Reuters: U.S. stock markets are rigged, says author Michael Lewis

[Mursilis]

Because it costs our industry and investors billions,   maybe trillions.    Because it's not a victimless crime.   Because it's hurts the economy.

 

What could you do about it...  You could mandate an even playing field for all investors across the board.     You could make illegal or at least transparent what is occuring.    You could toss a few keasters in prison...    It's like insider trading only on steroids...  You could certainly make it illegal.

 

 

I'd LOVE to see some of these people tossed in jail, but they seem to be subject to a different justice system than the rest of the country.  If no one went to jail after the 2008 fiasco, I doubt this problem will result in any convictions either. 

[PeterMP]

that addresses a need... but not THIS need.  

 

I actually chanced on the 60-minutes segment sunday night (i haven't seen 60 minutes in years...).  In this case the problem isn't the high frequency, high turnover traders... it is more malicious than that. 

 

if you are placing a buy order, it gets spread over several different locations where it can be filled-- all within a small fraction of a second.   What these people did was capture the buy order in the first location (before it could be filled) and then beat that buy order to the locations where it COULD be filled, and pre-purchased the buy, and and then fill the order... pushing up the price a tiny bit.  

 

It is pure sleaze.

 

But that is what high speed trading is essentially, no?

 

To take advantage of second based differentials in prices to make money where those differences are generally caused by inefficiencies in the market in terms of things like communications.

 

Market A has responded, but market B has not so I jump into market B ahead of you because I'm closer/faster to market B than you are.

 

What else does high speed trading really entail?

 

For what else, would you need to make trades on the microsecond time scale?

 

They are making small amounts of money on individual trades and holding the stock for small amounts of time.  They have to have lot's of transactions to make money.  If they had to pay a higher tax on every transaction, it would be much less cost effective.

 

There would be less of it.

[Skinz4Life12]

yea I saw the show on 60 minutes, it was pretty fascinating

[PeterMP]

I do think it needs to point out that this does provide some service in terms of liquidity in the markets.  There have always been market makers that made money by buying a stock at one price and selling it to somebody else at another.

 

Things like mutual funds depend on these sorts of things.

 

These things make the market more efficient and that is generally good.

 

The problem is at what price are we gaining the efficiency, and I think you can make a good argument here the gain in efficiency is not worth the costs in terms of larger society.

[alexey]

Such as? And why do you think anyone would care? I read the other day that Ryan Braun, the PED user who lied about his use and got suspended by MLB, got a standing ovation at his first at-bat following his suspension. The only problem most of us seem to have with cheaters is not getting in on the action.

This is the problem with our government and you fix problems with government by generating and sustaining public outrage.... So your attitude is not helpful at all.

Do you think current trends can last forever?

I do not.

The question is not whether there will be government action following a public outrage. The question is when it will happen and how much suffering and damage is caused between now and then.

[Corcaigh]

But that is what high speed trading is essentially, no?

 

To take advantage of second based differentials in prices to make money where those differences are generally caused by inefficiencies in the market in terms of things like communications.

 

Market A has responded, but market B has not so I jump into market B ahead of you because I'm closer/faster to market B than you are.

 

What else does high speed trading really entail?

 

For what else, would you need to make trades on the microsecond time scale?

 

 

No, they are not exploiting general inefficiencies in markets. They are using the specific knowledge that you are going to buy a stock in a certain quantity, and then through their access to a faster communications network, placing an order that exploits the knowledge of your trade and changes your costs.

 

That is a form of illegal insider trading known as front running if performed by a human. But it is not currently illegal if performed by a computer.

[PeterMP]

No, they are not exploiting general inefficiencies in markets. They are using the specific knowledge that you are going to buy a stock in a certain quantity, and then through their access to a faster communications network, placing an order that exploits the knowledge of your trade and changes your costs.

 

That is a form of illegal insider trading known as front running if performed by a human. But it is not currently illegal if performed by a computer.

Front running is different, which is why it is illegal and this is not (Front running is when you essentially enter the market ahead of your OWN client, and then resell the stocks to your own client).

 

The time for the information to go from one area of the market to another is an inefficiency in the market.

 

It is something that has gotten much more efficient in the last 20 years as our ability to communicate has gotten better, but there are still inefficiencies.

