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Comment by yummyfajitas | Hacker News Reader

This is not a case of the markets being rigged. This is a case of regulators (actually congress) failing to understand the CAP theorem.

But for obvious reasons, an article on WAPO can't use words like "partition tolerance".

The problem is that the SIP must be available and it must be consistent. As a result it sacrifices partition tolerance - high latency (which is equivalent to a network partition) causes things to break sometimes.

So for all the conspiracy theorists out there, here is the fundamental question: which two should be provided for the markets not to be "rigged"?

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>So for all the conspiracy theorists out there, here is the fundamental question: which two should be provided for the markets not to be "rigged"?

There is no need to make any complicated tradeoff. For it to count as non-rigged, you simply need a system where:

* You cannot pay to gain privileged access.

* Abuse of the system (e.g. quote stuffing) gets you punished.

I find it amusing that you call us 'conspiracy theorists'. These aren't allegations of a government cover-up of alien UFOs - it's mundane criminal behavior with a very minor twist.

To avoid payment for access, presumably access would need to be free. Who would pay for it, then? Should we have state-sponsored exchanges? The networks and rack space required to let people trade in near-time are not cheap (and using the internet doesn't really work because people would go right back to paying for lower latency, higher throughput, and/or better reliability).

We could make the markets go super-slowly, but you know what will happen then? Correlated securities in other countries will trade at high frequency and dominate the price discovery process for "our" listings. That won't help our economy, it won't help reliability, and it won't help us assess taxes.

>To avoid payment for access, presumably access would need to be free.

There is absolutely no reason to presume that. It could be one flat rate.

>We could make the markets go super-slowly, but you know what will happen then? Correlated securities in other countries will trade at high frequency and dominate the price discovery process for "our" listings. That won't help our economy, it won't help reliability, and it won't help us assess taxes.

If our intention is to kill HFT (and it probably should be), we could simply levy a very tiny transaction tax on trades. It would instantly render the practice unprofitable.

Retail and institutional investors wouldn't even notice the tax (although they would probably notice the fact that HFT isn't skimming money from their trades).

Thanks for pointing out the tax idea (a fairly popular one these days). It has some of the same issues as slowing the market down. For example, a transaction tax on one market will push transaction volume to other markets, like squeezing a water balloon. A lot of securities have correlated or even 1:1 equivalents in other jurisdictions (e.g. Europe vs. US), which results in a tricky situation. Basically, whatever market pushes their costs up first risks suffocating itself.

I'm not sure what you mean by "one flat rate." Exchanges already charge a flat rate for connectivity (the rate is per month, usually a couple thousand bucks or so).

>For example, a transaction tax on one market will push transaction volume to other markets, like squeezing a water balloon.

Actually the exact opposite will happen.

Only the HFTs will want to move away, the rest will want to move to such a market. For the rest of them, operating in a market that allows HFT is pretty much the same thing as operating in a market for lemons: https://en.wikipedia.org/wiki/The_Market_for_Lemons

Asymmetric information in markets means 'the bad drives out the good'.

Just as running an honest used car market will attract buyers and sellers, running an honest stock exchange will attract traders.

Then why hasn't a stock exchange that imposes a transaction fee appeared and pulled in all traders, leaving the HFTs behind?

This is what I can't understand about this stories, and makes me doubt the claims against the HFTs.

network effects work heavily against new exchanges. it's not like starting a SaaS to deliver email.

But there are already 13 of them that are regulated. At this point BATS owns 4 of them, the only reason to have 4 different exchanges is to have slightly different rule sets and fee structures. Any one of the existing exchanges (especially the small ones) could change their rule set or fee structure if they thought it would bring volume.

This is nonsense. There is a lot of competition in exchanges, a new one is sprouting up every few months. Not all of them are able to get Michael Lewis to shill for them, but a new ATS/Dark Pool/etc sprouting up is hardly uncommon.

You should consider asking yourself why most such trading networks actually go to great effort to encourage HFTs to trade on them. (Hint: no liquidity no customers.)

A transaction tax will increase spreads. That is a really big argument against that such an exchange would be popular.

HFT did not reduce spreads. electronic trading did. actually sometimes hft can be a liquidity taker and thus increase spreads.

I don't know where this meme started, but it's clearly untrue. Nanex likes to make this claim, but they claim "HFT" only started with Reg NMS in 2007. Tell me this doesn't sound like the most stereotypical HFT-style trading in 2005: http://www.bizjournals.com/kansascity/stories/2005/01/17/sma...

