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Comment by tsunamifury | Hacker News Reader

So essentially the NYSE is a provably fixed game, with large HFT houses paying for the right to trade on non-public information, and it hides behind the idea that it was just a few hundred milliseconds.

All the while they are selling non-public information as a product that is deliberately used to micro-manipulate the market?

I mean, deep down I always knew this, but to have it all spelled out is shocking because it exposes the NYSE as systemically fraudulent. The implication of that is so overwhelming it causes me to want to ignore it out of sheer inability to think of a way to solve the problem.

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Market data is not non-public definition. NYSE was simply slow in aggregating market data during times of high volume.

This did not affect you as a retail investor, as you get the NBBO price. This only affected you if you were an HFT firm with bad infrastructure who depended on the aggregate feed and not their direct line.

Like tptacek said, the price for getting a direct line, while expensive, is not unreasonable for a business. The largest cost will be salaries for the people writing your code and maintaining your infrastructure.

> NYSE was simply slow in aggregating market data during times of high volume.

Maybe I misunderstood, but it seems like they're saying that's not the case:

FTA: "First, we had to rule out the possibility of the delay being caused by the consolidation process (which people often erroneously point out)."

By consolidation, he means the Consolidated Tape Association which takes feeds from all exchanges (NYSE, Nasdaq, AMEX, etc) and puts out a single consolidated feed that most non-HFT entities use because its good enough.

They get their data from NYSE from apparently an aggregate feed, which was unintentionally delayed by NYSE. In my opinion, they should have been getting the direct feed and doing all consolidation themselves.

However, HFT firms will still have a vested interest in making more efficient aggregate feeds than the consolidators/exchanges.

> Like tptacek said, the price for getting a direct line, while expensive, is not unreasonable for a business. The largest cost will be salaries for the people writing your code and maintaining your infrastructure.

Be that as it may in reality, per below quote I assume that behavior is still illegal.

"A crucial sub-ruling in the regulations prohibits exchanges from giving stock quotes to special groups faster than to the public. This sub-rule is of such importance, that without it, the rest of the rules (Reg. NMS) essentially become meaningless."

Outside of labor, the primary costs are hardware, colocation, and networking, none of which is a fee to the exchange.

Please tell, how the world is supposed to provide that for free to anyone who wants it?

Colocated servers are the public.

If NYSE wants to lobby for laws to be changed, then they're welcome to do that. Just like Uber or Airbnb when they get hit with fines.

But the law's the law. "It doesn't make sense" isn't a valid defense.

Imagine that they're providing free firewood to the public - what obligates them to provide the pickup trucks?

The law, in the same way we regulate many markets that can only efficiently support fewer participants than would be required for a fully competive marketplace.

Usually due to capex: energy infrastructure, network effect: financial, or limited availability of resources: wireless spectrum.

If it's in the public interest to have trucks and no firewood seller would otherwise provide them. That's absolutely something government can (and IMHO should) mandate in exchange for a firewood license.

Well I demand that my free server have 128GB of ram, and holograms. Fucking fatcats.

The regulation is about equal access, not free access. Now, the SIP feed contains combined market data from all of the exchanges to which the National Best Bid / Offer (NBBO) applies, so that a broker-dealer can look at the SIP feed to determine nationally what the best bid across many exchanges is and what the best offer across many exchanges is. The Reg NMS mentioned is that the broker can't give you a price (before fees) that's outside the NBBO. (There's an exception if the investor explicitly opts the order out of Reg NMS requirements and directs that the order be filled on a specific venue. Last I checked there are 70-some equity venues in the US.)

The consolidated feeds are necessarily slower than the direct feeds, due to processing delays, unless the exchanges intentionally slow down their direct feeds. There are several companies that will sell you expensive FPGA or IBM Cell-based cards that will locally create a consolidated feed from all of the direct feeds. These cards aren't cheap, but are necessary for trading latency arbitrage strategies, and are also useful for low-latency market making.

Of course the consolidated feed requires a slight processing delay, so unless they intentionally slow down the direct feed, quotes from NYSE will appear first in the direct feed and very slightly later in the SIP feed. The argument here is about if the delay between SIP and the direct feed is small enough to be permissible.

The "public" being talked about is the paying public. Nothing in the regulation requires a free SIP feed, and I assure you NYSE doesn't provide a free real-time SIP feed. The regulation is to prevent selling an intentionally slow connection to everyone, and giving a faster feed to only their top tier customers.

Disclaimer: I'm not a lawyer.

