[ZT]A Fresh New Perspective on Technology and Electronic Trading

[ZT] Rise of the machines -buickregal(Motion - NonStop); 2009-8-2 {3605} (#2524@52)
本文发表在 rolia.net 枫下论坛Rise of the machines

Jul 30th 2009
From The Economist print edition
Algorithmic trading causes concern among investors and regulators

THE arrest of a former Goldman Sachs employee in July for allegedly stealing the firm’s proprietary computer codes thrust the arcane world of high-frequency trading (HFT) into the spotlight. The glare of attention is intensifying. High-frequency traders are essential providers of liquidity—accounting for roughly 50% of trading volume on the New York Stock Exchange—and can claim to have squashed bid-ask spreads. But many claim HFT comes at the price of gouging other investors.

The basic idea of HFT is to use clever algorithms and super-fast computers to detect and exploit market movements. To avoid signalling their intentions to the market, institutional investors trade large orders in small blocks—often in lots of 100 to 500 shares—and within specified price ranges. High-frequency traders attempt to uncover how much an investor is willing to pay (or sell for) by sending out a stream of probing quotes that are swiftly cancelled until they elicit a response. The traders then buy or short the targeted stock ahead of the investor, offering it to them a fraction of a second later for a tiny profit.

Another popular HFT strategy is to collect rebates that exchanges offer to liquidity providers. High-frequency traders will quickly outbid investors before immediately selling the shares to the investor at the slightly higher purchase price, collecting a rebate of one-quarter of a cent on both trades. Other tactics include piggybacking on sharp price movements to increase volatility, which increases the value of options held by traders. The speeds are mind-boggling. High-frequency traders may execute 1,000 trades per second; exchanges can process trades in less than 500 microseconds (or millionths of a second).

Asymmetric information is nothing new. Even its critics concede that most HFT is perfectly legal. But some of the advantages that accrue to high-frequency traders look unfair. Flash orders, a type of order displayed on certain exchanges for less than 500 microseconds, expose information that is only valuable to those with the fastest computers. By locating their servers at exchanges or in adjacent data centres traders can maximise speed. “It appears exchanges are conspiring with a privileged group of high-frequency traders in a massive fraud,” says Whitney Tilson, a fund manager. Requiring orders to be posted for at least a second would nullify the value of flash orders and of probing the market.

A group that accounts for nearly 50% of a market also introduces systemic risk. Lime Brokerage, a technology provider, has raised the prospect of a rogue algorithm going awry. Many believe that last year’s extreme market volatility was heightened by high-frequency traders. According to Nassim Nicholas Taleb, an author and investor, HFT “magnifies changes and ultimately makes the system weaker”.

The market can correct some of these problems. Institutions are developing their own algorithms to confuse high-frequency traders. Bigger investors are moving to “dark pools”, electronic trading venues that conceal an order’s size and origin. The London Stock Exchange announced in July that it was abolishing liquidity rebates. Regulators are also rolling up their sleeves. On July 24th Charles Schumer, a Democratic senator, urged the Securities and Exchange Commission to ban flash orders. As trading moves from milliseconds to microseconds to nanoseconds, everyone is learning to act more quickly.更多精彩文章及讨论，请光临枫下论坛 rolia.net

[ZT] How You Finance Goldman Sachs’ Profits -buickregal(Motion - NonStop); 2009-8-2 {8280} (#2525@52)
本文发表在 rolia.net 枫下论坛How You Finance Goldman Sachs’ Profits
An insider’s view of Wall Street’s rebound.
—By Nomi Prins

This is perhaps the most important thing I learned over my years working on Wall Street, including as a managing director at Goldman Sachs: Numbers lie. In a normal time, the fact that the numbers generated by the nation's biggest banks can't be trusted might not matter very much to the rest of us. But since the record bank profits we're now hearing about are essentially created by massive federal funding, perhaps it behooves us to dig beneath their data. On July 27, 10 congressmen, led by Rep. Alan Grayson (D-Fla.), did just that, writing a letter to Federal Reserve Chairman Ben Bernanke questioning the Fed's role in Goldman's rapid return to the top of Wall Street.

To understand this particular giveaway, look back to September 21, 2008. It was a frenzied night for Goldman Sachs and the only other remaining major investment bank, Morgan Stanley. Their three main competitors were gone. Bear Stearns had been taken over by JPMorgan Chase in March, 2008, Lehman Brothers had just declared bankruptcy due to lack of capital, and Bank of America had been pushed to acquire Merrill Lynch because the firm didn't have enough cash to survive on its own. Anxious to avoid a similar fate, hat in hand, they came to the Fed for access to desperately needed capital. All they had to do was become bank holding companies to get it. So, without so much as clearing the standard five-day antitrust waiting period for such a change, the Fed granted their wish.