And it wasn't just Tradebot doing it. There were many firms already active with similar styles in the early 2000s like GETCO, ATD, Madison Tyler (now Virtu) and a bunch of smaller guys. HFT does not depend on Reg NMS, fragmentation, or rebates. HFT firms are super successful in futures markets with a consolidated limit order book and fees for both sides of the transaction.

Canada tried a transaction tax (technically a regulatory fee increase) in 2012. The net result is that retail lost, institutional investors won, and spreads increased by 9%.

http://qed.econ.queensu.ca/pub/faculty/milne/322/IIROC_FeeCh...

Everyone would notice a 9% increase in spreads.

If you believe HFT is "skimming money from their trades", can you explain the specific mechanics (i.e., what orders are placed when)?

Didn't Canada loose out because people went to other markets instead? I.e. not because of the tax/regulation per-se but rather because other markets didn't have that tax/regulation.

From what I learned from a guy who did HFT back in 2007 HFT skimming money from their trades, thats why they make more money when markets are volatile.

In some ways it's just a more sophisticated version of the traders who in the nineties made their money from each trade they made happen whether it went good or bad.

The more customers they go to investe, re-invest etc the more money they made.

Don't think thats a big secret.

"Canada" didn't lose out. Individual investors in Canada did, because the bid-ask spread widened.

If that happened because HFT market markets decided not to use the TSX anymore and instead haunt exchanges that were amenable to HFT, that's evidence that HFT was helping individual investors.

Thats like saying tax havens are evidence that paying less taxes is helping individual tax payers.

Sure but that is not really the point is it?

You're implicitly begging the question by assuming that HFT is bad, and therefore permitting it is bad, regardless of any further evidence. The point here is that if an exchange successfully removed HFT, and that materially hurt people, that is evidence that HFT isn't bad.

I'm simplifying a simplification, and I personally would be among the first to point out that this is still just a one-point sample of a horrifically multidimensional space. My point is not to specifically claim that HFT is good, a matter that I still have no personal opinion on, but to point out the question begging. If HFT is shown in fact to be a net gain for consumers, then you should not blithely carry on with the presupposition that it is bad.

I was replying to this:

*"...If that happened because HFT market markets decided not to use the TSX anymore and instead haunt exchanges that were amenable to HFT, that's evidence that HFT was helping individual investors..."

Which claims that because people move to places that are not regulated/taxed it's a proof that HFT was helping individual investors.

That was in return in the context of me asking whether the reason why the Canadian market lost out was because it did so alone.

In other words. If ALL markets included taxation would the same drop happen? Or in even other words. If something can't handle being taxed is that an argument for not taxing it? Wouldn't it just be evened out.

I am not assuming HFT is bad or good. I am actually trying to figure out what exactly it's good for.

I understand how it's good for those who trade on the market, what I have not yet seen is any examples of how that transcends to society as a whole. And until someone can give me obvious examples of that I don't believe it's irrational for me to be sceptic.

Didn't Canada loose out because people went to other markets instead?

Most Canadian stocks are not traded on US exchanges. So no.

As for "skimming", I'll repeat my question: can you explain the specific mechanics (i.e., what orders are placed when)? Note: if you believe FIX/OUCH has a "SKIM" command, can you link to it?

With regards to the mechanics. All I have is what was explained to me by someone who started doing HFT more than 10 years ago and from those traders I know who made money by trading the same stock several time a day and taking a small fee each time they did. Back then they just didn't have computers or the knowledge to do it fast enough I guess.

> If our intention is to kill HFT (and it probably should be), we could simply levy a very tiny transaction tax on trades. It would instantly render the practice unprofitable.

That would also kill a lot of mutual funds, exchange-traded funds, asset managers, and others. These depend on the availability of frequent rebalancing of portfolios at low transaction cost. Add in a tax to this and you penalize it significantly.

I forget if it was on The Daily Show or 60 minutes, but the "solution" the new exchange came up with was to actually slow down his trades by fractions of a second such they all arrived at the same time. Once he did that his order fill rate went up and the HFT got cut out. He did this while a 60km fiber optic spool

So "super slowly" isnt exactly what he was doing

It was the Daily Show

http://thedailyshow.cc.com/extended-interviews/o7grtj/exclus...

As I understand it, that link is only good in the US. So for everyone else, that is the extended interview of the April 1 episode. I'm sure it can be found somewhere.

Thanks for the link.

It works fine from Denmark. I've never had problems watching it from a non-US country.

Also, pro tip if you want to avoid ads between segments: right before the video gets to a horizontal line (ad break) on the seek bar, skip to the part right after the horizontal line. You'll skip the ad. Also: if you work as a web developer at Comedy Central, you never saw this comment.