The SIP (consolidated feed) is tasked with using the most efficient hardware and software available. If a private company can consolidate faster than the SIP, then the SIP isn't using the most efficient hardware and software available now is it?

Pretty simple.

The exchanges take in $500M a year in SIP fees, which are supposed to go to the most efficient hardware and software available. Pretty sure that's not happening.

> Pretty simple.

Oversimplification, forgetting the laws of geometry and physics.

The triangle inequality and relativity conspire against the SIP. If you're getting the SIP from B, any new prices at C go to B and then forwarded to you, so it's faster (best case equal in the degenerate triangle case) to get direct feeds from B and C and consolidate locally.

Not to mention the CAP theorem. For the SIP to work you have to have a much stronger consistency model across many more nodes. To arbitrage latency in it you need neither.

Are you saying the SIP runs on the best hardware/software available? I want to get that cleared up before moving on to a new topic.

I don't know about the hardware being used by the SIP. It might very well be very slow hardware. You clearly have a lot more knowledge than I do and have done some very good research.

I was just pointing out that

> If a private company can consolidate faster than the SIP, then the SIP isn't using the most efficient hardware and software available now is it?

is faulty reasoning.

Are you saying that there is a special market operating in the NYSE that some traders cannot access? Why would my order not be eligible for being matched, but a HFT's would?

Edit: wow, rate limited after three posts this morning. A new HN low.

My response to tptacek below:

My dumb order?

How can HFT's intercept and redirect my trades to their, appently, captive pool of dumb trades?

Sure sounds like multiple markets are operating...and you are even telling me that my orders will be scraped before they can even reach some markets.

No, that's not what he's saying. But aside from that: the reason orders you place won't be matched on any market at NYSE, let alone a special one, is that HFT market makers will give you a price break to route your dumb order to them so they can collect their tiny spread from your trade without worrying that you're a hedge fund about to steamroll them with a giant block order.

Who is subsidizing the HFT market makers so that they can undercut the rest of the market on their private exchanges?

This is like a question from a markov generator. I won't try to answer it.

Some help:

>is that HFT market makers will give you a price break to route your dumb order to them

You claim a price break on a private exchange. How can they (HFT market makers) deliver a better price than the public exchange? Presumably they cannot have bought it on the public market at the better price, so some party must absorb the loss on the price break.

My question can now be translated to:

Who absorbs the loss from the price break?

When the going gets tough, the questions are dumb? This is the hallmark of lobbyist talk.

Read Dark Pools (http://smile.amazon.com/gp/product/B006OFHLG6/) and it will make the setup at least comprehensible.

I think I get the setup and that my characterization is rather accurate.

Well just to clarify a little. There are 2 different concepts that sound sort of similar.

1) A dark pool. This is just another name for an exchange, but one that is not public. I don't know if NYSE runs one, but it wouldn't be surprising. The theory behind these is that they are provided as a service to large institutional investors to trade with each others outside the vagaries of the public markets for lots of reasons (mostly advertised as a way to not impact prices). The reality of these has been mixed at best. You have to opt into using a dark pool.

2) Payment for order flow. In this case your broker (not the exchange) has an agreement with a third party to sell your trades to them so that they can either trade with you directly or route the trade to an exchange. The reason they want to do this is that the aggregate of all the trades they are buying is not price opinionated (as opposed to hedge funds say) so the market maker can make the aggregate difference between all of them. This mechanism is largely how all discount brokers offer cheap or free trading, so it is likely a huge boon to you. A couple of things to note about this, your broker has to disclose it to you, I believe you are still required to get the NBBO price, & I believe you are required to be able to opt out by directing your order to be directly routed.

[edit] To clarify your question `jsprogrammer `tptacek is referencing #2 above. The reason the technical oddities & violations at NYSE don't have a huge impact on a retail investor is that unless otherwise stated, they are interacting with a wholesale market maker before their order hits any exchange, in a deal worked out with your broker and governed by legal obligations on both their parts.

The case we are talking about however, I believe, is where NYSE operates an apparently public market with delayed quotes for some players. Tptacek claims that my orders cannot even make it into the supposedly public market because someone will scoop up my order on the way, before it even reaches the delayed quote market and therefore, the market is not special because I cannot access it (which is disputable).

Yes: if you, as an individual, place an order at an online brokerage, your order is most probably not going to make it to an exchange. It would be stupid to send it there, because wholesalers will give you better prices.

This is the case for retail orders, but not for trading firms. Prop trading firms don't tend to route their orders through wholesalers; they have deals with execution platforms (or implement their own) and route their orders to exchanges.