[mcsluggo]

   These are not "market maker" traders, they are not counterparties that fill a temporary gap, and thus increase liquidity  ,,,, this particular type of transaction provides zero liquidity gains, and zero efficiency gains.  

 

it is a pure dead weight loss of efficiency in the market. 

 

--- this deadweight loss is NOT the case for all high frequency, speculative transactions....   the fact is there is no speculation here at all, only asymetric information that is being capitalized on with certainty--- in a way that SHOULD be illegal (speculation requires there to be uncertainty and risk)

[Corcaigh]

Front running is different, which is why it is illegal and this is not (Front running is when you essentially enter the market ahead of your OWN client, and then resell the stocks to your own client).

 

Yes, 'front running' as currently defined because in the past you wouldn't have the information if it wasn't your own client. But the outcome is the same. Exploiting knowledge of someone's intended trade to make a profit.

[TradeTheBeal!]

Of the rich, by the rich and for the rich.

[JMS]

Whether speculating or high frequency trading should be discouraged is something that can be debated, but what was referred to in the 60 minutes piece was 'front running'. This is illegal for a human as a form of insider trading, but thanks to very fast networks and computers it allows a third party to intercept the trade you are trying to make and get in front of it thanks to their access to a faster fiber optic network so that you pay a higher price. This should be illegal.

 

It's really not speculating... That's the point.   If your software knows there are 100,000 people willing to buy stock at $18.50 and you can purchase 50,000 shares of that stock a split second faster at $18.25 and then flip it back to the investers for 18.50...   There is no speculation involved.   There is no risk for you....    Increasing a tax on high frequency trading just changes the algorithm for turning the profit.   It just means the clueless investor will get hit harder fewer times.    It doesn't deal with the fundimental problem that the investing market isn't flat.   The fundimental problem that there are privledged traders preying on investors who add nothing positive to the transaction.

 

Just like insider trading is illegal today....  the ability to harvest trade information from large clearing houses to the detriment of investors should be illegal.    After all it is the ultimate insider trading.

I'd LOVE to see some of these people tossed in jail, but they seem to be subject to a different justice system than the rest of the country.  If no one went to jail after the 2008 fiasco, I doubt this problem will result in any convictions either. 

 

The thing is what they are doing isn't illegal.   it's unethical, but not illegal.    The problem is it's systemic and it hurts the market by suppressing investor profits.    It creates a hidden corruption tax for entering and leaving the market for investors and corporations...

 

First you make it transparent by forcing corporations to publish their profits for such activities...    Then you make it illegal....  Then you start fining and jail time for the folks who are sitll doing it.

[JMS]

Yes, 'front running' as currently defined because in the past you wouldn't have the information if it wasn't your own client. But the outcome is the same. Exploiting knowledge of someone's intended trade to make a profit.

 

For large clearing houses there really is no difference between front running and what is being discussed.    If you know what the demand is and what their buying limits are and your access to the markets are fast enough to navigate around the casual investers;   The risk to this sort of high frequency trading and front running is the same... ZERO....     Whether you are selling to your own customers or the customers of a consortium of clearing houses all doing the same thing is irrelivent.     The companies with the better access to the markets are still exacting a cleptocracy tax on the more casual investor to the detriment of the investor and the company who's stock it is..

[Corcaigh]

It's really not speculating... That's the point.  

 

And that was my point too.

[PeterMP]

There is a fundamental difference between what is being done here and front running.

 

In front running, the information is only accessible to people paid by the client.  You are working against your client's best interest based on information that they've given you to work in their best interest.

 

This information is publicly available.  I can look at my computer and see differences between prices in stocks between different markets.  I've seen it.  You look at one source and get one quote and look at another and get another (where the difference are in pennies at most).

 

I just don't have the resources to profit it on it because I don't have the money for the high speed computers or to rent the space near where the exchanges are.

 

By the time I bought the stock and tried to sell it on another market the price would have changed.

 

(I can't believe I'm the one defending high frequency trading!)

[JMS]

There is a fundamental difference between what is being done here and front running.

 

In front running, the information is only accessible to people paid by the client.  You are working against your client's best interest based on information that they've given you to work in their best interest.

