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The Great HFT Debate

31 March 2014

No, Michael Lewis, the US Equities Market Is Not Rigged

While ‘Flash Boys’ may capture the complex execution framework of the US equities market, Michael Lewis does not portray the full story. The market may not be perfect, but it’s not rigged.

While Michael Lewis’s new book, “Flash Boys,” is an amusing read and does talk about the very complex execution framework of the US equities market, he has not portrayed the full story of the US equities market, leaving much on the cutting-room floor.

[Download a PDF of Larry Tabb's complete commentary at the end of this article.]

Flash Boys portrays an overly complex market hell-bent on speed and traders willing to ’sell their grandmother for a millisecond.’ The opportunity Mr. Lewis paints comes at the expense of unwitting investors who are being taken advantage of by high-frequency traders in conjunction with colluding brokers and exchanges. He talks about latency arbitrage between consolidated data fees and direct feeds, as well as distances between exchanges, dark pools and cable lines. While most of the physical infrastructure is adequately described, its purpose, how it is being used and its impact are dramatically misstated.

Market Fragmentation

While our markets are fragmented, there is significant benefit to having a fragmented market: competition. While economic theory represents that the most efficient market is one where all orders interact and compete in a central limit order book, this theory falls down when it runs headlong into a market devoid of competition. This was shown when market makers were caught colluding in 1998 on NASDAQ and on the NYSE in 2003. In both of these instances, market makers and specialists were taken away in handcuffs.

Out of both of these scandals came SEC rules to facilitate competition – not just between orders, but between markets. The SEC enabled the development of three major non-exchange-type matching mechanisms: internalization – where brokers could internally match buyers and sellers; ECNs’ (electronic communications networks’) alternative central limit order books (less-regulated, quasi-exchanges); and dark pools, opaque broker-owned matching venues that work like exchanges but do not display limit orders (hence, “dark”). During this time the SEC developed the Order Handling Rules, Regulation ATS, and Regulation NMS, which codified how orders needed to be treated in this fragmented market structure.

Today, while fragmented, equity execution is much less expensive, faster (generally sub-millisecond compared to more than 10 seconds in 2005), and more open. Retail brokerage fees are generally under $10 a trade, and institutions can pay under 1 penny a share (closer to .8 cents per share) for electronic execution. In addition, average effective spreads are down, and investors are much more in control of their executions than ever before.

The development of multiple execution venues has changed the economics of trading. If we look back on equity trading even as recent as a decade ago, the brokers and exchanges were standalone profitable powerhouses. Today, equity exchanges are not in the same financial shape. Derivative exchanges are driving exchange growth, and equity exchanges need to be lean and mean to survive. Brokers are not prospering either, as traders and experienced sales people are being swapped for machines and less experienced sales support. ETFs, self-empowering technology and investor pressure have reduced the cost of execution and have caused brokers to reduce their staffs.

So where is all of this value going? To high-frequency traders? We don’t see them doing much better than the exchanges or brokers. The pressure to invest in expensive technology and infrastructure, colocation and connections to many more markets, as well as improvements in vendor-based solutions, have caused a hit to their revenues. TABB Group estimates that US equity HFT revenues have declined from approximately $7.2 billion in 2009 to about $1.3 billion in 2014. Looking at recent public data, the profitability of HFT firms in the US equities market has declined, just as the number of players has decreased.

If the exchanges, brokers and HFTs are not reaping the rewards, then where is this leakage going? This money is going back to investors in the form of better and cheaper executions, as few if any institutional investors we have interviewed – and we have interviewed thousands – have ever expressed that their equity implementation costs have increased, meaning … trading just becomes cheaper and cheaper. That cost comes from somewhere: market makers, speculators, brokers and exchanges.

Risk and Reward

Everyone hates speculators. That is a given. They are viewed as parasites sucking the alpha out of investors’ brilliant ideas. While intermediaries do step in the middle of investors’ trading strategies, speculators/intermediaries do serve a true purpose: They facilitate price discovery – meaning they provide quotes. That is a very important (if not the most important) function of a market: determining the price. A market without price discovery becomes an expensive and illiquid market. While most major investors know the intrinsic value of an asset they are willing to trade, the quoting process not only crystalizes the price for all to see, it provides tradable quotes for even the largest investors.

To fully understand this, think of a store. A store that doesn’t display or advertise its prices doesn’t get much business. Think of walking into a store filled with merchandise with nary a price to be seen. For each product, you need to ask a salesperson, who may or may not give you an accurate price. While a store can advertise that it will beat all competitors’ prices, if it doesn’t display a price, it puts the onus on buyers to find the best price, bring proof into the store and haggle with the storekeeper to book a deal.

The same is true with displayed markets. A market without a pricing mechanism isn’t much of a market.

The people who provide these prices are market makers, speculators, or what most people call HFT. These actors quote product bids and offers across a wide spectrum of markets (exchanges, ECNs, and dark pools). Collectively, it is their business model to try to provide the most aggressive price they can provide to buy or sell a stock. These firms also generate their revenues from two sources: the spread between which they can buy and sell stock, and any incentives that exchanges, ECNs, or dark pools may give them to quote in their markets.

While trading venues may provide incentives to quote (generally up to $.00029 per share), venues do not share in liquidity providers’ trading profits or losses. This means that any trading house that improperly gauges supply and demand has to bear the entire cost of any losses itself.

Let me rephrase this: To have tight markets, many firms (mostly HFT) need to compete to set the best market price. These firms are competing to capture the spread (for liquid stocks, this is 1 cent per share) plus any incentive, minus any trading cost. If these firms miscalculate supply and demand, as Knight did one fateful morning, they will not only have a bad trading day, they could go bust.

So how do these firms manage risk?

Quotes equate to risk. Any time a trader (asset manager, retail investor, market maker or HFT) puts a quote into the market, it is an option for the market to trade. The quoter provides the option – I would like to buy 100 shares of IBM at $190 a share. Just because a buyer wants to acquire IBM at $190 doesn’t mean that someone is out there willing to sell IBM at $190; however, if someone is, unless the quoter cancels the order, the person quoting is committed to trade. While a longer-term investor may have a time horizon for the trade of days, weeks, months or years, generally a market maker, speculator, and/or HFT is looking at a horizon of seconds to minutes. If my whole business model is predicated off quoting to earn a spread, then I need to understand all of the market influences that could make IBM go up or down during my investment time horizon (seconds to minutes).

So what makes a stock go up or down in the short term? Certainly there are company fundamentals such as sales, earnings or management changes; but typically that information doesn’t change second to second. There also is research, news, information, and other data that gets released by analysts, media, or people simply expressing their opinions online. Lastly, and most important, in the very short term, supply and demand impacts price the most – how many people want to buy vs. sell and, more important, how much?

The problem with quoting – especially for market makers, speculators, and/or HFTs – is that the quoter cannot easily gauge the quantity the longer-term buyer/seller wants to trade. If the quantity is small, the problem is slight; if the quantity is large, then the investor’s order could significantly alter supply, demand and price, forcing the short-term trader to lose money. And remember, the quoting party is committed, while the aggressing party is not. The aggressor may want to buy 100 shares, or it could be looking for a million.

So how does the quoter manage risk?

There are different ways for market makers to manage risk. First, they need to be quick. If market makers are slow to react, they will be taken advantage of. If the price of IBM should really be $191 instead of $190, then either the market maker’s order won’t trade (if it is out of the money), or worse, it will trade disadvantageously and the liquidity provider will take a loss. And if that quote is for 10,000 shares, the loss could be significant.

