7/03/2014

HFT – How much did they hide from you


Michael Lewis' 'Flashboys: Cracking the money code' tells how HFTs rig markets
By Sanjay Kumar Singh, ET Bureau | 30 Jun, 2014,

‘….Michael Lewis, who has written such highly-acclaimed books as Liar's poker, The big short and Moneyball, tackles the subject of high-frequency trading in his latest work, 'Flashboys: Cracking the money code.'

Imagine that you are trying to buy a company's stocks priced at Rs 100 over the Internet. As soon as you put in a bid to buy the stock, its price jumps to Rs 102 and your order doesn't get executed. You wait for a while, get frustrated, and then ultimately buy the stock at the slightly higher price.

Something similar happens when you try to sell a stock. This time the price moves lower, forcing you to take a small loss. It is as if someone has read your mind, acted just ahead of you, and thwarted you. Today technology makes it possible for entities called high frequency traders ( HFT) to do such front-running (which means to learn an investor's intentions and profit from them by acting ahead of him).

When you send a buy or sell order to a stock exchange, its matching engines match your buy orders with others' sell orders and enable you to buy a stock at the best possible price. But what if the process doesn't run cleanly? What if there are intermediaries who can intercept your orders midway and glean the information therein?

They then run ahead of you and buy all the stocks available on all the exchanges and then put in sell orders at higher prices, thereby forcing you to buy at those prices, especially when orders are very largesized. This is a simplified description of what high-frequency traders do.

Now, you might argue: how much would buying a stock for two rupees extra matter in the larger scheme of things? But imagine a couple of bucks earned on millions of transactions—some of them worth thousands or even millions of dollars. All those little gains then add up. That's how HFTs make their billions.

One of the functions of a stock exchange is to make risk capital available to entrepreneurs. Intermediaries like HFTs make money while adding no value to this process, essentially indulging in a form of rent-seeking. They end up raising the cost of capital for entrepreneurs….

Even US stock exchanges were hand-in-glove with them, allowing them to place their servers close to the exchange's servers, thereby gifting HFTs that tiny micro-second's advantage. Broking firms also played a part. Instead of executing the orders they got themselves, they would redirect them to HFTs, who fleeced the customer while giving broking firms a kickback. It is this nexus that Lewis exposes in his book….Well, HFTs have spread their tentacles to exchanges around the globe. The next time the price of a stock jumps suddenly when you try to buy it, or a flash crash occurs, ask yourself: have HFTs arrived?’

The examples given by Lewis were simply criminal in nature. How much more the public did not know about the devious and criminal activities of HFT? If stock exchanges knew about how HFT operates as described, and allowed HFT into their systems, what shall be done to the management of the exchanges? If govts knew the same things are happening and do not stop them, what kind of govts are they? Heard of accomplices or partners in crimes?


Kopi Level - Green

16 comments:

Anonymous said...

I don't care about HFT.
I just want my CPF money back.
Either way - Voting Opposition is the only wasy to get what we want.

Anonymous said...

"If govts knew the same things are happening and do not stop them, what kind of govts are they?"
RB

Who voted in such govt? The majority voters (eg 60%), tio bo?

So ask these majority voters lah! Can they be asked or not? If cannot, just accept such govts lah. What else can u do, u tell me lah?

Anonymous said...

Rb like to ask a lot on his blog.

By doing so, and for those who know him, it is also another way of asking for kopi.

Just like when PAP care more for foreigners, or say Sinkieland belongs to all, and for those who know PAP, it is another way of telling Sinkies they don't really matter that much.



Anonymous said...

Tiok.

Sometimes, it is not nice to say or ask too directly. Paiseh lah, tio bo?

But for those who are not daft, they will get the hint. And acted accordingly.

Matilah_Singapura said...

@RB:

Please lah uncle. Since day 1 of the stock market being invented, every punter has had one goal in mind: TO ESTIMATE/ GUESS THE PRICE in the FUTURE, to guide his choices ad action in the present. If the price is going to go up, buy more. If you guess it is going to drop, go short.

So it is a matter of information -- who gets it first. So the HF traders have the means of "getting ahead" of you before you decided to buy or sell at a particular price.

Great book, BTW. Anyway, I'm a big Lewis fan, so my opinion is biased ;-) (Hot reality-based tip of the day: ALL opinions are biased).

