Mysterious Algorithm Was 4% of Trading Activity Last Week 617
concealment sends this excerpt from CNBC:
"A single mysterious computer program that placed orders — and then subsequently canceled them — made up 4 percent of all quote traffic in the U.S. stock market last week, according to the top tracker of high-frequency trading activity. The motive of the algorithm is still unclear. The program placed orders in 25-millisecond bursts involving about 500 stocks, according to Nanex, a market data firm. The algorithm never executed a single trade, and it abruptly ended at about 10:30 a.m. ET Friday."
Truth or dare... (Score:5, Funny)
The game was interrupted when the boss arrived (what he called "first thing in the morning").
Re:Truth or dare... (Score:4, Interesting)
The game was interrupted when the boss arrived (what he called "first thing in the morning").
So it is possible to create a large volume of "trades" without actually ever buying or selling anything? I am surprised that isn't gamed on regular basis - shaking up the stock market with minimal investment
Something similar to penny stock spiking by spam...
Re:Truth or dare... (Score:5, Interesting)
Try the article. This kind of gaming the system _does_ happen all the time. It's just this event seemed particularly large.
Re:Truth or dare... (Score:5, Interesting)
Try the article. This kind of gaming the system _does_ happen all the time. It's just this event seemed particularly large.
Eh, no one reads the TFA -- I come here for the comments :)
Of all the stock market defenders hyping the vital need for liquidity in the market, not one had ever mentioned that a significant fraction of that liquidity could be phantom trades.
Does the article mention why the "fake" traders aren't fined and permanently banned from stock market? Stock market is not an anonymous place.
Re:Truth or dare... (Score:5, Insightful)
It is allowed. They operate within the rules.
Considering it's basically a license to print money, nobody is particularly concerned with "fixing" the problem. That's why you see all this astroturfing bullshit about how good HFT is -- it is all they really have to delay public opinion turning against them.
Re: (Score:3, Informative)
If anything, it's a transfer from the other players in the market, not "printing" money, so how are they not concerned about it? Most market players aren't HFTs.
Re:Truth or dare... (Score:5, Insightful)
No, HFTs certainly skim off the top of genuine traders and investors. If they were just transferring money from each other, the practice would never have become so pervasive.
They do it by spending millions on computers, programmers, interconnects, and physical proximity and connectivity to exchanges. This gives them a fundamental and practically (for a small time player) unbeatable advantage over other users of the system, which is utterly against the spirit of a free market.
What they are doing is consuming the service to the detriment of other users, and extracting a tax with their unfair advantage over other users, while contributing exactly nothing back.
Re:Truth or dare... (Score:5, Insightful)
HFTs certainly skim off the top of genuine traders and investors
Yes, those are the other players in the market that I mentioned. "Players" is the people involved, not just HFTs.
What they are doing is consuming the service to the detriment of other users, and extracting a tax with their unfair advantage over other users, while contributing exactly nothing back.
Which is why I said the other players (the non-HT traders) have an incentive to end that behavior, which is why it doesn't make sense that "nobody is particularly concerned with "fixing" the problem". They should be.
Re: (Score:3)
"nobody with the power to do anything about it is particularly concerned with "fixing" the problem". They should be.
FTFY
Re:Truth or dare... (Score:4, Informative)
Problem is that "players" aren't actually the main deciding factor in how trade rules are made. They are an important one, but not major. Major factors are interests of exchanges themselves who benefit from HFT financially and major traders who run HFTs.
This leaves the small and medium traders who are basically exploited.
Re:Truth or dare... (Score:5, Interesting)
Nobody has made a compelling case that HFT has any real net impact on retail investors or anyone making an IPO or issuance. Look to my other post in this discussion but by and large HFT is just Wall Street Banks pirating from each other.
Bullshit. They skim the difference between what someone would be prepared to sell for and what someone is prepared to pay (ie an investor may be prepared to pay 1.25 for a share, but you are offering to sell for 1.20 -- instead of the investor paying only 1.20, the HFT jumps in, buys for 1.20 and sells for 1.25, pocketing the difference). This is not just HFTs screwing each other, it screws the normal investor (which includes, you know, funds investing your pension money).
The liquidity argument aside, the HFT guys are the ones who drove the technology that has enable you and I to trade online for low fixed prices, rather than the bad old days where you had to find a broker who would bother with you in the first place and then put up with his 3+% commission.
More bullshit (seriously, do you have a cattle farm?). You correctly describe the bad old days, but those ended in the 1990s, and are dealt with by having competition between brokers/online quote platforms. HFT sucks up the capacity of the trading systems to be able to deal with the frequency of trade, to absolutely no-one's benefit but their own (or do you really think a retail/corporate investor cares whether their trade executes a microsecond faster -- they care that they are not getting screwed by the marketplace).
And to answer the "why don't they put a stop to this" question -- the stock exchanges like having large number of quotes, as they charge for trades, so the more the better. They are acting in the interests of their own shareholders, to make money, and not in the interests of the participants of the market (who want a fair market).
Re:Truth or dare... (Score:5, Insightful)
The main problem, not with high frequency trading per se, but with all the fake bids that are put into the system and then cancelled, is that it prevents proper price discovery in the market, because you can't tell who the real willing buyers and willing sellers are from all the noise.
Re:Truth or dare... (Score:5, Insightful)
Re:Truth or dare... (Score:5, Interesting)
Nobody has made a compelling case that HFT has any real net impact on retail investors or anyone making an IPO or issuance.
Maybe nobody you've read. There have been plenty of articles and papers walking even the dumbest person through the negative side effects of high frequency trading.
As for IPOs, someone created a visualization of trades for the first day of Facebook's IPO and points out where the HFTs show up and
start arbitraging enormous volumes of stock right around the $38 price floor that was being defended by Morgan Stanley (lead underwriter).
Here is the video: https://www.youtube.com/watch?v=KrkH_WQxxEA [youtube.com]
Look to my other post in this discussion [...]