Second, they need to be connected. Market makers need to be connected to markets where liquidity either resides or will reside. If speculators are not connected to markets, it becomes harder to trade. They may be able to go through a third party to get to an unconnected market; however, if time is important, connecting via a third party will be latency-prone.

Third, they need to be connected to proxy products. Proxy products are products that may trade somewhat like the product that you are trading. These products could be futures, ETFs, FX, bonds, news or other indicative entities that may hint that the market is about to move. Traditionally, futures move before cash. If the S&P 500 future starts moving, it will indicate that the cash equities may soon follow.

Last, they must fully understand all of the nuances of each market they trade. This means: how to connect, their protocols, pricing, order types, market data structures, and all of the information surrounding how that market operates. Without this information, the speculator may find that its connection time lags, its order type usage isn’t appropriate, or it is just being outsmarted by someone more versed in market microstructure.

[Related: “Take the Time to Understand the Complexities of the Markets”]

Why do quotes fade when a larger order enters the market?

We hear frequently that on an aggregate basis there is significant displayed volume, but when approached, it disappears. The reason why this occurs is twofold: first, since there are 13 exchanges and more than 40 dark pools, liquidity providers and investor algorithms spread orders across exchanges and often oversize them, to ensure that no matter which venue you arrive at there is the ability to get executed. So that large aggregated volume really doesn’t exist. It is being represented multiple times. Second, if a large order does arrive in the market and outstrips supply, then the price should adjust given the increase in demand.

While no one really likes it, today’s yield pricing models do the same thing. When buying a ticket on a flight or booking a hotel room, the price displayed today is never the price displayed tomorrow. And given cookie technology, travel sites and, increasingly, other Internet pricing engines are determining your location, previous transactions, and obtaining information from other sites to do their best to extract every marginal dollar from your wallet that you are willing to pay. That said, if you don’t want to go, don’t by the ticket.

If you talk with the airlines and hotels, they say that “on balance” these pricing engines benefit both travelers and the airlines/hotels by enabling patient buyers to pay less and more urgent buyers to pay more. Liquidity providers in markets are using the exact same strategies to do the exact same function – gauge supply and demand and determine the value of their risk capital.

But how does this happen?

HFT exists because our markets are systematic. There are ways to connect, ways orders are executed, and ways data can be modeled. Our 53 or so lit and dark markets operate in specific and consistent ways. They are in different places, connected via jitter-free dark fiber connections where latency can be measured by the nanosecond. And orders move through this infrastructure in certain ways.

Orders move from investors to brokers, to broker algorithms, to dark pools, to exchanges. Placing limit orders across these markets gives liquidity providers (not necessarily HFTs) the ability to create a Tsunami early warning system.

If a trader places limit orders in all 53 or so markets, as one order is hit and then another, the trader could begin to develop a pattern of where liquidity was coming from, where it was going to, how much was being taken, and how aggressive the market was being pushed. Given this information, a market marker/liquidity provider would begin to develop a sense of how aggressive and price sensitive the trader was. The market maker can then raise or lower the price, depending upon demand. This, however, is easier said than done.

Can the market be manipulated?

Markets can be pushed, but not for long. With so many algorithms in the market calculating fair market value, machines can determine, by the microsecond, the price of almost every financial asset. That said, the more liquid the product, the harder it is to manipulate. Highly liquid products are much harder to push than less liquid products, just because they are highly liquid. The more people trading an asset and the more divergent the view, the more traders there are pushing that asset into an equilibrium price. Conversely, the less liquid the product, the easier it is to move the price, especially if the bid and offer are thin. However, the less liquid a product, the less supply and demand, so determining an accurate clearing price is also harder. So whether you call that price discovery or manipulation is hard to say with authority.

While markets can be pushed, does it mean they are rigged?

No. Not at all. Liquidity has a price. Having a firm commit capital to buy and sell at a moment’s notice costs money. That money comes from the bid-offer spread and any rebate a market venue decides to pay. While there is an intermediary, the intermediary doesn’t decide the price. A market maker holding a product for seconds or minutes can only have a limited impact on price. When firms are buying in second one (pushing the price a touch higher), and subsequently selling a few seconds or minutes later, the act of selling will generally bring the price back to around its original value. Only investors with longer holding periods and greater amounts of capital can influence a market for a sustained period. Speculators and HFTs tend to have limited capital and turn it over frequently. It is larger investors and hedge funds that buy and do not sell that can push the price for any significant period. However, this type of trading is aligned with real ownership, and hence should have a longer-term influence on price.

While larger investors’ trading influences longer-term price swings, it is the buy-side trader that is responsible for managing the impact of the investors’ executions. Institutional investors typically employ buy-side traders to manage their trading. It is up to the buy-side trader to determine the trading strategy that aligns with the portfolio manager’s investment thesis. Buy-side traders are professionals who have a fiduciary obligation to trade their clients’ assets with care.

When traders engage with the market, they are focused on execution quality and worry about interacting with bad actors. Institutional investors understand how much they are willing to pay and how active they want to be in the market. If speculators wanted to intercede and significantly market up liquidity, investors would vanish and the price would settle back down, until patient investors would reenter the market.

That is what a market does. It ascertains supply and demand and forces participants to pay the most they are willing to pay. When you run out of patience (if you and not others were pushing the market), reversion takes place, prices back down and investors can come back into the market again.

This is the cost of liquidity – the cost of trading.

Can trading be done smarter? Yes. Can it be done better? Certainly. Is the market rigged? Absolutely not.

So what if the market markers/speculators and liquidity providers all go bust?

While many would like to see speculators go bust, market makers, speculators and HFTs do provide a service. They price product. Since market markers quote and quotes are commitments to trade, without market makers there would be fewer quotes, less competition to be at the top of the book, and a less aggressive pricing mechanism for investors. While investors may fund the profits of speculators, without vigorous competition to be top of the book, spreads would widen, and investors would actually pay more.

That said, speculators can’t be allowed to capture all of the alpha either. While speculators need to make enough to survive, they shouldn’t strip all of the profitability out of investors’ ideas either.

The job of protecting investors’ alpha many times rests with the buy-side trader and the broker. The broker’s job (be it human or electronic) is to shop an order as efficiently as possible and capture as much of the economic interest of the trade for the investor as possible. If an investor felt that IBM was going to move from $190 to $200, the investor wouldn’t be happy if the broker, instead of obtaining the market price of $190, paid up $10 and bought the stock for $200. If that occurred, all of the alpha on that trading idea would be lost. If this occurred frequently, investors would get frustrated and eventually leave the market.

Protecting Client Orders

It is the broker’s job to protect the client order. The way brokers protect client orders in a fragmented market is through smart trading. Now, there isn’t one way to execute an order; some orders need to be traded aggressively, some passively, some in blocks, and some with capital. While strategies change with each trade and each name, there are certain tactics brokers have developed to help investors get their best price. While orders a decade ago were mostly traded by hand, in todays’ market, most orders are traded by algorithm.

Algorithms are developed to model the different ways that investors want their orders executed, such as at the current price (implementation shortfall), averaged VWAP or TWAP (volume- or time-weighted average price), when liquidity arrives, or in stealth mode. Algorithms generally have two major parts: the scheduler, and the order router. The scheduler will take a larger order (parent) and determine the most appropriate way to segment the order (break it into smaller pieces, or child orders) and when to send it to market. The router then takes the child orders and routes them to the appropriate trading venue. This could be a dark pool, an ECN, or an exchange. Each of these venues has a probability of execution associated with it, and each has a series of costs.

Execution Cost

Execution costs are not just spreads and execution fees. Some of the least-impactful trading costs are explicit costs such as spreads and execution fees. Other execution costs include market impact (what influence did your order have on the market?), adverse selection (was your limit order placed correctly?), and opportunity cost (was your order placed at the wrong venue?).