 

 

I would argue the fundimental similarity is the investor is getting sold his stock at an inflated cost...   Whether the person profiting from inflating that cost is "paid" by the investment house,  or is "paid" by a wholely owned subsiderary,  or is "paid" by a non profit who paid the investment house  is irrelivent.    In any model the investment house is profiting on the backs of his clients in a shady dishonest and harmful manor.

 

 

This information is publicly available.  I can look at my computer and see differences between prices in stocks between different markets.  I've seen it.  You look at one source and get one quote and look at another and get another (where the difference are in pennies at most).

 

I just don't have the resources to profit it on it because I don't have the money for the high speed computers or to rent the space near where the exchanges are.

 

By the time I bought the stock and tried to sell it on another market the price would have changed.

 

(I can't believe I'm the one defending high frequency trading!)

No it's not publically available.. Not with the kind of granularity to allow the public to profit from it. People who use this high frequency trading pay a premium for getting their information in a timely manor which allows them to directly profit from that information.. It is essencially the same as front running because the metrics they have don't reflect a historical record of demand like the metrics you or I might recieve... Their metrics are a real time display of what will be demand after I've purchased, and when I sell.

This is not day trading.. This is literally making money at no risk.. Day traders loose money all the time.

[TheGoodBits]

Keep the current capital gains tax for investments held for longer than 5 years, and the adjust it so that the shorter the investment, the higher the tax. Anything under a certain time frame that is clearly just trying to flip the stock gets taxed as regular income. It would be a fundamental restructuring of how "investing" works today, but I do honestly believe that it's VITAL for the long-term economy stability of this country. 

[PeterMP]

No it's not publically available.. Not with the kind of granularity to allow the public to profit from it. People who use this high frequency trading pay a premium for getting their information in a timely manor which allows them to directly profit from that information.. It is essencially the same as front running because the metrics they have don't reflect a historical record of demand like the metrics you or I might recieve... Their metrics are a real time display of what will be demand after I've purchased, and when I sell.

This is not day trading.. This is literally making money at no risk.. Day traders loose money all the time.

 

It is.  You have to pay a lot of money to be able to make use of it so there is a significant barrier to it.

 

But I pay money to buy and sell stocks on line (beyond the actual costs of buying and selling, I need a computer, and internet connection, etc.).  I don't think we should make it illegal simply because everybody doesn't have the money to access/utilize the information in the same manner as I do.

 

The business is also not NO risk.  They have to put a lot of money into computers, programmers, and the space near the exchanges.

 

The fact of the matter is that the amount of money made by high frequency trading is coming DOWN in recent years, while volume is increasing.

 

If people start doing what the guy described in the OP is doing, they don't make money, and the money the spent is wasted (and I suspect part of the reason why is because other people are doing things like the guy described in the OP that makes it harder/impossible to make money).

 

That's a risk.

 

My job is also a low risk way to make money.  I don't want my job to be made illegal.

 

**EDIT**

None of this means that this is a behavior that we want to encourage or even should be legal.

 

It just means JMS' arguments are garbage.

 

We should discuss what we want done, but in the proper context of the information and what is being done.

 

I think a good solution is increasing the tax on stock transactions so that this becomes far less profitable.

[JMS]

My job is also a low risk way to make money.  I don't want my job to be made illegal.

 

**EDIT**

None of this means that this is a behavior that we want to encourage or even should be legal.

 

It just means JMS' arguments are garbage.

 

We should discuss what we want done, but in the proper context of the information and what is being done.

 

I think a good solution is increasing the tax on stock transactions so that this becomes far less profitable.

 

Alternatively it means you don't understand the topic you are discussing. 

 

Pete if I know you have a buy order in for 10,000 shares of stock at $18.25-$18.50 good for the next 20 minutes,  and I know I can purchase that stock quicker than you for $18.25 per share and then flip them to you for $18.50 fulfilling the order I know you've already submitted...  What is my risk in buying, and flipping to you?   ZERO....   I just made $2k in 10 milliseconds...  I can do that for every trade conducted in the stock market NETing tens of billions... what is my risk?

 

Or put another way.

"They are able to identify your desire to buy shares in Microsoft and buy them in front of you and sell them back to you at a higher price," Lewis, whose book is available on Monday, said on the television program "60 Minutes" on Sunday.[/size]

 

.... 