As the HFTs have shown us, high volume != right.
Re:Truth or dare... (Score:5, Insightful)
In the "bad old days," I could track an investment on a day to day basis without much worry of what has happened in the last 5 minutes. In other words, if I bought a mutual fund, it wouldn't go up, or down, by much more than a fraction of a percent between the time I placed the order and when it executed.
Since the advent of widespread HFT, even well diversified funds can fluctuate 5% per day, get unlucky on entry and exit and you've lost 2 years of typical gains - similarly, get lucky on entry and exit and you've got an extra 10% in your pocket. We've already got Las Vegas if we want to gamble, I'm looking for a little more predictability out of Wall Street, instead we are getting less and less.
Re:Truth or dare... (Score:5, Insightful)
How does the HFT magically know what you were willing to pay? It's really hard to have a reasoned debate when people are attributing ridiculous feats to HFT.
Imagine two genuine traders, GT1 and GT2. There's an item that GT1 wants to sell and GT2 wants to buy. GT1 is prepared to sell for as little as 21.10, and GT2 is prepared to pay up to 21.20. Past trades have been at 21.17, so GT2 offers 21.15, and the sale occurs. Now add a high frequency trader, HFT.
Rinse and repeat to find the maximum that GT2 is prepared to pay. Buy from GT1 at their minimum price, and/or sell to GT2 at their maximum, pocket the difference. GT1 has made less than they would have without high frequency trading, and GT2 has spent more that they would have. And GT1 and GT2 are probably your pension funds.
Re:Truth or dare... (Score:5, Insightful)
Nope. Or more specifically, HFT guys get a big discount. That's why you get so much screaming and kicking over "transaction tax" proposed in EU right now. It wouldn't do anything meaningful to actual investors, but it would kill HFT because its profits are based on huge volume of trades executed with razor thin margins as they are skimming the top of the market. And with it, the profits of major players who run their own HFTs as well as profits of stock markets would go down, while reliability of market would go back to the levels 1990s when most diversified portfolios didn't really fluctuate much on daily basis as they do now.
Until major financial players are banned from lobbying politicians as effectively as they can do today and stock market rules stay lax, HFT will continue to destabilize the stock market. That is the reality of today.
Re:Truth or dare... (Score:5, Insightful)
As far I know in most cases they cannot cancel fast enough, so one of the key areas of research in HFT algorithms is how to determine the lowest sell/highest buy rate of the "genuine traders" in the shortest time frame with lowest possible buys at too high rates. So you get "buy a small amount of stock at price x, buy at slightly less then x, even lesser then that" until you hit the "no sale" at which point you buy everything at lowest price all while doing the same for the buyer in the opposite direction.
That is why speed matters. This needs to be done before GT1 and GT2 find each other and execute the trade as it would have happened without HFT. Even fractions of milliseconds matter. And that is why HFT adds zero liquidity to the market - HFT algorithms will not make trades that don't have a profitable buyer and a seller found. They make trades before buyer and seller find each other.
Re:Truth or dare... (Score:5, Insightful)
it's like saying that fouls are in spirit of sports, link farms are in spirit of search engines and bombing the shit out of brown people is in spirit of paying taxes to fund the state. Using the properties of the system outside the explicit rules of the game may be the rational thing to do, but is never in spirit of the game.
Re:Truth or dare... (Score:5, Funny)
Re:Truth or dare... (Score:5, Insightful)
I've read about 12 studies now [...] they all conclude the HFT is overall beneficial to the market as a whole.
That's funny. I've read studies which say otherwise, and I can even cite them [nanex.net].
How High Frequency Trading Harms Even Long Term Investors
- Investors are warned against using market orders and stops because HFT can and will suddenly withdraw their quotes. This alone should tell you something is rotten at the core.
- Some universities, such as Georgetown, can no longer afford to buy TAQ market data for their professors or students to analyze. This will lead to less academic oversight, guidance and involvement, as well as students who are less prepared for careers on Wall Street. Data has become prohibitively expensive because of all the excessive quotes generated by HFT.
- Quote spreads are much wider and less stable during market open, which causes many micro flash crashes in individual stocks.
- Misleading price quotes interferes with price discovery, one of the core functions of a stock exchange.
- Mis-allocation of resources, both human and technological.
- If left unchecked by regulators, traders who want to process quotes, will soon need super-computers, 10 gigabit connections and their own engineering staff to have the same basic level of trading information they needed in 2006.
- HFT generated so much Quote Spam in the flash crash, that it took 5 months for the SEC to assemble the data.
- During the flash crash, excessive quotes from HFTs overloaded quote data feeds, causing severe delays: stock quotes from some exchanges were behind over 30 seconds during the height of the flash crash.
But I'm sure these are all good things, and help keep the markets healthy. I must just misunderstand how awesome they are.
Re:Truth or dare... (Score:4, Insightful)
From what I understand, such practices are completely in the spirit of the free market. These traders have created and exploited an advantage for profit. There is not altruistic component of capitalism that demands "contributing something back."
You fail to see the bigger picture. The only reason we have a "free capitalist market" or a "stock market" at all is precisely because the population thinks these are useful items to have. The population has the vote, they elect lawmakers to allow the useful and disallow what is not in their interest. And if HFT becomes a problem, it might very well get outlawed. Or the stock exchanges might avoid regulation by setting a frequency cap so that geographical location don't matter. A few ms for in-city trading, or a few 100ms for nationvide trade.
The market is neither free nor is the playing field level - unless there is some regulation. Without law, the biggest gun wins.
Re:Truth or dare... (Score:5, Insightful)
From what I understand, such practices are completely in the spirit of the free market. These traders have created and exploited an advantage for profit. There is not altruistic component of capitalism that demands "contributing something back."