Bank holding companies (which all the biggest financial firms now are) come under the regulatory purview of the Fed, the Office of the Comptroller of the Currency, and the FDIC. The capital they keep in reserve in case of emergency (like, say, toxic assets hemorrhaging on their books, or credit derivatives trades not being paid) is supposed to be greater than investment banks'. That's the trade-off. You get access to federal assistance, you pony up more capital, and you take less risk.

Goldman didn't like the last part. It makes most of its money speculating, or trading. So it asked the Fed to be exempt from what's called the Market Risk Rules that bank holding companies adhere to when computing their risk.

Keep in mind that by virtue of becoming a bank holding company, Goldman received a total of $63.6 billion in federal subsidies (that we know about—probably more if the Fed were ever forced to disclose its $7.6 trillion of borrower details). There was the $10 billion it got from TARP (which it repaid), the $12.9 billion it grabbed from AIG's spoils—even though Goldman had stated beforehand that it was protected from losses incurred by AIG's free fall, and if that were the case, would not have needed that money, let alone deserved it. Then, there's the $29.7 billion it's used so far out of the $35 billion it has available, backed by the FDIC's Temporary Liquidity Guarantee Program, and finally, there's the $11 billion available under the Fed's Commercial Paper Funding Facility.

Tactically, after bagging this bounty, Goldman asked the Fed, its new regulator, if it could use its old risk model to determine capital reserves. It wanted to use the model that its old investment bank regulator, the SEC, was fine with, called VaR, or value at risk. VaR pretty much allows banks to plug in their own parameters, and based on these, calculate how much risk they have, and thus how much capital they need to hold against it. VaR was the same lax SEC-approved risk model that investment banks such as Bear Stearns and Lehman Brothers used, with the aforementioned results.

On February 5, 2009, the Fed granted Goldman's request. This meant that not only was Goldman getting big federal subsidies, but also that it could keep betting big without saving aside as much capital as the other banks. Using VaR gave Goldman more leeway to, well, accentuate the positive. Yes, Goldman is a more risk-prone firm now than it was before it got to play with our money.

Which brings us back to these recent quarterly earnings. Goldman posted record profits of $3.4 billion on revenues of $13.76 billion. More than 78 precent of those revenues came from its most risky division, the one that requires the most capital to operate, Trading and Principal Investments. Of those, the Fixed Income, Currency and Commodities (FICC) area within that division brought in a record $6.8 billion in revenues. That's the division, by the way, that I worked in and that Lloyd Blankfein managed on his way up the Goldman totem pole. (It's also the division that would stand to gain the most if Waxman's cap-and-trade bill passes.)

Since Goldman is trading big with our money, why not also use it to pay big bonuses? It's not like there are any strings attached. For the first half of 2009, Goldman set aside $11.4 billion for compensation—34 percent more than for the first half of 2008, keeping them on target for a record bonus year—even though they still owe the federal government $53.6 billion, a sum more than four times that bonus amount.

But capital is still key. Capital is the lifeblood that pumps through a financial organization. You can't trade without it. As of June 26, 2009, Goldman's total capital was $254 billion, but that included $191 billion in unsecured long-term borrowing (meaning money it had borrowed without putting up any collateral for it). On November 28, 2008 (4Q 2008), it had only $168 billion in unsecured long-term borrowing. Thus, its long-term unsecured debt jumped 14 percent. Though Goldman doesn't disclose exactly where all this debt comes from, given the $23 billion jump, we can only wonder whether some of it has come from government subsidies or the Fed's secret facilities.

Not only that, by virtue of how it's set up, most of Goldman's unsecured funding comes in through its parent company, Group Inc. (Think the top point of an umbrella with each spoke being a subsidiary.) This parent parcels that money out to Goldman's subsidiaries, some of which are regulated, some of which aren't. This means that even though Goldman is supposed to be regulated by the Fed and other agencies, it has unregulated elements receiving unsecured funding—just like before the crisis, but with more of our money involved.

As for JPMorgan Chase, its profit of $2.7 billion was up 36 percent for the second quarter of 2009 vs. the same quarter last year, but a lot of that also came from trading revenues, meaning its speculative endeavors are driving its profits. Over on the consumer side, the firm had to set aside nearly $30 billion in reserve for credit-related losses. Riding on its trading laurels, when its consumer business is still in deterioration mode, is not a recipe for stability, no matter how much cheering JPMorgan Chase's results got from Wall Street. Betting is betting.

