 September 2012
hopefully MiFID 11 will introduce rules on HFT and will enforce the exchanges to suspend the guilty BUT
the European govt will have to agree on MiFID11 and I doubt they can agree anything
Comments (251)
Anonymous
14 September 2012
When the exchanges changed to 'for profit' entities, they became electronic casinos. Nothing wrong with that, except in that model, their profit is directly relational to the volume that trades in their casino. What happened is, the casino attracts all sorts of gamblers, some very slow and methodical, others fast and frequent. Some of the players are card counters, some are cheats, and some are there just to game other players. But through it all, the casino is getting paid, and the more volume the better. The casino should have a level playing field, but because their are in it for profit, and their own dealers cannot supply enough tables for the crowd, they allow the fast players to fill the gap, as unsupervised dealers. Eventuallty the everyday normal players get tired of getting gamed, and leave the casino...and volume drops, dealers are forced to play other dealers and find the are in an endless race to go faster and faster for ever shrinking payoffs and pots. The equity market is broken, and the casino's won't be forced to fix it until their profitability starts to negatively impact their share prices. Change won't happen any sooner.
kurtkujawa
14 September 2012
Anonymous, the complaining has nothing to do with winning and loosing, i've been doing this for 25+years and have made a very nice living trading around and taking advantage of of all the smart ass little punks and scumbags like you, wether it is the HFT's or the SOES bandits before. I've seen 1000's of algo junkies and day traders come and go, and im sure you'll just be another one trading there 100 lots trying to get inbetween my orders, but you can believe me when I say I've burried more of you and your ilk then i can count. All any of us are saying is its a pain in the ass to keep dealing with all the crap and toxic parasites out there. By the way, I would probably post as anonymous too if I was a parasite.
Comments (171)
Anonymous
14 September 2012
Kurtkujawa,
If you are such an awesome trader, why do you care about the cheats? It sounds like you can run circles around them. I hope you make as much money trading as the amount of time you've spent commenting on this article. /s/ Parasite #2.
n8sk8lee
14 September 2012
Kurt, you need to relax and take your meds. If you had any intellect, you would understand my comment was just an observation about the role of the exchanges. Your ignorance would be comical if it were not so mean spirited.
Comments (3)
Anonymous
14 September 2012
@kurtkujawa, by what you're writing it sounds pretty much like you are a pretty much a parasite yourself, feeding off and burrying smart ass punks. I thought you were an investor with a long term interest in the company you invested in?
BTW I'm not a HFT, which much be very strange to you that there other participants in the market that are not blaming them for every bad trade they do.
My point is why just complain. Create you own retail only market, with no open APIs, only screen based trading, throttle the number of allowed transactions, thus avoiding any possbilities for HFT firms. If all of you complainers are right that no one except HFTs wants to trade on the large for profit exchanges, this new marketplace will be a homerun.
But, I know it is easier to just sit and complain...
kurtkujawa
14 September 2012
Anonymous, why do I care about the cheats? I don't know, why do you stand up for the cheats, it's probably a morals thing. Do you like liars and thieves also. Dealing with all the cheats and scalpers unfortunately is just part of the deal, that doesn't mean I have to like it. It is no different then retailers having to deal with shop lifters, or anyother business having to deal with thieves.
Comments (171)
ltabb
14 September 2012
Guys - let me use an old godfather quote - this is business, this isn't personal. So lets stop with the names and the personal attacks. I know that this is a topic that gets everyone's juices flowing - and that is good - let just dial down the rhetoric.
That said - cheats do not belong in the the market and do belong in jail. I think we all agree with that. That isn't the problem.
The problem is the rule set. And what rules do we want to implement to develop / maintain a fair and orderly market?
Every issue that has been discussed in this thread, has a valid premiss behind it. the question is, do we want to limit who trades, how they trade, and is one person's/firm/machine's trading style helping or adversely impacting another? do they have a valid right to trade that way? And if we stop them from trading that way are we taking away their rights? And do we want to have a market where we take away folks rights by restricting their trading strategies? and if we restrict enough folks trading strategies will that impact market quality, the ability of folks to buy and sell, and how does that impact the companies that are trying to raise money?
I wish I knew the answers to all of these questions. And I hope that the forum allows these issues to be aired but they need to be aired in a productive and civil way.
Chris started this discussion with a very valid proposal and its great to have so many folks weigh in on it. But lets stay away from the personal stuff.
Thx
Comments (303)
ltabb
14 September 2012
Guys - talking about HFT did you see this?
NYSE to Pay $5 Million Penalty to SEC
http://online.wsj.com/article/SB10000872396390443524904577651450485707824.html?mod=djemalertNEWS&_nocache=1347634892788&user=welcome&mg=id-wsj
Also on TF news.