Following your logic, a mugger is good example of a free market capitalist - he exploits the advantage he has over other people (big posture, a knife in his pocket) for profit, whilst contributing nothing back. You're right in saying that capitalism is not about altruism, but it's also not about exploiting the weaknesses of the system, and certainly isn't about using that advantage to curtail the efforts of others.
Re: (Score:3, Insightful)
It is transfer but its really only transfer between Wall Street Entities. There is a great deal of hand ringing about HFT but I don't see much evidence it does anything to your typical retail investor.
Look if your timescales are weeks,months,years and likely even intra-day its hard for me to see how HFT harms you. In the 2500ms it takes your brain to click the mouse, your online broker to process your web post and execute your transaction the HFT machines may have moved the share price up or down a few pe
Re:Truth or dare... (Score:5, Insightful)
Finally what if you hold positions in a "flash crash" or "melt up" depending on what your position is and if you have any cash on hand it might be an INCREDIBLE opportunity for you. You might have a shot out buying or selling at 1000 times the margin you otherwise hoped to get.
And then they roll back the day's trading, because we can't have little old you profiting from the cascading algorithmic panic of big money.
Re: (Score:3)
while the affair between the wall street big boys it's nothing more than a zero-sum game, the ball they play with has to be extracted from the unwashed masses trying to invest or saving for their retirement first. The profits GS et consortes reap in exchange for a bit more liquidity are ridiculous.
Re:Truth or dare... (Score:5, Informative)
I've had illegal manipulation of a stock I was shorting result in a margin call against my account. There was no opportunity to "wait a day" for the mess to subside; part of my position was closed at the manipulated price by my broker. I've also had a stop loss order triggered by someone pushing the price around with that as its intended effect, a few seconds before the close proceeding a positive earnings announcement.
The idea that an individual investor will survive a crash long enough for the volatility to end without damage is a very optimistic one. Position entry isn't the problem; yes, you use a limit orders, etc. The problems are on the exit side. Forced closing before the return to normal conditions and making safety stop loss orders impossible to use that just two of the many ways individual investors can get hammered by temporary price manipulation.
Re:Truth or dare... (Score:5, Interesting)
The bidding on the stock I was trading was moved up to benefit a company executive who was selling a block that day. Good luck getting the SEC to cancel trades due to simple forms of insider manipulation on that small of a scale. They're massively understaffed for that, and ineffective at most jobs they claim to be doing. Eventually the stock price went to 0 because this sort of crap put the company out of business, so in the end it all worked out fine.
I don't think executing a simple short transaction on a single stock that seems headed down is beyond the "typical retail investor". It's not like I had some crazy naked short or an options position here. Knowing how to use a stop loss order is not exactly trading rocket science either. This is all "Trading for Dummies" territory.
Re:Truth or dare... (Score:4, Insightful)
If you open a trading position that goes heavily against you, you can end up trading on margin even if you didn't start there. Take the simple example where someone trades their whole account with standard long positions. If the average price on those drops 25% before the close one day, via something like a flash crash, the next day they'll be on margin relative to the new balance in their account. Margin calls can happen just as easily from bad trading results as they can from using margin for extra leverage.
The claim I object to here is that people will always be able to sit through a crash until the usual regression to the mean afterward. That's true in a lot of cases, but it only takes one bad case to wipe someone out. The math behind Cumulative Risk of Ruin [bj21.com] is no fun.
Re:Truth or dare... (Score:4, Informative)
Here's a proper worked out example, I was sloppy before. The easiest way to get a margin call without trading on margin is to run into the minimum requirements to maintain an account. Open an account at Interactive Brokers (using them simply because that's where my last margin call came from) using $2500. Buy 25 shares of a stock at $100/share. Maintenance margin [interactivebrokers.com] is $2000 on this position, you have slightly under $2500 (transaction fees) to cover it.
There's a crash in that stock and the price closes at $75/share one day. Your account now is worth $1875, but the maintenance margin is still $2000. The broker can now liquidate some of that position at $75/share via margin call unless you deposit more money. Let's say you don't respond to that in time. Even if the recovers to its original price of $100 per share, your account won't be back to $2500. You'll have sold some shares at the bottom instead.
This example is admittedly a bit forced, but even the simplest long position can hit this sort of margin call in the face of a large enough artificial price crash. The maintenance minimums can change on you after a transaction is made too. Normally they only drop from what it takes to execute a trade in the first place, but there are edge cases that can kill you. Let's say you open an account with $20,000 and make $10,000 of long trades. One day you make some new trades just as the market turns sour, so you immediately sell them. Make too many trades in a short period, and you can suddenly be a Pattern day trader [wikipedia.org]. Your minimum account number goes up to $25,000, and you can face a margin call potentially forcing a bad liquidation trade as part of that, again without having ever traded on margin directly. I did that once, too, and it's no fun to resolve. That rule you can avoid if you open a strictly cash account, without even the possibility of margin.
Re:Truth or dare... (Score:5, Insightful)
It's undisputed at this point that HFT played a significant role in the 2010 Flash Crash [wikipedia.org]. Even though the intention is not to move prices, accelerating price moves can be an unintended side-effect of them at play, via things like adding to market congestion. It won't take many of these "4% of trading activity" bots to seize things up so that prices could go bonkers. There are plenty of bots executing real trades based on market activity around to serve as the other side of a bad feedback loop.
I was using a personal example to demonstrate how short-term crashes can result in an unrecoverable bad situation even if prices come back later. But the source of the price crash doesn't have to be identical to mine to run into the same class of problem.
Re:Truth or dare... (Score:4, Interesting)
The fact that this horseshit goes on, is one reason I'll never invest in the stock market. I'd just as soon take my paycheck and sign it over to a Las Vegas casino.
So, that's an influence.
Re:Truth or dare... (Score:5, Informative)
Indeed.
STOCK PRICES SHOULD NOT CHANGE FROM DAY TO DAY.