Let's pause for some reflection: The bank "stars" made most of their money on speculation, got nearly $124 billion in government guarantees and subsidies between them over the past year and a half, yet saw continued losses in the credit products most affected by consumer credit problems. Both are setting aside top-dollar bonuses. JPMorgan Chase CEO Jamie Dimon mentioned that he's concerned about attracting talent, a translation for wanting to pay investment bankers big bucks—because, after all, they suffered so terribly last year, and he needs to stay competitive with his friends at Goldman. This doesn't add up to a really healthy scenario. It's more like bad déjà vu.

As a recent New York Times article (and many other publications in different words) said, "For the most part, the worst of the financial crisis seems to be over." Sure, the crisis may appear to be over because the major banks of Wall Street are speculating well with government subsidies. But that's a dangerous conclusion. It doesn't mean that finance firms could thrive without the artificial, public-funded assistance. And it certainly doesn't mean that consumers are any better off than they were before the crisis emerged. It's just that they didn't get the same generous subsidies.

Additional research by Clark Merrefield.更多精彩文章及讨论，请光临枫下论坛 rolia.net

[ZT]A Fresh New Perspective on Technology and Electronic Trading -buickregal(Motion - NonStop); 2009-8-2 {5261} (#2526@52)
本文发表在 rolia.net 枫下论坛A Fresh New Perspective on Technology and Electronic Trading

Posted by Larry Doyle on July 30, 2009 9:14 am

Is high frequency program trading inherently unfair? Does it improperly utilize technological advances? Does it allow front-running at point of execution? So many great questions, but to this point, the debate on this topic has completely focused on the equity markets.

Well, let’s shift the focus of this debate to the debt markets, commonly regarded as the bond or fixed income markets. What can we learn by comparison? Do the fixed income markets represent a fair comparison? As with any comparative analysis, do we have sufficient data to analyze and compare these markets? Non-financial people may be surprised, but the debt market across all sectors totally dwarfs the equity market in terms of size. Let’s frame the debate.

I view technological developments on the investment superhighway as having three lanes: analytics, risk management, and trade execution.

Whether in fixed income or equities, technology which can more efficiently and productively provide robust analytics is a great advantage and should be embraced. As a case in point, when I traded mortgage securities throughout the ’80s and ’90s, Bear Stearns invested in and utilized tremendous analytics. The Bear system was so advanced that it could literally analyze the mortgages in a mortgage-backed security to the level of the underlying zip code. No other dealer had those capabilities and it was a boon to Bear’s business. This technology was utilized to run a wide array of customer portfolio optimizations and helped Bear become the top mortgage shop on Wall Street. Bear’s downfall is a story for another time. The point being, technology which can more thoroughly review an investment product promotes competition and capitalism. There should be no speed limit on this technology lane of the investment superhighway.

The second technology lane on the investment superhighway entails risk management. When trading at First Boston, I and every other trader manually monitored our own risks, whether those risks were interest rate risk or credit risk. Management had no ability to view the overall risks across the entire fixed income division on a real-time basis, meaning at any specific moment in time. To say that First Boston was inefficient was a gross understatement. In going to Bear Stearns in 1990, I was blown away by the robust real-time risk management system. A trade from point of execution to entry into the system to updating my risk profile was literally a matter of a few seconds. What were the results? I could trade greater volume with greater confidence knowing exactly where my risk stood. There should be no speed limit on this technology lane of the investment superhighway.

technology-superhighwayThe third technology lane on the investment superhighway entails trade execution. The fixed income market, much like the equity market, had traditionally been a person-to-person executed model. That process changed dramatically over the last decade with the development of a platform known as Tradeweb. This company was launched with equity capital provided by a consortium of Wall Street dealers. Tradeweb has revolutionized the business. Having started by executing trades within the U.S. Treasury market in 1998, Tradeweb now globally engages customers and dealers. Tradeweb executes trades across a wide array of market segments, including: a variety of interest rate products, the U.S. mortgage market, the corporate bond market, the credit derivatives market, and money markets.

Tradeweb not only engages in trade execution but is also fabulous at trade settlements and thus risk management.

Let’s zero in on Tradeweb’s trade execution because this is where the rubber meets the road — no pun intended — in comparative analysis with high frequency program trading activities in the equity markets. Tradeweb allows fixed income investors to engage Wall Street dealers across all of the aforementioned markets with trades executed within a matter of mere seconds. The playing field is completely level as dealers enter price levels, stand by them, and execute trades. If a Wall Street dealer is delinquent in responding to an investor inquiry, so be it.

