Be sure to read the July Trader Magazine’s article on algorthmic flash trading, a/k/a front running:

Flash orders are also called “step up” or “pre-routing display” orders. The rationale for these order types is simple: Better me than you. They allow a venue to execute marketable orders in-house when that market is not at the national best bid or offer, instead of routing those orders to rival markets. They do this by briefly displaying information about the order to the venue’s participants and soliciting NBBO-priced responses. If there are no responses, the order can be canceled or routed to the market with the best price.

All four markets with flash orders treat these orders in a similar way. If they get a marketable buy order, for instance, that would otherwise be routed to a market quoting at the NBBO, they flash the order to some or all of their participants as a bid at the same price as the national best offer. Exactly who sees the flash, how that information is conveyed and the duration of the flash vary by market. The maximum allowable time for a flash is 500 milliseconds, or half a second, although most of the markets flash routable orders for under 30 milliseconds.

The details are worth a few minutes of your time.


Hat tip Bill King

>

Source:
Flash PointEquities industry clashes over flash and step-up orders
Nina Mehta
Traders Magazine, July 2009

http://www.tradersmagazine.com/issues/20_296/-103978-1.html

Category: Quantitative, Trading

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

192 Responses to “Flash Trading’s Dark Volumes”

  1. dead hobo says:

    ben22 Says:
    July 22nd, 2009 at 3:06 pm

    I’m sure I’ll get it for this but the whole “the game is full of crooks” “everything is manipulated” stuff from some people is getting a little old for me. It’s always been full of crooks, isn’t every business? … You saying that the SEC is just now starting to look at it should be telling enough. Guess what, if you stop HFT there will be a new things the crooks find, it’s the way it is.

    reply:
    —————
    Not all business is full of crooks. Just some. If you believe we should just ignore the current crop of crooks because new ones will replace them later, so, why bother, then you are ignorant. Efficient markets require two things … Self interest and a respect for contracts. By this I mean you don’t play screw your buddy whenever you can get away with it. That kind of behavior only creates a race to the bottom for everyone. By ignoring the HFT tax, you are just a willing participant in a race to the bottom.

  2. KidDynamite says:

    @ben22 – the people on this blog are much smarter than the people on the other blog you mentioned. TBP is my one bastion of sense and intelligence on the internet, so i’ll try to defend it with knowledge and logic.

    @capitalist canuck – you asked why Johnny Retail is paying all those fees to mutual funds: i realized this JUST last week – get ready – they pay fees to the mutual funds so that the money managers (who should be rendered obsolete by ETF’s) can act as STOCK LOBBYISTS – going on CNBC to spread their optimism to get more people to buy more stock. Ponzi up bay-beeee

    @Transor – i definitely didn’t mean to imply that the market would collapse without HFT (you wrote flash trading, but i think it was a typo on your part) – because i don’t think HFT is keeping the market up. I do think there would be a lot less liquidity, and a lot more volatility without HFT, and that we wouldn’t just suddenly see everyone trading stock with perfect rational thought and contentment if they could be fat and lazy in their executions.

  3. manhattanguy says:

    I see a big DOJI on S&P. Dollar refused to go below yesterday’s lows. Oil topped out. Tech is the only thing going for the market. Trend reversal anytime soon.

  4. KidDynamite says:

    by the way, Ben22 – what’s very interesting is that i left the same comment i left here at 8:46am on that OTHER blog you mentioned – and they actually UNDERSTOOD and AGREED with me – for the most part. i was shocked.

  5. KidDynamite says:

    just to get back on topic and wrap this up – i don’t have a strong opinion either way with respect to flash trading (and the option of price improvement) – i was merely pointing out that it’s not “computers frontrunning people and ripping them off” quite as it’s portrayed – it’s a technological progression from the same way trading has always been done at the NYSE.

  6. Thor says:

    Kid – you’re doing a good job debating this issue here, I don’t understand half of what you’re all talking about but I do very much appreciate that you all have had this discussion.

  7. Thor says:

    One question though – are flash trading, HFT trading, and machine trading all the same thing?

  8. Onlooker from Troy says:

    Kass is apparently shorter than he’s been since Feb. Even than early June. Not that I worship Kass or anything, but he does have a good record of late. He called the previous correction about as well as anybody. And of course he hit with the bottom call in March, along with some other folks (ahem).

  9. I-Man says:

    Looks like EBAY and QCOM shit the bed…

    Lets see what my old bitch MOS has to say… glad I kicked her to the curb at 50…

  10. Onlooker from Troy says:

    KD

    Good insight re: mutual fund fees and fund managers. Everybody needs a greater fool after all (otherwise known as multiple expansion, especially in a moribund economy like the one we’ll be seeing for some time).

  11. KidDynamite says:

    thor: machine trading or algo trading is traders using algorithms to automate executions. from that, was spawned high frequency trading (HFT) which was basically OTHER people using smarter computer programs (And faster ones) to outsmart the first computer algos. Flash trading is different – and, as I’ve said multiple times in this thread – is a convoluted way of exchanges allowing their traders to improve the price of an order before execution (as the NYSE has done since its inception).

  12. karen says:

    Speaking of tech, VMW spiked on the earnings release.. seems to have had 18% of shares short however. could be fun to watch.

    etrade is up a bit after hours and its loan loss provision “was lower by $49 million from the prior quarter.”

    but the wild one is ISRG up 12% or 20 pts… it also had 18% short position.