The entire damn premise of the stock market is _supposed_ to be 'I would like to own a piece of this company because I think this company will turn a profit and pay me a dividend'. People should buy or sell stock based on how that. This means that stock prices should be how much people believe it's quarterly reports, combined obvious market changers like a plant fire or a new CEO or a competitor coming out with a better product or something, which might rationally cause you to reevaluate that.
There is absolutely no reason for anyone to buy stock and sell it in less than a month.
Instead, we have a goddamn casino. A _literal_ casino that has no bearing at all on how well companies actually do, because something like half the investors aren't there to try to get profit from companies, but to get profit from the reselling the stocks!
If I could magically restructure the way this works, I would set it up where all trades get executed at 12:01 Sunday morning. And dividends go out immediately after that for the previous week's owners. (Not that there will always be dividends, but if they exist, they should be evenly divided between weeks instead of them being saved up for each month or quarter or whatever.)
That's it. A weekly cycle. Buy it Sunday morning, wait a week, check Saturday evening what the dividends will be (Technically you only have six and a half days information, but that should be enough.), decide to keep it or not, decide who else you think will make money, and repeat. The question should be 'Do I think this company will make money next week?'.
Yes, obviously stock prices will change also, but that should not be the goal of anyone to really make money that way. And handing out profits as dividends instead of holding on to them will stop the constant inflation of stock prices.
Stock needs to return to meaning 'owning part of a corporation'.
Re: (Score:3)
If anything, it's a transfer from the other players in the market, not "printing" money, so how are they not concerned about it? Most market players aren't HFTs.
As long as it inflates share prices, it's just as effective as printing money. When they push it too hard and the bubble bursts, it's like burning money with H-bombs.
Liquidity (Score:5, Informative)
If it's advantageous to sell, you sell and make money, there's your liquidity
That is most definitely not liquidity. Just because you want to sell something doesn't mean there is a buyer. Or it might mean there is a buyer but they want a big premium to do the deal. Liquidity is a measure of the ease with which buyers and sellers can find each other and agree to a price. Our recent financial crisis was in large part a crisis of liquidity. Big banks needed to be able to borrow money and everyone was afraid of lending to someone who might be insolvent so there was literally nowhere to borrow from. It's not just an all or nothing proposition either. If a stock is thinly traded, the spreads are going to be huge and it will be really expensive to buy that stock. If it is difficult to find sellers it likely will be difficult to find future buyers as well. The more trading that occurs in a stock, the narrower the bid/ask spreads because it is easier (and less expensive) for buyers and sellers to find each other. More trading = more liquitity = lower transaction costs.
Re:Liquidity (Score:4, Insightful)
Re:Truth or dare... (Score:5, Informative)
Something similar to penny stock spiking by spam...
Continued unregulated algorithmic trading can have only two effects: 1) someone will get rich at everyone else's expense; 2) the NYSE will become the penny stock market.
Re: (Score:3, Insightful)
Re:Truth or dare... (Score:4, Interesting)
Stock trading is a zero sum game, in which two people exchange goods of notionally identical value.
The stock market is not a zero sum game, but a proxy for most of the economic activity on the planet. ie: put $100 of capital into a company today, let them add some labor, create real goods and services that didn't exist yesterday, and the company can give you back your capital and a share of that newly created product. The apparent failure to understand that fundamental nature of the stock market is why HFT is so despised by investors.
Re:Truth or dare... (Score:5, Interesting)
If you look at the investment career of the plutocratic candidate Romney you can see how far this transformation has already gone. A lot of his $250 Billion (or more) was acquired (i.e. stolen) from Bane investors. The deals were always structured so that Bain insiders would come out ahead, no matter what the outcome: win, loose or draw.
What is called capitalism in the West is close to the way the Mafia used to work after WWII. You joint a crew associated with an insider and you get a license to steal. You pay for the privilege of stealing by kicking money to the bosses. In the current setup the insiders support outfits like the American Enterprise Institute and the Chamber of Commerce which influence government to legalize theft.
A current example: Wallmart is in huge scandal right now with bribery in Mexico.
http://www.forbes.com/sites/adamhartung/2012/04/26/walmarts-mexican-bribery-scandal-will-sink-it-like-the-icerberg-sank-the-titanic/ [forbes.com]
The US Chamber of Commerce was the vehicle for their attempt to change the law to make bribery legal.
http://www.washingtonpost.com/business/economy/wal-mart-took-part-in-lobbying-campaign-to-amend-anti-bribery-law/2012/04/24/gIQAyZcdfT_story.html [washingtonpost.com]
If you believe that last line you also should believe in the tooth fairy.
Re:Truth or dare... (Score:5, Interesting)
This is market judo, push the opponent, measure the response, feint again, and again until you assess the defense - in this case the various times constants of responses, how the market falls and rises with these assorted feints (false trades) and then you attack, force an arbitrage gap and execute two counter trades and grab the arbitrage difference - repeat many many times.
I think this is what is going on with this high speed trading
Re:Truth or dare... (Score:5, Informative)
So it is possible to create a large volume of "trades" without actually ever buying or selling anything? I am surprised that isn't gamed on regular basis
It is and this is the basis of high frequency trading... though on Wallstreet they call it "providing liquidity". It works like this:
Alice wants to sell 1000 shares of Acme Corp. She places an sell order for 1000 shares at $25.00 on the exchange, but she also places a minimum bid of $23.90 on the sell order. This minimum bid what Alice is willing to accept should someone counter-offer but is suppose to be secret, only the sell price will be published.
Bob is looking for 1000 shares of Acme Corp. He wants to place it in his portfolio for long-term growth, but he thinks it is currently worth less. Bob places a general buy order at $24.40 on the exchange. For the sake of simplicity we will say that is his only price, though he too could have a maximum bid he is will to pay.
So there is a sell order at $25.00 and a buy order at $24.40 pending on the exchange, nothing trades. Now Bob could make a buy offer to Alice at $24.40 and the trade would go thru, or Alice could make a sell offer to Bob at a lower price and follow thru. In a perfect world the exchange would figure it out and match the orders... but that doesn't happen without further action on the part of Alice or Bob.