But there's a whole 'nother set of reasons why we're not especially concerned about competitions between prop trading firms on speed/latency/whatever: if they're impacted by HFT at all, they're competing in a zero-sum game to arb prices, and there's no moral reason why a slower trading firm is entitled to some equitable share of all the available profit from some arbitrage strategy.

Tptacek seems quite convinced that the "tiny spread" pocketed by HFT arbitrageurs comes entirely out of the pocket of competing HFT shops and has no impact on the prices paid by other participants.

A U.S. equities exchange has to be registered with and approved by the SEC. There are currently 12 of them. As a registered exchange you have to play by certain rules, and in exchange your displayed top of of book is subject to the order protection rule, meaning that no other venues (exchanges, dark pools, ECNs, or broker dealers) are allowed to trade through your top of book quote without first routing an order to you for the full amount of the displayed size. Exchanges also get a share of SIP revenue (which is important to exchange economics).

In it's most technical definition, a dark pool is an ATS (specifically not an exchange) that has no displayed quote i.e. no market data whatsoever. Most ATSs in the US fit this definition, though there are also ATSs that display a quote. For example, IEX is an ATS that has feed for their top of book quote... so technically not a "dark" pool.

NYSE doesn't run a dark pool and it would be weird if they did. Most US equity exchanges support fully hidden (completely non-displayed) orders, so if you want to trade in the "dark" on NYSE you can just send a hidden order. I think this is one area where futures exchanges and equity exchanges differ. In futures you have icebergs but not fully hidden.

Wholesalers aren't allowed to give you a worse fill than the NBBO. That's the law. Often they will actually give you a tiny bit better than the NBBO on marketable orders. I think they do this so retail brokers can advertise price improvement. For most of the low cost retail platforms there is no ability to direct your order. You give it to the broker and I think basically if it's a marketable order they send it to the wholesaler and if not they post it to an exchange that offers a liquidity adding rebate (the brokerage keeps the rebate, natch). If you are willing to spend a little more on your brokerage account, you can use a platform like Interactive Brokers which does let you route orders directly.

How does priority work on fully hidden orders? Are they always at the back of the line?

Thanks for the clarification on the NBBO ramifications on wholesalers. I have never worked on a order flow trade and would love to see an insider account of them (its sort of what I was hoping Flash Boys would be about).

Yeah for a given price, fully hidden and the non-displayed portion of iceberg orders will be ranked (generally by time priority) behind any displayed shares. Most of the rules are meant to incentivize displayed size.

Non-displayed orders and the non-displayed portion of iceberg orders are generally put in the back of the line behind all displayed liquidity. There are some exceptions, such as the BATS "hide not slide" order.

Oh boy, you got this 100% the wrong way around.

As a small trader, you get access to special lower prices that a hedge fund can't get. Your broker will be routing your order to a wholesaler who will fill it at lower prices (ie, narrower spreads) than you would get on the open market, because they have a legal obligation to not screw you over.

You can request that they route it to anywhere you want, and they are legally obligated to do it if you ask, but you really don't want to do that. Unless you like giving money away of course.

(Also, you don't seem to understand basic market mechanics. You use words like "scraped" or "picked up" which are nonsensical in context.)

IEX recently suggested that retail investors should request their broker to route their orders to IEX, for which they got criticised very harshly. And rightly so.

As a small trader I don't get paid to provide liquidity. A hedge fund may.

I used the word scrape in response to tptacek's response below my above post. If a trader is not aware that what tptacek describes is happening to their orders, then I believe my characterization is accurate.

You're still not addressing my main point.

As a small investor, your order is probably routed to a wholesaler like Citadel, where you will get a better price than you would otherwise get.

And you are upset because you incorrectly believed that your order would be routed somewhere else (where, exactly?), where you would get a worse price, which you think would be better because...why?

> I believe my characterization is accurate.

It's not even slightly accurate; it's literally the opposite of the truth.

Are you from Citadel?

Would you trust Wall Street to give you the best price on anything if there was no way to verify it?

There is no way to reasonably know if you are getting the best price (because they can change many times in the same second).

You are relying on the internalizer to give you the best of many possible prices. History says: "that's not going to happen"

Just as a heads up as you're new here, accusing someone of shilling is a pretty big no no.

Full disclosure, I have in fact worked with your data and at an HFT in the past but have moved out of the industry, if you were going to ask.

This is incorrect. We destroyed a Barron's article for making similarly false claims and we back it up with solid data: http://www.nanex.net/aqck2/4685.html We even caught Barron's cheating! The nerve of some people to lie with abandon.