Were Tradeweb to allow one dealer to see another dealer’s price level or allow dealers to instantaneously flash price levels without obligation of standing by their price, there would be hell to pay. Why? If dealers and investors knew that certain entities were provided preferential treatment by Tradeweb, then there is no doubt in my mind that Tradeweb would be out of business tomorrow. Make no mistake, the speed limit on the trade execution lane of the investment superhighway is extremely fast. How fast? Trades are executed within a matter of a few seconds. It works just fine for the hundreds of billions in daily volume compared to the relative odd lots traded in the equity market.

I strongly believe and embrace technology. I also have a soft spot in my heart for fundamental fairness and integrity. I think all global equity exchanges should implement the fixed income trade practices. I believe they are the best of both worlds.

LD更多精彩文章及讨论，请光临枫下论坛 rolia.net
[zz from FT] In defence of high frequency traders -elonghit(elonghit); 2009-9-9 {7585} (#2623@52)
本文发表在 rolia.net 枫下论坛By Justin Schack

Published: August 2 2009 17:50 | Last updated: August 2 2009 17:50

It finally happened. After years of operating in obscurity, high-frequency
traders have been thrust into the public spotlight. What started with a
publicity-hungry critic or two ranting on the internet has given way to
breathless media coverage — and questions from Washington policy makers.

Unfortunately, much of this publicity has been riddled with errors and half-
truths. And the cumulative effect has been to demonise high-frequency
trading as a shadowy activity through which sophisticated elites exploit
unfair advantages to reap billions in profits at the expense of ordinary
Americans.

In other words, high-frequency trading is in danger of joining short selling
and commodity speculation in the post-crisis pantheon of misunderstood
market practices. This process typically begins with self-interested
business people “raising questions” about whether a little-known activity
is harming the public. Then, well-intentioned but under-informed financial
journalists (trust me, I used to be one) rush to be the first to “expose”
these allegedly damaging practices. Politicians pounce on a fresh wave of
populist rage. Congressional hearings are scheduled. Regulators are pressed
to “do something” about a problem that doesn’t exist. And, sometimes, we
wind up with new regulation that does more harm than good.

That’s why it’s important to inject some balance into the high-frequency
debate. First, full disclosure: my employer, Rosenblatt Securities, provides
brokerage, consulting and research services to high-frequency firms. But we
do no proprietary trading, and the vast majority of our revenues comes from
“high-touch” trading for traditional institutions that manage trillions
in average Americans’ savings. We want to educate investors about both the
negative and positive effects of high-frequency strategies.

Make no mistake, this phenomenon has complicated traditional traders’ lives
. Superior mathematics and computing power lets high-frequency firms manage
risk better than ever, routinely quote the best prices first and,
consequently, reap most of the rebates exchanges pay to liquidity providers.

Less-sophisticated traders can find themselves hitting bids and lifting
offers — and paying exchange fees — even in situations when they’d rather
provide liquidity and earn rebates too. The end result: their exchange-fee
bills rise. This cuts profit margins for brokers, making them less likely to
reduce commission rates for end customers. It also can force potential
counterparties to trade with high-frequency firms rather than directly with
each other, inflating overall market volume. That can confuse algorithms
that traditional institutions use to buy or sell set percentages of a stock
’s daily volume, and potentially increase their implicit transaction costs.

But high-frequency traders also bring substantial benefits to the market. As
the US market has changed in the past decade, automated market-making and
arbitrage strategies have supplanted New York Stock Exchange specialists and
old-style Nasdaq market makers as the primary source of liquidity for the
investing public. Competition among high-frequency firms has improved quoted
prices, compressed bid-ask spreads and reduced transaction costs
dramatically for all investors. Statistics strongly support this trend.

Most importantly, high-frequency trading is not the same as “flash”
trading. Flash programmes let exchanges and ECNs [electronic communications
networks] delay routing orders to the best quoted prices so that customers
who opt in can view and elect whether or not to trade with them first. Flash
orders raise serious market-structure and surveillance questions, and
deserve the regulatory scrutiny they are receiving. High-frequency firms are
likely the chief recipients of flashed orders, but this constitutes a tiny
fraction of their overall trading activity. And at least one huge high-speed
firm is publicly against the practice.

One prominent critic recently suggested during a television appearance that
if flash orders went away, exchanges would lose the 70 per cent of their
volume that comes from high-frequency traders. This is grossly inaccurate.
Flash orders have become popular only in the last several months, but high-
frequency firms have dominated US trading for far longer. According to our
data, flash orders accounted for just 2.4 per cent of US equity trading in
June. The vast majority of high-frequency activity occurs in markets that
display firm quotes and, unlike most flash orders, helps investors transact
at the best possible prices.