Eve is a high frequency trader... Actually, Eve is a high frequency trading program at MegaTraders LLC. and has spotted that there are buy and sell orders for Acme Corp on the exchange. Eve places a bid at $24.99 for Alice's share, the exchange accepts, and then Eve immediately cancels the bid order. Eve has just learned that Alice is will to sell for less than the sell order posted. Eve then continues placing bids on Alice's stock, $24.98, $24.97, $24.96, etc., each time immediately canceling the buy when the exchange accepts the bid. Eve gets down to $23.89, at which point the exchange does not accept the bid for Alice's stock. Eve has just learned that Alice is willing to sell for as little as $23.90 and all of this has happened within 10s of milliseconds.
Remember all those articles on Slashdot about high frequency firm X laying their own fiber directly to the exchange to cut milliseconds off transit time? Having custom L2 firmware on their switches and no firewalls on their trading links to cut milliseconds off transit time? This is why they do it, so they can submit hundreds/thousands of buy/sell/cancel orders on a single stock within a fraction of a second to learn pricing differences between orders that otherwise should be secret.
So Eve now knows that Alice is will to sell for $23.90 and would perform the same procedure against Bob to discover his highest buy price. Once found Eve can now see a price difference advantages to herself. Eve buys the 1000 shares from Alice at $23.90 and then immediately sells the shares to Bob at $24.40, pocketing the $500 difference. On Wallstreet they call this "providing liquidity", anywhere else this would be considered insider trading and illegal. Multiple all this by several hundred firms with special inside access to the market place, each running their own competing Eve programs, and you quickly realize how the market can go into turmoil within seconds....
Re:Truth or dare... (Score:5, Insightful)
Re: (Score:3)
Because lobbyism.
Re:Truth or dare... (Score:5, Informative)
A few questions:
- Why are you allowed to cancel orders ? At an auction you owe the money once you've raised your hand.
- Why isn't there a fine on traders who happen to cancel more than X% of their orders ? X being in the order of 1.
- Why aren't transactions or even 'reservations' (which is what a canceled order looks like to me) taxed ?
Just to be clear... The above is a grossly oversimplified example of HFT. Thanks to the new world of online trading, an order isn;t really processed until both sides have confirmed the order. In the old days with a hundred guys in a trading pit, someone offering to buy at $150,000/share would obviously be wrong. Mistyping the same in an electronic order that autocompleted could have disastrous consequences, so there has to be a way to cancel a request. Why aren;t there fines or taxes? Well ask NASDAQ/etc.
In the real world the above is happening on trades with a difference of a fraction of a cent. In many cases it may be that Bob has a buy order at $25.01 and Alice has a sell order at $25.00. Eve has millisecond timing and can simply enter the orders faster than any human trader could possibly react. Eve is also taking in every market fluctuation and stock move the virtual instant it happens... meaning a well built Eve can anticipate the bounces in a stock price based on buys/sells and just announced news, before a human could recognize that news. But at the end of the trading day, Eve has no position in the market. Eve has only served to suck money out of the market by acting as an (unwanted) intermediary.
Re: (Score:3)
Eve has only served to suck money out of the market by acting as an (unwanted) intermediary.
Ah. Like a scalper of concert tickets.
Thanks, btw. It's 11:36pm and I just learned something for today :)
Re:Truth or dare... (Score:5, Insightful)
If anyone is having trouble following the details of the above, or more likely having trouble believing what they are reading, just remember this:
The stock exchange is based on rules. If anyone is making money through exploitation or gaming of the existing rules, then they will spend that money in an effort to ensure that the rules remain in their favour. When history is written, the story of electronic stock exchanges in the 2000s will be one of patronage, lobbying, connections and bribery on a wide scale. Retail investors will be the marks who lose out.
Re: (Score:3)
Or are you maybe confusing this with a stop-loss order? (where the stop may indeed be secret, but would be the highest of the two bounds?) But in that case, the HFT would need to approach its targe
Re:Truth or dare... (Score:4, Insightful)
Thanks for the explanation.
Now for the real question: Anyone got an explanation that does not involve bribery to explain why this kind of crap is a) possible and b) legal?
I run an online game. There's a very simple trade market in it. If I found this to work on my trade market, I'd consider it a bug, the people abusing it cheaters and react accordingly.
Re: (Score:3)
If you don't like the exchange's rules, don't play there. I know this might sound scary, but look outside your own borders. A lot of International exchanges (the LSE being one of them) take a dim view of order/cancel/order/cancel flows that have no hope of ever being filled. In the US, it seems anything goes, but elsewhere, there are at least codes of conduct, and you get a very stern call from an exchange if you don't play along (and get fined or banned if you don't pick up your game). Very occasionally, t
Re: (Score:3)
It's called High Frequency Trading (HFT) and it constitutes over 70% of all trading [washingtonsblog.com].
Our share based, public limited company investment system has been taken over by numerologists armed with high speed internet connections and blade servers.
By extension, our entire model of corporate governance, founded on the principals of directors accountable to shareholders, has now completely broken down.
Re: (Score:3)
Re:Truth or dare... (Score:5, Interesting)
The article indicates that there were no trades at all, just large numbers of orders.
I misspoke. Not "orders", but "activity". Still, this activity is clearly visible and accessible to players thus potentially gaming the market.
Why would anyone on the market need to know the "activity" before it actually happens? Are those the HFT traders watching the transactions before they occur, hoping to skim some profit off the top? Could it be that a new kind of market predator had evolved and the newcomers are now trying to game the HFT traders?
Re:Truth or dare... (Score:5, Informative)
It may not affect the prices directly. However it might affect the prices indirectly, by influencing the decision making of others (especially other algorithms).
mod parent up (Score:3)
Indeed this is an important information...
Re:Truth or dare... (Score:4, Informative)
It may not affect the prices directly. However it might affect the prices indirectly, by influencing the decision making of others (especially other algorithms).