How parent orders are segmented and where child orders are routed have everything to do with how effective your trading strategy is.

Once the child order is created, getting that order to market becomes critical. Should it be a market or a limit order, or some special order type? Should it be exposed or dark? How many dark pools should be checked before the order is routed to a lit venue? Should it be sent to a ping network (an electronic capital commitment facility)? Which exchange should it be routed to? Should the exchange route the order to another market, if there is a better price elsewhere?

This process can change depending upon the stock, time of day, supply and demand, and a host of other issues. This is not an easy problem to solve.

Measurement

Just because this problem isn’t easy, however, doesn’t mean it should not be solved. The brokers that develop buy-side trading algorithms take this job seriously. There isn’t one firm that has ever told me that it goes out of its way to give its clients a poor execution. Most brokers have a vast array of folks that analyze execution costs or provide Transaction Cost Analysis (TCA) services. This service tries to analyze the implicit cost of trading by analyzing each execution.

Besides broker TCA services, most buy-side firms analyze their own trading performance, and there are a number of firms that provide TCA services across brokers such as Markit, Bloomberg, ITG, Abel Noser, Elkins McSherry, SG Levinson and others. Are these firms perfect? Probably not. But the investors spend heavily to analyze their trading, their brokers, their algorithms, and their impact on the market.

Takeaways

Now, is there a single best way to execute an order? Are brokers perfect? Are there conflicts in the pricing structure of trades that may push brokers to trade off-exchange in their own dark pool versus at a lit exchange? Absolutely. That said, investors, brokers, and third-party measurement firms are trying to help better analyze the problems, help investors shift flow toward better performing brokers and algorithms, and help traders better understand where there is leakage.

We have not yet reached execution nirvana.

Toward a Better Solution

Brokers’ algos are not perfect. No trading machine, be it silicon or human, is perfect. The idea, however, is to create a more perfect and more efficient market. That is what competition and freedom are about. If IEX has a better idea, great – put up capital, create a new market, and see if it works. If it does, it will gain share; if not, it will go bust.

Should the SEC restrict markets? I had said “yes.” I had felt that there were too many exchanges, too many dark pools, and too many internalizes. However, if the SEC would have placed a limit on matching venues, would new markets such as IEX or Tripleshot have been developed? Would they have had enough funding to buy an ATS license? Who knows? But one thing is for certain: The ability to bring new ideas to market is a hallmark of our markets. If the SEC limited licenses, then new platforms would have a harder time coming to fruition.

The most important aspect of our markets is our transparency. Each order is tracked, each order is archived, and each trade is printed. The key to making our markets better is being able to analyze that information – to make information-based judgments that accurately represent the truth for each investor, each broker and each market. Once this information is in the hands of investors, they can value it as they like. If they care about execution quality, then obtain, analyze and measure broker and venue execution quality and shift your trading flow accordingly. If leakage is less important than other services your broker provides – whether online access, custodial services, research, or corporate access – then understand the true cost of those services and make a value judgment accordingly.

The markets are not rigged. They are just intermediated and possibly not effectively brokered. Information, analysis and choice are our most powerful weapons. Analyze your trading data. If your managers, brokers, and/or trading venues are not doing their jobs, leverage your choice, send them a message, and fire them!

Let’s use the power of choice appropriately.

No Michael Lewis

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Comments | Post a Comment

55 Comments to "No, Michael Lewis, the US Equities Market Is Not Rigged":
  • Missing
    John Harris

    31 March 2014

    You've put a lot of effort into this, Larry, and provide your readers with an excellent description of how secondary trading takes place in U.S. equity markets--well done on those counts, at the very least.

    But you are guilty--innocently so, I am sure--of choosing your facts to fit your conclusion. In effect, you've narrowed your focus to matters largely devoid of controversy and then drawn a sweeping conclusion from that fine point, entirely ignoring the facts that cause people to suggest the market is rigged in the first place.

    In principle, you reason as follows: "People say this river is polluted. But look here! I have taken a sample from the river and isolated its essence, which is the water molecule. And I have subjected this water molecule to the most advanced, mass spectroscopy available and can assure you that it consists of nothing but hydrogen and oxygen! So, the river is most definitely not polluted!"

    I've heard many people suggest our stock markets are rigged, but not one who cited the existence of market makers as evidence for their accusation. Most thoughtful people know that market making, even systematic market making, is an economic good.

    Instead, those making these accusations talk about Federal Reserve manipulation of interest rates and credit (including margin credit), Federal Reserve intervention by proxy in support of stock and other prices, the existence and operations of the Treasury's "plunge protection team," non-publicized order types, secret matching engine features, artificial barriers to entry and restraint of trade, inconsistent application of exchange rules (e.g., treatment of Goldman versus Knight), sudden changes in short sale rules, bank holding company applications that normally take months to process receiving approval over a weekend, suspension of mark-to-market-accounting rules, and a host of other facts too numerous to list.

    The market isn't just rigged--it is exquisitely rigged. Competition is exquisitely constrained, innovation is exquisitely controlled, and even at that, when the largest firms all manage to get themselves on the wrong side of the market in the most massive way at exactly the same time, which happens every few years or so, they can always exercise their Fed puts.

    Speaking of rivers, if we want to get rid of the oppressive stench wafting through our markets, ridding the lower Hudson of the miscreants on its banks is the best place to start. 

  • Anon_avatar
    Anonymous

    31 March 2014

    I am disappointed, but not surprised, at Larry's "talking the book" response. The old phrase "your word is your bond" no longer applies--as evidenced by the percentage of canceled quotes and fictitious flashes which aren't commented upon. This is market manipulation and picture painting at its best--indeed, the idea that exchanges, which are totally dependent on the volume driven by the HFTs, are fair to the buyside is absurd. All of the convoluted orders (I mean, how many do we REALLY need), and worst of all, "last looks" ability to renege, indeed allow for activity that benefits the minor player, who only wants to do 100 shares, but absolutely kills that same public who, like I, prefer to invest passively through mutual funds.

    Couldn't you at least acknowledge some truth in what Lewis brings out instead of being an industry mouthpiece? Any alcoholic knows: you have to admit there is a problem, or the problem is you. The success of IEX, and the movement from ParFX that has trickled through to EBS and now FXall/Reuters, is evidence enough that there is room to serve the buyside, and the old ways do not serve the true owners of securities, but those who only intent on gaming the system. 

    I understand that there are benefits--but as one who has tried to chase the phantom liquidity, I'd happily pay old spreads to do size without the frontrunning.

  • Comment_tabb_-_larry_tabb_hi-res_wo
    ltabb

    31 March 2014

    Ok guys. Explain how it's rigged. Do you not believe the prices that are posted at exchanges? When you execute are the prices far off the market (and I mean more than pennies)? Do you think that the the true clearing price is nicles, dimes, quarters, dollars off the market (for things other than the pink sheets)? When you buy stock does it not wind you in your custody account? Who do you think is pocketing the money? It doesn't look like any public company or company going public? Unless their financials are a complete fraud. Now that may be but that's a pretty serious fraud. But that is what you are accusing folks of. So when you buy a $10 stock how much is at the clearing price and how much goes into a fraudster's pocket? As for randomized fx platforms. I not hearing they are doing too well. Also you want to talk about the epitome of a unfair market the fx market is poster child. With fixings and Libor. No they are completely legitimate markets.

  • Missing
    John Harris

    01 April 2014

    Larry: in the fifth paragraph of my post, I listed numerous ways in which the U.S. equity market is rigged. Let's take just one item from the list: Federal Reserve policy. Fed policy effects the call money rate, margin requirements, and the availability of funds for margin lending. Do these factors not "rig" (to use your term) the market, in this case, in favor of funds flowing into the market and higher prices?