GP: >>You cannot pay to gain privileged access. [my emphasis]

>>To avoid payment for access, presumably access would need to be free

(Also, high frequency trading can't have much to do with finding the price points of stuff.)

I don't have a horse in this race (I don't know the subject area), but most of that comment was a straw man argument.

I realise that was probably a mistake in reading, but even I can see the implementation ought to be somewhere between simple and possible: Publicise the algorithm for a random delay between a tenth of a second and (more seldom) ten seconds for all buys/sells. Or something similar.

Make certain to have good random number generators.

Edit: If it is a good thing (or possible) to do this I don't know.

So everyone needs to pay several thousand/month for direct access? I don't know why it's bad that people who don't need low latency are allowed to not pay for it.

"Quote Stuffing" is not the nefarious activity that Nanex portrays it as. It's generally the result of your algorithm screwing up. It provides no benefit to the trader and exposes him to risk - specifically, an HFT who is quote stuffing will always be at the bottom of the book. As a result, he won't get any retail fills, he'll only trade with informed traders who are buying up the whole book. It also lowers your fill rate, which can result in a trading halt or financial penalties.

As a result, most HFTs put effort into reducing quotes and making their algorithms more stable.

I shouldn't have used the term "conspiracy theorists". I just find this topic frustrating since there are a large number of comments that display a complete misunderstanding of basic market mechanics and a complete unwillingness to be specific. No shortage of moral posturing, however.

I don't know why it's bad that people who don't need low latency are allowed to not pay for it.

For years, mil-spec GPS time was masked with randomness and unavail to the public. Why not do this with the markets? The regulators only care about mean prices being unbiased. They should equilibriate just fine with some non-sequential information introduced. Why or why not?

The regulator cares about more than just the mean price. The idea behind Reg NMS is that anyone who places an order at a protected venue should get the best price available, not just something close. It isn't enough for the differences to just average out, because some people get poor execution in one direction, and others get poor execution in the other.

Agree but consider this:

If the timing is perfectly tractable the system is gamed. A small amount of noise that prevents manipulation is a good thing over time for the market. It means the stock is going to have less vol which increases the value of the market equity given constant cash flows. That's another policy goal more broadly. That is, if it works this way.

> I just find this topic frustrating since there are a large number of comments that display a complete misunderstanding of basic market mechanics and a complete unwillingness to be specific.

Not to mention, an abundance of aggressive misuse of terms of art such as "insider trading", "front running", and others. These terms have a well-defined meaning in SEC and FINRA regulations, and it does no one any good to accuse HFT of doing things that it isn't doing.

"I don't know why it's bad that people who don't need low latency are allowed to not pay for it."

With the prices I am hearing it's not about those who don't need it but rather those who need it and would like to have it but cant afford it.

If I want to move one lot or ten lots through the market, I don't need low latency.

If I want to move 10k lots through the market, I can afford low latency.

And why would you want to move 10K lots through the market any others point of view than the HFT traders? It's a genuine question.

Your English broke down there, and I'm not sure what you're asking. "Why would anyone but HFT traders want to move 10K lots through the market?"?

Sorry English is not my first language and sometimes I end up writing convoluted sentences.

Let me rephrase then.

Why would anyone but HFT traders need to move 10K lots through the market?

"Sorry English is not my first language and sometimes I end up writing convoluted sentences."

No worries at all. I certainly didn't mean to imply any sort of a judgement; I just needed clarification.

"Why would anyone but HFT traders need to move 10K lots through the market?"

To a first approximation, it's never the HFT traders that need to move 10K lots. In commodities, it's big producers and consumers - Chevron needs to secure crude stock, ADM needs to buy up a ton of corn, some mega-farm (or co-op of large farms) wants to lock in a price on what they're producing, &c. In equities, it's institutional investors, hedge funds, and possibly exceedingly wealthy individuals, who have decided they want to hold many more or many fewer of something. It's clearly going to be a big player - transacting 10k lots of a stock priced at $10 would be $10 million. Most people - including HFTs - aren't trying to move millions of dollars in one direction in a short time. Those who are have resources, almost by definition.

One of the core complaints about HFT regulation is that the regulators refuse to update their definitions to include HFT activities that follow the letter of the regulation but clearly violate the spirit of the regulation. Therefore arguing that HFT detractors are not relying on precise definitions does more to show that you're not really listening to their argument but rather just finding something to nitpick. It looks like an avoidance strategy, not an honest defense.

First off, my quibbles about the definition of front running vs predatory trading are unrelated to my defense. The defense I gave was about price discrimination. It doesn't matter what label you apply to the definition - if you want to argue against me then say why price discrimination is bad. Or say I'm wrong about price discrimination.