And although slight, it might slow down the system. Maybe 4% will not result in a noticable change, but could it slow the system down enough to give someone an advantage? Just thinking out loud here! This effect might however be a lot bigger for the broker that made these trades. And in that case it could mean that someone on the inside of that tradehouse would have had an advantage if that happened. Yeah I know, that's pure speculation.
Re:Truth or dare... (Score:5, Informative)
And although slight, it might slow down the system. Maybe 4% will not result in a noticable change, but could it slow the system down enough to give someone an advantage? (..) Yeah I know, that's pure speculation.
That's exactly what I read in some article [cnbc.com] might be the point:
“My guess is that the algo was testing the market, as high-frequency frequently does,” says Jon Najarian, co-founder of TradeMonster.com. “As soon as they add bandwidth, the HFT crowd sees how quickly they can top out to create latency.” (Read More: Unclear What Caused Kraft Spike: Nanex Founder.)
Translation: The ultimate goal of many of these programs is to gum up the system so it slows down the quote feed to others and allows the computer traders (with their co-located servers at the exchanges) to gain a money-making arbitrage opportunity.
Re: (Score:3, Informative)
Re:Truth or dare... (Score:5, Insightful)
You can bid ridiculously low prices, or ask ridiculously high prices, and no trades will be made, but this won't affect the stock prices. Stock prices are set based on trades that do occur. It's like selling a house - some bozo can offer you half what it's worth, but the net effect on the house price statistics for your area is precisely zero.
With automated trading systems this probably isn't entirely true anymore, since automated systems are likely take these bids into account when making their trading decisions. You could use this to trick your competitors into buying or selling a certain stock.
Re:Truth or dare... (Score:4, Informative)
You can bid ridiculously low prices, or ask ridiculously high prices, and no trades will be made, but this won't affect the stock prices. Stock prices are set based on trades that do occur. It's like selling a house - some bozo can offer you half what it's worth, but the net effect on the house price statistics for your area is precisely zero.
the idea is to flood the system - to increase ping to other people.
it's ridiculous that there's no rules against flooding it with millions of trades you have no intention of ever executing.
Re: (Score:3, Insightful)
Re:Truth or dare... (Score:4, Insightful)
I don't think that HFT is about making ridiculous offers that will never be met. I think the trick is that if you want to buy shares that are trading at around $100, then you flood the market with thousands of bids for small numbers at $99 and if there are enough takers then you cancel the bids and then flood the market with thousands of bids at $98, then $97, until the number of takers on the offers drops off and that's the price that you stick at. What's unfair about that? It sounds quite reasonable on the surface - you shop around and get the best price you can. It's when having millions of dollars worth of the best hardware and fibre gives the big players an overwhelming advantage and "shopping around" with an algorithm breaks the system that it becomes a problem. Sometimes "sustainable" should trump "fair".
If you're selling a house for $100,000 and you get an offer for $99,999 and in an identical letter you get an offer for $99,998 and another for $99,997 then what would you do? Maybe you would phone up the $99,999 buyer, and if you get a "sorry I'm not interested any more", and you get the same from the $99,998 buyer whose voice is suspiciously similar, how many of these identical offers would you reply to before realising that you are being manipulated?
Testing (Score:4, Insightful)
Perhaps somebody was running some unit test on production here?
Re: (Score:3)
Perhaps somebody was running some unit test on production here?
Or Skynet is gradually acquiring conscience
It could probably do the most damage and take us to the post-apocalyptic future by totally crashing the stock market.
Re:Testing (Score:5, Insightful)
Or Skynet is gradually acquiring conscience
Conscience: an aptitude, faculty, intuition or judgment of the intellect that distinguishes right from wrong
Consciousness: the quality or state of being aware of an external object or something within oneself.
If SkyNET developed a conscience, it would cancel third world debt and cut spending from pork-barrel programs, and would also be vegetarian.
Just FYI; It's an important distinction. No need to mod.
Re: (Score:3)
Re:Testing (Score:4, Interesting)
I was going to post the obligatory Skynet comment, but you beat me to it.
Instead, I'll expand by theorizing that Skynet wouldn't even need to have launch control of nuclear missiles itself if it just collapsed the economies of the first world - we'd get about blaming China soon enough, China would probably decide that they've had enough of Taiwan's bullshit and fire a missile or two across the water at them, drawing us into a quickly escalating war which sees us firing missiles at them, China firing back, and Russia getting in on the fun as well as NATO.
All because some dick at Goldman Sachs wanted to make a few basis points more profit by hacking together someone's AI research with a stock trading flavor.
Re:Testing (Score:5, Funny)
my bad lol (Score:5, Funny)
forgot to exit my Do While loop :) had to ctrl+al+del
Market manipulation (Score:5, Interesting)
A single mysterious computer program that placed orders — and then subsequently canceled them
The algorithm never executed a single trade
No regulator should accept this.
Re:Market manipulation (Score:4, Funny)
Re:Market manipulation (Score:5, Insightful)
Kinda puts a spotlight on who is in bed with whom doesn't it?
Re: (Score:3)
Or maybe the non-HFTs should complain and/or leave the stock exchange instead. They're the ones getting screwed.
Re:Market manipulation (Score:5, Interesting)
I think we are taking significant risks (Score:5, Insightful)
Re:I think we are taking significant risks (Score:4, Insightful)
And these days that's practically *everybody*. In all major advanced countries, pension funds are linked to the stock market. So when a crash happens as it did a few years ago, people lose many years of their pension money, causing misery, longer working lives, and burdening their children.
Re:I think we are taking significant risks (Score:5, Insightful)
Have you been asleep for the last five years? What happens in the stock market has tremendous impact to everyday people - not just those who interact with it on a daily basis. When banks fail due to their own stupidity, that impact extends far beyond just the bank.
