US Stock Market is Rigged

[Chad]

Some of us already know this, but it appears it may be hitting the main stream.

http://www.cbsnews.com/news/is-the-us-s ... et-rigged/

Might not hurt to suggest to our brokers that using IEX would be appreciated.

[Felix]

I wonder if that magic shoe box is enough. The magnitude is shocking. Will be interesting to see if this will lead to a change in regulations making it illegal.

[Chad]

I wonder if that magic shoe box is enough. The magnitude is shocking. Will be interesting to see if this will lead to a change in regulations making it illegal.

I thought the same thing about the shoe box. I wish they would have given more detail. It's probably in Lewis's book.

[fips]

Thanks for the interesting article.

I think most people know about high frequency trading but the general public doesn't really care because it feels like we can't change it and having this one penny pinched off doesn't effectively hurt us.

But good job for working on change before the regulators do.
Question is, how can you invest in IEX?

[workathome]

Now I *have* to buy the book.

[jennypenny]

Now I *have* to buy the book.

Don't buy it yet. I read an ARC. I'll review it later (I'm out today).

[Seneca]

Now I *have* to buy the book.

Don't buy it yet. I read an ARC. I'll review it later (I'm out today).

High frequency book reviewing?

I knew almost nothing about this other than the buzzwords, thanks, Chad.

[Riggerjack]

Wait, so the theory is that these high speed traders are getting a few minisecond headstart, so they are going to add a .3 minisecond delay in front of the high speed trader's server? Seriously?

No. 1 how is that enough?

No2, if, somehow it is enough, why would a group or groups will to place a dedicated fiber run 300 miles suddenly decide a new server was out of reach? This smells like a marketing gimmick with no real impediment to high speed trading.

[Chad]

I don't think you can come to your #2 conclusion without more info on how this all works.

[Riggerjack]

Chad, my point was the "solution", is hardly a solution.

60km fiber, transmission speeds of fiber: 200,000 km/s. Adding in the 60km buffer between them and "the bad guys" wouldn't add enough delay to get the results they claim they want. This isn't esoteric thought, this is very basic telecom engineering.

Even if the magic shoe box works, then all the bad guys have to do is buy a new server and order a new circuit. What's this new exchange gonna do? Fill up the room with magic shoeboxes? If everyone has the same delay, then it's the same as no delay.

If they were looking for a real solution, they could simply introduce a order buffer of a random .1 to .5 seconds within their own software.

When I see a group playing up how trustworthy they are, while selling a new product, bashing an old product, and their "solution" is technically questionable, I think marketing gimmick.

[Chad]

I'm saying neither you nor I have enough information to make that judgement yet. You may be right, as I have similar thoughts. However, the 60 Minutes piece, I would guess, leaves a lot of information out.

[jennypenny]

RJ-- The book does a good job of explaining the technicalities.

IMO The 60 Minutes piece is a little misleading. I also found it odd that Croft was surprised by what he was hearing since, IIRC, 60 Minutes did an interview with Arnuk and Saluzzi when Broken Markets came out a couple of years ago.

[Riggerjack]

Oh no! I've been posting on here for years, I jump to snap judgements all the time. I thought you'd notice that by now!

Stock market investing is all done thru my 401k, and is small enough that any changes are probably all handled in house within fidelity. This, while wrong, doesn't affect me enough to ever notice, I have no skin in that game.

I'm just pointing out a technical issue that pertains to my profession.

I don't think anyone here is making moves that are in any way affected by this, but as it gets more efficient, it will affect more and more people. So I'd like to see a working solution before it gets down to my level.

[jennypenny]

My point was that you might find the book interesting because of your background. They don't skip over the details.

I don't have a copy anymore, and I would butcher the details if I tried to do it from memory.

[jennypenny]

Now I *have* to buy the book.

Don't buy it yet. I read an ARC. I'll review it later (I'm out today).

High frequency book reviewing?

I knew almost nothing about this other than the buzzwords, thanks, Chad.

I didn't review this one. A reviewer asked me to read it and then read their review to make sure they understood the technical points.

[jennypenny]

I had to return my copy of Flash Boys to the reviewer, so forgive me if I get a detail wrong since I’m doing this from memory.

First, as I said above, I was surprised by the tone of the 60 Minutes’ piece. Yes, a large part of the book explains how high-frequency traders can get an edge, but half of the book is about a group of guys and how they end up trying to open an exchange. Why was Einhorn even interviewed? I don’t recall him being mentioned in the book. If he was, it was in passing during the section where Lewis discussed their difficulties in finding investors. The whole thing seemed alarmist, but I suppose it sold a lot of books, so Lewis must be pleased.