What if you want to write your own code and run your own infrastructure? The direct line may still be cost prohibitive and bestow a distinct advantage to your competitors.

Some people think this is not the case?

No one is entitled to be able to enter a market. It would be practically infeasible for me to compete against Amazon by writing code at home. That doesn't mean the ecommerce market is a bad thing.

Where to begin.

The retail investor gets the slowed down price (the NBBO is really what the internalizer/wholesaler saw from the SIP when they executed your order). That same internalizer buys/sells from the faster feed. Whenever the two feeds are out of sync, it's like printing money.

"The price for getting a direct line is not unreasonable?" I just laughed out loud reading that. Is $60,000/month for just one exchange (there are a dozen), reasonable? Then you need network engineers, infrastructure, etc. It used to be nowhere near this expensive for "real-time" data. Orders of magnitude less.

What would be your proposal for a solution to a sync'd feeds obvious distributed systems problems?

How much latency would be acceptable for a fully consistent, high throughput distributed log of events, that when it becomes unavailable the entirety of US trading shuts down and if it ever gets out of order can cause gigantic lawsuits?

How would you change the obvious organizational disincentives as well? Given that maintenance of the SIP is full cost, no profit operation for the exchanges?

Finally, don't take this as a criticism of your whistle blowing, I think that is critical to a functioning market, I am curious to know how you would solve the obvious technical challenges the consolidated feed faces?

What do you mean by "fully consistent" in the context of the SIP feed? The SIP isn't required to be consistent in the CAP sense of "consistent".

The SIP isn't currently required to be consistent in the CAP sense of "consistent", but that is something people complain about. I think rightly, they point that the audit/compliance components of RegNMS are very troubling in the face of N inconsistent SIPs.

Similarly, people complain about the SIP feeds being latent and I'm sure it would be a very real problem if any single exchange being unavailable made the entirety of the SIP unavailable.

Its a fascinating problem because the engineering trade-offs are relatively static and well known, but each and every decision you could make provides an opportunity for arbitrage market activity that someone would consider predatory.

That we've layered a regulatory requirement that is pretty vague on some of the edge cases on top of this, just adds to it.

Please point to the exact paragraph in Reg NMS that backs up your story. To those reading, don't waste your time awaiting an answer because there is no such paragraph in Reg NMS.

The Regulations (Reg NMS) are very clear about this. That's why I was awarded $750K from the government after all.

I'm not sure what story you want me to back up is? If you are claiming that the current law requires the SIP to be consistent in the CAP sense, I'll defer to you and ask that you point out why you think so?

If you are asking about evidence that some people have claimed that the SIP being non-consistent is a problem for audit and regulatory compliance, is that not what you yourself are arguing in this post? http://www.nanex.net/Research/IsNBBOIgnored.html

I think maybe you are reading into my comment something that isn't there?

You are making straw man arguments. While I'm happy to discuss what the SIP should be in an ideal world, the topic at hand is what is current law. For those that don't know, it's Reg NMS (google it).

If you are so happy to discuss what the SIP should be in an ideal world, why don't you? This reply seems to be a deliberate non-answer.

Actually, I was asking how you would design an ideal SIP. I have no opinions on the current law, but find the technical challenges of the SIP terribly interesting.

I'd still love to hear you discuss it...

So, no? From 2008-2012, if you paid NYSE (one of like 15 different exchanges that trade NYSE-listed stocks) for a proprietary feed --- something that costs more than most idle home day traders can afford, but would be affordable by any YC startup --- you were getting an edge in competing with other electronic trading systems.

If you were a retail investor or a mutual fund, what NYSE was doing probably didn't impact you at all.

> what NYSE was doing probably didn't impact you at all.

Then where does all the money HFT firms make come from?

First, HFT firms aren't especially lucrative compared to other finance specialties, so one answer to that question is "nowhere".

Second, HFT firms compete with other finance firms, so what money they do make comes from bidding down the costs those firms were imposing on the rest of the market.

If you're a retail trader, automated electronic traders make money off you by outbidding the markets to quote good prices to you for your dumb market orders, and then pocketing the spread --- in other words, they make money the same way market makers have always made money; they just make less of it at an instant, but at a far larger scale.

The same is true of mutual funds, which is why Vanguard --- the firm most people would say is the most trustworthy in all of finance --- has repeatedly claimed that HFT has lowered their cost of trades.

Somethings off. If all this is is market making, why all the trouble with the microsecond latencies? Microwave links? Shared colos?

That seems like a lot of cost everyone could save on by simply having the exchange enforce some minimum timings.