Darting in and out of trades, HFT firms make just fractions of a penny per trade, but the sheer speed and volume of their trading activity allows those that are successful to make significant profits.[/size]

 

http://www.reuters.com/article/2014/03/31/us-markets-hft-flashboys-idUSBREA2U03D20140331

 

The programming and computer power isn't a risk.  That's not the barrier to play at this level.  You could do the same transaction on your PC at home, ( or at least I could) with pretty basic programming skills,  Only we can't...  because we the consumers don't have access to the data to identify the opportunity,  nor do we have the latency with our trades to take advantage of these opportunities if we did have access to that third party trading data.   We are the guys who's trades occur in minutes rather than milliseconds..  Why don't we have this ability?   BECAUSE IF WE DID HAVE THAT OPPORTUNITY IT WOULDN'T BE RISK FREE FOR THE  HFTs..

 

This is fundamentally about a special advantage reserved for companies to exploit smaller investors in order to enrich  those we trust to place our stock orders for us.    There is no value to the consumer.    It's a parasitic practice by large investment houses,  or firms to take advantages of everybody else.....   The fact that

 

"HFT makes up more than half of all U.S. trading volume"  

 

http://www.reuters.com/article/2014/03/31/us-markets-hft-flashboys-idUSBREA2U03D20140331

 

 

 

tells you two things..  One this is highly lucrative because it basically effects every trade conducted in the market.  Two this corruption is systemic.

 

And like I said this is just the tip of the iceberg.   If you really want to be shocked you should wait for the other shoe to drop...  What happens with the IPO market in this country.

[JMS]

It is.  You have to pay a lot of money to be able to make use of it so there is a significant barrier to it.

 

But I pay money to buy and sell stocks on line (beyond the actual costs of buying and selling, I need a computer, and internet connection, etc.).  I don't think we should make it illegal simply because everybody doesn't have the money to access/utilize the information in the same manner as I do.

 

Pete...  There are lots of people with lots of money...   If that kind of data and trade latency is available to everybody... How come it's only carried out by Banks and  proprietary trading firms?

 

High-frequency trading (HFT) is a practice carried out by many banks and proprietary trading firms 

 

http://www.reuters.com/article/2014/03/31/us-markets-hft-flashboys-idUSBREA2U03D20140331

 

 

 

 

   One would think there would be lots of folks who could afford the cost of a PC, and a programmer for a few months if that's all they needed.     If they had access to the data and the high trade latency...  What's a fast PC now a day's... Core 7 =  3.4 Gighertz = 90,000 MIPS or  90 million Instructions per millisecond...    That's a lot of processing power you can pack in a PC now a days..

 

( See Intel i7 Core 975 )

http://www.guru3d.com/articles_pages/intel_core_i7_980x_review,11.html

 

Those things cost what $1000 per chip?   So say 4-5 k per box?  Let's say 10k and you put four of those chips on one motherboard...   That's a hell of alot of processing power with 1 millisecond granularity.

 

The $10k price of a computer and the $20-40k price of a decent programmer isn't a barrier to entry into the HFT market... The reasons it's only Banks and proprietary trading firms who do this is because there is an incestuous relationship between the company taking your order, and the company exploiting that order..    The larger the stock trading company,  the larger the opportunity to milk that trading population for these dishonest profits..   

[ABQCOWBOY]

One has to wonder how this might be used to shape world events?

[DCSaints_fan]

As I understand it, the process goes something like this

 

Trader A puts in a buy order for stock, at some max price say $21 

 

Trader B puts in a sell order for the stock, at some min price say $20

 

Trader C, the "man in the middle", knows about both A and B's trade orders, before A and B know about each others.  So what Trader C can do, is buy from B at $20, then sell to A at $21, making a $1 profit.

 

Please explain to me how allowing this behavior actually benefits the economy.   Its just a wealth transfer without any actual worthwhile "work" being done by the beneficiaries.  This amounts to an additional "fee" that you have to pay the brokerage, indirectly, for trading. It boils down to false advertising/fraud. 

[JMS]

Please explain to me how allowing this behavior actually benefits the economy.   Its just a wealth transfer without any actual worthwhile "work" being done by the beneficiaries.  This amounts to an additional "fee" that you have to pay the brokerage, indirectly, for trading. It boils down to false advertising/fraud. 