  13. Onlooker from Troy says:

    KD

    Re: HFT. I understand what you’re saying here, and I agree with ben’s perspective. But I also don’t think we have to leave it right there. It’s not an either/or situation. We can still improve on things. And I do think that there can be some changes to decrease the predatory nature of what they’re able to do without discarding the whole concept and therefore decreasing volume with the consequences of that.

    Yes, trading is cheaper than it used to be, with lower spreads. But that doesn’t mean that things can’t be improved even more, taking away this easy skim from the Goldman Sachs’ of this world. I don’t think we should argue this on a relative morality kind of basis (i.e. at least it’s better than it used to be).

    With that said, I am far from an expert here so I won’t take an un-budging stand on this – just yet.

  14. I-Man says:

    wow… ISRG… Now thats a short squeeze

  15. I-Man says:

    And I apologize to you EBAY… you must have done something good. When was the last time they had a good report?

  16. KidDynamite says:

    @OFT – absolutely – i just hate the idea of limiting profits (who decides how much is too much?) and basically declaring capitalism null and void – and yes, i KNOW that the government already did that – we don’t need to make it worse… I hate intervention – as long as people are not being stolen from and laws are not being broken – and i don’t think laws are being broken. the entire nature of the stock market, and ALL capital markets are “predatory in nature” – that’s a very essential thing for everyone to realize

    and yes – i know that GS got money from the government and didn’t have enough restrictions imposed on them. i’ve written about it multiple times – be mad at the government – they are the ones who screwed up. don’t hate the playa, hate the game

  17. Transor Z says:

    @KD: Yes, I meant HFT generally, sorry. I’m pissed b/c I left a “discovery request” comment for you earlier that’s still languishing in the ether. Oh well. I’m sure this isn’t the last time we’ll be talking about this stuff. Bottom line: I need things explained to me in very very basic terms.

  18. dead hobo says:

    KidDynamite Says:
    July 22nd, 2009 at 4:11 pm

    i don’t have a strong opinion either way with respect to flash trading (and the option of price improvement) – it’s a technological progression from the same way trading has always been done at the NYSE.

    reply:
    ————-
    You’re absolutely right. Guns don’t kill people. People kill people. There are laws against killing people. HFT, at this time, does not share that restriction.

  19. karen says:

    I-Man.. up 25 pts now.. wonder if it is back on its way to 359.. lol.

  20. KidDynamite says:

    i think the best comment i’ve read about this situation was after TD posted Saluzzi’s initial white paper. i clipped it.. as follows:

    “Frontrunning is trading in front of a customer order. It is illegal. Collecting and analyzing publicly available information and trading based on your insights is legal. And guess what, someone will be the fastest and most accurate in doing this. The result of their actions is to translate meaningful information (strained from a stream of mostly noise, it’s incredibly difficult to do) into price changes which make the price more accurate relative to what’s knowable at the time. Unfortunately for people like Saluzzi, a 19th century “tape reader”, a lot of the information that quicker, more talented, machine-using, more insightful players uncover is information about large size that he’s trying to deceptively move without anyone knowing the truth about what he’s doing. There’s nothing wrong with what Saluzzi is trying to do. What’s wrong is crying foul when the one-sided benefit you wanted to obtain is defeated by people who have made a bigger investment in what’s important for trading. The big winners in all this are small traders who are not fleeced by large professional size deceptively getting them to buy or sell at insufficient prices. I can understand Saluzzi’s campaign against technology and modern information processing, it’s his ox that’s getting gored. The thing that’s truly hilarious is that what Saluzzi wants to be legal, his “tape reading”, is just another example of where professionals have an edge over the little guy.” But it would never occur to Saluzzi to outlaw what HE does, only what his competitors are doing better than him.”"

  21. KidDynamite says:

    to be clear – i think this guy Saluzzi is, in the style of the immortal Barry Ritholtz, “a monkey’s ass.” Yesterday he was ranting about how HFT’s were manipulating the price of CIT to stay above $1 so that it would be eligible to earn rebates (As sub $1 stocks are not eligible). pure drivel. and it makes me despondent that the average person reads this and gets fired up.

    even guys like Whitney Tilson are now quoting Saluzzi’s rubbish. Sad. That’s why i fight it here – if BR gets on board with the misinformation and foil hats, i’ll have to quit the internet.

    (sorry – in case it’s not clear, Saluzzi is the guy from Themis Trading who has been ranting about HFT lately)

  22. dead hobo says:

    KidDynamite Says:
    July 22nd, 2009 at 4:35 pm

    Yesterday he was ranting about how HFT’s were manipulating the price of CIT to stay above $1 so that it would be eligible to earn rebates (As sub $1 stocks are not eligible). pure drivel.

    question:
    —————–
    Are you speaking from a position of actual knowledge because you have a personal relationship with the facts of the situation, or or you just an idiot.

  23. dead hobo says:

    KidDynamite,

    My apologies for the derogatory word above.

    I should have elaborated and asked if you are confused by an admiration of a power greater than you. One that has the power and influence to make markets and do what it damn well pleases.

  24. Onlooker from Troy says:

    KD

    Re: Saluzzi. Indeed we always have to look at people’s vested interests and try to see where they’re coming from and what their motivations may be. Rarely is anybody just as pure as the wind driven snow and just doing what’s best for society and humanity. There are some out there, but you can only trust their motivations after a very long track record is laid down.

    Most are just “talking their book”, or angling for some advantage of their own.