Slashdot headlines (Score:3, Interesting)
How does "4% of Trading Activity Last Week" sync with "the algorithm never executed a single trade"?
Re:Slashdot headlines (Score:5, Informative)
"Trading Activity" isn't the same as executing a trade; it was running loops of "I want to buy this share...actually I changed my mind", seemingly in the hope of introducing additional latency into the system and giving an advantage to those traders with on-site trading hardware.
Re:Slashdot headlines (Score:5, Insightful)
so its basically a d.o.s?
Inflation and lack of competition (Score:5, Interesting)
The real problem is that there is too much fake money that people do not personally feel attached to, because it's created by the main counterfeiters of the world - the central banks, and because starting a competing exchange is nearly impossible.
How about this for a story [bloomberg.com]:
In April, motivated by what I consider pure maliciousness, the SEC initiated a âoecease and desistâ administrative proceeding it deemed âoenecessary for the protection of investors and in the public interestâ against Egan-Jones Ratings Co., a privately owned, 20-person firm based in Haverford, Pennsylvania, and against its principal owner, Sean Egan.
Do you know what the alleged crimes are?
Here:
Now, incredibly, Egan-Jones is the sole rater that the SEC has decided to attack. The trouble for the firm started on July 16, 2011, when Egan-Jones downgraded the U.S.â(TM)s sovereign debt by one notch, to AA+ from AAA. Egan-Jones cited âoethe relatively high level of debt and the difficulty in significantly cutting spending.â Two days later, the SECâ(TM)s Office of Compliance Inspections and Examinations contacted the firm seeking information about its rating decision. (The next month, S&P also downgraded the U.S.â(TM)s sovereign debt, but neither Moodyâ(TM)s nor Fitch did.)
Then, on Oct. 12, Egan-Jones received a call from the SEC notifying the firm of a Wells Notice, an indication that it was being investigated. On April 5 of this year, Egan-Jones again downgraded the U.S. sovereign debt, to AA from AA+. On April 19, leaks started emanating from the SEC that it had voted to start an âoeadministrative law proceedingâ against the firm. And on April 24, the SEC filed its complaint.
The crime is that this one agency is not paid by the sellers of the bonds but instead it's paid by the buyers of the bonds, and the buyers have an incentive to have debt rated properly, so that they know their risk.
Of-course AFAIC US bonds are junk.
So you think SEC is interested in really dealing with HFT and whatever you think is market manipulation?
Think again, the only thing it is interested in is protecting the fake rating of the sovereign debt, so that the US gov't can keep piling it on.
What are you smoking? Must be good! (Score:5, Informative)
The US Savings bonds remain the safest bonds in the world. They're also the only bonds worth buying. * * * There's still plenty of funds available to service the debt.
First, while there are too few of them, there are a number of countries in the world without debt problems. The US is one of the countries that is worst off [chartsbin.com], especially if you add in all of the unfunded pension liabilities (which the government generally avoids). Any country colored green, yellow or even orange in that map has its debt under control. Cross-reference for a trustworthy government, and you still have quite a selection of countries whose bonds are a much better choice than US Savings Bonds.
The only source of "funds" to pay off this massive debt are called "printing presses". While printing more money is, in fact, probably what will eventually happen, this will destroy private saving, cause massive inflation, and completely undermine the position of the dollar in the international markets.
tldr; The US is not the whole world. Have a look around, much of the rest of the world is doing a lot better than the US nowadays...
Re:What are you smoking? Must be good! (Score:5, Insightful)
Put down the crack pipe, Limbaugh. This "printing press" inflationista crap is getting old.
The source of funds to pay off (currently zero-interest) debt is growth. There will be no growth until there is demand. We don't have a supply-side problem - businesses are flush with cash and manufacturing capacity, but no-one is buying anything, because they are still suffering from a massive deleveraging hangover. Businesses don't need some kind of mythical 'confidence' - they need customers.
The problem isn't government borrowing today, it's government borrowing yesterday. Today, the government should be borrowing on a massive scale to stimulate growth. If you want to scare people about debt and deficits, then you should be really pissed at the people who went on a massive government borrowing spree WHEN IT WASN'T NECESSARY to pay for shit like unnecessary wars and tax cuts for rich people - not at the people who are trying to fix the damage.
When the economy is depressed, and interests rates are zero, the government should borrow like crazy. When the economy is growing, and interest rates start to go up, government borrowing (and spending) should go down. Instead we do the opposite, and the crazies come out with ex-post-facto idiot economic theories about how our current problems are the result of current policy, as if the number one world economy turns on a government dime. Wake the fuck up.
Much of the rest of the world is doing better than the US these days? Wow. We certainly have our problems, and we're not number one at absolutely everything, but what the hell are you talking about? That's completely ridiculous.
Re:Inflation and lack of competition (Score:4, Insightful)
There are well placed equities, it's just they are mostly not in USA.
Really? Compare, say, the S&P 500 (US, 25% return this year), the FTSE 100 (Europe, 10% return), ASEAN (Asia, 20% return), which strongly suggests that the USA is a pretty good place to put your money. Gold and silver, as previously discussed, are either flat or dropping, which also strongly suggests that the hyperinflation you're concerned about isn't happening.
I get it: Fiat money is just a piece of paper with no inherent value. The thing is, the social value of a dollar still exists, there's no evidence whatsoever that we're anywhere close to turning into Zimbabwe, and there's lots of evidence that the monetary policies of Bernanke are helping substantially in mitigating the effects of a recession (in fact, if it doesn't, there's no real point in having a Federal Reserve or even a currency). And what will happen (if the Fed is doing its job) is that when the economy recovers, the Fed sells back those assets they bought up back to the open market and may even raise interest rates to cool things down.
For comparison, would you rather be in:
A. The United States (7.8% unemployment and dropping slowly), where the Fed cut interest rates and bought up assets like crazy, risking inflating the dollar.