Because speed is an implicit and intrinsic "figure of merit" in automated market making: if you are faster than other market makers, you outcompete them.

There are two straightforward problems with microsecond-speed electronic trading:

* At very small timescales, possibly as a sort of inevitable consequence of the CAP theorem, correlations between instruments that should trade in lock step start to break down. Since you can make money correcting these mispricings, time and energy gets sunk into doing that, and that imposes costs on the rest of the market. It's uncertain how high those costs are, but they are small, and clearly a pittance compared to non-automated market making.

* Electronic trading provides very nice paychecks for pretty interesting technical work, which means some talent gets attracted to the market that would otherwise get paid less money doing something with more social value. How big a deal this is to you depends a lot on your worldview.

To me, neither of these issues seems worth the galactically high cost of restructuring all the markets in such a way that we'd reliably avoid these problems.

That's circular reasoning: right now speed is a figure of merit because that's how the game has been designed. I'm suggesting to change the game rules.

I don't mean to get rid of automatic market making, I'm saying the exchange could just move to a system where it checkpoints every 10ms or whatever, still much faster than humans can blink, but no detriment to the algorithms. Then everyone has 10ms to come up with orders that make sense in the current market situation, instead of the ridiculous timing game.

You don't actually have 10ms to act in the scenario you describe. Because there is new information entering the world at all times, you would want to wait until the last possible microsecond before the end of the 10ms window before entering any bids.

The window does nothing to remove the need for speed.

The world is a continuous system. No matter how hard you try you can't force it to be discrete.

(There are other problems in your proposed scenario to having to do with mismatched buy vs sell volume, but we'll ignore those for now.)

What new information?

I think the above poster meant to imply that the 10ms delay would cover all market transactions, so if you put in an order now, then no one knows it till the next 10ms stop post.

Essentially its buffering all the data then releasing it at once, so it's not a truly continuous system anymore.

> What new information?

Stuff that happens in the real world. The stuff that all security prices are eventually based on. It's not a closed system you know?

Ah, that's why I wanted an example. Your answer is fairly obvious, but it's pretty absolute too so there's no way to ask questions like "is this information actually going to affect the bid size or price of a bidder?" or "is this event important but infrequent, like quarterly reporting?"

For example, infrequent important events will result in a race for people to submit at the last microsecond, but because they're infrequent 99% of the time the 10ms buffering will effectively change the behaviour of market participants.

At the level of a penny, which is what the minimum price change is on most US stocks, almost anything can affect a sophisticated market-maker or proprietary trader's pricing: information in the stock's own order book, the price of related securities globally like the same stock trading in foreign markets, prices of correlated stocks, index futures prices around the world, his or her risk exposure in that stock and others in a portfolio, foreign exchange and interest rate market shifts, news feeds, sentiment analysis of online sources like twitter, company exposure to oil or other commodity price changes, etc. etc.

> What new information?

Trades occurring at other locations. Even if the other location are operating in discretized time, there's going to be variability in how fast different market participants can transmit information from one location to another. From Wolfram Alpha, Tokyo to NYC is 36ms at speed of light in vacuum and 51ms at speed of light in fiber, so someone with a faster network could be multiple discretized ticks ahead.

Exactly. Instead of the game being "who communicates fastest" it would be "who can time the sample rate the best"

There are plenty of solutions to that but it wouldn't even be a problem if exchanges weren't -selling their order flow before the trades happen-

By selling order flow brokers have reduced your commissions significantly (and all the way to zero in the case of robinhood.com).

This is good for you, not bad.

Can you give an example of an exchange that sells the order flow before it happens?

Are you perhaps confusing exchange in this case with a broker?

That's silly, because it's an universal truth. Yet they still close the exchange and the dumb traders go home to sleep.

You can design the rules to optimize for one thing or another, continuous world notwithstanding. I'm suggesting a way to optimize for something more useful.

And I'm saying that your optimization wouldn't accomplish any goals that you might have.

Let's say that happens. The system checkpoints and everyone orders off those checkpoints.

What changes? What's the end result? How do normal people or society benefit? What would have to happen for the change to be declared a success. Conversely, what would have to happen for the change to be declared a failure?

The benefit? People don't have their order front runned by algorithm which will sell it back to them at a slightly higher price, skimming money off the top to no one's benefit.

Can you explain in as much detail as possible exactly how algorithms are front-running people's orders? Can you do it with an example of a specific kind of order, preferably down to where exactly the order is being placed? Then we can dig into the specifics and evaluate the claim being made here.

He can't, because he's wrong.