    I don’t know enough about this myself to judge this one way or another. But it’s my normal skeptical approach.

  25. leftback says:

    Onlooker said: “Kass is apparently shorter than he’s been since Feb”

    Wee Dougie has been short most of his life, he is a sharp cat, though. Interesting that he has turned around on the market now.

    manhattan guy said: “Dollar refused to go below yesterday’s lows. Oil topped out. Tech is the only thing going for the market. Trend reversal anytime soon.”

    Believe me, pal, anytime cannot come soon enough for LB and other observers here.

    We have had to talk I-Man off the ledge several times since the start of July. We should be wary of shorting anything in the tech sector while these earnings keep coming in hot. There are three sectors where we know that the fundies stink into Q3/4: XLF, XLE and IYR, and they are all inversely leveraged to the $ to some degree.

  26. dead hobo says:

    Onlooker from Troy Says:
    July 22nd, 2009 at 4:42 pm

    KD

    Rarely is anybody just as pure as the wind driven snow and just doing what’s best for society and humanity.

    reply:
    ——————–
    That would be me, except when I’m talking my book, or lack of one.

  27. ben22 says:

    ah DH, how did I know it would only be a matter of time before a response from you.

    My guess is that you have absolutely 0 real experience working with HFT and the reality is there isn’t a simple solution like a tax. Sorry but I found your responses to KD only amusing, not insightful. Then when you couldn’t answer KD, or you just didn’t want to anymore you resorted to this:

    are you stupid or just ignorant

    I don’t think either applies to KD.

    then he said:

    but wait – you don’t really think these guys are getting long massive amounts of stock to prop it up, right? no – you think they’re magically moving the prices higher without accumulating positions… alas, it doesn’t work like that.

    He is exactly correct about this and your response back was that: This isn’t a problem that needs to be over-intellectualized.

    lol.

    Save the nonsense about what makes an efficient market, as if a tax on HFT helps solve your second requirement. Last I checked our Federal govt wasn’t too interested in respecting contracts.

  28. KidDynamite says:

    dead hobo Says:
    July 22nd, 2009 at 4:46 pm

    Onlooker from Troy Says:
    July 22nd, 2009 at 4:42 pm

    KD

    Rarely is anybody just as pure as the wind driven snow and just doing what’s best for society and humanity.

    reply:
    ——————–
    That would be me, except when I’m talking my book, or lack of one.

    actually, DH, you’re confused again. that’s ME. i have no motivation, other than to educate foil hat mobs on the internet who i’m basically wasting my time and sanity with. Sorry, I’m done with you though, after you called me an idiot twice in an otherwise civil thread.

  29. KidDynamite says:

    @ben22- the realization that it’s very very hard to move prices without accumulating positions is one that would silence MOST of the conspiracy theories – but it’s one the common man doesn’t understand for some reason.

  30. dead hobo says:

    ben22 Says:
    July 22nd, 2009 at 4:57 pm

    but wait – you don’t really think these guys are getting long massive amounts of stock to prop it up, right? no – you think they’re magically moving the prices higher without accumulating positions… alas, it doesn’t work like that.

    reply:
    ———–
    Actually it can with the proper amount of front running and a good collar routine. Also, if you buy low and pump the market a little, you can get a few cents on the upside from the sucker you fooled into thinking the rise was from real demand. Only the slowest computer and the last buyer in loses.

  31. ben22 says:

    and to be clear from onlooker:

    Re: HFT. I understand what you’re saying here, and I agree with ben’s perspective. But I also don’t think we have to leave it right there. It’s not an either/or situation. We can still improve on things. And I do think that there can be some changes to decrease the predatory nature of what they’re able to do without discarding the whole concept and therefore decreasing volume with the consequences of that.

    I’m not saying to just let everything go, not in the least. Everything can always be improved but to think that there is a solution that stops corruption is crazy to me. My comments are in response to the solutions suggested above by people that appear to have 0 experience with any of this. Of course, that’s probably dumb on my part to think that people that don’t know anything about a subject would sti back and observe rather than try to offer solutions, after all, we’ve got a whole crew of folks in Washington that do just that. Why should the blogs be any different.

  32. leftback says:

    @KD: We have all been called idiots by DH, so no worries. Thanks for the education today and do come back.

  33. dead hobo says:

    KidDynamite, ben22,

    You are thinking in terms of accumulation. The market manipulation , HFT, and pump works in terms of flows. Massive flows where a little is scammed on each transaction. It’s not the one big score, It’s the humongous mass of little scores, daily.

  34. dead hobo says:

    leftback Says:
    July 22nd, 2009 at 5:04 pm

    @KD: We have all been called idiots by DH, so no worries. Thanks for the education today and do come back.

    reply:
    ——————–
    Not you or most others. Maybe Franklin411 but he asks for it aggressively. I’ve disagreed with you. Maybe been a little sarcastic. But I don’t think I’ve crossed that line with most here.

  35. ben22 says:

    @Karen,

    Re: ISRG

    The Fast Money crew were buzzing about this stock last night. They mentioned the large short interest as well.

    All I can say is not for me.

  36. ben22 says:

    hobo,

    I’m just gonna let this one go. As for the idiot thing, I don’t know if you’ve ever called me that but I’m pretty sure once I got the insane label from you, maybe more than once. oh well, I can take it, I’ve certainly been called worse.