    You seem to want us to draw a sweeping conclusion--"the stock market is not rigged"--on the basis of your observations of a narrow slice of it, which is the formation and operation of the NBBO and trading that takes place within the context of the NBBO. Fine, let's do it that way. The market is rigged even at that.

    With few exceptions, can the market touch? Can it cross? Touching and crossing are natural phenomena that arise in free markets, even in the U.S. government bond market! Yet government policy forbids such price behavior for U.S. stocks. Why? Why does the government intervene to prevent in one market what it allows in the market for its own securities? Answer: because the government, acting as agent for politically-powerful market makers in stocks, intervenes to insure that market makers can extract rents from the U.S. equities market that would otherwise not be available to them. Government rules designed to prevent stock prices from doing what they otherwise naturally would do exist solely to take money from one set of pockets and place those funds in another set of pockets.

    You want us to be satisfied that the nominal market in price terms for a hundred shares of a $25 stock is a penny wide. But so what? In the bond market, we routinely trade blocks of $100 million at spreads half of even that. If the stock market is so pristinely free of "rigging," how can that be?

    And you want us to focus solely on price but not on quantity. So the nominal market for a hundred shares is a penny. What's the nominal market for 2,500-share or 25,000-share blocks? No one knows, because we can't see that information anymore.

    You're so focused on penny spreads for hundred lots that you're neglecting to consider other market phenomena that contradict your conclusion.

    The market is rigged to preserve a role for market makers that they would not otherwise enjoy, among other motivations. They would still have a role, mind you, and a valuable one at that, in a free market. But we don't have a free market. We have a market exquisitely rigged for the benefit of the few at the expense of the many.

  • Comment_tabb_-_larry_tabb_hi-res_wo
    ltabb

    01 April 2014

    Touching and Crossing? Since when can a US bond trade go off without a broker/bank intermediating it? do you really think that the price you get when you are calling the broker for a quote is the price that they see on the inside market? do you really think trading in govvies is free? do you really think you have more information (and faster) that some of the largest banks in the world. Do you really think that the equities market is being influenced by the fed and Bonds are not? Hell the fed controls interest rates. Now look who is being naive.

    That said you are absolutely right on about the US equity market not being a block market. That is why most orders are broken up and traded in 100 and 200 share lots. If you went into a pit in chicago saying that you wanted to buy 500 lots do you think that you would make it out alive? you would get carved to pieces by the guys in the pit. The markets have changed. They are no longer about liquidity discovery the SEC has made them all about price discovery. Now people may like that or not - that is just how the SEC wrote the rules.

    But you just don't come into a gun fight with a knife and expect to survive. If you are investing millions and or billions - don't you think its in your best interest to figure this stuff out? Investors spend heavily to develop strategies. Why shouldn't they invest to implement them well?

    This tech is expensive but not killer expensive. The feeds are available, co-lo is available, the fiber channels are available, programmers are available, TCA services are available. None of this stuff is classified or open to only the few. And if you need to use a broker, use one that you trust. and if they breach that trust - fire them and use someone else.

  • Missing
    John Harris

    01 April 2014

    Larry: Perhaps we use the terms differently in the bond market than you do in the stock market. By "touching" I mean that the bid and offer price are the same. By "crossing" I mean that the bid price exceeds the offer price. (We typically use "offer" in lieu of "ask," but the terms mean the same thing). In the bond market, no regulation prevents the market from touching or crossing, and so it does, frequently, throughout the day. Arbitrageurs tend to eliminate crossed markets quickly. Markets touch typically for fee avoidance or other structural reasons and so may persist a bit longer. But either way, that this condition arises regularly (and naturally) in the market for U.S. government bonds, while the same government prohibits such natural developments in the U.S. stock market contradicts your thesis.

    And, yes, the customers can see the "inside market" and even trade at inside market levels. That is not to say they always receive the inside price--many times they don't, especially in the less-liquid issues--but in those issues frequently there is no two-sided market, so the notion of a persistent spread doesn't apply.

    I'm not going to dignify the remainder of your questions with answers. You know better.

    I am not suggesting, by the way, that the government bond market is free--it isn't. It's just rigged differently than the stock market.

  • Comment_230146_210851315613283_100000652474653_678322_2285980_n
    crammond1964

    02 April 2014

    larry ; sorry front running is rife ! Try hitting a bid or offer in size ; its not just disappears but manages to intercept and overtake your order .  Im fed up with folk defending this as we left the open outcry market for this very reason ' yes we accepted it was going on  rather than denying it .                                                            Larry front running is extremely harmful and perhaps Virtu financial  one lost day in 1200 proves how beneficial cheating is . Sadly if you believe "rigging " does not exist in any form you should be in politics as in my 30+ years of trading I have seen plently .

  • Comment_tabb_-_larry_tabb_hi-res_wo
    ltabb

    02 April 2014

    Neil, That is the problem. You can't hit a large order with size in this style market. They quotes are quick, the average trades size is small, the liquidity isn't all in one place... It just isn't a style of trading that is supported by the structure we have. The answer is, you need to break up the order into smaller pieces. You need to use algorithms - algos you trust. No one sits on a bid or an offer with size anymore. Anytime there is size displayed its a gazillion small pieces that add up to size scattered around a bunch of different venues. does that mean that the market is rigged? Does that mean that there is front running... I don't think so. (BTW - even this isn't front running - which is defined by a breach of fiduciary obligation).

    Is this the perfect market - absolutely not. That is the market that the regulators wanted. one that efficiently handles 100 share lots. Is that the right structure for the majority of folks trading - hell no.

    It sounds like you are walking into a uzi fight with a knife. you need better tools. At least for this market.

  • Comment_230146_210851315613283_100000652474653_678322_2285980_n
    crammond1964

    02 April 2014

    not in futures markets larry  ;  rules have not changed and thats my issue ; blame lies totally with exchanges ; they have stopped governing and allowed these abuses therefore rendering "fair & orderly markets " useless . 

  • Missing
    kurtkujawa

    02 April 2014

      

    Larry, I agree with you that the markets aren’t “rigged”.  I also had to laugh when all day on CNBC they kept referring to Lewis as if he was some type of expert!  CNBC should be ashamed of themselves, for a show that promotes itself as a financial show, they are sure naive as to how the markets work, but I digress.  Where I disagree with you is your statement regarding collusion on NASDAQ and NYSE specialists.  To say that a CLOB would not work because of that is akin to saying all investment managers are cheats and Ponzi schemes because of Madoff and SAC.  If anyone can actually say the markets are better off today with all the fragmentation and for profit exchanges, I question their sanity.  The argument that keeps getting perpetuated that execution is cheaper is the same false argument that liquidity = volume.  Although .01 spreads may be better for scalpers and the so called “individual investor” it is not better for the institutional manager, who I would argue, IS the individual investor in actual terms.  If say, 90% of the market is institutional (representing the individual in the form of pensions, MF’s IRA’s etc…) , I ask, should the market structure be tailored to the institutions or the 10% of retail and day traders?  I agree that commissions have come down, and that does reduce costs, however, that has nothing to do with market structure or competition among exchanges.  As for speed, I ask who in the hell needs to trade in sub-milliseconds and why is that better?  Nobody hates speculators, we do however hate scalpers.  I also totally disagree that they serve any purpose what so ever.  If you honestly think that THEY are the ones that provide price discovery then you have never traded a stock.  100 share markets do nothing to promote price discovery.  I also question your logic that without them the market would be expensive and illiquid.  Let me explain how price discovery actually works.  I have 100k shares for sale at $20, the bid may be 19.5 for 50K.  I can decide if I want to sell ½ my order at 19.5, offer any part of my 100k somewhere in between, or stay put at 20.  Now let’s use your scenario, the market is 19.75 for 1 and 1 at 19.76, what good does that do me if I never see the 19.5 bid for 50K because you’re so called “market makers” are risking a whole 100 shares trying to get in between.  So nothing trades except 100 lots back and forth.  100 share scalper lots are not what discovers price, what discovers price is where the 50k or 100k lot trades! This is why regardless of what the 100 share market says, blocks continuously trade outside their market. 