You've misunderstood what I'm saying. I agree with you: timescales far below anything that provide any meaningful social value are an intrinsic figure of merit (usual definition: "often arbitrary-seeming number people compete over") of the market microstructure we have now.

I'm not saying the markets must function this way, only that they do, and it's not evidence of a giant conspiracy or grift that they do.

The rest of my comment suggests that while we could potentially quantize the markets, it doesn't seem like we have much to win from doing that, and, further, that it's likely that the problems we're trying to solve by doing that would persist.

Exotic quote types and being paid for making the cross is where this explanation seems to hit market realities. HFTs are able to make money on fees by having special access not only in terms of latency but in terms of ordering.

All public exchanges are required to have public approval for all of their order types and you can look up how they behave at any time.

> Exotic quote types and being paid for making the cross is where this explanation seems to hit market realities.

What exactly is an "Exotic quote type"?

Do you mean order type because there is a huge difference. If you don't understand the difference it makes it hard to take your assertion seriously.

The fundamental issue is Fisher consensus - arbitrage is a feature in other words.

A couple of things:

1) It is a common fallacy that there is "the exchange" or "the market". The market is an aggregation of exchanges (and non-exchange traded instruments) across a wide variety of jurisdictions and localities. But even though there is no central coordination between all that jumble, the instruments are correlated. That is, the change in price, demand, or availability of one is a signal about the pice, demand and availability of the others.

2) The market is made up of participants who exist on a band of price/time sensitivity. That is, someone like a retail trader doesn't have extreme price sensitivity but may have time requirements. In trading that style of participant is known as "dumb" (oh traders, you so PC).

3) Market makers make all their money trading spread for time but thats not where the latency games come into play. The latency is because...

4) Smart money is price sensitive (or price informed) and they tend to be where market makers lose money. Smart money tends to be either prop traders with particular algos, large block hedge funds or other market makers. Those are the people who cause market makers to play latency games, because its a vector a market maker can control that keeps them smart. They will never be smarter than the hedge fund that knows its going to buy a bunch of shares and therefore drive up the price, but they can at least jump out of the way quicker than the other smart money.

It is a common fallacy that retail orders ever go to stock exchanges. This is a good way to determine someone telling the truth. Here's proof: http://www.nanex.net/aqck2/4704.html

If you're doing market making, note that you're more likely to get a buy order filled when the market is going down, and more likely to get a sell order filled when the market is going up. This is the flip side of getting to "capture the spread".

So in order to be successful, especially when your margins are razor thin (and they pretty much always are), you have to be very, very good at canceling your orders as quickly as possible any time it looks like the market is likely to move against you.

Can you define "not especially lucrative"?

I.E. how much money is a good HFT firm making at scale?

Virtu, one of the very largest HFT firms, had revenues of ~$750MM, with net income around $120mm, in 2014. Goldman Sachs made $34bn.

Does that list include the HFT arms of the bigger traditional firms? Goldman bought into Perseus[1], so I assume if Perseus counts for them, but I imagine there may be some larger firms with HFT divisions that don't report separately.

1: http://www.bloomberg.com/news/articles/2015-04-21/goldman-sa...

You are wrong. I'm sure you mean $750M, but they only have 200 employees, Goldman has 40,000. HFT is extremely lucrative.

Thanks for correcting; yes, I meant that Virtu makes a small fraction of what Goldman makes. Goldman, of course, is not principally an HFT firm.

http://ir.virtu.com/results.cfm

Actual results for 2015. Your numbers are a fair bit off of those. What you can see from the results is that their revenue/profit numbers are small in real terms, but their margins are big compared to other businesses, even technology ones.

Personally, I'm not offended by that and think that the entire conversation about HFT is funny given how little money is actually involved, but if you view profitability in any context as evil or rent seeking, then you have ammunition for that argument with Virtu.

[edit]

Another good one to look at is Knight (Getco) http://investors.kcg.com/phoenix.zhtml?c=105070&p=irol-SECTe....

Had a much better year last year vs the previous 2 and it still was a fundamentally little amount of money.

[edit again]

That Knight statement is very interesting because it shows that the vast amount of their profit came from execution services and that their market making business was very low margin. Now that could be because their market making business is taking the full shot of the infrastructure accounting that enables the execution services business, but its interesting none the less.

From the source you gave:

> Full Year 2015:

> Net Income of $197.5 million

> Adjusted Net Trading Income of $500.7 million

His numbers seem pretty accurate.

He edited it down an order of magnitude (and rightly so, it was clearly a typo).