  37. dead hobo says:

    Just as the oil thieves used ‘peak oil’ to justify and provide cover for their theft last year, the new scam is to say HFT is a natural evolution in technology. Just ignore the front running, collaring, manufactured short squeezes, and pumps.

  38. Thor says:

    I must say – this is the most heated I’ve you get Ben – you’re usually so Zen ;-)

  39. KidDynamite says:

    DH – if you refuse to be the sucker, the HFT cannot manipulate the market. If you put in a bid for 1k XLE, you may see the market move 10c against you. If you panic and take the new offer (you SHOULD have taken the offer initially, paying the 1c spread – which, as I’ve said repeatedly – is better than you’ve ever been able to do before in history) – then you’re the sucker and the HFT’s have won. I mentioned in another thread the way to beat them: put your order in and go play golf. The market will move up 10c, 20c, who knows, and then come back down. stocks move. Ignore the cat scan oscillations – you can’t beat them.

    markets don’t move when HFT’s buy and sell unless, as you so eloquently put it – there is a sucker involved. So don’t be the sucker. There is ALWAYS someone who is the last buyer – in every market, regardless of how it’s traded. If HFT’s outpsyche you (i’d call it OUT TRADING) and get you to pay up for stock, well then, find a new job.

  40. KidDynamite says:

    i LOVE the oil example. Did you short oil last year? why not? you knew it was such a “bullsh!t” price right? free money! except that’s not true – because it didn’t look like that at the time did it? when everyone was talking about “chinese demand”.. .

    the public is under the impression that Goldman can run around driving up the price of oil (which, they absolutely can, if they get massively long oil) and then miraculously unload it at the top. guess what – if buying tens of millions of barrels of oil drives the price to $150, then selling those tens of millions of barrels drives the price right back down – and GS makes no money. UNLESS there are some other greedy bastards who bail out goldman and buy at the top.

    Oil was driven up by the expansion into commodities of an asset class, and blind “indexed” investing by hedgies, endowments, and pension funds. it’s always easy in hindsight, but it was suicidal to step in front of that freight train at the time.

  41. dead hobo says:

    KidDynamite Says:
    July 22nd, 2009 at 5:18 pm

    DH – if you refuse to be the sucker, the HFT cannot manipulate the market

    reply:
    ————
    OK, I’m safe. What about some 401k depositor who is saving for a comfortable retirement. Are they screwed because they weren’t hip to the groovy HFT trip?

  42. Thor says:

    Kid – re:oil – I understand your explanation, but are you arguing that this kind of speculation in the thee kinds of markets (oil, food, electricity) should be allowed? I’m all for free capitalism, but when we get to a point where families are having to decide between food and gas to get to work there might be some rules that need to be changed.

  43. KidDynamite says:

    DH – yes – if their money manager is not looking out for them, they pay the price. that’s called capitalism. the 401k investor who logs into his account 4 times a year and rebalances his account by hitting bids and lifting offers (at the tightest spreads ever!) is doing better than he’s ever done before in terms of execution costs. If he decides he’s gonna get fancy and play Joe MarketTimer, gets out traded by a machine or anyone else, and complains about it, well, tough cookies.

  44. KidDynamite says:

    @Thor – i believe the more people you allow to participate in a market with the fewest restrictions, the more accurate your pricing is.

    I mean, is cheap gas another right we have in America? I don’t think so… If everyone said the price of oil was completely out of whack, the beauty was that everyone had the option to act on that opinion. (lets not have a discussion about how crappy a product the USO is – that’s only because, like you say ,we do NOT allow free speculation in the oil market – which would be done via cash settled futures)

  45. dead hobo says:

    KidDynamite Says:
    July 22nd, 2009 at 5:35 pm

    DH – yes – if their money manager is not looking out for them, they pay the price. that’s called capitalism.

    reply:
    —————
    And so goes another example of why markets need regulation. Animal House rules are standard equipment without them (You Fucked Up, You Trusted Us). Thank’s for proving my point so eloquently.

  46. Thor says:

    Kid – What about supply and demand though? Was there actually a demand or lack of supply for oil to be at $140 a barrel? If so, why did oil fall to below $40? Did we suddenly have almost 2/3rd’s less demand for it? With demand for oil falling now, and oil tankers full of the stuff sitting offshore, why is oil currently at $65? I will freely admit that my understanding of both economics and the markets is lacking (clearly) but as an average guy looking at this from the outside, it does not seem like it is beneficial to either out economy or our society for people who have nothing to do with the production, sale, or use of oil to be trading in it. . . .

  47. KidDynamite says:

    EXPECTATION of supply and demand, Thor… Forward looking markets. Oil now is also effected by views on the USD.

    by the way – i’m a compassionate capitalist – not a “let the poor suckers wither and die” capitalist – but someone will ALWAYS be the loser – you cannot prevent that or legislate it away.

  48. KidDynamite says:

    yes DH – that’s the same reason GS doesn’t outright steal from its clients as Matt Taibbi alleged – it’s BAD FOR BUSINESS…. if GS phucks you, you stop doing business with them.

  49. dead hobo says:

    KidDynamite Says:
    July 22nd, 2009 at 5:50 pm

    if GS phucks you, you stop doing business with them.

    reply:
    ———–
    Given their participation in SLP and status as an HFT trader, that would require a total halt of all trading of equities. Thus, the Goldman Tax.

  50. dead hobo says:

    Gotta go now. Been fun. If there’s anything interesting I’ll get back in the AM. Had fun kicking your ass, KD.

