What does it say about the state of our exchanges that trader on proprietary and execution desks now can buy a software program to alert them to the activities of Co-Located Algo Servers?

“HFT Alert, the first real time software designed to detect high frequency and algorithmic trading systems. HFT Alert identifies when these trading systems are running and what stocks are being affected. HFT Alert can detect several types of algorithms as well as stocks experiencing elevated quote rates associated with algorithmic trading.”

We are now apparently in a silicon based arms race to learn when quotes are real and when they are spoofed faux quotes driven by HFT algos designed to increase volatility.

The exchanges once operated fro the greater good of the investing public, akin to nonprofit utilities. They are now hellbent on chasing away private investors who will eventually learn that this is a zero sum game, and co-located HFTs are a tax on saving and investments . . .

Video here; Descriptions here, press release here.

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Category: Quantitative, Really, really bad calls, 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.

39 Responses to “HFT/Algo Trading Alert Systems”

  1. Sechel says:

    This whole HFT trading mess is a page out of the cold war. The United States develops stealth planes to hide from Russian Radar making them look like small birds (the big blocks being broken up) and the Russians develop algorithms to look for small birds and put them back together to detect American Jet Fighters. Is it any wonder the stock market looks like a WWI battle field?

  2. Richard R says:

    A tax is collected by a government. In this case the word should be “skimming.” HFT, prop-trading, and other modern investment banking practices are just ways for insiders to skim off the top of investor wealth. Skimming would be a criminal act if the crooks didn’t control the definition of crime on Wall Street.

  3. DeDude says:

    We need a real tax put on every trade and bid even if it only exist for a fraction of a second. Let them pay. We also need the exchanges to become non-profit. There are certain things that simply cannot enhance the public good via the profit motive – capitalism is one of them.

  4. AnnaLee says:

    So now that the game is tracked can the odds of the house (against the investor) for HFT be estimated like other casino games?

  5. tax (tks)
    n.
    1. A contribution for the support of a government required of persons, groups, or businesses within the domain of that government.
    2. A fee or dues levied on the members of an organization to meet its expenses.
    3. A burdensome or excessive demand; a strain.
    tr.v. taxed, tax·ing, tax·es
    1. To place a tax on (income, property, or goods).
    2. To exact a tax from.
    3. Law To assess (court costs, for example).
    4. To make difficult or excessive demands upon: a boss who taxed everyone’s patience.
    5. To make a charge against; accuse: He was taxed with failure to appear on the day appointed.
    [Middle English, from taxen, to tax, from Old French taxer, from Medieval Latin taxre, from Latin, to touch, reproach, reckon, frequentative of tangere, to touch; see tag- in Indo-European roots.]

    http://www.thefreedictionary.com/tax
    ~~

    “…The exchanges once operated fro the greater good of the investing public, akin to nonprofit utilities. They are now hellbent on chasing away private investors who will eventually learn that this is a zero sum game, and co-located HFTs are a tax on saving and investments . . .”

    x2

  6. TapeReader says:

    Here’s another approach to monitoring order flow. This one is free and focuses solely on electronic futures.

    Hope that you like it.

    http://algofutures.com/

  7. KidDynamite says:

    Barry – this product looks kinda like what you’d see on a late night infomercial for get rich quick trading systems, no?

    Also, Barry, regarding zero sum games: Yes – HFT will eat other TRADERS’ profits. It’s a positive sum game for investors as spreads have, beyond the shadow of a doubt, decreased.

    @RichardR – I must correct you on one very important note: HFT is not for insiders to “skim ” profits – quite the opposite in fact. It’s the democratization of what was FORMERLY only for insiders: the role of specialist…

  8. Moss says:

    Certainly a tax but the whole HTF methodology and justification is a just another financial sham.

  9. dead hobo says:

    Slick. If I were a day trader I would give it a spin.

  10. dead hobo says:

    KidDynamite Says:
    October 5th, 2011 at 8:29 am

    this product looks kinda like what you’d see on a late night infomercial for get rich quick trading systems, no?

    reply:
    ———-
    Anyone who sells any service on Wall Street or for the benefit of Wall Street is part of your infomercial. Anyone with a foolproof system would be rich and their system would be a secret. This goes from the kachinga kicking guy to the pundits from capital advisory services with great suits and expensive haircuts and smooth presentations.