That said, whenever any trading entity talks about their trading income, be suspicious, because that is usually just the difference between bought/sold (and fees) and doesn't account for the infrastructure costs of trading.

Thats why I like these public SEC documents so much, because they have to use GAAP so you know exactly what they mean.

> First, HFT firms aren't especially lucrative compared to other finance specialties, so one answer to that question is "nowhere".

Total bullshit. If there was so little money to be made why is every exchange catering to high frequency traders? Why was the building across from the NYSE hollowed out to become a data center? Why are custom fiber optic cables being layed down specifically for it?

> If you're a retail trader, automated electronic traders make money off you by outbidding the markets to quote good prices to you for your dumb market orders, and then pocketing the spread --- in other words, they make money the same way market makers have always made money; they just make less of it at an instant, but at a far larger scale.

This seems to be typical of HFT apologists. They start to use terms that are defined in other terms that they've essentially made up, much like trying to get to the first principles of a religion. There are no 'market makers', there are people selling with a miminum price and people buying with a maximum price. They aren't outbidding the markets, they are front running by seeing an order, buying it, and then selling it to the original buyer. Everything else is there to obscure the truth. I've seen so many of these posts here and none of them has ever approached any sort of justification or validity.

>They aren't outbidding the markets, they are front running by seeing an order, buying it, and then selling it to the original buyer.

Please step me through this scenario. Exactly what do you think is happening, in what order and how?

First, let me gingerly remind you that strong arguments don't appear stronger when they include things like "total bullshit" and name-calling.

Second: I didn't say HFT wasn't lucrative at all. I said it wasn't lucrative compared to other finance specialties. I would feel worse about this misunderstanding if the thread you were commenting on didn't include actual numbers backing this up.

Third: the ultimate reason exchanges "cater" to "HFT" is that they get paid based on order volume. That's what it means to be an exchange. Exchanges compete with each other. If nobody trades on your exchange, you don't make much money with it. Exchanges would rather you do business with them than not. It's not complicated.

Fourth: if you're in the normal demographic of HN (age 20-35 or so), you've never bought or sold a share of stock that went through a human market maker. Market-making is automated now and has been for something like two decades.

Fifth: if you're an individual buying and selling stocks for your own account by clicking buttons in an online brokerage, you are placing market orders. There aren't "minimum" and "maximum" prices. There's a current best bid, and a current best offer, and a gap between those two prices. We have decades worth of research on what automated trading is doing to that gap: it is slashing it from dollars to pennies.

Sixth: if you are placing limit orders, there is nothing an HFT or anyone else can do to "front-run" you to cheat on your order limit. Incoming orders are priced according to the price on the order resting on the book. When you place a limit order that doesn't immediately execute (in other words: when you place a limit order that is actually meaningful), that's the price your order is going to trade for, if it ever trades.

If you disagree with any of this, it would be helpful if you could lay out a hypothetical sequence of events in which this "front-running" is actually occurring. I place a LIMIT SELL order for 1000 CSCO on BATS at $27.90. An HFT decides to front-run me. What exactly happens next?

He's right - if you weren't part of the group that was paying them over $100M/year in fees for "real-time" data and you weren't buying or selling stock in 2008, 2009, 2010 and 2011, it probably didn't impact you at all.

The people making money on the HFT stuff are the exchanges. The HFT people are making realtively easy money, but require vast bulk to do so.

Quote from an interview with Hunsader on CNBC regarding this topic:

   Q (CNBC): Should long-term investors care about milliseconds?

   A (Hunsader): Yes, they should.

Ok, and...?

What NYSE was doing seems to have increased frothiness of the markets. Your median individual investor might not pay a direct price for this, but it certainly could increase costs in subtle ways. Or simply make the market more frothy in the macro view as well as the micro (nano?) view.

Further, some whales (pension funds) might get hurt and that hurts your median citizen. Many hedge funds seem to have a strategy of whale-hunting. Thus dark pools and all that.

In 2010, internalizers ABSOLUTELY, WITHOUT QUESTION, priced retail investor orders with SIP prices (the feed that got way behind). What the NYSE was doing:

ABSOLUTELY. POSITIVELY. Impacted retail investors and mutual funds.

Shouldn't internalizers be required to use direct feeds instead of the SIP? The SIP, by construction, will always be lagging the 'real' (if that even means anything) NBBO.

Internalizers use both. The give retail the slower price, and buy and sell on their own account at the faster price. Nanex has uncovered a document from the NYSE stating that this is the case.