  51. AmenRa says:

    @KD

    The HFT can’t make you chase a price to enter a position, right? I’ll use a limit order to establish a position (I never use market price to get in). My problem is when I sell I’ll sell at market. I have seen the price drop and wipe out some profit when I do a market sell. Is that the HFT at work? Or does it concentrate on large orders?

  52. manhattanguy says:

    Re: ISRG
    As I mentioned in one of my posts yesterday, you don’t want to be short on stocks like Apple or ISRG going into earnings. They will just run over you. ISRG might be a great short candidate at some point, but not until Nasdaq falls off the cliff.

    On the other hand, it will be interesting to see how the current administration’s Health reform will impact ISRG’s business model. Not many hospitals can afford to buy those expensive DaVinci systems ($1.43Million a piece), can they? Probably the reason why they are refusing the reaffirm 2009 Sales guidance.

  53. Thor says:

    @kid “EXPECTATION of supply and demand, Thor… Forward looking markets. Oil now is also effected by views on the USD.”

    Good explanation – thanks for the edumacation! You’re a trooper, how you stood up to the insanity that is the average poster on ZH is still a mystery to me. Heavy tranquilizers? ;-)

  54. leftback says:

    Agree with manhattan guy, don’t EVER play earnings, the Street has information you don’t have access to, it’s easier to fade the reaction to earnings after the fact.

    An interesting chart we have all looked at many times:
    http://www.calculatedriskblog.com/2009/07/stock-market.html

    LB is struck by how the 1998 correction (was that Asian crisis/LTCM?) is an almost perfect mirror image of the present rally around the SPX axis. Back in 1998 the trend was restored around SPX 950…. fascinating, eh?

    Evenin’ all….

  55. AmenRa says:

    @leftback

    The SPX entered the monthly 3LB downtrend back on 1/31/08. If the SPX can close out July at 968.75 or better then it will have reversed the trend. To reverse a monthly trend is serious to me. My 2¢

  56. KidDynamite says:

    @Amenra – i don’t ever use market orders electronically. if you’re trading instruments with narrow spreads, i’d suggest not messing around – instead of bidding on the bid side, just bid with an offer side limit – pay the spread. Then again, i don’t know what your model is or what your size is…

    and you are correct – HFT cannot force you to chase prices on your limit orders. I’m not sure what’s up with your market order liquidations – i’d doubt it’s HFT’s gaming you, but if you’re trading huge size it’s possible.

  57. ben22 says:

    @Thor,

    Yeah, I even did the Yoga X workout today and still a little fired up. I need to get back into prayer stance I suppose. Really though, I never actually got upset, just a little louder to make my point. I’m glad most of the time I seem Zen like, blocking out emotions is one key to trading success.

    As for the final part of the debate above, hobo, you are really just starting to sound bitter, like you are pissed you missed some good trade opps. You have been sitting in cash have you not? I should have realized this a few weeks ago when you were saying that all of the computers find our trade strategies amusing. Sorry, I’m thinking the regular posters on this site that talk about trades beat 95% of all money managers in the last two years. Who is laughing?

    Then this:

    Had fun kicking your ass, KD.

    lol, hardly.

    Last, nobody forces you to buy equity in a 401k. Getting sick of this argument as well, I have never ever once seen a 401k, and I’ve looked at 100′s, that didn’t have a safe bond option or even a cash option. If you know people that do they should be going to their HR department and demanding change. Further, many many companies offer an in-service non-penalty distribution while you are still employed giving you the ability to roll all of the capital or a portion to an IRA where you can take complete control over it and can invest in whatever you like, or stay in cash. If people are too lazy to request the summary plan description to see if they can do that, well… People that lose money are looking for someone to blame for the fact that they were blind to what was coming and HFT will be just one target in a long line to come under attack all in the name of helping the retail investor, who will, in the fullness of time, get duped anyway.

    As for your quote on this is why the market needs regulation in relation to a 401k investor getting burned. Here’s a little taste of reality: For an advisor making recs to a client on a qualified plan. We all MUST comply with the “Rule of 3″ meaning for each asset class I MUST provide the client with three investment options if there are three options in that asset class in the 401k, but I AM NOT allowed to tell them which one to pick. Is that the kind of regulation you think will help the retail 401k investor, because that’s what we’ve got, and that rule just went into effect last year.

    I wish BR would chime in on this, I know Fusion has HFT programs that they can sell to institutions.

  58. matt says:

    @KD and everyone else:

    I have yet to see anyone on this blog explain exactly what these algorithms are actually doing. I’ve heard some vague mentions of “buying low and selling high” and such. Are you sure that this is what is really happening? The proprietary nature of these programs implies that anyone who actually knows what they are doing wouldn’t even be posting vague comments on a blog – they would be tight lipped.

    I think that there is a lot more to these trading programs than buying and selling really quickly. That kind of program trading has been going on in the NASDAQ for my entire lifetime because it just makes sense for market makers to operate this way.

    The growth in the program trading at the NYSE implies that this is something different. I’ve heard all sorts of weird stories from traders – from algos incrementally machine gunning one share orders through for price discovery to picking off limit orders from the central book. In fact, before KD started talking about “buying low and selling high before you even know what’s going on,” I assumed the the HFT was a heterogeneous mixture of these little trading games.