Comments (303)
kurtkujawa
14 September 2012
Larry, you are right, and to all the others I might have offened i appologize.
Comments (171)
Anonymous
14 September 2012
Thanks, Larry. Regarding the article on the NYSE fine, unless I am reading it wrong (which is very possible), it seems that the issue relates to when the information was published (seemingly mils) to the prop feed vs. the consolidated feed. It is interesting because even if the info went to the feeds at the same time, the prop feed is considerably faster by nature so the effect would have been the same--some participants would have received it sooner. It seems that Mr. Sparrow's suggestion would dampen the need for these prop feeds a little. But, should we try to slow people down assuming they accessed the information fairly (i.e., NYSE provided it to the feeds at the same time), albeit, at a higher cost for better technology?
Also, do most market participants need access to prop feeds? I know that even within firms that might be termed HFT, they run non-latent sensitive strategies where these prop feeds don't matter.
dwgerhart
14 September 2012
I accept the premise that markets are discrete rather than continuous physical process and that they have a natural minimum switching time. The pricing signal generated by the market carries a high frequency component which reflects these minimum times but the signal is actually spread across a wide time spectrum with daily, weekly, monthly, quarterly, annual, and every increasing lower frequency components. The contreversy surrounding high frequency trading relates to the possiblity that excessive noise in the high frequency portion of the spectrum will drown out the lower fequency components of the spectrum. If this is in fact happening and we want to protect the lower frequency portion of the spectrum we need to reduce the power of the high frequncy singals. The economist in me says charge more for the use of that portion of the spectrum, impose a noise fee on high frequency traders.
Comments (17)
csparrow
14 September 2012
One point I am trying to make is that we can never structure things so participants receive info simultaneously. We can however structure things so it doesn't matter who gets the info first but we let all participants have a chance to react to the information at the same time (think of a regulatory halt to disseminate news).
Remove time priority, have blind order entry windows and synchronize across venues so everyone operates at the same frequency.
Comments (37)
Anonymous
14 September 2012
csparrow, would you propose consistency across futures and FX venues as well for an equity vs. future or FX strategy?
csparrow
14 September 2012
yes, I think it is important that the concept extends across asset classes (and jurisdictions - I am Canadian and we have lots of inter-listed stocks that also trade in the US).
Comments (37)
pskopp
14 September 2012
Chris,
In your proposed world, what would happen to retail market orders on thinly traded equities once the HFT market makers withdrew from the markets?
Blind auctions on heavily traded equities with lots of natural liquidity where participants enter limit orders might work well, but for thinly traded equities where there is typically not a natural buyer and seller available to match against each other in the same time quantum, what would happen?
One thing missing from this conversation is the loss of price information that dark auction markets would create. If a market for XYZ is 99.00 / 101.00 with no trades taking place, one can still assert that the market value is between 99.00 and 101.00. If however all trades are through auctions like the opening or closing auction - it is quite possible for a price range to materially drift from the last traded price without any dissemenation of that new price.
So, if at time T, the last trade is $95, and then at T+1, some positive news item moves bids to $99 and offers to $101 but no trades transpire, there is a material loss of information to the public markets. Price discovery should not be limited to the last trade (whether in a continuous or periodic auction market).
Comments (28)
anonymole
14 September 2012
@pskopp, HFT'rs don't trade illiquid markets. There are various, recent, research papers that have shown that even when liquid markets alter their trading structure, HFT drops out. (Can't remember the papers but I know the relationship is there.)
Therefore, it would seem, that markets in illiquid instruments would change hardly at all.
Comments (83)
csparrow
14 September 2012
I think there can be market makers without requiring HFT. In any event, I am not actually trying to get rid of HFT, just impose some control over what I believe are the "unfair" types of HFT strategies such as latency arb. My view is HFT will still exist but will adapt to the new model.
I think of price discovery more in terms of bid/offer. Yes, there is price discovery from dark pool trades, but the quotes indicate where trades can be done immediately and in my "world", we would show residual orders (i.e. quotes) from previous calls, so we would still have quotes.
Addressing your last point, there is news overnight and next day's open does not need to be continuous with today's close, so we already have that issue of quotes moving without trades. I agree with you that price discovery should not be limited to last trade.
At the risk of repeating, more detail can be found here: http://www.bima.ca/Portals/17/2012Conference/Chris%20Sparrow%20-The%20Failure%20of%20Continuous%20Markets%20BIMA.pdf
Comments (37)
pskopp
14 September 2012
anonymole > HFT'rs don't trade illiquid markets.