Let me be more clear -- if internalizers are regulated to use anything, why aren't they regulated to use the direct feeds specifically? If the regulation specifically allows them to use the SIP, that seems to be a failure of the regulation itself.

Is this the same thing that was discussed in the documentary Wall Street Code (http://topdocumentaryfilms.com/wall-street-code/) where certain types of order/purchase types actually bumped your position in the queue?

No.

its pretty amazing how few people seem to have base domain knowledge of core market infrastructure considering how many people work in that area and that it isn't particularly tricky. It certainly colours the opinions of everyone here jumping to entirely silly conclusions.

I can read (and have read) Volumes 1, 2, and 3 of The Art of Computer Programming and thereby acquire a considerable amount of "base domain knowledge" in that area.

I'm not aware of a correspondingly simple way of acquiring base domain knowledge of the topics we are discussing here. Perhaps you can suggest some books?

This is OK as a book, I read much of it many years ago:

The Complete Guide to Capital Markets for Quantitative Professionals (McGraw-Hill Library of Investment & Finance) Hardcover – 1 Dec 2006 by Alex Kuznetsov

A book on trading is prob more useful. There are many public specs of exchanges. For example:

http://www.cmegroup.com/confluence/display/EPICSANDBOX/MDP+3...

The main thing to learn is orderbook building mechanics

You can also come to the same conclusion if you see how NYSE conducts opening and closing auctions. The presence of human specialists and d-quotes is in the same vein...

And $5mm seems like a very small penalty to pay for systematically ripping off retail investors. I wonder if there is a valid basis for a class action that could recoup more of the theoretical losses due to the delayed quotation...

Can you explain exactly how this is an instance of NYSE "systematically ripping off retail investors"? Please be as specific as you can.

The article detailed how NYSE provided delayed quotations to it public service. This means that investors without access to the real-time info unknowingly traded at a disadvantage to those who did.

In exactly what way is a retail investor harmed by the kinds of delays that this problem introduced? Please be specific.

Note: despite the fact that retail investors virtually never trade directly on exchanges, let's stipulate that they always do.

I don't think it's a good thing that the NYSE's feeds were this crappy; that's not what I'm debating.

I don't see a need to pretend that retail investors trade directly on an exchange to show harm. The reason that some firms pay for access to current information is that it gives them an advantage. An advantage against whom? Is this only a matter of HFT firms trading against each other, and they all have access to the same info? Or, is the info asymmetric and someone is disadvantaged in a trade? I have to think that at some level, HFT will result in higher prices paid by brokers and their clients, and directly or indirectly by mutual funds. It's a bit of a stretch, and I think that may explain why we haven't heard of any civil lawsuits based on these facts. Also statute of limits on some related claims may have expired.

> Or, is the info asymmetric and someone is disadvantaged in a trade?

There is no expectation in the markets that everyone is working with the same information, quite the contrary, the markets wouldn't provide value if everyone was working with the same data. One of the chief reasons the markets are valuable is that they give people incentives to surface (in the form of market activities) pricing information they might otherwise keep secret.

> I have to think that at some level, HFT will result in higher prices paid by brokers and their clients

Quite the contrary, it has led to a race to the bottom such that I can trade for free on my phone from anywhere with internet access at spreads that are nearly nothing. Robinhood is only possible because HFT has made it so.

> and directly or indirectly by mutual funds.

Vanguard, the gold standard for low priced mutual funds, completely disagrees with you.

https://www.sec.gov/comments/s7-02-10/s70210-122.pdf

How do you know Vanguard disagrees with me when I haven't even stated a position. I'm posing a loaded question hoping that someone can make an intelligent and factual argument as to why the sanctioned behavior that the SEC believes is illegal does or does not in fact cause any harm to retail investors. The Nanex commenter does that pretty well, and I think frames the proper issue (if we care about the "morality" of this) as not having to do with HFT at all. If we accept this, it means that my earlier comments here were irrelevant to the topic, as are yours and the comments by other HFT defenders in this thread.

Perhaps he is referring to your comment I have to think that at some level, HFT will result in higher prices paid by brokers and their clients

From the Vanguard comments: This roughly 25% decrease in the end value of the investment demonstrates the impact of reduced transaction costs on longterm investors.

So perhaps you didn't state a position, but you posed a thought (I have to think that at some level) or question and Vanguard rather decisively answers that question.

Vanguard is talking about electronic trading. Vanguard specifically states the time horizon is 10-15 years. HFT began in U.S. Stock in 2007. The biggest impact Vanguard experienced was from decimalization (going from eights to pennies, well before HFT). More info/proof: http://www.nanex.net/aqck2/3532.html

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