    I’ve never really understood all of the Zero Hedge conspiracy theories. They just don’t make sense to anyone with a cursory understanding of our exchanges. I’m not saying that this is a fair playing field. I’m just not able to work myself into an outrage, as these exchanges have never offered a level playing field for retailers and the Wall Street firms. The exchanges are for-profit firms that get paid to offer different levels of service.

  59. cvienne says:

    Fascinating discussion…

    Somehow I “missed” this thread as being the ACTION SPOT for the day…

    I was off in another world (and another thread), and otherwise slept half the day…Yet I did make the following posts…

    http://www.ritholtz.com/blog/2009/07/foreclosures-are-highly-regional/#comment-196102
    http://www.ritholtz.com/blog/2009/07/foreclosures-are-highly-regional/#comment-196117
    http://www.ritholtz.com/blog/2009/07/foreclosures-are-highly-regional/#comment-196122
    http://www.ritholtz.com/blog/2009/07/foreclosures-are-highly-regional/#comment-196128
    http://www.ritholtz.com/blog/2009/07/foreclosures-are-highly-regional/#comment-196133

    What actually fascinates me in perusing “the remains of the day” (which apparently was contained in this thread), is the notion of ALGOS vs. HUMANS…

    I respond as follows…

    Ask yourself what you’d rather be…

    1. A computer, trying to predict HUMAN behavior based on how your programming instructs you to behave
    2. A HUMAN, observing computer algo patterns and trying to identify how they seem to behave…

    Your first sample QUIZ is to try and figure out which one of the two options cvienne likes.

    Happy trading! :-)

  60. Thor says:

    Ben – Brilliant post. You work for an investment firm yes? Sounds to me like you’ll be needing to go out on your own at some point!

  61. cvienne says:

    The bottom line to my previous post is this…

    When you FARM & grow food, you don’t need a lot of crap opinions to tell you how to get better harvests…

    - You don’t need SPECIAL seeds…
    - As long as you have ways to somewhat neutralize humidity, temperature, and irrigation factors, you have no real constraints…
    - Everytime you try to grow something new, grow it a half dozen different ways (soil nutrients, soil temperature, pollination characteristics, etc.)…ALWAYS – & I MEAN ALWAYS, which experiment works out the best the first year out, works forever…
    - Harvest the seeds of your most productive bounty…They have the genetic code to survive…There is no sense in buying new seeds once you’ve established a successful harvest…
    - Keep Digging…3/4 of the time, the Earth just needs to get rolled over a little…do it…let it breathe…
    - Keep the bees coming…Start ANYTHING by planting hardy plants that attract bees (lavendar & rosemary are the best in my book)…After the bees arrive and you subsequently get better harvests, notice what bugs tend to chew on your harvests…Don’t eliminate them by chemicals…INSTEAD, plant more plants that attract the carniverous insects that like to EAT the bugs that are eating your plants…PROBLEM SOLVED…

    Nature has a cure for everything…

    Except, I think, Obama has a BETTER cure for everything (than even NATURE itself)…So if you’re so inclined, keep yourself tuned to his rhetoric…

  62. karen says:

    Cvienne, you are on something tonight… not sure what.. : ) ps. i did pilates today, but it’s not on my VISA and I don’t cost anyone anything :P

  63. karen says:

    smiley face = colon + a “p” Is there a middle finger symbol?

  64. ben22 says:

    cvienne,

    what happens when if the bees go away? don’t we have massive decline in bee population or is that made up?

  65. karen says:

    ben22, not made up! one of my best friends is a beekeeper! he’s been called repeatedly for testimony…

  66. Thor says:

    Ben – good question, that was all the rage a few years ago wasn’t it? Haven’t seen anything at all in the news about it, just tried to google it and didn’t find much that wasn’t at least two years old. Saw a fascinating documentary on the Africanization of the North American bee population this weekend and they didn’t mention population collapse at all.

  67. Thor says:

    Karen – what’s the current status do you know? I can’t find many recent articles on it anywhere.

  68. Thor says:

    TADA! – Looks like they might have found the culprit!

    http://www.sciencedaily.com/releases/2009/04/090414084627.htm

  69. cvienne says:

    @karen

    Don’t imbibe my flares so much…(not that I really think you do – you seem to me to be VERY within yourself and capable of acting accordingly, from my POV)…That’s a GOOD thing…

    I’m ON my Qi (Chinese), or Xi (Greek)…It’s a preferable state of being…It often happens during the fortunate times that you get to EAT the fruits of your toil & labor…

  70. KidDynamite says:

    @Amenra – i wish i hadn’t given you any advice on how to execute your trades since i have no idea what you do – please disregard. for ME, trying to buy $20k-$50k blocks of large cap stocks or $100k blocks of ETF’s, i think i need to learn to pay the spread and take offers when i trade instead of trying to get fancy and bid on the bidside/offer on the ask. let me put it that way.

  71. ben22 says:

    karen/thor,

    well that is pretty interesting he’s been called in more than once for testimony. I have heard very little on this topic actually, but I remember reading a study somewhere about the many problems that would be caused if the bee population continued on what I recall was a fairly consistent decline in bee population.

  72. KidDynamite says:

    @Matt – to summarize, everyone in the markets is trying to buy low and sell high – the HFT guys are just trying to take advantage of your psychology to gain an edge on you. They hope that if they know you have to buy 1000 shares, and you see offers disappear, you will chase and pay up a penny or two when you see them start to lift offers in front of you. Again, this is nothing new – traders in the crowd (or “tape readers” like Saluzzi) used to do the same thing – it’s called TRADING. Now, it’s just done faster and for smaller amounts.

    g’night ya’ll . my wife has threatened to get me committed for internet addiction

  73. ben22 says:

    thor,

    thanks for that link.