Second, the "spirit of the regulation" about front running is about allowing people to trust their agents. Other regulations in the same spirit are lawyer-client confidentiality and "financial advisers can't take gifts from companies they give advice on" regulations.

There are no "you can't kick people's ass in the stock market" regulations, in letter or spirit. If you play the stock market everyone is trying to take your money. You are trying to take theirs.

>So everyone needs to pay several thousand/month for direct access?

I think you're overestimating the cost of running an exchange by several billion dollars.

>I don't know why it's bad that people who don't need low latency are allowed to not pay for it.

FRONT RUNNING

>"Quote Stuffing" is not the nefarious activity that Nanex portrays it as. It's generally the result of your algorithm screwing up

No, it's generally the result of an HFT intentionally trying to clog up the order stream (in order to push everybody else back), or trying to gain an information advantage.

>It provides no benefit to the trader

Now you're in cuckoo land.

> I just find this topic frustrating since there are a large number of comments that display a complete misunderstanding of basic market mechanics

Yes, i find it frustrating arguing with you too. What's worse is that you think using industry jargon will intimidate others into thinking you know better.

I'm planning to write a blog post on quote stuffing - explaining why it is dangerous for the trader and why it is easily caused by software bugs. I hope you reads it.

That's a false dichotomy. Even something seemingly binary as CAP is actually subject to many assumptions and preconditions. Change one and the question is of whether CAP still holds for the system, is relevant, etc.

For one example, partitioning comes in degrees. You can accept partitioning up to a certain threshold and only then choose to sacrifice availability until partitioning crosses below the threshold again.

Ok - what complicated tradeoff do we make for things to count as "not rigged"? Please be specific.

Don't sell privileged access to the stock exchange and don't enable abuse of the trading system.

Can you tell us what you mean technically by "privileged" access? Is there a threshold in dollars you have in mind for what is an acceptable fee for connectivity, or is it something else?

Is it a matter of the stock exchanges profiting from this, or the fact that it's possible at all?

I can't see how it can ever be possible to give everyone the same information at the same time. Latency will always be there, and renting rack space in a building near to the exchange will allow the information to reach you before the opposite coast of the country. Although this might mean that the owner of the neighboring building is the one making money, and not the stock exchange itself.

Firstly, I wasn't arguing that the market is rigged: I was arguing that your argument doesn't hold, because there is actually an infinite amount of options to choose from, instead of just two (or one, as you are implying).

Secondly, you are not being constructive in your questioning, as you have already marked any answer I would give as 'complicated' (as if the system isn't complicated already).

Thirdly you are unfairly asking for 'specifics', where you yourself are arguing in generalities. Why won't you be specific: explain why the market is not rigged? 'The market' is not 'innocent until proven guilty' or 'efficient until proven otherwise'. You claim the market is fair: prove it. Please be specific.

Fourthly, as long as you are asking: I think we don't need the amount of Availability the system currently has. Quote stuffing is currently possible and you can get rid of that by reducing the availability of the system. Any form of rate limiting is a deliberate sacrifice of availability to achieve some other goal. Rate limiting the number of orders per licensed party, per instrument, per unit of time is eminently doable.

In conclusion, from the whole of your posts here on HN, I think you are way too infatuated with capitalism and unable to see her for the bitch she sometimes is. Your response was uncivil and uncalled for.

I didn't mean to imply there were only two possibilities. I merely wanted to ask what "not rigged" means to you? As the current article shows, there are real technical details necessary to figure out and the CAP theorem limits what can be done. It isn't a simple question to answer, and I personally lean towards "the SEC did a generally good job".

I don't know why you feel I was "uncivil" - I merely asked a question. However, please accept my apologies.

If you want to see assorted defenses of specific aspects of HFT, I have quite a few on my blog. I just posted a new one today. If you look way back, you'll also find a tutorial explaining the basic mechanics of HFT. I'm planning to publish an explanation of "quote stuffing" (aka screwups in your algorithm) shortly, as well as a takedown of Mark Cuban's idiotic article on the topic.

http://www.chrisstucchio.com/blog/tags/high%20frequency%20tr...

As I read the article, what you claim happens "sometimes" is rather "most of the time, let us say 99.999999% of the time", which is not so acceptable because it almost always (i.e. always) benefits HF traders.

So, I had rather it would be designed in a different way which does not benefit the people with more money. For example, sacrificing latency so that there is no partition. This way, everybody has the same information at the same time, which is the basic tenet of an equal market.

Also, having different routes for different actors (as per the graphs) does not look like a road map to equality.

BTW: I do not get why you have been downvoted although in some sense your comment might be seen as a misunderstanding of the text. But I am surprised.

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