The PnL of millions of shares of BAC for a small fraction of a penny surely dominates HFT relative to trading low volume names, but as spreads widen out to compensate for the longer trade horizon, there is money to be made (and therefor automated market making) in every equity.
Ignoring that point though, what happens to trading amongst 2 retail traders in XYZ with one playing a buy order at 9:40AM and the other a sell order at 10AM. The markets are dark, they don't see each others quotes and what happens??? This is a non-issue for shares of SPY, but for anything where market makers are the temporal bridge between natural buyers and sellers, what happens?
Comments (28)
anonymole
14 September 2012
Chris, these discussions, being purely academic, are all entertaining and such, but to actually design, implement and have accepted in the industry a new market venue will be nearly impossible. Mr. Tabb pointed out prior attempts in addition to the new AX.com marketplace, but without the support of at least one market monster, such an attempt it doomed.
It was my thought, some time ago, to offer a new IPO mechanism (in the aftermath of the Fadebook fiasco), that would perform the offering and then allow the new security to trade in such a paced market venue. It would be the companies that themselves wanted to have their shares traded in a more fair environment then that offered by the current crop of for profit exchanges. I've got a whole writeup of this new IPO scheme that would feed into the continuous auction market you talk about. It's just more academic dreaming.
But again, as Larry points out, it's been tried. There is too much power and money being wielded by the financial industry to think that relinquishing such power to an idealist type market venue would ever work. The best we can hope for is to get the old corrupt incumbent Congress out of power and get a new crop in there that might have a chance at reining in the likes of NYSE, GS and company.
Comments (83)
kurtkujawa
14 September 2012
pskopp, anonymole is correct, the HFT's dont patrol the small illiquid names untill therer computers detect unusual volume or price movement, trust me on this, I am involved in theese stocks everyday. 2nd, contrary to what one might think, wider spreads actually cut down on preditory HFT strategies. They don't want to take the risk. They can't afford to take 1/4 and 1/2 hits that the rebates can't cover and they need to go flat by the end of day. since its all machine, they want as much riskless trades as possible. they are happy to trade the rebates all day or even sit in front of limit orders that with a penny risk. As for 2 retail orders or any other order for that matter, in my opinion, time is actually irrelivant, if the prices match they will meet, if not it doesnt matter what time the orders went in. The only problem with time is the colocation, where the preditory HFT's actually see the orders milliseconds before the public and act on them. That is why I always advocate a CLOB and no more for profit exchanges, it will get rid of latency arb, fragmentation resulting in less darks and the result will be larger deeper and more transparent markets. I'll ask again, where were the largest and deepest markets before all thees competing exchanges? NYSE or NASDAQ. You couls always get a 25-50k market in NYSE cuz every order in that security went there and filled the book, on NASDAQ you had any number of places to work an order, each with 100 share b/o's finding the other side was a crap shoot and all it lead to was soes bandits.
Comments (171)
csparrow
14 September 2012
I take your point. I believe to actually implement this would probably require a regulatory response and co-ordination across regulators (and jurisdictions). A single venue probably couldn't pull it off unilaterally.
It may be a pipe dream but nonetheless if we don't try and think of alternatives, then we most certainly won't find any.
Comments (37)
pskopp
14 September 2012
> pskopp, anonymole is correct, the HFT's dont patrol the small illiquid names untill therer computers detect unusual volume or price movement, trust me on this, I am involved in theese stocks everyday
Kurt - thanks very much for doing the code inspection on the thousands of automated trading strategies out there. It is nice to know that they all behave identically and can be summed up into a single paragraph, and that the entire universe of HFT is risk adverse and is leaving money on the table with low volume wide spread equities....
> time is actually irrelivant
No - it is not. A temporal mis-match of a natural buyer and seller without someone to bridge the gap is a problem. I guess you have never been in a hurry to accumulate a position or exit one, but that is not how the world works. Time *is* important to most people (and machines).
> You couls always get a 25-50k market in NYSE cuz every order in that security went there
And if you were willing to donate an 1/8th to me on each transaction like you used to give to the specialists at NYSE and Nasdaq, I'll give you great volume as well... The inside market is now smaller primarily because the price granularity is now $0.01 for anything trading over $1.00. Have you tried an analysis of liquidity sweeping markets 12 cents (i.e. an 1/8th of a dollar)?
Comments (28)
kurtkujawa
14 September 2012
pskopp,
Yes time is irrelivent in that if i want to enter or exit a position, and I am refering to an institutional position, not a trading position, size usually trumps both price and time. You can always move a stock up or down to find the natural, it just depends on how much of a hurray you are in and what price you are willing to pay for that liquidity. So you see, its really up to you if time is more important than price or size. As for someone to fill that gap, exuse me but when did taking you out of a position you no longer want become the resposibility of the market?
