Hacker News Reader

Comment by chollida1 | Hacker News Reader

If you're wondering what IEX becoming a full blown exchange means to you, well it probably doesn't matter at all.

They have been operating for some time already as an ATS, today they are now part of the RegNMS protected quote, meaning that up until today, brokers did not have to route orders to them.

it also allows them to have companies "list" on their exchange, though I don't know of any companies that are planning on listing with IEX currently.

They bring 4 unique things to the market

- their built in delay of 350 micro seconds on each incoming and out going message, ie they delay order's coming in and they delay fill notifications going out.

- they have a patented dynamic peg algo that will allow a user to place an order that the exchange will dynamically price. This order type was a bit contentious as the exchange doesn't delay quote changes when updating these orders, ie these orders are blessed in the sense that they don't obey the 350 microsecond delay.

https://www.iextrading.com/trading/dpeg/

- they aren't currently allowing co-location

- they don't participate in the maker taker model. They charge, I think, 9 cents on dark orders and nothing for lit orders.

Maybe the most interesting thing that IEX has brought to the US market is that the NYSE is now filing to add their own discretionary PEG order.

https://www.nyse.com/network/article/nyse-order-types

View on HN

For more on the dynamic peg controversy, this article lays it out in detail:

https://www.bloomberg.com/view/articles/2015-12-22/the-flash...

TL;DR:

> In other words, the objection goes, IEX uses the magic shoebox (and its router's ability to skip the shoebox) to do "latency arbitrage" and trade with stale quotes on other exchanges before traders on those exchanges can update their quotes, just like it accuses high-frequency traders of doing to its own investors. And, the objection goes, if it's unfair for high-frequency traders to do this to IEX's customers, then it's just as unfair for IEX's customers to do it to high-frequency traders.

[but maybe this is just leveling the playing field...]

This is the thing when I see wall street, and specifically high frequency trading vilified. Income inequality, the plight of the middle class, etc has almost nothing to do with that kind of financial maneuvering. Getting rid of high speed trading won't affect the average person really at all - but yet it's constantly vilified.

I think it's vilified because for some reason people think that the HFTraders are "stealing" from them in the form of tax avoidance and their exorbitant incomes.

Nerds making money and people gunna hate.

I'm not generally a fan of viewing the world in terms of an extended version of the social struggle from high school, but given that this actually does do a reasonably accurate caricature of human market makers versus HFT firms, this has always confused me regarding HN's reaction to HFT.

In one corner, we have sweaty alpha male jocks [+]. In the other corner, we have geeks with computers. The geeks ran the table on the jocks primarily because the geeks can do math faster. The jocks complain that the geeks are cheating, because how can they be expected to out-math a computer and, also, isn't math just a little suspicious? And HN sides with the jocks?

[+] People might think I'm exaggerating. Videos exist of the daily life of a market maker. Here's a representative day at the office, circa 2000, in Chicago's open outcry options pit: https://www.youtube.com/watch?v=mvx3xM02iUs In stocks and bonds, you generally got to be sweaty in your own office (open plan, frequently) and yell at someone over the telephone rather than straight to their face.

I thought about your question on my walk home from work today. I decided that as much as jocks vs geeks is a powerful force, a more powerful force is people's distrust of middlemen. People don't really understand that liquidity provisioning is a service that needs to be paid for. They think that if we could just wipe all middlemen off the face of the planet that buyers could just trade with sellers and we'd all save a little bit of money on trading fees.

So it's not so much that HN has sided with the jocks over the geeks. It's that (some portion of) HN dislikes both of them. And since the geeks killed the jocks the geeks are all there is left to dislike.

We're paying entirely too much for liquidity that value investors don't need. If my holding period was less than a day, that's a buyer and seller who would have found each other without my "help", and I didn't contribute any insight about the company's value, just about flaws in the marketplace.

Thank you for demonstrating my point!

Feel free to place a limit order for the price you want instead of taking the liquidity from the HFT.