The first half of the book discusses the intricacies of high-frequency trading. I think he does a good job of explaining each step and how it’s interconnected, as well as explaining how firms trade, dark pools, etc. I imagine many of the people who watched that interview on 60 Minutes and then ran out and bought the book won’t be able to slog through all of the detail Lewis includes. I thought it was necessary to the book, and anyone here who has an interest in learning how HFT works would enjoy it. Unfortunately, anyone who puts the book down after 2-3 chapters will come away with an unbalanced view of HFT, and will be grabbing their torches and pitchforks without understanding the entire issue.

@RJ—Lewis described how trades were executed to show the advantages wrt speed. Say I put in an order for 1000 shares of KO. It goes to the closest exchange, where HFTs were 'listening in' if you will to see what I wanted to buy. They then raced to the next exchanges to buy up KO so they could be the one to sell it to me and skim a little in the transaction. That’s why they needed faster and more direct connections. If the first exchange was able to fill my trade, nothing happened. If my trade moved along the food chain, HFTs were waiting to sell me (slightly higher priced) KO because they had beaten my trade order to each exchange. This is a really simplified version of one tactic, but you get the idea.

The second half of the book details the group’s attempt to open an exchange. It was interesting to see the dynamics of the group and how these guys (they’re all guys) work together. Anyone who’s a programmer will relate to this part. Lewis romanticizes the players a bit here. They probably seemed like a rag tag group of really bright outsiders trying to get something meaningful done to Lewis, but it’s a common dynamic in programming groups. Lewis repeatedly points out how undervalued tech guys are at the firms, but that’s true at any non-tech company. Malcolm Gladwell has been pushing Lewis’ book, which should give you some idea of the tone Lewis uses.

I liked the book. Lewis did a good job of explaining all of the detail necessary to understand the issue. He also told the story through the players involved, which softened the story. I thought he relied too heavily on the ethnic backgrounds of the people involved to explain their behavior. I don’t think ethnicity explains everything, and I always see it as a ‘cheat’ in describing people when writing. I think he used it to strengthen the David vs. Goliath theme he was trying to push, but I thought he overplayed it. It was also a little frustrating that until the final chapter of the book, the only women Lewis mentioned were either wives or secretaries. I supposed that’s just emblematic of Wall Street.

I came away feeling like Lewis was describing a problem that has been around forever. Being bigger or stronger or faster can always give you an edge. HFTs can gain advanced knowledge of certain trades in milliseconds, which must sound like something out of Star Wars to lay people (like Croft). What those same people don’t understand is that all trades happen at close to that speed. It’s all relative. Their higher volume also gives them a certain edge. It gives me one, too. More volume is an advantage whether you’re a trader or Walmart. If one wants to criticize the power and influence of traders, (I think) the book demonstrates that political power is still the trump card, and HFTs have very little compared with big firms like GS.

I’m not saying that there aren’t things that could be changed or tightened up to make trading less opaque and level the playing field a bit. (I personally don’t see the need for 100+ types of orders.) I think that could be said of all electronic trading though. Look at recent news stories that showed that firms were executing trades in a certain order to maximize profits the same way banks used to process withdrawals and then deposits to try and force bounced items for extra fees. It’s ok to set up rules to make sure HFTs can’t block me out of the trade entirely, and can’t manipulate the conditions to trigger the countertrades and then act on those (although shorts do this quite frequently and the street doesn’t seem overly concerned about it).

By painting the world of HFT as some mystical world of shoe boxes and hocus pocus, they give the impression that HFTs are hiding something. IMO, they are doing what Wall Street already does, but in other ways. Does doing it faster automatically make it illegal? I think Wall Street culture has contributed to the animosity. They’ve always acted like what they were doing was beyond the comprehension of most people. Now that trading has gone high tech, techies can beat the ‘smartest guys in the room’ at their own game. To me, it’s not David vs. Goliath, but more ‘Revenge of the Nerds.’

[workathome]

Thanks JennyPenny

[JohnnyH]

Thanks Jenny! I think I'll pick it up just for the first half.

http://www.zerohedge.com/news/2014-03-3 ... ppens-next

[Chad]

IMO The 60 Minutes piece is a little misleading. I also found it odd that Croft was surprised by what he was hearing since, IIRC, 60 Minutes did an interview with Arnuk and Saluzzi when Broken Markets came out a couple of years ago.

60 Minutes seems to be a little misleading fairly often, such as the puff piece the did for the NSA. Half their reporters are on death's door, which probably doesn't bode well for them digging deep into stories. It's kind of interesting how they take a 15-20 minute story, but barely give you more information than a 30 second story.

[JohnnyH]

This might be the most (only?) relevant segment I've seen on CNBC... Wow, that CEO is like a cornered animal.

http://www.cnbc.com/id/101544772