As you will notice form the book -- the fuckers responsible have all got science and math backgrounds: physics, engineering, imaging, telecomms, computer science, math and self-taught computer hacking. All geeks, all fucking smart.

Those with bullshit and increasingly worthless degrees in econs, finance and business can go and fuck spiders lah. The future belongs to the nerds and the geeks -- those fuckers who can do math and science.

BTW, regulation doesn't work. The geeks are smarter than the regulators. Any regulations which come in are turned around to work in favour of HFT.

Very soon those half-wits with econs, business and finance rubbish-degrees won't be hired anymore, because the geeks will outperform them. Some hedge funds and trading firms will only hire people with science and math qualifications.

Got "Philosophiæ Naturalis Principia Mathematica"?

Chua Chin Leng aka redbean said...

Matilah, would you be dumb enough to play poker with someone who can see your cards and cannot see his?

Chua Chin Leng aka redbean said...

And thanks guys, for your kopi.

Matilah_Singapura said...

@RB:

>> Matilah, would you be dumb enough to play poker with someone who can see your cards and cannot see his?

Of course not. I'llbe on the side of the HFT guys lah, tweaking the hardware to make them even faster. Or figuring out how to re-route "the suckers" so that their info is delayed. All done legally, of course.

The market is a "just" place lah. If you go in there greedy and dumb, then you lose. If you are going to be greedy, then you need to hone your intellect so that you are also very smart (the resources) and also very greedy (the motivation).

Then you have a chance.

BTW, you can "buy in" to faster connection. So at least it is FAIR. You want fast? Then you pay lah for fast systems. Similar for dark pool entry: available for a fee.

Chua Chin Leng aka redbean said...

I will also be on the side of the cheats. But when the cheat is cheating your sons and daughters, and you also joined in to bankrupt your sons and daughters, what kind of moral beans are you?

Oops, I know you don't live on morals. Delete what I said.

Anonymous said...

The Susan Lim case is looking like a big joke. A thief is a thief is a thief.

b said...

Scams are everywhere and the stock exchanges are just one small one compared to how politicians play the cards of education, healthcare, retirement, jobs, transport, housing, weapons against their people etc. People who go to stock exchange and play, walk in with their eyes open. Playing anything must pay one, nothing is free.

Anonymous said...

The question we need to ask is whether we are investing or trading. If one is a trader, then HFT is a leech creaming off your potential gains.

If one is investing, then HFT does not matter one bit because you will just want to buy at the price that you think is right. If one is right on the fundamentals, then the stock price should track the business performance, sooner or later.

So the bottomline is that HFT does not matter one bit if one is an investor

Anonymous said...

If the market is only for investors, it would have closed down many centuries ago. Buy and keep for 10 or 20 years. Some don't even want to sell and pass down to children and grandchildren.

Anonymous said...

Yes, there are traders in the market but they mostly screwed by the hft, syndicates, insiders & analysts who issue buy calls when their companies r selling behind the scene.

But the real money r made by the warren buffets, wee cho yaws n tan chin tuans of this world. They buy good companies when they r cheap. Right now, wee cho yaw is buying uob Kay hian Thailand when there is no reason other than the fact to it is a good n cheap company. As the profits rise so will the stock price.

How many traders hv the kind of wealth tt these guys accumulated?

Anonymous said...

Matilar, u die die must post your nonsense everyday. Why don't u make yourself useful by writing your books? Knn, why waste other people's time daily. I will help the book poster to come up with additional topics or subjects for u to write but in the mean time, go write book 16 by using the humor style of writing please.


1) how to boast about sexual power when both tiny are missing
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5) learning to be thick skin and flameproof
6) how to tahan when your ass kena fucked
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Matilah_Singapura said...

@ confused and sputtering RB:

>> I know you don't live on morals.

That's impossible. Everyone has a moral code, otherwise they couldn't take goal-directed action.

I'm just like every other person: my moral code, like theirs is personal. We all interpret the world and other people differently and so we'll choose our actions according to what we believe to be "true" from the perspective of our individual world view.

That's why in the realm of human behaviour: ANYTHING GOES.

People who go into the market and get skinned alive DESERVE IT. If you come in without caveat emptor or blur-blur, then it is all your fault if you lose money. No one FORCED you to come and play. You did so willingly.

Anyway, in case you've forgotten:

YOU CAN'T CHEAT AN *HONEST* MAN!