    How can you try and justify fading quotes?  You can’t on one hand say that HFT is needed for price discovery, and on the other say its ok for them to fade once a REAL player enters the market.  Because then what your saying is that they have nothing to do with price discovery.   When the market moves up because of the real order to a price that it trades, apparently, we never needed them in the first place, correct?  

    I would agree that manipulation and rigged are loaded and incorrect terms based on selling books and creating a stir rather than reality.  Some would argue that moving the price of a stock to find liquidity would be manipulating the stock, whatever.

    If you honestly think that if all the market makers and scalpers would go bust, the market would suffer, you are greatly mistaken.  I don’t know why you think that stocks need to constantly trade.  If there was a CLOB and no fragmentation, the spreads would still be tight, but the size displayed would be greater.  There is no need for all the market makers and scalpers.  All you need to do is look back between the NYSE and NASDAQ.  The NYSE had tighter spreads with large displayed markets. NASDAQ was fragmented with wider spreads and smaller displayed size.  Seems pretty obvious where the problem lies. 

    The biggest execution costs are more a problem of leakage , which goes hand in hand with fragmentation. 

    Bottom line, the biggest problem is not HFT, scalpers or market makers.  They are all symptoms of the grand mistake and overreaction of the SEC and the Order Handling Rules, Regulation ATS, and Regulation NMS.  The problem is Market structure.  Fix that and everything else goes away.  Oh and sorry Lewis, the markets are not rigged!

  • Missing
    pchepucavage

    02 April 2014

    Can anyone tell us how these traders locate their shares before they short the market.especially their ETF shares?

  • Comment_tabb_-_larry_tabb_hi-res_wo
    ltabb

    02 April 2014

    kurt,

    thx. don't disagree. the structure isn't working well for anyone wanting to trade size. everything is so fragmented that you come into one venue and it begins to leak. that said, this is the market that the regulators designed. They need to change the rules if they want it to change.

  • Missing
    dmking

    02 April 2014

    John Harris makes the right and best arguments as to why the market is rigged.  Spoofing in order to find out what orders are out there and then, because of the speed or their systems/algos, front run them is an example.  charging $0.01 "transaction tax" would kill that in a hurry.  Any number of "taxless" solutions have also been proposed.

    The fact that in many months last year, Goldman et .al. did not have a single losing trade strains credulity.  The fact that the SEC has been MIA on this issue borders on negligence in the extreme.

    Yes, the markets ARE rigged when looked at in totality.  Anyone who does not believe that has either "drank the Kool-Aid" or is cherry picking facts to make their case.

  • Missing
    henry

    02 April 2014

    Larry,

    You make your money from an industry that is coming under increasing attack and whose days in its current form are numbered.  Your reaction speaks to your vested interest and perhaps your inability or unwillingness to acknowledge reality.

    What about coincidence in the timing of Virtu's IPO.  Vince clearly sees the game is up and he is cashing out.  He has perhaps left it too late to get the best possible price, ironically a classic error of judgement in trading.

    Ultimately trading is a zero sum game.  Currently Joe Public (the 99%) are the losers.  The bankers' gleaming spires are counterbalanced by growing poverty of the middle and lower classes.  That's not a world I wish to live in.  In a sane world all aspects of banking would revert to being a low margin utility rather than the current situation which amounts to absurdly crony wealth concentration.  All of us selling into this industry feed on the crumbs that fall from the table (in my case selling latency monitoring solutions to HFT participants).  We're all guilty of supporting, one way or another, activities that are immoral at best, and perhaps illegal even in the context of the very warped regulations in place these days.  Why don't we all face up to that truth and get on with the business of making the world a better place for all.

  • Missing
    kurtkujawa

    02 April 2014

    Henry,  

    Do you believe in black helicopters too?   Who do you think makes money in the market?  Do you really think it is only 1%? Whose money do you think mutual funds, pension funds etc… are representing? Where do you think they invest?  Sure sounds like to me, anything less than a fictitious utopian society would fall short of your grand illusion.  Unfortunately, that is not reality.  

  • Missing
    bmk2323

    02 April 2014

    Decent discussion - thanks.  While I don't agree that markets are rigged I do feel like any order I execute is being manipulated in an effort to make me pay more of receive less.  At some level that is capitalism, if I am demanding something why wouldn't someone else look to demand it first, limit its availability & then force me to pay more?  But in the context of the investment process it can be frustrating; its like deciding to buy a car & upon entry to the showroom you are asked to pay a fee simply to bid for the car.  The hard part should be the decision to buy, the easy part should be making the purchase.  Larry used this example:

    If you talk with the airlines and hotels, they say that “on balance” these pricing engines benefit both travelers and the airlines/hotels by enabling patient buyers to pay less and more urgent buyers to pay more. Liquidity providers in markets are using the exact same strategies to do the exact same function – gauge supply and demand and determine the value of their risk capital.

    Here is the issue, how many people using Expedia believe there are other bidders lingering that know you exist & stand ready to grab the room ahead of you simply b/c they know you want it?  That's crazy, right?  But not so crazy as it pertains to the capital markets, every time something goes live its information leakage.  Although I disagree that markets are rigged, I firmly agree that my order(s) is being watched & manipulated by other participants who exist simply to force me to pay more, in other words I have little confidence my orders are protected from HFT & given their mandate it seems to reason that the only reason they might be willing to make a market is b/c they think whatever happens next might make them a profit (I wonder what HFT marketing materials look like?!).  This isn't illegal, & to Larry's point shame on me for not having better technology to defend against it, but it certainly doesn't give me confidence that some players get more information than others & then use that information to force me to pay more or receive less. 

  • Missing
    kurtkujawa

    02 April 2014

    bmk2323  great analogy!

  • Missing
    abekohen

    02 April 2014

    Wow. When specialists ripped me off for 1/8s and 3/8s, I was upset. Now institutional investors are upset about losing 2 cents on their 10,000 shares! My orders were never protected against specialists and their buddy trades or NASDAQ traders enforcing 1/4 spreads. You want to pay .11 on your order? Be smart. Figure it out. The HFTs have done it. You can too. Use order types smartly. Don't show size. Design or buy a smart router. If you're willing to pay .13 and the market is .10-.11 try placing a .13 limit order. See what happens. It's not rocket science. It's just simple fear and greed.

  • Missing
    abekohen

    02 April 2014

    When Expedia shows me that 3 others are viewing the hotel, I open another tab and check the price at the hotel's own web site, and if it's the same or better, I buy on the hotel's web site. It's even easier to do that with a smart order router in stocks and options.

  • Missing
    kurtkujawa

    02 April 2014

    abekohen,

    big differance trading odd lots and trading "real" instiututional orders.  If you always paid the spread before that was your fault,  it was an auction market, there was no reason you had to pay the spread, figuire it out!