B. The UK (8.1% unemployment and basically flat) where the Bank of England cut interest rates from 4.5% to 0.5% in response to the recession, risking inflating the pound.
C. Spain (25% unemployment and climbing rapidly), where the European Central Bank is maintaining the value of the Euro at all costs.
Unclear? Really? (Score:5, Insightful)
"The motive of the algorithm is still unclear."
Oh what a load of bullshit.
It's obviously an experiment in painting the tape. Make bids, cancel them. Walk stocks up and down with the bid price. Head-fake other HFT corps that track bid prices in their algorithms.
It went badly because it was detected. It needs tweaking to be not so obvious next time. And yes, there will be a next time.
It's a casino now. It's been a casino for a while, and if you're not part of the house, you're the mark.
--
BMO
And THIS is the heart of our financial system... (Score:5, Insightful)
Guys, think of it. Our stock exchange, i.e. your pension or if you are unlucky also your mortgage is depending on this kind of software these days... And this is not the first time this year that stock trading software is in the news. This has nothing to do anymore with owning a share of an organization in the hope the organization will make a profit and pay you dividend. This is total craziness.
Re:And THIS is the heart of our financial system.. (Score:4, Informative)
A couple of questions (Score:4, Insightful)
1) If I were to do something like this with amazon.com (add things in my shopping cart and then remove them rapidly) wouldn't the headline be "hacker attempts to take down amazon site" with jail time? Why does this receive such a neutral headline like "mysterious algorithm?"
2) I pay $25 to execute a trade. How much money does it cost these people to put a bid or ask up and pull it? Shouldn't there be some sort of punitive cost for doing this?
Re:A couple of questions (Score:4, Insightful)
"All in all, no damage done."
BULLSHIT!
Suppose you're an honest trader trying to win in the market based on your own research and DD. All of a sudden you see this massive quote traffic on a stock you've been watching. You try to place an order against all this FAKE traffic that you wouldn't have otherwise made. It's no different than someone leaking a fake press release or engaging in a pump and dump scheme to manipulate other traders into making orders. Deliberate distortion of the market is a crime.
This also has the effect of skimming margins from the little guys. Suppose you put in a bid for $10, and you hit an ask for $9.75. That 25 cents is yours. If a company with an algobot really wants to sell at $9.75, they program their bot to start placing and canceling orders at $11 and work their way down a penny at a time until they hit your bid. They could have this running all day long until they sell of all their shares. YOU can't possibly sit there at your computer and start submitting and canceling bids at $9, $9.01, $9.02 trying to hit your bid below $10.
The markets are supposed to be a mechanism for honest price discovery. You should win when you're smarter than the other guy, not when you have a faster computer.
Identification? (Score:5, Insightful)
Re:Identification? (Score:4, Funny)
I find it a bit strange that these trading systems don't seem to use some kind of identification (like signed certificates). How is it possible that some system did these things and the stock exchange doesn't immediately know whose system this was? This sounds like a disaster waiting to happen.
Regulation BAD. Free market GOOD. RRROOOOOAAARRRR!
Re: (Score:3)
They know they just have NDA's and similar that don't let them disclose that information. You can't even make a 10K cash withdraw without the FED and Treasury being informed. You bet the exchange knows who did this, and there is a good chance the SEC does too. Unless they are confident that a criminal prosecution is going to happen the names will never be made public, it would only invite a tsunami of lawsuits.
Felix Salmon on high-frequency trading -BBC Radio (Score:5, Informative)
Listen to this 13 min BBC programme/essay at: http://www.bbc.co.uk/programmes/b01n1thw [bbc.co.uk] available for the next 12 months
The Exchange knows who they are..... (Score:4, Informative)
HFT needs fees (Score:5, Interesting)
Much as I dislike adding fees to inhibit the free market, the whole HFT world desperately needs them. Placing any bid or making any transaction should cost some small-but-tangible amount of money.
Even better, if more complex: add a fee based on how long a particular security is held. Less than a second, the fee is 1000% of the transaction value, more than a year, no fee at all, and scale for all values in the middle. HFT is legalized theft, and needs to be penalized out of existence.
Re: (Score:3)
Make trades non-cancellable, and move to a gross receipts tax at the federal level (~3% would run the gov't). That way all this fake movement wouldn't exist - when you enter a trade, it executes; when you execute a trade, you log that transaction and the person receiving money for the trade has a taxable event. This shit, along with a lot of other "skimming" operations, would stop overnight.
Quote Stuffing (Score:5, Interesting)
Where's the news? This is called quote stuffing and has been going on for ages. The reason is simply to mislead or overwhelm the HFT algos of competitors.
cancel (Score:4, Interesting)
Ok, it's been a few years since I worked at the stock exchange, so someone please update me:
What is this bullshit with cancelling orders, in bulk? What is the reasoning, how could anyone ever think that would be a good idea to allow?
More crime, no investigation, no prosecution (Score:3)
The rule of law is dead in the USA. Bankers and financiers have a free pass from Washington DC to break the law with impunity.
It is a crime to undertake any action (other than buying and selling of course) to profit from deliberately attempting to manipulate prices. Placing orders with no intent to have them executed is no different than a pump and dump scheme, or leaking a fake press release to affect a company's share price.
There's an easy solution (actually two) to stop this BS. Make a rule requiring that all orders need to be open for at least, say 15 seconds. Long enough for a small day trader to act on them. Alternatively, they could assess a small fee for every canceled order above some threshold in a trading day. Call it 5000. i.e. You get to submit and cancel 5000 orders for free, but every additional canceled order costs you a penny.
If I could figure out a good way to cash out my 401K without getting ass-raped by the government (Ask Slashdot?) I'd cease participating in this gambling casino where the house always wins.
EU is considering a 0.5s min order duration (Score:4, Interesting)
I read the other day that the EU Parliament is considering adding a 0.5 second minimum order duration limit to the relevant directive (MiFID) to ensure that other parties can actually close the orders and prevent this kind of thing from happening.