I agree about distrust of middlemen. The analogy that i would go with is that the biggest HFT firms are like big-box retailers. Not glamorous at all (despite the math), and most of the hard work is in automation/process to manage the storefronts and inventory at scale. HFT becomes comparable to walmart, which does not engender much love.

It's not so much distrust of middlemen, as it is distrust of anonymous middlemen. And also automated middlemen. People are happier getting shafted by a person they can see than a bot they can't. Otherwise, they would be hurling abuse at Apu down at the Kwik-e-mart when he charges them 30% extra for a quart of milk just because he bridges time (11pm) and space (down on the corner) to provide liquidity and make it convenient for them.

Part of this is also algorithm aversion (even here on HN) - watch how people are reacting to Tesla autopilot crashes. There is a lot of tin foil stuff about 'algos gone haywire', but I can tell you now that humans fat fingering in the market were both more common and more deadly.

What's "exorbitant"?

For the "average" 30 something American, probably anything over 150k.

Man, wait until people find out what Google employees get paid.

HFT firms make something like an order of magnitude less than their prey, the major investment banks.

Even more than that. Going by their 2015 reports, KCG made $885M in revenue, and Virtu made $757M. JPMorgan made $93,543M. If you look at net income, it's even more dramatic since HFT firms generally run on tighter margins.

I've never quite understood the amount of HFT hate here. God's work it ain't, but it's a bunch of nerds using bleeding-edge technology and machine learning to break into and (dare I say) disrupt an industry whose avarice and sense of entitlement is perhaps unparalleled in modern history. It's tailor-made for this crowd, but somehow still gets a bad rap. I truly fail to see how that's less exciting than anything else anyone here gets worked up about.

As a mostly lay person, for me it's vilified because my understanding of it is that HFT has a significant advantage over my own personal trading, and that through this advantage HFTs are able to make "more" profits than would be possible without HFT. My brain tells me that some of these profits are likely at my own trades' expense, and that while markets and economies rise and fall, my own profits are negatively impacted by HFT.

That may not be accurate, but that's why I personally feel uncomfortable with HFT.

Rather than seeing HFTs as competing against you, a more accurate model is to see various firms competing against each other to service your needs at the lowest possible cost. These firms used to be staffed with expensive and slow humans, but by automating they are able to deliver a service to you at a much lower cost than was previously possible.

The story of automation in the financial markets is similar to the story of automation in many other businesses.

How does that really help me if I'm buying/selling a specific stock (vs. being in a larger fund, etc...)? My, again very lay, understanding is that the HFT is likely to push my buy price up slightly and make money in the middle of me a non-HFT seller, and push down the price slightly on the sale side, again making money as a very fast middleman.

I may have that completely wrong though.

It helps you in 2 ways:

1) It reduces the bid/ask spread. There isn't just one price for a stock, there are two. The price at which you can buy and the price at which you can sell. The price at which you can sell is lower. So when you buy a share of stock you are immediately down a little bit. This amount is called the spread. By automating firms can reduce this spread which does the opposite of what your intuition told you. It will bring buy prices down slightly and sell prices up slightly.

2) It helps make sure that prices are as accurate and up to date as possible. When you go to buy a share of $GOOG you probably aren't really sure if it should cost 775.40 or 775.45 or 775.50. You just figure it's a good company and likely to go up in the future. But because there are all these firms working really hard and acting really fast you can be pretty confident that whatever price you buy at at any given time contains the total available knowledge currently available in the world about Google's future potential.

If you think HFT is going to push up the buy price, set your limit a penny lower and wait a second for the "slow" traders to handle it. (If that's how you think markets work.)

Adverse selection! ;-)

What you are missing is that in the old days, your buy/sell order was probably handled by a human market maker instead of an HFT's algo, who would push up/down the price much more than 'slightly', hence making you pay more in trading costs. The biggest opponents of HFTs are the major financial institutions who used to provide those market making roles.

Unless you are exceeding the liquidity on a single exchange HFT will never affect you.