    Anyone who has ever wondered why the charts rise on no information or excessively bad information would get some inside baseball from this program if it works as advertised. Is it a pump or is it real? Perhaps the program knows. If I were day trading I woulds definitely look into this puppy to see if I could game the gamers.

  11. theexpertisin says:

    Buy and hold for the” long term” now appears to be less than a minute. The more complex the gadget is, the more likely it will break down with no one to fix it. We are at this stage in the securities market, and it is powerfully dangerous.

  12. Richard R says:

    @KidDynamite – Thanks for the clarification. If I can build a supercomputer in NJ then I can participate in this democracy. As an outsider, it is clear that market pros who come up with techniques to take money out of the markets by playing the system are extracting value that should go to investors. I may be a rube, but I thought specialists were actually making a market for investors. These guys can talk about increasing liquidity but everyone knows that’s BS and they have just found a way to grab some money. It’s like the wise guys taking half of the dollars pinned to the saint at the San Gennaro feast.

  13. constantnormal says:

    BR, you just need to Think Big … have Fusion IQ buy this package and commoditize it … selling subscriptions to customers who would get text messages warning them of storms of HFT activity. Price it by the ticker symbols monitored.

    And then to further leverage this notion, securitize that business, spinning it off into a subsidiary (and erecting the famous Swiss-Chinese Wall that allows information, but not liability through it) and selling shares in that.

    And then for the trifecta, front-run the likely responses from the customers of this service — not actual front-running, as you don’t know for sure what they will do with that info, but you would get an edge — just like the vampire squids.

    There, did I win the buzzword bingo prize? Commoditize, securitize, HFT, liability shield.

  14. constantnormal says:

    forgot “leverage”.

    “There, did I win the buzzword bingo prize? Commoditize, securitize, HFT, liability shield, leverage.”

    There. Fixed that.

  15. Lukey says:

    This is a “tax” in the same way the Mafia collecting a fee to make sure your store doesn’t get busted up is a “tax.” And it should be just as illegal. How is this different than a “pump and dump” scheme?

  16. number2son says:

    Grotesque

  17. aceholeone says:

    HFT is not an all encompassing term. Most of you clearly get your information regarding HFT from CNBC and your Senators, which is to say that you have no idea what it is.

    By the way, for $2500 you can build a “supercomputer” and for $700 a month you can “participate in this democracy” of illicitly stealing money from “investors”.

    You guys have no idea what HFT actually is or can be.

    Also, yes, this service sounds like a scam.

  18. dead hobo says:

    constantnormal Says:
    October 5th, 2011 at 9:11 am

    “There, did I win the buzzword bingo prize? Commoditize, securitize, HFT, liability shield, leverage.”

    reply:
    ————–
    Buzzwords with out cliches, lame and current, are only the sound of half a hand, clapping. You need lots of both. Deduct one point for each missing word: Oversold, overbought, technical level, resistance, support, organic, price-earnings ratio, breakout, traders are reacting to _____________ (fill in the blank from the current Yahoo Business AP headline), victory for the bulls/bears,Nigerian oil field shutdown, … you get the idea. Anything that sounds intellectual to the rubes with money. Then you need to put it in a sentence that everybody has been trained by repetition to believe without question. For more insight, go to Marketwatch and read most of the opinionated pundits.

  19. tagyoureit says:

    It’s the HGH of the investing world. Top traders will swear up and down they don’t use it. Get ready for record breaking profits by the superstars. For the rest of us, buy your tickets, hot dogs and beer; kick back and enjoy the game.

  20. Concerned Neighbour says:

    Grotesque is a good word to describe it, number2son.

    My concerns with HFT are many, one being they appear to act on technicals rather then fundamentals. As an example, I honestly think if they’d kept the market open another half hour yesterday it would have close up 2-3% higher then it did. Craziness.

    It means that people like me, who actually use tried and true valuation methods like the CAPE, are likely priced out of this market forever. I’m sure this is naive of me, but shouldn’t the price of a security matter more then whether it’s technically oversold?

  21. streeteye says:

    HFT is to New York Stock Exchange specialist as blog is to New York Times.

    Does same job, sometimes better/cheaper, sometimes irresponsibly.

    Basically same business model without the thin veneer of respectability.

