Comment by steve8918 | Hacker News Reader

Comment by steve8918 | Hacker News Reader

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The real issue is that in order to get an edge, HFT traders are engaging in electronic warfare in order to slow down their opponents.

One of the worst things they are doing is "quote stuffing", which means submitting bids and cancelling them tens of thousands of times per second. They stuff the exchanges with quotes and eventually cause a huge latency with respect to the quotes that are shown by the exchange, such as NYSE, NASDAQ, etc. However, they aren't affected because they can see the prices because they have a raw data feed. This gives them an edge relative to the other traders that don't have their own raw feed straight from the exchanges, and they use that to basically shoot fish in a barrel.

This was one of the main causes for the flash crash in 2010. The excessive quotes

The thing is that they could stop this by implementing a minimum time for a quote to exist, something innocuous like 100 ms, but they don't because this would be a detriment to the HFT shops.

The other thing is that HFT shops behave like market makers, and they claim to provide liquidity, however, they have no obligation to provide liquidity, like real market makers. So just like during the flash crash, they turned off their machines, and the markets went haywire. So they want their cake and eat it too. If they are going to trade like market makers, they need to have the obligation to continue to provide liquidity.

If I recall correctly, wasn't there, like, an extremely fast recovery from the flash crash? Why does the flash crash even matter? (I'm not being snarky at all, BTW.)

A lot of people lost a lot of money during the flash crash, through margin calls, stop loss hits, etc. It also called into question the stability of our markets. If people lose confidence in our stock markets, then people stop trading on them.

If we have another flash crash, you can bet that the already-low volumes on the markets will be met with even lower volumes, which could damage our economic recovery. Most peoples' 401ks are tied to the stock market, and the last thing we need is a generation of un-retireable people because they lost a lot of their retirement on the stock market.

A lot of people lost a lot of money during the flash crash, through margin calls, stop loss hits, etc.

Well, if day traders lost money, who cares? That's the business they're in.

It also called into question the stability of our markets. If people lose confidence in our stock markets, then people stop trading on them.

True, but there was a fast recovery, and people are still trading. You mentioned that volume is low. I wasn't aware of that (just don't follow things that closely). Does that correlate to when the flash crash was? I'd be surprised if the flash crash rattled people so much that it still has an effect on market confidence.

Most peoples' 401ks are tied to the stock market, and the last thing we need is a generation of un-retireable people because they lost a lot of their retirement on the stock market.

Well, investment managers who control people's 401ks should not be trading during a flash crash. I mean, I'm just not so sure that it affected everyday people much.

Also, there are a LOT of things to blame the current economic scewing-over of people on, and the market would be near the bottom of my list.

It's not the day trader losses we're worried about. It's the average investor who had trailing loss orders in on P&G (just an example) who had to sell their positions at steep losses only to see the market rebound immediately leaving them with zilch. This attitude of "If day traders lost money, who cares" is missing the forest for the trees. Lots and lots of people got screwed by the flash crash and that starts to cause credibility issues.

Serious question: Aren't stop-loss just another form of algorithmic trade? I understand their purpose (in principle), but perhaps its not an intelligent move for a long-term investor...? (Or to put it another way, perhaps the risk mitigation aspects of stop-loss trades are not properly valued.)

That's what a stop loss order does, it gets you out of your position regardless of the price. When P&G was dropping like a stone there was no way to know if the market was going to go straight back up or straight down. If it hadn't been a 'flash' crash but a straight up crash, if at that moment North Korea had invaded someone those average investors would be thanking their lucky stars they got out at only a 20% loss.

You can't have it both ways, either you set hard limits for your position and take the hit when you guess wrong or you let your position ride and risk losing everything. The crazy prices were busted after the fact anyway so if you had a stop loss further out than 60% of the pre-nonsense price your trade never happened.

That is a very good point.

I know the exchange can automatically put a halt to the trading of an asset, and that seems (to me) like a good tool in this case. e.g. if there is a certain pre-defined amount of volatility in a certain time. Do you think that would address this concern?

No.

The exchanges had similar circuit breakers in place during the flash crash. They even cancelled some orders after the fact.

But the flash crash still caused real investors (not professionals) to lose real money for the reasons outlined.

But the flash crash still caused real investors (not professionals) to lose real money for the reasons outlined.

Alternatively, the exchange's failure to tune the circuit breakers correctly caused real investors to lose real money?

Definitely an avenue for exploration. I'd argue that the exchanges have been doing this over time, but that market manipulators will always move faster than the exchanges can tune circuit breakers and other mechanisms to prevent manipulation. Folks who stand to benefit from the type of volatility embodied in the flash crash will always be able to outrun these sorts of changes.

Oh, also don't forget that the exchanges are subject to regulatory capture from the firms who benefit from real investors losing money to market manipulators. It's not like Goldman Sachs is going to be pounding the table for the NYSE to make it harder for HFT desks to manipulate markets.

Oh come on. Anyone who understands even the basics of equity trading should know that trailing loss orders are no real protection. That's been well understood since at least Black Monday 1987.

This is something people miss entirely in this argument, the fact that lots of investors have trailing stop trades in and in a flash crash, those people get their asses handed to them. Then we immediately start having a credibility problem. Once you have a credibility problem, the end game is getting close. When you combine that with things like the MF Global bankruptcy where client accounts were stolen from, you start to think maybe the game is rigged. Or at least I do.

Exactly. $1.6 billion lost from customer accounts that were not supposed to be touched, and no one is arrested? It just evaporated into thin air? The entire thing is disgusting, and I pulled out most of my money from my futures trading account exactly because of this, because I didn't have confidence that I would see my money again. Hedging through futures is something that many commodities producers do in order to have predictable revenues, and they just lost their shirts because of criminal fraud, and nothing is going to be done.

Haha, I hope you don't have a 401(k).

Hello? The game has always been rigged. That doesn't necessarily mean you shouldn't play, but you have to go into it with you eyes open.

Where are the customers' yachts?

Some have suggested that the problem was when the quotes were timestamped.

http://www.nanex.net/FlashCrash/FlashCrashAnalysis_NBBO.html

I don't really understand how you could abuse an exchange through quote stuffing - I've heard(and it seems reasonable to me) that they would use round robin queues to protect from exactly this sort of thing.

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