Here how it works... Imagine you want to BUY 10000 MSFT...

You send your order to exchange A, it does a partial fill for 1000 orders, and sends the remainder to exchanges b,c,d. An HFT firm sees your order to exchange A knows its not going to fill and sends its own orders to buy the liquidity on B,C,D and then sends sell orders at a higher price to B,C,D, your order fails to fill and you have to issue a new order at a higher price.

Since retailers will very likely never exceed the liquidity on a single exchange they'll never have any issue with HFT and will just experience increased liquidity and faster fills.

However, if you're a large dinosaur still sending huge orders now you'll need a group of suckers who want to trade only with you, enter IEX, and 'consumer' protection from HFT on their exchanges who now has a large pool of suckers to trade with.

And how do you convince the suckers to go to IEX? Incredibly cynical marketing!

https://www.youtube.com/watch?v=v2OZkTesSx0

I kind of agree with your underlying premise, but when I invest in a mutual fund / ETF, isn't that a giant investor that might be affected by HFT? And if that was costing the fund money, wouldn't that affect me (without me seeing it directly)?

Assuming that hft forms didn't drive other prices down. In particular the costs to trade (in the form of the spread, fees & execution costs) hadn't been decimated by hft firms.

"You send your order to exchange A, it does a partial fill for 1000 orders, and sends the remainder to exchanges b,c,d. An HFT firm sees your order to exchange A knows its not going to fill and sends its own orders to buy the liquidity on B,C,D and then sends sell orders at a higher price to B,C,D, your order fails to fill and you have to issue a new order at a higher price."

Maybe, but that seems like a pretty risky strategy. A simpler and far less risky strategy that would look very similar (admittedly only if you're looking exclusively at orders on the book and not fills) would be for HFT market makers to cancel or reprice their existing resting orders on exchanges B, C, D in response to getting or seeing a large fill on A.

In the strategy described by the parent, in addition to having to cross the spread, the HFT firm would also be at the back of the line at the next price level (unless maybe they already have an order there? but no guarantee that it's the right size, or maybe they have multiple small orders and cancel whatever is in excess of the position..).

So I'm genuinely curious: is what the parent describes something that is really that commonly done? This is one of the things that made me highly skeptical of Flash Boys. It seemed to me they observed a phenomenon, came up with a single explanation for it and never even considered any other possibilities that didn't fit the chosen narrative.

I believe the repricing behavior you describe is far more common now than the more aggressive strategy. Several years ago, before the exchanges got rid of "flash" orders, a variation of the more aggressive strategy was common, but under limited circumstances. The way it worked was that after a limit order was partially filled on exchange A, it would show the remaining size at the limit price very briefly before routing it to the other exchanges (this was the "flash"). If the limit price was a few ticks through the other exchanges best prices, the HFT's would take those prices out and offer at the order's limit price. Less risky because they knew the order would be automatically executed at that price as long as there was an offer there.

Short story:

HFT is generally considered good for retail traders because spreads tend to be lower. You trade both more cheaply and more quickly.

However, it's generally not good for large institutions (which are more than just 'big evil hedge funds') because markets react very quickly to movements caused by this big firms. If they decide that something is priced wrong, they won't be able to make many trades taking advantage of that.

https://www.bloomberg.com/view/articles/2016-02-25/-flash-bo...

I see HFT as good for everyone.

Market has a hard time reacting to option spreads when the long option is executed prematurely. I don't see why big players can't use them.

Also the market can't react too predictably. Because then the big player could just yank the market around and profit.

Some of this is limited by regulations on large holders / insiders.

It limits the ability of value investors who do fundamentals research to profit. Arguably those investors are the ones who actually ensure efficient allocation of capital (the supposed purpose of the market). There's kind of a paradox of efficient markets - the more efficient the market is, the less value can be gained selling information to it.

It does no such thing. Market makers prefer not to interact with people that have a directional view as they may move the market. If a market maker gets caught with inventory and the price is moving they will lose money. Market makers tend to be less involved in price formation then other types of investors.