Some have suggested that high-frequency trading unnaturally props up stock
prices. Others, including a recent New York Times opinion piece, warn that
its “sudden popularity” could “destabilise the market,” creating the
potential for panics triggered by computer errors. An additional line of
attack centres on the practice of co-location, through which high-frequency
firms house their servers in exchange data centres to minimise the time it
takes to execute trades.

Here is the truth: most high-frequency firms aim to end each day flat. Some
will carry overnight positions, but these typically stem from arbitrage
strategies that attempt to counter and profit from inefficiencies, not
contribute to them. They do not take a view on the market and are not
artificially inflating or deflating share prices.

Additionally, their notoriety may be “sudden,” but their popularity is
anything but. High-frequency firms have accounted for a very big chunk of US
equity trading for years (we estimated them at two thirds of overall volume
about 18 months ago). They were the biggest source of liquidity on exchange
-traded markets that performed incredibly well during the worst financial
crisis in eight decades — the very same markets that regulators, before all
this high-frequency hysteria was whipped up, were celebrating and looking
to bolster by encouraging the migration of OTC [over-the-counter] activity
onto exchanges.

And co-location is merely the information-age manifestation of traders
wanting to be as close as possible to the point of sale. It’s no different
than brokers manning every room of the NYSE floor to be close to every stock
’s specialist, or commodity traders elbowing — or sometimes punching —
their way to the top step of the pit.

In short, high-frequency traders have made the US stock market more
efficient than ever. However, a hyper-efficient market is, by definition,
not the most democratic market. High-frequency firms have decided to invest
in technology and brainpower that give them an edge over others. Competition
in free markets has always been thus. They are not, as one dark-pool
executive said: “the natural enemy of institutional investors.” Rather
than complain that old trading methods are no longer as effective in this
new environment, critics would do better to adapt, so they may reap the
benefits of the high-frequency explosion while minimising its complications
and costs.

Justin Schack is vice president, market structure analysis, at Rosenblatt
Securities, a New York agency brokerage. This essay is a preview of a
forthcoming paper by Rosenblatt on the topic of high-frequency trading.

Copyright The Financial Times Limited 2009更多精彩文章及讨论，请光临枫下论坛 rolia.net

Good to learn. Thanx. -elonghit(elonghit); 2009-8-3 (#2528@52)

Currently there is a big debate on HFT in captiol hill. There might be some regulation out soon, but who knows? -buickregal(Motion - NonStop); 2009-8-3 (#2529@52)

They need a long debate to figure it out before propose a new bill to tame it. -yueren(爱拿铁); 2009-8-3 (#2530@52)

You are right. -buickregal(Motion - NonStop); 2009-8-4 (#2533@52)
It looks like some changes are going on at Exchange level - WSJ NEWS ALERT: SEC to Explore Changes to Flash Trading -buickregal(Motion - NonStop); 2009-8-4 {2094} (#2535@52)
本文发表在 rolia.net 枫下论坛WASHINGTON -- The Securities and Exchange Commission may clamp down on a practice that some critics say gives an unfair advantage to some traders by giving them an early look at buy and sell orders.

Flash trading, which routes stock trades through private liquidity pools before being sent to other exchanges for filing, has come under increasing fire from critics in Congress and elsewhere in recent weeks.

SEC Chairman Mary Schapiro said Tuesday that she has instructed SEC staff to explore "an approach that can be quickly implemented to eliminate the inequity that results from flash orders."

"Under the rule-making process, such a proposal to eliminate the ability to flash orders would need to be approved by the commission and be open to public comment," she said.

Most major U.S. stock exchanges have said they would not protest if the SEC moves to curb some of these practices.

Sen. Charles Schumer (D., N.Y.) said Tuesday that Ms. Schapiro personally promised him she will seek to ban flash trading.

Charles Schumer
In a statement, Sen. Schumer said he spoke with Ms. Schapiro, who informed him of an imminent ban during a telephone call Monday. The ban will come as part of a broader look at dark pools -- electronic trading venues where money managers trade large blocks of shares anonymously -- and high-frequency trading, he said.

"We salute the SEC for moving forward with this ban that will restore integrity to the markets. The agency is absolutely making the right call by stepping up and ending this unfair practice," Sen. Schumer said. "It is also important to make sure flash orders aren't just the tip of an iceberg lurking in the dark reaches of the market," he added.

Ms. Schapiro first announced in a speech in June that she planned to explore possible new regulations for dark pools.