  22. KidDynamite says:

    @RichardR – you wrote “I may be a rube, but I thought specialists were actually making a market for investors.”

    I don’t mean to be rude at all – but yes – that is rube thinking, and it’s another important point of clarification. The Specialists were the biggest crooks on Wall Street – a license to print money – and they actually DID see your orders before they were executed (HFT algos do not, no matter how many times that misconception is repeated). HFT has completely democratized that role via competition.

    Other than their ability to see all order, specialists performed a role that is similar to what HFT algos do now – only they did it with no competition – a monopoly special club, and much slower.

  23. Concerned Neighbour says:

    BTW, as I’ve said many times here and elsewhere, all that would be needed to get rid of HFT would be a very tiny (perhaps .1% or .05%) of a tax on every order submitted to the exchange. So, if you submit an order for $1,000, you pay $1 or 50 cents.

    No doubt such an egregious tax burden would be the end of the world as we (more properly, they) know it, but it’s the right thing to do. It would rid us of the illegal quote stuffing, at the very least.

  24. reedsch says:

    But doesn’t this expose HFT activity to the light of day? How is that a bad thing? Instead of an arms race it may be MAD and we’ll settle back into an equilibrium where information asymmetry will be where the smallpox virus is now, in a bottle on the shelf. “God made some men big and some men small, but Colonel Colt made them all equal.” The computer is the great equalizer. Of course at the end of the day some will still be a bit smarter than others.

  25. Richard R says:

    @KidDynamite – Huh? You’re saying that the HFT algos are doing the same crooked things the specialists did only bigger and better. My point was that the specialists at least had a stated purpose before they stole some of your money. The scale of HFT belies any purpose relating to an orderly market. Maybe there is a place for an automated liquidity function, but it can’t be based on shaving a couple of microseconds off the data path.
    Kid, if one is not an insider, does one stand a chance? And once the insiders blow off all the outsiders, the whole thing crashes. Maybe that’s what’s happening now.
    Years ago I had ML managed accounts until I realized that not one person at Merrill in NY could care less about me making money. So once I was really a rube. If the markets can’t keep the self dealing and skimming under control then capitalism will fail.

  26. Liminal Hack says:

    I think what reality is trying to tell us here is that ‘investors’ should invest in projects they understand in places they understand (e.g. close to home or at least within the boundary of political risk in which they reside), and not send their money to some buffoon half way across the world when it will be preyed on by said buffoon and a range of algorithmic parasites.

    Most of these so called investors are investing in liquidity, e.g. securities that are massively traded and very sensitive to arb and fraud.

    You can’t really “invest” in liquidity and expect a decent return, if any return, without speculating.

    What you can do is invest in illiquid projects, like local businesses, illiquid corporate bonds and so on with less fear of being gamed.

  27. ZackAttack says:

    And this is why the retail investor has been out of the markets for months or years, and won’t return.

  28. Richard R says:

    @Liminal Hack – The broad markets are supposed to exist to make investments in real businesses liquid. It’s true that the idea of investing is a thing of the past – only trading has any style. But even if we stick to local businesses and real estate, we still have mutual funds in pension accounts and an interest in the performance of institutions and foundations that trade in the broad markets. Of course, this money is managed by the herd which will allow anything to happen as long as their jobs continue to exist.
    It’s not hard to see how our economy is destroying itself. New capital goes right to the pass line. Let them be hungry and well fed. But over the last thirty or forty years the pigs have taken over. Let’s just try to go back (or forward) to a time when there was something other than grab all you can as fast as you can.
    You might like Michael Lewis’s piece about California in Vanity Fair.

  29. Robespierre says:

    HFT preys on those who make “investment” decisions based on technical analysis not fundamentals. If your trade decisions are based on just looking at the “pattern” HFT trades ahead of those signals or fakes those signals. So in a way HFT forecasts why technical traders will do or forces technical traders to do something. “HFT alert” software does to HFT traders what HFT traders have been doing to technical traders.

  30. budhak0n says:

    Capitalism fell a long long time ago. We’re on to Financial Cronyism at this point.

    Oh well you play with the puck they drop on the ice .

    LOL and the call to invest in “illiquid” businesses is hilarious and just completely does an overhead forehead smack of any previous exchange legislation that has ever existed.

    The idea of securities “regulation” and “legislation” was always to attempt to provide a level battlefield. That’s long since been blown into a billion pieces.