> It does no such thing. Market makers prefer not to interact with people that have a directional view as they may move the market. If a market maker gets caught with inventory and the price is moving they will lose money.

Are you claiming this doesn't impact the profitability of those people with directional views?

It depends on what you mean by impact. A market makers role is to provide market participants the instantaneous ability to buy or sell a security. They compensated a small amount for providing this service. If someone is using very poor execution techniques the price could worsen, however most large asset managers and brokers that serve them have quite advanced execution technology. The actual impact of modern market making on final execution price is typically positive relative to not having it due to competition and ultimately a tighter spread.

See Vanguard on this: http://www.cnbc.com/2014/04/25/vanguard-chief-defends-high-f...

Vanguard invests almost purely passively, and does not generally take directional views. I agree HFT benefits Vanguard but that doesn't contradict my point at all.

Buy and hold is a directional view.

Let's not get into a semantic argument. The point is that Vanguard doesn't do fundamentals research or participate in capital allocation (in a meaningful sense; Vanguard does allocate capital but in proportion to existing allocation); they just invest passively and hope to earn the return of the overall market.

Its not semantics. You simply don't know much about the asset management business. Vanguard has numerous actively managed offerings. For example Windsor (http://performance.morningstar.com/fund/performance-return.a...). But there are others like the Admiral funds.

Any big enough company has small fingers in many pies. Vanguard's focus and specialty is their low-cost index (and similarly passive) funds.

A clarification on my other sister post: options allow one to lock in a price for cheap even at large volumes. For example expiring options can be bought for nickels in premium, with each one locking in price for 100 shares.

Expiring options are pretty thinly traded, no? If you're trying to sell 100000 shares, you may have a hard time scrounging up 1000 puts at 3:30 Friday.

You don't do the kind of trading HFTs do. No matter whether trading is done with hand signals or in FPGAs, you were never going to be making markets.

Meanwhile, cost of trading for normal people like us has gone through the floor. And we're only really looking at the last 15 years when we think about trading costs, but even steeper reductions precede that, and it was all brought about by replacing human market makers --- who are crooked as a barrel of fishhooks --- with automated systems.

Respectfully --- I don't know you, and this isn't a personal comment --- but my guess is that you distrust HFT because you've been told to distrust it. If you do even the most superficial cui bono analysis, you'll see the people most interested in making you believe that are themselves major financial institutions, all of them far larger than the HFTs.

It wasn't HFTs that brought down the economy in '07-'08. It was their adversaries.

The only disagreement I have with Thomas here is the last line. Securitization groups at the large banks and HFTs aren't adversaries -- they don't interact in any meaningful fashion. Large banks, taken as a whole, have some groups which are in competition with HFTs but have other groups which are their happy customers. (If you're a large bank, and you're taking liquidity, you are either astoundingly bad at your job or you actually desire to be buying what HFTs are selling.)

The industry standard for buying/selling mortgage-backed securities or collateralized debt obligations isn't HFT. It isn't even automated. It is one sweating jock yelling at another sweating jock over a recorded telephone call. You can see this dramatized in The Big Short, where to unwind the shorts that the "good guys" have made they have to get their own not-quite-sweating not-quite-jock played-by-Brad-Pitt to do the phone calls on their behalf.

> It isn't even automated.

Yes. No. Maybe. There's a massive push towards exchange trading the more liquid products: traders are expensive, and if you can get a robot to do basic inventory management and market making for you (even with a human in the loop), that's savings for a desk manager looking to cut costs in a highly straightened FI environment.

The highly distressed and/or exotic stuff that people are talking about in the Big Short are still slung by salespeople, with the connivance/approval of traders.

I think labeling literally all human market makers as "crooked" is probably excessive...

I've done a fair bit of exchange work, and the stories I've heard suggest I'm not far from the mark.

What about all the human market makers that went on to found HFT firms. DRW, GETCO, Jump, Virtu, etc. Bad guys as well?