 

Exactly...  It's a risk free way to transfer 10s of billions of dollars from lower advantaged investors to higher advantaged investors with out the victim's ever suspecting.    It happens on average to every trade conducted in the American stock market today.   It's just kleptocracy.

[alexey]

It's a job creator for a lot of very smart people.

...

Very smart people who could be doing useful things.

[Larry]

There is a fundamental difference between what is being done here and front running.

 

In front running, the information is only accessible to people paid by the client.  You are working against your client's best interest based on information that they've given you to work in their best interest.

 

This information is publicly available.  I can look at my computer and see differences between prices in stocks between different markets.  I've seen it.  You look at one source and get one quote and look at another and get another (where the difference are in pennies at most).

 

I just don't have the resources to profit it on it because I don't have the money for the high speed computers or to rent the space near where the exchanges are.

 

By the time I bought the stock and tried to sell it on another market the price would have changed.

 

(I can't believe I'm the one defending high frequency trading!)

 

But, are the people being discussed, buying the stock because they spotted that there's a price differential between the two markets?  Or because they saw that Predicto just placed a buy order in San Francisco, but the order hasn't made it to the Chicago branch yet? 

[PeterMP]

Pete...  There are lots of people with lots of money...   If that kind of data and trade latency is available to everybody... How come it's only carried out by Banks and  proprietary trading firms?

 

 

 

   One would think there would be lots of folks who could afford the cost of a PC, and a programmer for a few months if that's all they needed.     If they had access to the data and the high trade latency...  What's a fast PC now a day's... Core 7 =  3.4 Gighertz = 90,000 MIPS or  90 million Instructions per millisecond...    That's a lot of processing power you can pack in a PC now a days..

 

( See Intel i7 Core 975 )

http://www.guru3d.com/articles_pages/intel_core_i7_980x_review,11.html

 

Those things cost what $1000 per chip?   So say 4-5 k per box?  Let's say 10k and you put four of those chips on one motherboard...   That's a hell of alot of processing power with 1 millisecond granularity.

 

The $10k price of a computer and the $20-40k price of a decent programmer isn't a barrier to entry into the HFT market... The reasons it's only Banks and proprietary trading firms who do this is because there is an incestuous relationship between the company taking your order, and the company exploiting that order..    The larger the stock trading company,  the larger the opportunity to milk that trading population for these dishonest profits..   

 

1.  It is also the space.  These companies pay a lot of money to rent space in the same building as the exchange computers.

2.  You have to be faster than their computers.  That's a fast computer, but it isn't going to be fast enough.  If they buy in at the lower price and already start to drive up the price coming in after that price drive up isn't going to do you a lot of good.

 

**EDIT**

Being second because your programmer wasn't as good as their's and did not generate as an effecient program produces the same result.

 

But, are the people being discussed, buying the stock because they spotted that there's a price differential between the two markets?  Or because they saw that Predicto just placed a buy order in San Francisco, but the order hasn't made it to the Chicago branch yet? 

I don't think there is any claim they knew who placed the order.  They see the order placed, but I doubt they know or care that it was placed by Predicto.  That will/does cause a price differential.  They use that price differential.

As I understand it, the process goes something like this

 

Trader A puts in a buy order for stock, at some max price say $21 

 

Trader B puts in a sell order for the stock, at some min price say $20

 

Trader C, the "man in the middle", knows about both A and B's trade orders, before A and B know about each others.  So what Trader C can do, is buy from B at $20, then sell to A at $21, making a $1 profit.

 

Please explain to me how allowing this behavior actually benefits the economy.   Its just a wealth transfer without any actual worthwhile "work" being done by the beneficiaries.  This amounts to an additional "fee" that you have to pay the brokerage, indirectly, for trading. It boils down to false advertising/fraud. 

 

I don't generally make stuff up.  Try reading on the topic:

 

http://pages.stern.nyu.edu/~jhasbrou/Teaching/2014%20Winter%20Markets/Readings/HFT0324.pdf

 

"The best papers for this  purpose isolate market structure changes that facilitate HFT. Virtually every time a market  structure change results in more HFT, liquidity and market quality have improved because liquidity suppliers are better able to adjust their quotes in response to new information."