  • Missing
    abekohen

    02 April 2014

    kurtkujawa, I was doing arbitrage in size and my risk tolerance was different from a pension fund. I paid the spread on about 1/2 the orders (and bought at the bid on the other 1/2) because I locked in the profit. I had no problem figuring it out

  • Missing
    henry

    02 April 2014

    kurtkujawa - Funnily there used to be a black Chinook that flew along the Thames once a week here in London.  I have no objection to capital invested in funds appreciating.  I do object to the hidden taxes imposed by those who skim fractions of cents in the dollar off orders that flow through the market structure.  I do object to the so called market making firms making huge and suspiciously consistent profits without actually creating any real value.  In this case profit = legalized theft.

  • Missing
    kurtkujawa

    02 April 2014

    Henry,

    I too cannot stand those skimmers who hide under the false pre-tense of market makers, all you have to do is read my posts.  I apologize if i misinterpreted your comments.

  • Missing
    joegaw

    02 April 2014

     Larry, Excellent job explaining why the market is not rigged as claimed by Lewis in Flash Boys & how it actually works.  My hats off to you.

    Joe Gawronski, Rosenblatt Securities

  • Missing
    peroniriserva63

    03 April 2014

    No the market isn't rigged. It just doesn't work the way they hoped it would and the HFT firms have taken advantage of the situation. Unfortunately the regulators via RegNMS and Mifid have now opened the box and the lid can't be replaced. How can you now regulate to stop the HFT 'edge' , these are legitimate prop investors after all and no different from the Joe Schmoes on the street investing their retirement dollars or euros; so regulating against them is anti-competetive. The people they should go after are the multiple exchanges (that we don't need) who have perpetrated the problem by providing some investor over others with information they should never have had.  As for describing HFT as 'market makers' , I'm sorry but no HFT ever made me a price in $50mn on the touch and never will.

  • Comment_salarnuk
    sarnuk

    03 April 2014

    The constant focus on the word "rigged" makes one miss the true point of Flash Boys. A system is in place that includes large brokers and exchanges. This system inserts the maximum amount of unwanted intermediation - or "touching". Flash Boys is about the absurd conflicts, where the large brokers and exchanges for their own benefit try to insert their largest high speed short term customers where they are not wanted or needed. And Flash Boys is about how one firm has chosen to not wait for Washington to fix it, but instead crafted a for-profit model to address the suffocating unwanted touching. Anyone who has read the book knows that this is the true theme. It's not about HFT as it is about those enabling them to the detriment of investors.

    A not-so-funny aside: Who here has looked into the operating of the typical VWAP institutional algo? Their operation truly exemplifies the issues in Broken Markets and Flash Boys (PS we are not trying to drive any sales of Broken Markets; call if you want to discuss why). Todays's typical VWAP algos break the day down into time buckets, be they 1 minute or 5 minute, and have tremendous leeway within those time buckets on how to execute. They will try to bid and bid and bid for the rebate, when they should have just taken from the getgo. They are not random. They have "liquidity partners" to which they will send the child order - for a rebate. Within these time buckets... if the stock trades between 11 cents and 15 cents, do you think you are buying closer to 11 cents or 15 cents? Do you think the algos actions are predictable? Do you think the skimming tat goes no there is 1/10th of a cent? Please.

    Larry, no one likes the word "Rigged" in the industry - for many reasons. But the incessant talking-point focus on that word, by status quo enablers, is deflecting the real issues. Smart readers and observers of all this week's debating will not be deterred. At this stage of the game they will be looking at the right hand as well as the left hand in this three-card-monty debate. This is why IEX is already almost at BIDS's volume. This is why Invesco's Saurubh is creating tools that get rid of the touching - or mitigate it. The free market is crafting solutions - not with the help of the status quo.

    Rigged? Skimmed? Scalped? Who cares what the word is. Its broken, and as the free market addresses it as it is doing, some existing business models are in very real danger. That's good. Flash Boys is not about a word, its about a problem and a road to a solution.

  • Missing
    henry

    03 April 2014

    I agree it is all about semantics.  When we use the term "rigged" we assume our individual interpretation of right and wrong, legal and illegal, moral and immoral, beneficial to insiders only or mankind as a whole.  We each read the word "rigged" from the perspective of differing value systems.  Hence we all seem to disagree with each other that we probably do.  And having self righteous libertarians like me contributing probably doesn't help either !

  • Missing
    henry

    03 April 2014

    ... all seem to disagree with each other more than we probably do

  • Missing
    John Harris

    03 April 2014

    Let's not shy away from a perfectly-good, commonly-understood term for U.S. markets, just because people with an interest in preserving the rigged game for as long as possible wish to pretend otherwise. But for the avoidance of confusion and to put the arguments of the defenders of the indefensible in as much relief as possible, let's define the term: to rig a market is to create by force one or more of a set of artifices, structures, barriers, rules, laws, procedures, or features that advantage one group of market participants at the expense of another or else operate to deceive or otherwise create a false appearance that enables some participants to exploit others.

  • Missing
    derek

    03 April 2014

    Natural buyer meets natural seller. Intermediary/ market marker stimulates transaction by bringing naturals together and facilitating volume imbalance, then providing post trade stability by rule. This accomplishes true price discovery and has been available to ALL investors for almost 200 yrs. #256

  • Missing
    otctrader

    03 April 2014

    Do HFTs & Algos exploit weaknessess in technology infrastructure? Absolutely.  However, if you're asking me who's a bigger criminal, HFTs, Algos or the FOMC, I'd agrue the FOMC.  The FOMC has done more to destroy integrity in equity markets in the past 5 years than an HFT or Algo could do in the next 30.  The FOMC has deployed tactics to inflate the stock market, lie about future rate environment and even leaked information to media outlets in order to achieve one of their objectives - which has, and will continue to be an absolute failure - namely creating a wealth effect with hope of trickle down economics.  Who's a bigger criminal?  Ben Bernanke, who crafted QE which forcers savers to forego earning interest income and subsidize government borrowing costs? I didn't realize a new mandate of the FOMC was to institute new taxes.  Wall Street isn't the big, bad wolf - their product isn't a widgit. CSO's didn't create the financial crisis - reckless monetary policy under Ben Bernanke did.  The Dodd-Frank Act has done more to destroy jobs, reduce compensation and inject absurd rules into a market which had little, if anything to do with the financial crisis.  The problem isn't HFTs, Algos, credit default swaps or making money - the problem is an incompetent democratic administration, a Central Bank which seems inclined to deploy manchurian-esqe tactics on markets, and a lisping fool with the first name Barney, last name Frank who acts like a rock star when appearing on CNBC; a incompetent, politician who single handidly crafted legislation which destroyed invaluable markets while embedding an infrastructure which will create the next financial crisis.  Washington, D.C. wants to look for criminals? I would say have Janet Yellen, Ben Bernanke, Nancy Pelosi, Harry Reid, Eric Holder, Barak Obama, Barney Frank, Clinton, Schumer, Rangal & Geithner all look in the mirror and turn themselves into police.

  • Missing
    kurtkujawa

    03 April 2014

    here here, exept you forgot one, Greenspan and his effort to controll the market with coments and interest rates.  He started the whole central bank manipulation of the stock market.

  • Missing
    kosterix

    03 April 2014

    as soon as you sell you'll get scalped by hft, the market is rigged insofar as the market organisation is a whore to hft clients.

  • Missing
    hyoung

    03 April 2014

    ... Nixon for closing the gold window, Kissinger for creating the petro-dollar policy that is in the early stages of unravelling ...