I do not believe DRW is colluding with Virtu to keep spreads wide. In fact, all available evidence overwhelmingly suggests that the opposite is happening.

But human market makers colluded routinely, and in some cases famously.

Do you think when Don Wilson (founder of DRW) was making markets in the pits at the CME in the 80s that he was colluding with anyone is more what I was asking. Does he deserve to be labeled "crooked as a barrel of fishhooks?"

Maybe? I mean, he's been in hot water much more recently than that for trying to fix the market. http://www.bloomberg.com/news/articles/2016-03-09/manipulati...

On that case I think I agree with the Matt Levine take that "Back in September I was pretty sympathetic to DRW and after reading the CFTC's complaint. I'll double down on that.†" I guess we'll see what happens.

My only point was that some people think all HFT is bad, and here we have a complaint that actually the situation is reversed and it was actually all human market making that was bad. I don't think either statement is completely true, and I was trying to highlight the contradiction because the human market makers and the HFTs are, in a lot of cases, the same people.

† https://www.bloomberg.com/view/articles/2013-11-06/cftc-sues...

Alright, it's hard for me to explain how sometimes all means all and sometimes it doesn't. But tptacek's comment didn't literally say that every last floor trader was crooked, just that was generally true. And it's easy to see how it could be true. A wink here, etc. The difficulty for anyone to see the size of the order book.

I think it's harder to describe how HFT is bad. Most of the efforts in this thread are, we'll say, only loosely connected to reality.

The best you can say about sweaty men shouting is that if not corrupt, still inefficient. (To say nothing of spreads in eighths.) I think that's a claim that really is true for literally every trader.

I don't think people on the floor were necessarily all crooked or doing something illegal, but that market structure doesn't invite fierce competition. You'd see the same people every day and go to drinks with them. There was a real camaraderie between people on the floor, even if they were ostensibly competitors. Think of any community. Most people would probably work a little harder to have a nicer car than their neighbor, but they wouldn't want to see the neighbor's family starve to death in the process. By undercutting your rivals in the pits, you were literally taking away their mortgage payment, and you had to do it to their face. A lot of the locals in the pits were independent, so it was personal, not just business.

You also could see who was on the other side of your trade. Savvy floor traders would use that information to their advantage. If a sharp broker traded with you, you could hedge more aggressively or speculate in the same direction. Most electronic markets are anonymous these days so there's less information leakage.

In the pre-HFT era there were manual day traders doing spreading, arbitrage and short-term speculation based on the order book. A famous example would be the SOES bandits of the 90s. They would pick-off slow NASDAQ market makers and offer the shares back out on nascent ECNs like Island to make a few ticks.

Some of them worked for firms as professionals, but many traded on retail platforms similar to what you'd see from Interactive Brokers or TT these days. Still you are right that the average investor never traded in this fashion. At worst, the people HFT put out of work were trading as a profitable hobby similar to playing poker online.

> Getting rid of high speed trading won't affect the average person really at all - but yet it's constantly vilified.

You could say the same thing about ebola.

It affects a lot of average people in certain parts of the world terribly.

You're probably correct here. The part people find a little unsavory is not that it's somehow eroding the middle class. It's the idea that HFT can act as an unnecessary intermediary, essentially taxing a transaction that otherwise didn't need to be disrupted and at scale the amount extracted becomes material.

Imagine your neighbor owned a Ferrari and you told him one day you were going to buy a gallon of milk at the store. "On sale for $3.99!" you say to him. Now imagine he sped past you on your way to the store and when you arrived there he had bought all the milk at $3.99 and was selling it in the parking lot for $4.01.

You wouldn't necessarily be ruined financially paying $4.01 instead of $3.99. The cost is negligible. But you would probably think he was kind of a jerk.

Your intuition about financial markets does not match reality. In financial markets no one knows that you want to buy a gallon of milk (or a share of stock) until your bid has already been submitted. No matter how fast their Ferrari, there is no way for them to get in line ahead of you at the store.

