Wall Street goes “Putin” on IEX

From Michael Lewis:

One of our financial sector’s most striking traits is how fiercely it resists useful, disruptive entrepreneurship that routinely upends other sectors of our economy. People in finance are paid a lot of money to disrupt every sector of our economy. But when it comes to their own sector, they are deeply wary of market-based change. And they have the resources to prevent it from happening. To take one example: in any other industry, IEX, the new stock market created to eliminate a lot of unnecessary financial intermediation and the subject of my last book would have put a lot of existing players out of business. And it still might. The people who run IEX have very obviously found a way to make the U.S. stock market — and other automated financial markets — more efficient and, in the bargain, reduce, by some vast amount, the take of the financial sector. Because of this they now face what must be one of the best organized and funded smear campaigns outside of U.S. politics: underhanded attacks from anonymous Internet trolls, congressional hearings staged to obfuscate problems in the market, by senators who take money from the obfuscators; op-ed articles from prominent former regulators, now employed by the Wall Street machine, that spread outright lies about the upstarts; error-ridden pieces by prominent journalists too stupid or too lazy or too compromised to do anything but echo what they are told by the very people who make a fortune off the inefficiencies the entrepreneurs seek to eliminate….

Read more at Occupational Hazards of Working on Wall Street | Bloomberg View.

The High-Frequency Trading Arms Race: Frequent Batch Auctions as a Market Design Response

Extract from a paper by Eric Budish, Peter Cramton, and John Shim proposing that frequent batch auctions — uniform-price double auctions conducted at frequent but discrete time intervals (e.g. every 1 second) – be employed to end the high-frequency trading arms race:

The fourth and final part of our argument shows that frequent batch auctions are an attractive market design response to the HFT arms race. Batching eliminates the arms race for two reasons. First, and most centrally, batching substantially reduces the value of a tiny speed advantage. In our model, if the batching interval is τ , then a δ speed advantage is only δ/τ as valuable as it is under continuous markets. So, for example, if the batching interval is 1 second, a 1 millisecond speed advantage is only 1/1000 as valuable as it is in the continuous limit order book market design. Second, and more subtly, batching changes the nature of competition among fast traders, encouraging competition on price instead of speed.

Intuitively, in the continuous limit order book market design, it is possible to earn a rent based on a piece of information that many fast traders observe at basically the same time – e.g., a jump in the price of ES – because continuous limit order books process orders in serial, and somebody is always first. In the batch market, by contrast, if multiple traders observe the same information at the same time, they are forced to compete on price instead of speed.

Read more at The High-Frequency Trading Arms Race: Frequent
Batch Auctions as a Market Design Response;Eric Budish, Peter Cramton, and John Shim;July 7, 2013

ASIC: High-frequency trading taskforce—Key findings

Findings of the recent ASIC investigation into dark liquidity and high-frequency trading.

The high-frequency trading taskforce found that:

(a) some of the commonly held negative perceptions about high-frequency trading are not supported by our analysis of Australian markets—for example:

(i) that high-frequency traders exhibit unacceptably high order-to-trade ratios. Increases in order-to-trade ratios in Australia have been moderate compared with overseas markets, and other algorithmic traders operate at similar levels; and
(ii) that high-frequency traders’ holding times are often a matter of seconds and therefore that they make no contribution to deep, liquid markets. Our analysis shows that only 1.2% of high-frequency traders held positions for an average of two minutes or less, 18% for less than 10 minutes and 51% for less than 30 minutes; and

(b) there is some basis in fact for other perceptions (e.g. about high-frequency trading creating excessive noise and exhibiting predatory or ‘gaming’ behaviours), but other traders are also contributing to the problem.

Both [the HFT and Dark Pools] taskforces have found evidence of potential breaches of ASIC Market Integrity Rules and the Corporations Act 2001 (Corporations Act), and some matters have been referred to our Enforcement teams for investigation. We have also seen a change in behaviour as a result of our inquiries. For example:

(a) fundamental investors are asking more questions about where and how their orders are executed;
(b) there have been improvements to automated trading risk management controls; and
(c) at least one high-frequency trader has ceased trading in Australia.

The main problem with HFT is investor perceptions that they are paying more for stocks than they should be. HFT trading profits can only come out of investors pockets. While the ASX receives massive fees from HFT traders, the erosion of investor trust in fair pricing is too serious to ignore. Failure to address this could see investors migrate to other exchanges or platforms, especially if there is a transparent auction process where HFT traders are unable to intercede.

High Frequency Trading Fake Quotes | Business Insider

Linette Lopez writes:

Nanex, a Chicago-based market research firm, sent us a chart that illustrates what can stand in a trader’s way when they’re trying to quote the right price……

“It happens all the time,” [Nanex CEO Eric] Hunsader told Business Insider. “It crowds out legitimate prices… it’s like SPAM. Maybe one of these guys is a legit offer but there’s no way of knowing.”