  74. cvienne says:

    @all

    BEES…

    It’s a combination of things…

    Like ALL species, bees (on their own) will learn how to adapt & migrate…

    So if “challenged” by another predatory species, some will survive and seek out other survival…

    OR

    If their arena isn’t hospitable, they will migrate…

    Humans can’t predict what will happen…But what they CAN do is to try and provide potential areas for survival…I’m TELLING you that rosemary and lavendar work extemely well (yet are UNDERUTILIZED in America vs. ITALY where they are ubiquitous)…

    You can’t read this stuff in book or on the internet…You have to EXPERIMENT…I have about 12 years under my belt so far (and I’m just a ROOKIE)…

  75. cvienne says:

    @ben22 (10:41)

    We’d be TOAST without bees…

  76. ben22 says:

    cvienne,

    yeah, after I read the link Thor posted that was my basic conclusion.

  77. karen says:

    cvienne, darn, i was so hoping to get something going.. jk, jk,.. so tonight i bot two piece of the most spectacular italian pottery (in my blue..) she, the italian, did it with these two men in mind..

  78. karen says:

    tempting danger, i sent my friend an email.. believe it or not, he often works till midnight.. last discussion i remember tho, was he held pesticides responsible for many bee woes… he was super big in MT until he got wiped out by the ranchers’ spraying.. which runs into the streams… anyway, his big money always came from pollinating the almonds in CA..

  79. cvienne says:

    @ben22

    Bottom line on bees: I’m not as worried as the BEE ARMAGEDDONISTS are…To me, it’s a simple matter of habitat…I’ve learned how to provide the best habitat…& I appreciate the contribution (by them – It’s ABSOLUTELY invaluable – I couldn’t grow SQUAT without bees)…As long as my habitat is relatively safe, there will be no problems (and actually, other FARMING areas of the country will eventually migrate to reflect this phenomenon – wherever it may be)…I’ll only become worried when the ENTIRE CONTINENTAL US becomes endangered…I don’t see that happening anytime soon save for some CRAZY event…So until then…KNOW…GROW…and have fun doing SO…

    @karen

    Sorry to not have drawn BLADES (as the case may have been)…I’ll draw blades most anytime as the case may be…Hell, this past summer I’ve been spending half my time slinging a 25 pound mattock around my head and into the ground so I kinda feel like an Arturian Knight at the moment…

    Pottery…

    All I can say is this…I’m SURE it’s beautiful (as it’s not hard for me to divine from reading these posts that you have “impeccable” taste)…

    But the MONA LISA is the MONA LISA regardless of the frame (or the section of the Louvre it hangs, or the “L’histoire des collections” thereof)

    So grow pretty flowers, or tasty EATS, whatever you desire…

    From MY experience, it’s best to differentiate…Pretty pots, put in ordinary plants…Exquisite tasting fruits & vegetables, grow in the ULTIMATE pot…= Planet Earth

  80. Thor says:

    Karen – your pottery makes me think of a funny story. I collect pottery when I travel, was in Morocco in November and took a trip down to a little town on the Atlantic coast that is known for their pottery. I loaded up on so much pottery it was insane. The bag I was carrying it all in was so heavy I could hardly lift it – at least 20 pieces. I figured I’d give them away as presents. Managed to truck that bag through the whole country, on trains, buses, cabs, up and down stairs in hotels, you name it. Not one scratch on any of it. Even got it from Marrakech to Casablanca to London as carry-on.

    I set the bag down in the tube station at Heathrow, when the train came I picked up the bag and the strap snapped – dropped it hard. When I got to the hotel and opened the bag every single piece of pottery was broken – large, small, heavily wrapped or not – everything. I couldn’t even muster up the energy to be upset. I figured it was the Universes way of telling me not to be such a pig next time I travel.

  81. cvienne says:

    @Thor

    I’m so sorry to hear your story because mine is EXACTLY the same (after about the first 5 years I lived in Italy)…

    I mean…jeez…I lived about 5 miles from DERUTA (which is arguably the ceramic pottery “capital of the world”)…

    I kept trying…something kept happening…they kept breaking… I gave up…

    mistfully so, because the CERAMICS that I ended up leaving behind when I sold my farmhouse in Italy were exquisite!

  82. Thor says:

    Cvienne: I feel your pain my friend – I’ve worked hard to try to take what life gives me in stride – often things happen for a reason. Besides, I collect carpets when I’m in a country known for them – those are IMPOSSIBLE to break :-)

  83. cvienne says:

    @Thor

    somehow…I suppose…we need to get into the FLYING CARPET thing…

    Fly the damn thing home dammit and forget about the weight, & thinking of it as baggage…

    Funny you should mention that (carpets)…In my house, I’m going to need a whole new set of them (as time goes by), but I just installed some sunken heartpine flooring…I’m thinking it’s going to take about two years for the ambient sunlight to AGE them adequately in a way that they darken uniformly…There4, I don’t want to toss carpets over the top just yet for reasons you might imagine…

  84. Thor says:

    Cveinne – I love carpets too, always thought they made a room look warm. Most of my house is wood – old craftsman bungalow, all the original flooring and mouldings. I’ll miss my carpets when I move to PS next year – concrete flooring is all the rage out here and the partner wants them to keep the place cooler.