Maybe you should read "Flash Boys" then. They can and do. Orders start at one place, and by regulation then can get sent to many other markets. If you can go to those next markets a little faster, you can front run the order.

Maybe you should read "Flash Boys: Not So Fast" then. It highlights a lot of errors in Flash Boys (which I have, in fact, read).

https://www.amazon.com/Flash-Boys-Insiders-Perspective-High-...

Flash Boys uses a totally fabricated use of "front running". It's worse than people that call copyright infringement "theft". That book is probably one of the worst books I've read as far as accuracy goes. At least that I'm aware of.

Seriously, at one point, Lewis suggests that the trading station of some big trader is hacked. That just by typing numbers without submitting an order, stuff jumps. This should send huge red flags off on anyone that's even remotely familiar with anything similar to a computer. But it's another "see how rigged it all is?" anecdote blended in with his nonsense.

Some programmers don't understand latency, so there's no hope for anyone who's not familiar with software development to wrap their head around the concept of "yes, things happen in milliseconds".

Which makes it all the more easier to get away with anything that sounds as sensational as this.

https://gist.github.com/jboner/2841832

Ohh there is a way to do it, and it is a show on 60/60. I think to be specific, there is a delay between NJ switch to Wall st, so some ppl tap in the switch in NJ, know what you plan on to order, then make their order use a different route to wall st... this was well documented. I dont know if it still exist though.

This is the complete opposite of what is happening.

What you're describing is straight up hacking, and if there was as clear of a breach of the law like that, we wouldn't be having civil discussions about whether HFT is good or not.

Besides, almost nothing routes to Wall Street anymore. Especially not for stocks.

NASDAQ's trading platform is in Carteret, NJ. NYSE's trading platform is in Mahwah, NJ. Most HFT firms, if they're not already colocated in Carteret or Mahwah, are located in Secaucus, NJ.

Well, there is in a matter of speaking. To take the analogy further, imagine not buying a gallon of milk but 100,000 1 gallon can of milk. The guy with the Ferrari wouldn't be able to get in front of you at the next door target but they'll loot the most convenient Walgreens, Safeway, Walmart, and Amazon Prime. Of course, the analogy no longer holds for numerous reasons (100000 gallons of milk, driving around, buying from the farms directly) but the point is the Flash Boys work on the likelihood of such an event happening which, believe it or not, is fairly common in the stock markets these days. Think, mutual funds, ETF managers, etc. This is now, largely, considered the cost of doing business.

If you want to by 100,000 gallons of milk you don't have a god given right to do so at the currently posted prices in every grocery store in town. Those grocers are well within their rights to raise prices as soon as they figure out what you're doing.

The grocers' price is irrelevant to the discussion here.

The guy with the Ferrari would still outrun you and offer you a new price, with a margin just enough for them to be profitable, yet not substantially large as to talk you out of the deal altogether.

Once the grocers raise their prices, there's no margin left for the Ferrari owner to capture.

There is still a margin if the intended buyer was willing to pay more or would just want to buy the milk at whatever price offered. Of course, the grocers could keep raising the price arbitrarily but there is still a delta that the guy in the Ferrari could overcharge. I think you understand the point we are trying to get across but just trolling it. I'd have appreciated an honest discussion rather than a trolling attitude.

I'm not trolling.

The situation I'm describing is literally what happens in the real world. If a large trader wants to buy a big block of stock such that he can't fulfill the order on a single exchange he has to be pretty careful about how he executes the trade or the market will move against him. As soon as he purchases all the stock at the market price on a single exchange those selling stock on other exchanges will raise their prices.

It's very important to understand this. The price doesn't (generally) rise on other exchanges because someone swoops in and buys up all the supply. It rises because the people who were selling in the first place change their offers.

Yeah, so if you're not a fucking idiot, instead of taking out a front page newspaper ad announcing to the world that you want to buy ALL THE MILK.

You should instead send 4 or 5 trucks to each location and buy the available milk, the guy in the Ferrari cannot outrun you because you're already there, and your order filled before he even got there.