As for paying an 1/8 to the NYSE or NASDAQ, it sounds as though you never traded institutinally, because you should know that the majority of trades on the NYSE were traded as agent, and regardless of the spread in NASDAQ institutional x's traded for 1/8 or 1/16th which was split between the 2 for a .0625 or a .312 cents per share commision. Now on the same hand, I am by no means condoning alot of the things that were done on the NYSE, i am just saying that the model of 1 place where all the orders go, would create deeper and more transparent markets.
As for liquidity sweeps for 12 cents, the only problem with that is that when 50k is offered thru 25 different venues and you sweep it, you might get 35k because all the other 100 lots disapear and some actually try and take stock ahead, thats the problem there. It is very frustrating. If it is bid or offered, it needs to be legite, not peggeed not flashing.
Comments (171)
n8sk8lee
14 September 2012
If we call all agree that the rule set is the primary issue, then here's a proposal. Goal is a fair playing field that foster's technology and innovation, and increases liquidity and transparency, while lowering trading cost and transaction frictional losses. The old dilemma: make it faster,cheaper and better-the rule is you can usually only get 2 of 3. But here goes:
1)BD's pay a surcharge on messages that don't result in executions. This would force BD's to pass through the surcharge to customers who are bandwidth hogs, quote stuffers, and non liquidity providing HFT's.
2)Min tick increments for all market participants. Mid point executions must be blind and and in whole lots only.
3)Latency leveling-50 milisecond min for all inbound orders. Flicker, latency arb and bandwidth gaming are eliminated. I don't know what the right number is for latency leveliing, but if you are going to level the playing field, pricing, market data, and latency all have to be fair game.
4)An audited Consolidated tape-allow price time priority to be safisfied. Surcharge from excess messaging could fund the development of this.
5)Exchanges cannot sell specialized market data to HFT, and co-location will have well defined limits.
There it is. What would happen if these rules were put in place? Short term: spreads would widen, liquidity would flag, HFT would be reduced to perhaps 50%-70% of what it is currently, messaging would decrease by 500%. Exchanges would have less revenue. Long term? tighter spreads, increased liquidity, more legitimate HF liquidity providers, and much greater institutional and retail investor participation. Maybe the only way forward is to go backward for a bit. Exchanges would gain back market share as consolidation forces volume to higher quality liquidity venues, long term win situation.
Comments (3)
Anonymous
14 September 2012
n8sk8lee - one quick comment on your proposal to charge for messaging. It would need to be a smart surcharge (e.g., weighted by quality) and not just a flat fee/message. Otherwise, it might be a detriment to market participants that provide continuous two-sided quotes at the inside and at multiple levels. It wouldn't hurt liquidity takers as much because their messaging would probably be light in comparison to a market making type of participant.
n8sk8lee
14 September 2012
Anon-Agreed. I just threw out 5 quick points, to serve as a constructive starting point towards sane solutions that advance the state of our art, and brings good to the majority. I don't know what the ultimate answer is, but without the start, we'd be as hopeless as the SEC and CFTC seemingly are at getting a grip on it!
Comments (3)
ltabb
14 September 2012
Guys (and gals), I have been out of the office most of the day but i want to thank you for raising the level of discourse on this thread. Really great ideas and things we should all be thinking about. And things that I may think of incorporating into my testimony to senate banking next week (I may leave out the part about throwing out the old corrupt congress) but all are good ideas. thanks again
Comments (303)
jessiehenshaw
16 September 2012
It's SO true, that market players are thinking of their narrow self-interest, not of making the markets work for the economy, when playing "mutual pick-pocket" to make money for themselves and skim the wealth of others. That aspect of "how the system works" does not create any liquidity for real investors. It robs liquidity from where the real business world and consumers need it. So, simple devices to make the markets safe and more effective for people doing real investing are always welcome.
Comments (1)
shamlet76
16 September 2012
as i see it, you cannot sell what you do not own. so if the system of "renting" stock is taken down, if you cannot sell what you do not have in your portfolio, then the whole stock market would go back to the supply and demand produces a price equilibrium. most of the complexity in rules is to accommodate shortseller and HFT and broker/dealers. it is not necessarily a healthy stock market if we accommodate traders.
Comments (149)
sarnuk
16 September 2012
I wonder what other exchanges and dark pools also have enabled built in latency arbitrage? We wrote about this three years ago. I guess I am happy that the SEC validated our paper.
Comments (160)
crammond1964
17 September 2012
pretty sure most of the exchanges are guilty of latency arbitrage ; here on TABB we have mentioned it for years ; nice to hear from those who denied it !!!
Comments (251)