  85. cvienne says:

    BTW & FWIW…

    Amidst all the banter this afternoon (about Vancouver sunsets and computer algos), I was keeping my EYE ON THE PRIZE…

    I couldn’t help notice that the S&P hit its 233 day EMA at around 12:30 (whereby cvienne went SHORT)…

    So if Bill Miller (who was quoted today as saying “stocks are a bargain”) wants to trade against me then let the ball licking begin…

    My caveat is ONLY as follows…”Show me the earnings”…

    So great…if the S&P wants to continue to trade at P/E’s that make the likes of Steve Barry roll over…then FINE…Bill Miller is a genius…

    But TODAY…officially…we reached our “event horizon” of lunacy…

  86. Whammer says:

    @ben22,

    Actually, for me the TARP stuff is still sufficiently mystical that I’d like to hear what you would have said to your uncle.

    I have been hearing people tell me that the fact the banks are paying back the TARP is a sign that things are on the rebound. I’m not convinced, but I can’t really argue the case convincingly.

    And, I must say, as a poster child for the Johnny Retails of the world, the commentary from you, LB, Andy T, cvienne, manhattanguy, I-man, Karen, et al (at least I’m not like Hillary Swank and forgetting my spouse), makes this my favorite finance blog by far.

    I’m pretty much in cash now, switched my 401k to cash and an individually-directed element that is in cash. I’ve missed about 15% return in this latest rally as a consequence, but I don’t feel bad about it (yet). As I’ve said before, the friggin EMH has cost me more money than anything.

    I did want to share one observation about tech — I work in tech, so I am biased. But there is a bit of a “floor” under some of the tech business, and that is an “echo boom” of the Y2K stuff. People bought a whole lot of equipment pre-Y2K, and that is now getting to the point where it really needs to be replaced. You can’t run mission-critical business processes on obsolete equipment, or at least you shouldn’t, so that is propping up demand to some extent I think.

    Now, what that has to do with the stock prices is a whole other story, and I’m sounding like a fundy, so I hope that’s not too gauche ;-).

    I also believe that we will see something within the next 2 years that will be the “next big thing” in tech. I don’t know what the heck that might be, and it very well could still be something “already discovered” like VMW, but I think we’re due.

  87. cvienne says:

    @Thor

    When in doubt…”cooler” trumps anything (so I can understand)…

    Man…if I were in PS, I’d SERIOUSLY look into the idea of being able to excavate down (underground), and create a “cooler” atmosphere…

    but that’s just me…

  88. cvienne says:

    @Whammer

    Re: “next big thing”

    I’m looking for that too my friend…My GUT tells me it’s going to be ENERGY related (perhaps not solar or wind, but WASTE related)…I think any investment there needs to be willing to LOSE 100% though…

    “Echo boom”???…I understand the concept, but I’m dubious about the reality…

    It’s like CARS…everybody needs a new car every 3 years UNTIL THEY DON”T…when they realize they can make do with their old jalopy in tough times, then they change…Moreover, when their NEIGHBORS see that they don’t have a new Escalade in the driveway, they don’t bother either…We haven’t even BEGUN to see that phenomenon yet…

    Yet from an “equity” perspective, that’s where the last HOPE of cash is still teetering…

    FWIW – I’m actually using it as an indicator…When the TECH investment finally unravels, I’ll start to be convinced that the downturn is reaching a climax…

  89. @Whammer,

    INTC was saying in their call that a lot of equipment is at least four years old so there is a lot of pent up demand. Companies are clearly too afraid to spend right now with such a murky horizon but that will be a benefit sometime in the future

    Another point about trading against computers. I’m wondering if this may not be easier to trade against than people. If you think about video games is it easier to play against the computer or another player? It is clearly easier to play against a computer because a computer can’t ‘see’ what you are doing the same way a human being can therefore it should theoretically be easier to trade. The trick I suppose is being able to figure out the ‘algos’ cheats, tendencies and weaknesses. I can see how computer against computer may not be a effective and human against computer because humans can see in a much more comprehensive, instinctual way

    Adaptability should work in the favor of the human brain over the computer I would think. It should at least put you ‘behind’ other traders in that you would end up using them as shields for the computers to snack on while you get what you want done

    Re Bees: Bees are apparently responsible for 1/3 the crops out there. They matter to us but we could survive without them. I think our food choices would be like going from color TV back to B&W though. Thanks Bees! :)

  90. dead hobo says:

    matt Says:
    July 22nd, 2009 at 8:49 pm

    @KD and everyone else:

    I have yet to see anyone on this blog explain exactly what these algorithms are actually doing.

    reply:
    ——-
    Have you thought of using Google to look it up? Themis Trading has a lot of material, some of it is complicated. zerohedge write about it frequently.

  91. ToNYC says:

    Exactly, Kid Dynamite..my guys would be banging their keyboards statusing the order at the Specialist as they watched the situation change on the DOT..they’d let you have 4K then drop the bid a point or two.. while watching the Naz execute on the other screen..now HFT managed to be the Specialist on ‘roids..
    Don’t even think about a smart tax/time fix ’till they are get their fill, and leave the bag to the little guys and move on to the next gaming…that’s the real job..rigging the game or the regulators one step ahead of the light.

  92. DeDude says:

    Nothing that couldn’t be fixed by a fat tax on any trade that is reversed within less than 1 hour.