Now imagine that you have at your finger tips a giant constantly updating database to the nearest millisecond about how much milk there is at every grocery store, but you still decide to take out a front page ad and announce your plans in advance, instead of breaking up your order into multiple parts and sending each to its own store. If you did this, everyone would laugh at you like they are at IEX and Capital Group.

Like I said in the original comment, it is pointless to get bogged down in the analogy because it doesn't reflect the truth accurately. However, you guys are continuing down the path an down-voting a perfectly legit argument. The purpose of an analogy is not to maintain fidelity to the original scenario but to simplify it to convey the point of author (otherwise it ends up getting as complicated as the scenario). The analogy is only a coarse approximation of the actual scenario, a best-effort attempt to drive the point across. I'm disappointed with the unreasonable down-votes and the explanation provided.

On the contrary, the grocers' prices are the very heart of the matter. You see, the Ferrari neighbor may be HFT, but so are the grocers. And every grocer wants to sell their goods at a newly-higher price if they get wind of a big buyer, because it will cost them more to restock if you buy everything. So they will naturally raise their prices. If you buy from the grocers one at a time, expect them to call the other stores (ok it's a chain grocery) to alert them. You will pay a lot for your last milk purchase, unless you stop buying because the asking price has gone too high. If you instead have milk trucks make synchronized purchases across town, you will pay the same price everywhere, and all of the grocers will be upset once they realize what happened. If you do the synchronized milk truck plan enough, the grocers may permanently raise their milk prices at the expense of losing a few other price-conscience buyers.

In reality, this occurs i the stock market because the "national market" consists of something like 15 different exchanges in a big distributed system, so there are race conditions. HFT market makers trade on all of the exchanges, and adjust their prices based on trading demand seen from other exchanges. They spend a lot of money on fast networks between the exchanges, so that they can be/beat the proverbial ferarri. But synchronized trades a la tgemilk trucks or Katsayuma's "Thor" cannot be raced against.

IEX is intended to partially commoditize the Thor approach: take the advantage away from the grocers (HFT, market makers) and give it to the big milk buyers (institutions like hedge funds and pension funds). Retail trading is not affected one way or another.

That analogy is tempting but inaccurate. Pretty popular with the Mike Lewis "the market is RIGGED against the LITTLE GUY and we're all MAD AS HELL" crowd, but in the end it's hyperbole. IEX is not for the little guy. IEX is for the really big guy. Institutional investors. They are tired of having the market run away from them on large orders.

A closer analogy would be that the neighbor is the owner of the local supermarket and you have recently announced that you were going to buy all the milk in the region. You go to one local supermarket (not his) first and buy out the entire stock of milk. On your way to the next one (his), he raises the price of milk to $4.20, knowing that your increase in demand is going to drive up the price everywhere and he doesn't want to be the idiot that sold you milk at $4.00/gal and will have to resupply at $4.20, losing 20 cents per gallon on that sale. When you get there your realize that the price of milk has gone up, and you yell and scream and stomp your feet, but you buy the milk anyways, because you have high demand for milk. The supermarket owner is not a jerk for responding to the increased demand for milk, but many people see it that way.

So maybe your a really rich guy who can afford a lot of milk, and so you lobby the government to restrict the ability of supermarket owners to talk to each other, maybe they have to wait a day or something. The supermarket owners are just going to respond by increasing the price of milk on average, because there are random milk thirsty people coming through every once in a while buying up all the milk, increasing the price, and they need to increase the milk premium so they can afford to resupply. They need to compensate for that risk. For that reason everybody loses out. Less people are going to buy milk due to increased prices, so that's bad for the store owner, and milk buyers are going to have to pay a higher price.

Same thing is going to happen at IEX. There is simply going to be a wider bid/ask spread.

Yours was the comment that made me understand how the spread economics described elsewhere in this thread worked, thanks for that. The average price increase in the absence of the HFT bids was the part that made it click.

Very helpful explanation!