She said Tuesday that she believes flash orders can disadvantage some investors, and staff are reviewing flash orders by both exchanges and electronic trading systems as well as dark pools.

Write to Sarah N. Lynch at sarah.lynch@dowjones.com更多精彩文章及讨论，请光临枫下论坛 rolia.net
http://online.wsj.com/article/SB124940289965505053.html#mod=djemalertNEWS

How do they regulate HFT? Are they gonna to prohibit commission rebate as UK did, and then HFT is never to be profitable? Is HFT only beneficial from commission rebate and fast execution,I doubt? -elonghit(elonghit); 2009-8-6 (#2537@52)

Since HFT is now on SEC and Congress' radar, it is highly visible...The loose end will be closed out sooner or later, it is just the question of when I guess. -buickregal(Motion - NonStop); 2009-8-6 (#2538@52)

More scoops - [ZT] High Frequency Trading Is A Scam -buickregal(Motion - NonStop); 2009-8-6 {14567} (#2539@52)
本文发表在 rolia.net 枫下论坛High Frequency Trading Is A Scam

The NY Times has blown the cover off the dark art known as "HFT", or "High-Frequency Trading", perhaps without knowing it.
It was July 15, and Intel, the computer chip giant, had reporting robust earnings the night before. Some investors, smelling opportunity, set out to buy shares in the semiconductor company Broadcom. (Their activities were described by an investor at a major Wall Street firm who spoke on the condition of anonymity to protect his job.) The slower traders faced a quandary: If they sought to buy a large number of shares at once, they would tip their hand and risk driving up Broadcom’s price. So, as is often the case on Wall Street, they divided their orders into dozens of small batches, hoping to cover their tracks. One second after the market opened, shares of Broadcom started changing hands at $26.20.
The slower traders began issuing buy orders. But rather than being shown to all potential sellers at the same time, some of those orders were most likely routed to a collection of high-frequency traders for just 30 milliseconds — 0.03 seconds — in what are known as flash orders. While markets are supposed to ensure transparency by showing orders to everyone simultaneously, a loophole in regulations allows marketplaces like Nasdaq to show traders some orders ahead of everyone else in exchange for a fee.

In less than half a second, high-frequency traders gained a valuable insight: the hunger for Broadcom was growing. Their computers began buying up Broadcom shares and then reselling them to the slower investors at higher prices. The overall price of Broadcom began to rise.

Soon, thousands of orders began flooding the markets as high-frequency software went into high gear. Automatic programs began issuing and canceling tiny orders within milliseconds to determine how much the slower traders were willing to pay. The high-frequency computers quickly determined that some investors’ upper limit was $26.40. The price shot to $26.39, and high-frequency programs began offering to sell hundreds of thousands of shares.

But then the NY Times gets the bottom line wrong:

The result is that the slower-moving investors paid $1.4 million for about 56,000 shares, or $7,800 more than if they had been able to move as quickly as the high-frequency traders.

No. The disadvantage was not speed. The disadvantage was that the "algos" had engaged in something other than what their claimed purpose is in the marketplace - that is, instead of providing liquidity, they intentionally probed the market with tiny orders that were immediately canceled in a scheme to gain an illegal view into the other side's willingness to pay.
Let me explain.

Let's say that there is a buyer willing to buy 100,000 shares of BRCM with a limit price of $26.40. That is, the buyer will accept any price up to $26.40.

But the market at this particular moment in time is at $26.10, or thirty cents lower.

So the computers, having detected via their "flash orders" (which ought to be illegal) that there is a desire for Broadcom shares, start to issue tiny (typically 100 share lots) "immediate or cancel" orders - IOCs - to sell at $26.20. If that order is "eaten" the computer then issues an order at $26.25, then $26.30, then $26.35, then $26.40. When it tries $26.45 it gets no bite and the order is immediately canceled.

Now the flush of supply comes at, big coincidence, $26.39, and the claim is made that the market has become "more efficient."

Nonsense; there was no "real seller" at any of these prices! This pattern of offering was intended to do one and only one thing - manipulate the market by discovering what is supposed to be a hidden piece of information - the other side's limit price!

With normal order queues and flows the person with the limit order would see the offer at $26.20 and might drop his limit. But the computers are so fast that unless you own one of the same speed you have no chance to do this - your order is immediately "raped" at the full limit price! You got screwed, as the fill price is in fact 30 cents a share away from where the market actually is.