View chart at High Frequency Trading Fake Quotes – Business Insider.

High-Speed Traders Profit at Expense of Ordinary Investors, a Study Says | NYTimes.com


The chief economist at the Commodity Futures Trading Commission, Andrei Kirilenko, reports in a coming study that high-frequency traders make an average profit of as much as $5.05 each time they go up against small traders buying and selling one of the most widely used financial contracts [E-mini S&P 500 Futures].

via High-Speed Traders Profit at Expense of Ordinary Investors, a Study Says – NYTimes.com.

How Regulations Led to High-Frequency Trading

John Carney writes that high frequency trading is an unintended consequence of regulatory action to remove market specialists:

High frequency trading grew up in the aftermath of a decades-long struggle by Congress, the SEC, and the stock exchanges to stamp out the specialists, who were accused of front-running customers, favoritism and interfering with the smooth operations of markets…….. Things really came to a head after the dot-com crash, when everyone was looking for someone to blame for all that money lost. By 2005, the government passed a series of market reforms that were aimed directly at eliminating the specialists. In the wake of those reforms, commissions fell, pricing improved, exchanges became more competitive—and high-frequency trading arose.

Seems they have swapped one set of problems for another.

The safest way for retail investors or traders to minimize the cost of HFT market interference may be to participate in opening or closing auctions where bids are matched by algorithm.

via How Regulations Led to High-Frequency Trading.

The high frequency trading threat

Extract from a paper by Tom McDonald at the Australian Risk Policy Institute (ARPI), as quoted by Sell On News at Macrobusiness.com.au:

The principal purpose of capital markets is to facilitate the efficient allocation of capital across industries, and by extension, society, and via efficient means of allocation, create financing options to facilitate consumption and future additional wealth creation. Capital markets are unique but constitute the lifeblood of capitalism and thereby promote national growth, opportunity, peace, order, good government and individual welfare.

That said, the risks inherent in capital markets are like no other. Ultimately, when these risks manifest, they can destroy national economies (Iceland), even the world economy, wreak famine and the total collapse of ordered society. Accordingly, any development that carries uncertainty or intrinsic risk must be scrutinised, understood and dealt with to protect the whole.

Put in the bluntest way, HFT is parasitic in relation to capital markets. It adds little or no value and it creates friction, as opposed to greater liquidity. It can also dislocate or render markets unusable. Most importantly, it operates within an environment alien to the underlying structure that underpins markets. In fact, it operates generically across different market platforms so that in a worst case scenario, automated decisions may dislocate multiple markets at the same time.

via How politicians failed us | | MacroBusiness.

EU: Trades Must Live for Second | Securities Technology Monitor

By Laton McCartney

Members of the European Parliament tightened up the EU’s proposal on high-frequency algorithmic trading, voting that all high-frequency trading orders should be valid for one half second. The rule means orders cannot be cancelled or modified for at least five hundred milliseconds………All firms and trading venues also would have to ensure that trading systems are resilient and prepared to deal with sudden increases in order flows or market stresses. These could include Europe’s own “circuit breakers” to suspend trading………

via EU: Trades Must Live for Second | Securities Technology Monitor.

Anatomy of a flash crash | Fiscal Times

By John Kemp


In their report on the 2010 equity market crash, the SEC and CFTC staff found that “against a backdrop of unusually high volatility and thinning liquidity, a large fundamental trader (a mutual fund complex) initiated a sell program to sell a total of 75,000 E-mini contracts (valued at approximately $4.1 billion) as a hedge to an existing equity position”.

“This large fundamental trader chose to execute this sell program via an automated execution algorithm (“Sell Algorithm”) that was programmed to feed orders into the June 2010 E-Mini market to target an execution rate set to 9% of the trading volume calculated over the previous minute, but without regard to price or time,” the report noted. “On May 6, when markets were already under stress, the Sell Algorithm chosen by the large trader to only target trading volume, and neither price nor time, executed the sell program extremely rapidly in just 20 minutes”…………..

via When Oil Prices Drop in a ‘Flash’: Is It Real?.

For Superfast Stock Traders, a Way to Jump Ahead in Line – WSJ.com


Haim Bodek was a Wall Street insider at Goldman Sachs and UBS before launching his own [high-frequency] trading firm.

Mr. Bodek approached the Securities and Exchange Commission last year alleging that stock exchanges, in a race for more revenue, had worked with rapid-fire trading firms to give them an unfair edge over everyday investors.

He became convinced exchanges were providing such an edge after he says he was offered one himself when he ran a high-speed trading firm—a way to place orders that can be filled ahead of others placed earlier. The key: a kind of order called “Hide Not Slide”………

via For Superfast Stock Traders, a Way to Jump Ahead in Line – WSJ.com.