That said, it should be mentioned that the "rich guy"/"institutional investor" includes various pension funds.

"In a letter urging the SEC to approve IEX as a full exchange, the Teacher Retirement System of Texas, a pension fund that manages more than $125 billion, suggested that trading through IEX could save the system millions of dollars a year."

This is not how it works. It's more like he sees you buy one gallon of milk at 399 then decides to go buy others. He has NO idea if you're going to buy it or not. He's taking a risk.

What your described is more like real front-running: A customer places an order, the evil broker sees it and goes out in front to buy for himself then gives the customer a lower price.

Your buddy in the Ferrari reliably making money requires him to be able to properly predict. AND you're missing the other side of the trade! The poor shopkeep that priced at 399 when you were OK paying 401. Why should he lose out?

HFT market makers solve this.

HFT costs 'everyone' that uses the stock market though an intermediary money so it really does cause income inequality. To suggest otherwise is to suggest they can somehow increase the value of stocks on average when they don't increase dividends and profit from the stock market. AKA money magically appears from nothing without costing anyone anything.

Which is not to say every single person is worse off just that this does not increase the long term value created by the companies who's profit makes the stock market a positive sum game.

The technology put a lot of people out of work and at the same time eliminated a loophole that wealthy people had to take advantage of the markets.

That is a recipe for vilification.

Think of the wrath of the unemployed truck and taxi drivers that will be aimed at the evil computer programmers and engineers who perfect self-driving cars and trucks. The headlines will be amazing.

The technology targets the wealthy people who were taking advantage of the markets.

This is true only to a certain extent. Mutual funds have been getting squeezed and the impact, though not immense, trickles down to millions of middle class investors.

No. The opposite is true. Vanguard, one of the largest and beyond a doubt the most trustworthy mutual fund complex, is on the record repeatedly as saying HFTs have lowered their cost of trading.

Where did you get your claim from? I can source mine, if you really need me to.

Then source it...

http://www.cnbc.com/2014/04/25/vanguard-chief-defends-high-f...

Vanguard runs etfs mostly, so I'm not sure why they care about support small spreads since they probably do a lot of efp trades (I'm not sure how the underlying prices are determined, but I think they can convert at a set price). The mutual funds and hedge funds who are more fundamental will try and buy or sell large blocks, so they're more affected by adverse market moves from trying to dump $1M of apple. I could see VG's attitude change a little since there are more traders engaged in rebalancing arb. If you know that the S&P index has to allocate more money to a certain stock, you can buy it ahead of time and sell to VG for a slightly higher price. If you're a passive fund with $1B in an etf, everyone knows what you're obligated to do. It's basically stat arb with higher probability. I still buy VG funds though

"Vanguard runs ETFs mostly"?

> Vanguard runs etfs mostly

Is there a socially acceptable way to call a person an ignoramus on HN?

Sorry, what's ignorant about that?

Vanguard has something like three trillion dollars under management, only 450Bn of which are ETFs. Vanguard is not the largest ETF provider, but has long been the #1 mutual fund provider. Anyone who rebuts an argument about Vanguard's role in the mutual fund industry by saying "Vanguard mostly runs ETFs" doesn't know what Vanguard is.

No.

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2330053&d...

I only invest in index funds. I do not day trade. I am all for HFT and a liquid market.

No, the exact opposite happened, narrowing the spread is super favorable to mutual funds http://www.cnbc.com/2014/04/25/vanguard-chief-defends-high-f...

I think it put several hundred people out of work at nyse and nasdaq who were also charged with colluding for $.50 tick size. They went quietly. The repercussions have come from institutional investors and banks who we're used to putting in 100,000 lot orders without the market moving against them. I do see some wrath coming from drivers too. The companies they're pissed at are too well known though. People will still see google and tesla as inovators and get behind them

If I ever chose to invest with K2, it would be entirely because of our contribution to HN. You always make great posts about financial news.

I believe Interactive Brokers has for a while now provided access to IEX, they pass through the fee though per trade.

Reply on news.ycombinator.com