A couple of years ago if you entered a limit order for $26.40 with the market at $26.10 odds are excellent that most of your order would have filled down near where the market was when you entered the order - $26.10. Today, odds are excellent that most of your order will fill at $26.39, and the HFT firms will claim this is an "efficient market." The truth is that you got screwed for 29 cents per share which was quite literally stolen by the HFT firms that probed your book before you could detect the activity, determined your maximum price, and then sold to you as close to your maximum price as was possible.
If you're wondering how this ramp job happened in the last week and a half, you just discovered the answer. When there are limit orders beyond the market outstanding against a market that is moving higher the presence of these programs will guarantee huge profits to the banks running them and they also guarantee both that the retail buyers will get screwed as the market will move MUCH faster to the upside than it otherwise would.

Likewise when the market is moving downward with conviction we will see the opposite - the "sell stops" will also be raped, the investor will also get screwed, and again the HFT firms will make an outsize profit.
These programs were put in place and are allowed under the claim that they "improve liquidity." Hogwash. They have turned the market into a rigged game where institutional orders (that's you, Mr. and Mrs. Joe Public, when you buy or sell mutual funds!) are routinely screwed for the benefit of a few major international banks.

If you're wondering how Goldman Sachs and other "big banks and hedge funds" made all their money this last quarter, now you know. And while you may think this latest market move was good for you, the fact of the matter is that you have been severely disadvantaged by these "high-frequency trading" programs and what's worse, the distortion that is presented by these "ultra-fast" moves has a nasty habit of asserting itself in an ugly snapback a few days, weeks or months later - in the opposite direction.

The amount of "slippage" due to these programs sounds small - a few cents per order. It is. But such "skimming" is exactly like paying graft to a politician or "protection money" to the Mafia - while the amount per transaction may be small the fact of the matter is that it is not supposed to happen, it does not promote efficient markets, it does not add to market liquidity, the "power" behind moves is dramatically increased by this sort of behavior and market manipulation is supposed to be both a civil and criminal violation of the law.

While the last two weeks have seen this move the market up, the same sort of "acceleration" in market behavior can and will happen to the downside when a downward movement asserts itself, and I guarantee that you won't like what that does to your portfolio. You saw an example of it last September and October, and then again this spring. As things stand it will happen again.

This sort of gaming of the system must be stopped. Trading success should be a matter of being able to actually determine the prospects of a company and its stock price in the future - that is, actually trade. What we have now is a handful of big banks and funds that have figured out ways around the rules that are supposed to prohibit discovery of the maximum price that someone will pay or the minimum they will sell at by what amounts to a sophisticated bid-rigging scheme.

Since it appears obvious that the exchanges will not police the behavior of their member firms in this regard government must step in and unplug these machines - all of them - irrespective of whether they are moving the market upward or downward. While many people think they "benefited" from this latest market move, I'm quite certain you won't like it if and when the move is to the downside and the mutual fund holdings in your 401k and IRA get shredded (again) by what should be prohibited and in fact result in indictments, not profits.

High-Frequency Trading - My View

Senator Schumer apparently believes this is an unfair practice, and I agree.

July 24 (Bloomberg) -- Senator Charles Schumer asked the U.S. Securities and Exchange Commission to ban “flash orders,” saying the transactions give high-speed traders an unfair advantage over other investors.

Nasdaq OMX Group Inc., Bats Exchange Inc. and Direct Edge Holdings Inc. hold these orders for milliseconds, giving their customers the opportunity to gauge demand before traders on other exchanges get the chance to bid, Schumer said in a letter to SEC Chairman Mary Schapiro. Brian Fallon, a spokesman at Schumer’s office, confirmed the authenticity of the letter.