  • Anon_avatar
    Anonymous

    03 April 2014

    Nonsense, Larry. You miss the point.. The idea that the profits of HFT traders are "going back to investors" somehow is absurd. Lower commnissions are the result of competition and the fact that thye SEC and Congress did away with the fixed commission scheme long ago, way before HFT. Narrower spreads are a function of having destroyed the fractional pricing custom, albheit at some cost:  the collection points for meaningful price changes (though those were long gone even under the fracional system due to the disappearence of what twelve cents was worth in the '30s compared to today -- a remakable fact no one seems to take into account). What did we have before? Specialists on exchanges that, if major, had time and place trading advantages. (Floor traders were allowed to slip through the net  by the  SEC even though Congress so clearly meant to get rid of them -- the first appearence opf the bogus "we provide liquidity" BS that now has infected everything .)  But we knew  who the specialists were. They had certain obligations, which at least sometimes they fulfilled, and we tried, with mixed success, to regulate the crap out of them.  Now we have in their place HFT traders with no obliogations, no regulation, and no responsibility to anyone or anything except the bottom line. What did we get out of all this? Smaller quote spreads (no particular thanks to HFT traders, though their phantom bids and offers and phony orders, all cancelled before anyone can hit or take them);  lowier commissions (no thanks at all to HFT traders); vastly inflated, meaningless volume (sucking in the exhanges who feed off volume for fees as well as fees for advanced market depth and incoming order information services to HFT-types through co-location and other means);  markets riddled by eight thousand, constantly changing payment for order flow arrangements ( including payment for HFT flow); "price improvement" by fractions of a penny (destroying any hope of a legitmate auction at any particular moment or the idea the a broker can and does get best execution and enabling HFT types to jump ahead successfully every time -- thanks, Reg NMS: you got to lit bids and offers, but nothing else);  order internalization (feeding HFT internally, with the customer never winning since the dealer side of the trade knows what's immediately ahead through other means as to future price movements).  And a host of deceptive practices from HFT traders affecting prices and market appearence, orderliness, and fairness.  Is it really so obvious that the term "rigged" is not warranted?  What does the public think? Even before some of this was made clear by Lewis and TV shows, the vote was in: the public walked out..  Now more will. Good for America? I don't think so. 

  • Missing
    JAFO

    03 April 2014

    When the argument is largely over the banks', exchanges', and HFTs' behavior instead of the regulators unintended consequences and subsequent inaction (i.e., SEC's RegNMS) ... we know the fix is in and the discussion has been rigged more than the market.  Market participants and trading venues dance to the tune of the regulators, so if one doesn't like the music it's the regulators they should demand action from.  

    How does the house Madoff get 6x the budget and people of the CFTC, whereas the latter gets nothing but grief for actually implementing US law (DFA) while the former kicks the can on making most of those rules (DFA) into 2017... what's up w/that?!  Talk about latency.

  • Missing
    abekohen

    03 April 2014

    kurtkujawa, Off Topic: Nowadays when I see someone write "here, here," I say : where? where? The actual saying is "Hear! Hear." I know this because I made the same mistake in the past until I realized that the source for the saying was the Hebrew Bible (Samuel II 20:16). I also used to write "walla" when I meant "voila" until I got flamed in a usenet discussion about 27 years ago. C'est la vie.

  • Comment_tabb_-_larry_tabb_hi-res_wo
    ltabb

    03 April 2014

    Anon - where to start? So if commissions are lower, spreads are narrower, exchanges are taking less, and HFTs / intermediaries are taking less - then how are those profits not going back to investors.

    We have also eliminated specialist / market maker advantages and their economics. But that said do we want to give market makers and specialist an information advantage? Not sure that worked either? As for market makers and specialists having commitments - how did that work in '87? That was the 80s flash crash. Actually wasn't that the start of electronic trading with SOES?

    Now, do we want to eliminate all intermediaries and only quote stocks when a "natural buyer/seller" want to trade? But what about illiquid stocks? What about stocks where there aren't many natural buyers and sellers - do we just close down shop for those stocks. shut down those companies? what about all of the folks? Do you want to turn the less liquid products into the corporate bond market / muni market where the average bond trades 3 or 4 times a year? Not sure that is good either

    Also if you don't want intermediaries and only want naturals -- what is a natural buyer / seller? what should their time horizon be?

    you don't want sub-second time horizons? ok so we have to hold stocks for more than a few seconds. But what about minutes? hours? should we ban day traders? how about short term hedge funds how have a few hours to days/weeks time horizon? Aren't they blood suckers from the guys who have months to years time horizons? Where do you draw the line. I am glad you know where this line should be. Last I heard we had free markets?

    Also you talk about meaningless volume - but many times the meaningless flow is only one side, the other side is a long only or a retail investor - so what is the other side supposed to do? I guess wait for an other natural investor - but what if the natural investor doesn't want to put out a limit order? they only want to trade using someone elses' quote, in that many investors don't want to leak any info so they don't use too many limits.

    In addition there are 57 markets (dark and lit) what if one side is in venue 1 and the other is in venue 35? and dark - how does one side find the other? isn't finding the other side worth something?

    As for auctions - the auction market has been dead for a while. A few folks are trying to bring it back. maybe it will work but in the world of free choice, stock auctions have not won over continuous markets - anywhere. I don't know of a single auction market that has won over a continuous market where where the two were head to head.

    As for price improvement - I don't know about you but I would always like money in my pocket rather than the broker, or the other side? Wouldn't you? Even if it is .001 or is t$1.00 on 100 shares or whatever. At least its my dollar and not someone else's.

    As for all of the complexity, and the leakage, and all of the tech and all of the other stuff - you are absolutely right. This market isn't great. There are tons of problems. That said - when I buy stock I get the price that I see. its cheap to trade, and the stock winds up in custody account.

    In my book, I don't call that a rigged market - that is unless you are a day trader and then you are out of business.

  • Missing
    John Harris

    03 April 2014

    Wow. This Lewis article really touched a nerve. Most people know the stock market is rigged. The remainder must fall into two camps: good people suffering from cognitive dissonance and fundamentally amoral people who are happy to profit from a rigged game.

    For those afflicted with cognitive dissonance, if the market isn't rigged, is it free? Is that what you think? And if you think it's neither free nor rigged, then how would you describe it?

    When the SEC banned short positions in a select group of financial stocks in 2008, if that wasn't rigging the market, what was it? And hasn't that act tarnished the market to this day, creating an upward bias in prices?

    When the Fed and the SEC allowed DTCC's FICC division to violate its own rules and absorb Lehman's positions rather than allocating losses first to the clearing fund and then to members in accordance with their trading positions against Lehman, if that wasn't rigging the market, what was it?

    When the NYSE allows an order type with SEC approval that provides for automatic cancellation in the event an older order is executed ahead, does that order type serve any purpose other than creating a false appearance of depth? And if that isn't rigging the market, what is it?

    And these are but a few in a long line of comparable events that don't even touch on structural riggings imposed by force by that captured prostitute of a "regulator" known as the SEC or the biggest scoundrel of them all, the cartel-controlled Fed.

    Fortunately, more and more people are learning that the market is a cesspool and staying as far away from the stench as they can.

    Fortunately, too, there is still room to innovate and one way or another, no matter how long it may take, entrepreneurs will eventually fix this problem.

  • Missing
    anonymole

    04 April 2014

    The inherent problem with capitalism is what I call the Inner Circle Syndrome.

    Take a resource, it could be a gold mine, a wheat field, an exclusive piece of real estate, a market exchange or, in a recent bizarre SCOTUS twist, a politician, but regardless what this resource is it has a set amount of “space”, if you will, around it to allow interaction. With a geo-physical entity this space doesn't necessarily have to be actual spacial space, it can be more like financial access space; only a certain number of people can access such a resource and therefore only those with the biggest bank accounts are generally granted this access. Let’s look at two resources that better illustrate this inner circle syndrome.