    Can’t legislate outcomes… just looking to make sure that one team member doesn’t smack the other team member in the shins with the stick while their compadre comes barreling over the blue line

  31. carleric says:

    I remember Lous Rukeyser complaining about program trading back in 80s or so. He was right hen and even more right today. As more and more “lazy” investors came into the market in the 90s, technical trading beame all the rage. Now it seems the chart monkeys have taken over the world. Little wonder that I focus on other things and have pretty much left the market to the clowns using computers to do their thinking.

  32. rd says:

    “They are now hellbent on chasing away private investors who will eventually learn that this is a zero sum game,”

    I think there is a confusion about investors versus traders.

    I am an investor, not a trader. I have very few transactions in my accounts (other than dollar-cost averaging from bi-weekly pay checks into my 401k). Most of my transactions occur near secular market tops and bottom.

    I make moves based on what look like long-term valuation signals like Shiller’s CAPE and Tobin’s Q. As a result, I have significantly lowered my equity holdings over the past year. This has been a gradual process.

    The volatility is actually useful to me as a small investor. As the market declines to reasonable valuations, I can identify specific value points where I want to buy specific ETFs and then put in “Good Til Canceled” bids at or below those values in my Schwab IRA account. Periodically, some HFT computer group will duke it out, knocking the values around until something slips into my “buy” range where my order will get snapped up. I do the same thing in the “sell” range where over-valued ETFs can get sold if some computer wants to buy it from me at what I consider to be a very good price.

    I had a stop-limit on an ETF at a multi-year trend line as part of that risk reduction process due to over-valuation. The HFT volatility blew it down past my stop-limit points on the open but then the next day, it bounced back up temporarily into my stop-limit zone to fill the chart gap, so it got sold and it has traded lower than that sale price ever since. I generally don’t put stops on until I think we are in a significantly over-valued market as I don’t want them to get triggered during a secular bull market just because of some HFT activity.

    As small investors, we just need to recognize that we are playing a totally different game than the big boys. Our goals are very different too, since we are looking at lifetime returns, income, and solvency, not just meeting some quarterly or annual profit goal. Also, we are on our own. We don’t have Uncle Sugar covering our banks in a liquidity or solvency crisis.

  33. KidDynamite says:

    @RichardR -wrote “You’re saying that the HFT algos are doing the same crooked things the specialists did only bigger and better”

    no, I’m saying that HFT performs the same job the specialists used to, WITHOUT the illegal frontrunning, and via a mechanism that is democratized – ANYONE can do it. Contrast that with the Specialist Old Boys club that you had to be born into by blood. Which do you prefer? I prefer open competition, but hey – that’s just because I’m one of those crazy radical Capitalists….

  34. gordo365 says:

    Wall street is run by crooks with super computers.

    How about that transaction tax?

  35. Molesworth says:

    Ditto DeDude, gordo365 and all others calling for a tax.
    I like $.01-$.10 per trade.

    BR:
    Sorry can’t make your conference. It’s my bday and I’m gonna play.

  36. We need the Vince Lombardi of exchange regulation:

    Gentlemen, this is a buy order

  37. Bill Wilson says:

    What is the social utility of markets? I think it is price discovery. Does HFT add to that? I don’t think it does.

    The government gives us incentive to invest in the stock market by offering the tax advantages of a 401(k). Is the govenment just serving us up to be slaughtered? Most 401(k)s only allow you to invest in equities, bonds, or into a money market. Maybe the law should mandate that 401(k)s offer the investor the ability to invest in Certificates of Deposit from competing banks.

  38. DeDude says:

    rd@11:20

    The general volatility might be good to you, but the intraday volatility is burning you’re a$$(ets). When you put in your order to move funds within asset classes in your 401K you have to do so no later than 1-3 hours before the markets close. That information is then used to trade against you. If a lot of Mutual Funders (MF’ers) a selling that day then the big boyz will sell ahead of them, if a lot of MF’ers are purchasing then they purchase. Either way the MF’ers are screwed. That is why there is particularly strong movements in the last hour of trading after the MF’ers have been locked in.

  39. ToNYC says:

    HFT is a fraud because all the laws underlying the essence of the transaction depend on the business rights of humans. A human cannot transact in a patently absurd time frame. The idiots are in charge.