“Flash orders allow certain members of these exchanges to obtain access to order flow information before that information is made available to the public,” Schumer wrote. That allows “those members to use rapid trading programs to trade ahead of those orders and profit from advanced knowledge of buying and selling activity,” he added.
The senator said that if the SEC doesn’t prohibit flash orders, he will introduce legislation that would.
This is my view:
1. Getting a look at orders before someone else does is commonly called "cheating". The National Market System (NMS) was supposed to prevent that; this was the so-called "innovation" of Nasdaq, remember? No specialists, no balancing of orders to open a stock, all done by computer. Equality of access. Up until it became profitable to make some people more equal. The intent of a public stock exchange is to insure equality of access to information so that the markets are orderly, not rigged.
2. Using flash order information (or anything else) to front-run is illegal. In all of its forms, this is an extremely serious matter and it must be stopped.
3. To the extent that these HFT systems are in fact using flash (or other) traffic to get in front of orders and advantage themselves they are dramatically increasing the violence of market moves. A stock trading at $20 that has a bid come in with a limit of $20.10 would normally fill (assuming sufficient depth) at $20; this does not materially move the market. But if a HFT system "sees" that order, steps in front of it and buys up all the shares at $20 and then re-sells them to the customer at $20.04 (one penny better than the next best offer at $20.05) it has caused the current "last" price to move where it otherwise would not. Multiply this by millions of shares an hour and the impact on price moves could be tremendous. While I understand that many people like the move of the last two weeks in the market, the fact remains that what goes up can also come down with equal violence.
4. HFT systems that front-run are able to garner risk-free profits. This is in fact the reason such a practice is banned - their "risk-free" profit is your guaranteed loss. Remember, the markets are in fact a negative-sum game (due to trading costs) - if there is a "risk-free" opportunity out there it can only exist because someone else is guaranteed a screwing.
I call upon The SEC to conduct a full and public investigation of the HFT systems in use today, along with immediately banning the "flash" traffic in accordance with Senator Schumer's request. I specifically want to know:
1. Have any of these HFT systems been using flash traffic (or any other mechanism) to "step in front" of a flashed order?
2. What part did these systems play in the October and March meltdowns, along with the ramp job of the last two weeks? Specifically, were they stepping in front of orders in these cases, thereby dramatically amplifying market moves while skimming off their pennies?
Public and fair markets demand transparency. All users must obtain access to order flow at the same time, without exception, and attempts to "step in front of the line" must be met with both civil and criminal sanction for market manipulation.
I can think of three relatively-minor changes that would leave those who are using HFT legitimately unharmed but would destroy most of the ability to cheat. These are:
1. Eliminate the 'flash order' entirely. All market participants must get order and flow information at the same time - no exceptions.
2. Force all orders (e.g. IOC, etc) to be valid for a reasonable minimum period that allows human response. 1 second would meet this criteria; it would destroy the ability of the "robots" to use abusive order patterns without preventing the legitimate use of "immediate or cancel" orders. The time selected must be greater than the average human reaction time plus round-trip network transit time within the nation; visual recognition time for young adults averages a bit over 200 milliseconds (0.2 seconds) exclusive of the response (e.g. a mouse click) and round-trip transit time on high-speed circuits cross-country (corner-to-corner) is approximately 100ms. Thus the minimum acceptable time is in the neighborhood of 500ms assuming no intervening computer computational delays (e.g. brokerage servers, etc); doubling this to provide for a margin (not all people are 20 years old, there are typically multiple computers between the exchange and end user, charting or display software requires time to post the event on the screen, etc) seems reasonable.
3. Define as "front running" by law any scheme or practice that exposes or discovers orders to any select group of players before the market as a whole, irrespective of how. The unfortunate reality is that there is no mechanism available to prevent computers from exploiting asymmetric information; ergo, you must define the provision or discovery and use of any such asymmetric information in the public markets as a criminal offense. Penalties should include treble forfeiture of all profits gained from such an abuse and a permanent ban on all access to the securities business as well as prison time.
"Arms races" are inherently negative-sum games; the only winning party is the guy who is selling the weapons. In this case the losers are the public and institutions who are attempting to invest or trade in the equities markets.
It is time to put a stop to this part of The Bezzle.更多精彩文章及讨论，请光临枫下论坛 rolia.net

Nasdaq will stop flash trading soon. today's news reported. -yueren(爱拿铁); 2009-8-6 (#2542@52)
So what is the impact to the market to stop "flash order"? I mean on the microstructure of the market, especially impapct on existing algo trading desks that explore the microstructures? -elonghit(elonghit); 2009-8-7 {513} (#2545@52)
I suppose stoping "flash order" will drive some HFT out of the market, the immediate results are to reduce liquidity and widen bid/ask spread. This generally could be bad news for algo trading who is not HFT type. But the effect could be limited because other HFTs which don''t rely on flash order will still be there, depending on how much percent of HFTs in market are flash-order based.

Any comment?

Hi buickregal, thanks for posting these interesting topics. BTW, where do you get these articles?

I think you have already answered yourself. :) -buickregal(Motion - NonStop); 2009-8-7 {669} (#2546@52)
For those that don't heavily rely on flash order, the impact at this moment will be limited. I saw some conversation between some Europe trading desks and they don't think HFT will be out of the market either; The next question is what SEC or congress plan to do next...Banning flash order might be just a starting point. If they are aggressive to "overact", then those HFT traders will be influenced, that's very possible.

I try to read The Economist regularly, and I receive WSJ alerts every day. I do enjoy catching up the news and reading what other people think about these headlines. :)

Waiting for more posts from you, anything will be welcomed!

@Edmonton

[ZT]A Fresh New Perspective on Technology and Electronic Trading

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