    A person, any person, has only so much room around them, whether physical or emotional or sociological. We can only deal with so many people at a time. Once we've saturated our inner circle we just can’t take on any additional friends, associates or compatriots. Now imagine if access to this inner circle, this circle of yours or mine closest associates, was gated by money. The more you paid me the higher the probability that I would let you in and kick someone else, someone who paid me less, out of my inner circle, an odd proposition I'll admit.

    Now imagine you are a US Congressperson... now this strange application of money to control inner circle access - doesn't sound so strange.

    [And with the recent (April 2014) ruling by the Supreme Court such financial gating is even more apropos.]

    With little stretch to the imagination one can easily see how a Congress member can eventually have their inner circle primarily populated by the highest bidders.

    Other financially gated inner circles are those around stock market exchanges. These are, to a large extent, actual physical inner circles; there is only so much physical space around the building that hosts an exchange. And so, as the inner circle syndrome goes, this ring around an exchange is populated by those brokers, funds, and banks that can pay the highest rents. It’s these inner circle exchange participants who then benefit from the fastest access to market data. This phenomena exists; is part of the various exchanges’ and the brokers’ plans.

    Capitalism supports, condones even, this eventuality, those with the most money get access to limited resources. 

    There is only so much space around an entity. Whether that space is actual square footage, cubic area, social or network connections, or just a fixed list of party invitations, school slot vacancy or any of hundreds of other limited access resources the rule still applies; capitalism will see that those with the greatest wealth will always gain the inner circle. This is the inherent issue with capitalism. Eventually all systems where success is measured by wealth evolve into a plutocracy. 

    The Inner Circle Syndrome guarantees it.

  • Missing
    henry

    04 April 2014

    anonymole - What a perfect explanation of the fundamental problem with the singularization or centralization of any resource.  A corollary is that decentralization fixes all this.  This in turn moves the discussion onto the decentralisation facilitated by the Bitcoin "blockchain" and how similar principles in the future will facilitate completely decentralised distributed stock exchanges.

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    vddb95

    07 April 2014

    Is decentralized = unregulated ? Because then those with the most ressources available will have an ever larger edge. On the other hand Decentralized as in, more competition amongst exchanges led to the current situation. In the end, it looks more like a regulation issue. I mean those who complain can just set up their own lobbying organization, the media will love giving them a tribune - at least half of it will.

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    vddb95

    07 April 2014

    Similar point in FT's Alphaville blog:

    http://ftalphaville.ft.com/2014/04/04/1820732/come-with-me-if-you-want-to-trade/?

    "Markets, at the end of the day, have always benefited those with information advantage. HFT traders are disliked precisely because they’re better and smarter at fishing out that sort of knowledge than any predecessors to date.

    Resistance comes from those who object to having their poker hands spied on, especially if their strategies are based on bluffing, lies or the reading of others.

    ... ultimately, HFT generally means the unpicking of privileged information from the market using perfectly legal techniques. Yes, at first the information gained is directed to the exclusive advantage of the entity doing the unpicking. But eventually the practice circulates that information more widely and in a way that provides transparency to areas which were previously kept very dark..."

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    crammond1964

    07 April 2014

    over the years I have crusaded about manipulation and bad governance /regulation ; and especially how HFT alwaysbeen given the benefit of the doubt . Sorry gents its now time  for action and only option here is for ZERO TOLERANCE ; that will quickly remedy a lot of faults . However the main solution would be a FTT  on over cancelled orders which would satisfy our governments and rid us of ghost orders and clogged lines of trading . Two options that can be quckly inforced and relatively cheap to imply . Open outcry markets experimented on many different methods to make trading better and support the retail trader who provide open interest ; screen trading must also never forget this .

     

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    VanishingMediator

    23 April 2014

    HFT market makers collude using game theory and/or test orders to capture money from options traders... You yourself said that derivatives are where a lot of the trading is going on.  Grandma's broker has to hedge.  They drop liquidity to set the price to whatever they want.  Example from today:  FB dropped enormously right before earnings, everyone knew they were going to do good, they tripple their earnings, and they will pin the price lower for a while until all the call owners exit positions.  They don't need money to do it, they just need to know no other HFT market maker is going to take advantage.

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    anonymole

    23 April 2014

    Nobody likes middlemen. I think that's the bottom line. Farmer's markets are wildly popular as you can avoid all the grifters in between the producer and the consumer. I can give my dollars straight to to the farmer who grew those delicious tomatoes. Or on Kickstarter, I can invest right with the people who will be designing and building those cool new gadgets. Or Tesla, I can buy a car right from the manufacturer. Yeah, yeah, I know about the "market" economy but still, people don't like middlemen. And traders all end up being middlemen. Short term speculators bent on scratching out a portion of the money flowing from divestors to investors.

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    kurtkujawa

    23 April 2014

    Anonymole, it's not so much middlemen, some are needed, a good sales trader that has good relationships in the street and knows how to put together a large block of stock with multiple players is invaluable. What nobody wants is a UNINVITED middleman. The problem with HFT and the predatory strategies they use hiding behind the t I between tguise of being a market maker is the problem. No body has a problem paying a middleman for doing a service that they are asked to do, nor does anyone have a problem paying a true market maker to take down a block of stock. It's when the "scummers" as I like to call them, try and get I between trades so THEY can make a buck without being invited to the party.

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    abekohen

    24 April 2014

    kurtkujawa, wouldn't it be great if you could buy AAPL for around 525 (yesterday's close), instead of 567 now. Oh, those pesky speculators and "UNIVITED" other participants. 

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    abekohen

    24 April 2014

    kurtkujawa, wouldn't it be great if you could buy AAPL for around 525 (yesterday's close), instead of 567 now. Oh, those pesky speculators and "UNIVITED" other participants. 

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    kurtkujawa

    24 April 2014

    if someone wants to buy in front of earnings or for what ever reason, so be it, thats not what im talking about.  I am refering to preditory trading stratagies that do nothing exept try and figure out if there is a institutional order in the market place and tarde against it and claim to be a market maker and adding liquidity.  Unless i ask for you to get in the middle and try and broker something or commit capital, stay the F%^#K out of my business!

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    abekohen

    24 April 2014

    But the SEC does not agree that it's YOUR business, f%$&ing or otherwise. It's a market open to all participants. When you come in with an order to buy 1 million shares of AAPL, demand has suddenly gone up, and the dynamic market responds appropriately. But I guess that you now trade exclusively on IEX, so you no longer have this problem with "UNINVITED" participants.

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    anonymole

    24 April 2014

    Technology is replacing middlemen. If the trend continues then the likes of all market maker/dealers will get squeezed out of existence. If today's trader/speculator/liquidity provider can only take out a half a cent (or less) in friction payment when a decade ago they could get a nickel. And a decade before that they could get an eighth... I'd say in ten more years that they won't or can't exist. Technologically advanced markets will have pinched them out of existence. Maybe all we need to do is wait. By 2020 I'll be able to buy or sell directly to those who want to sell or buy from me -- investor to investor -- no middlemen at all.

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    abekohen

    24 April 2014

    I'll be happy if I can buy my wine and single-malt Scotch without a middleman. I'll drink to that.

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    kurtkujawa

    24 April 2014

    IEX still allows HFT, and by slowing things down a little, does little to stop preditory algo strategies.  So i just try to stay upstairs as much as possible.  I find that the more I stay away from the markets the better off i am.  It is unfortunate that because of the high amount of parasites in the markets, true natural liquidity is leaving.  Causing more volatility and thinner markets.  Have fun trading against eachother when there are no orders to shoot against.

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    kurtkujawa

    24 April 2014

    those scenarios can not come soon enough! I to will drink to that!

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