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

Japan marching to war

The final chapter in the remilitarizing of Japan has been written with the Abe administration denouncing its Pacifist Constitution imposed by the Americans after its barbaric and brutal invasion of Asia and South East Asia. The spate of cruelties and atrocities inflicted on the people of Asia and South East Asia were beyond description, even more vicious than what the Germans did to the Jews. These acts led to the Americans lifting all restraints to drop two atomic bombs into Japanese cities as just deserts for the abominable crimes of the Japanese Imperial Army.
 
In contrast, today America is backing and supporting the Japanese to rearm, which is a fallacy anyway as the Japanese have already built an armed force more powerful than any country in Asia, and deceptively called it a Self Defence Force. In the name of defending Japan against a hyped up threat of an aggressive China, by the way China was the biggest victim of Japanese invasion and atrocities in WW2, and Japan is now asserting itself to conduct wars outside Japan on the excuse that China is an aggressive nation.
 
Without the revisionist reinterpretation of its Pacifist Constitution, the Japanese Defence Force is all ready and provided by its Constitution to defend Japan against any attacks by external forces. There is no need to reinterpret the Constitution to allow it to be involved in wars outside Japan. The intent is simply to allow Japan to conduct wars of aggression all over again.
 
While Japan is raising its military posture, behaving provocatively against its immediate neighbours, the whole world watched in silence, and the Americans clapped their hands in approval. The only retribution that the Americans deserved for this wanton support granted to the most barbaric nation in modern history is to be hit by another Pearl Harbour of a bigger scale by Japan. That would be rightful justice for encouraging and supporting a wild beast and unleashing it into the international arena.
 
Japan has not changed a single bit in its wild and ferocious ambition to be a big colonial power. China and the Koreans are prepared to deal with this animal should it return to its evil ways. The only country that is willingly and happily to be deceived by the pretentious Japanese is the USA, a country that the Japanese have a score to settle, to return the favour of Hiroshima and Nagasaki.
 
History will repeat itself to those that refused to learn from their historical past.

Kopi Level - Green

Medishield Life – What to worry about?

Gan Kim Yong has fleshed out some of the details concerning premiums payable in year 2015 and year 2019. Under Medishield Life, with higher payouts and benefits, it is expected that the premiums should logically be higher. But given the fact that the coverage is for everyone, young and old, covering the whole population with everyone paying, would there be economy of scale to offset the premiums to make it even lower instead?

Gan Kim Yong announced that the premiums would be held unchanged for the next 5 years which is quite reassuring. This is possible by taking into consideration all contingencies that could be foreseen, a kind of front loading. So whatever that needs to be added in, real or imagination, or just to take care of the unexpected has already been added to the premiums payable. Just wondering what is the percentage in this front loading to the actual cost? If it is 30%, it means the premiums are already 30% higher than it should be. And this is a very conservative guess. What if you have a decision maker that wants to think of everything under the sky that could crop up and wants to include them for safety measures, never mind, it is ok to collect more?

Would Gan Kim Yong be transparent as to how much has already been added in the calculation of the premiums? There are enough statistics from the Medisave schemes to give a reasonable estimate of claims against cost. As Gerald Giam has pointed out in Parliament, the claims came up to be 67% of the premiums collected. I stand corrected if the number is slightly different from Gerald’s number. The data shows that there is room for the lowering of the premiums instead of raising it like someone who wants to cover front and back and top and bottom, every hole that he can possibly think off or imagine.

Gan Kim Yong has given the impression that he is very concern about the cost of premiums and wanting to ensure that it will remain affordable. I find the affordable formula frightening if the cost of medicare in hospitals is not reined in and not allow to run away like a wild horse. It would be more reassuring if he also announces that the policy and objective of the Medishield Life is not profit making and any profit would be ploughed back to lower the premiums in the future. Would he commit to this?

The other frightening thing about the premium tables is the premium for the oldies. Oldies are expected to continue to pay premiums up to the age of 90. How many people would have the money to pay premiums at that age? Many would have long retired by the time they reached 65 or 70. The PMEs may even be retired by 50 or 55 and cannot find reasonable employment. There are exceptions for people to work to 90. Maybe you can find some working as cleaners in the hawker centres and food courts.

Would Gan Kim Yong want to consider lobbing off the senior citizens from his tables, say by age 70 or 75? Would it be too big a burden for the govt to pay for the oldies? He has said that there will be more govt subsidies to help the seniors, why not have a policy to remove them from the premium tables and the govt absorb the cost? Under the PGP, those 80 and above will not have to pay for the Medishield Life premiums. Is this applicable to those in the pioneer generation but not yet 80? Why is this not extended to the future seniors when they hit 80? How many seniors in the future can afford to continue to pay Medishield Life premiums after paying for a life time and no longer having an income?

Kopi Level - Green

Can Singapore play the property investment game?

The property developers are crying foul. The cooling measures must be lifted. To them, property prices must go one way, up and up. And the only thing good about the property investment game is to let property price to go as high as it possibly could. I fully agree with this kind of thinking if I am a property developer or property churning investor. It makes good sense, and very good profit when property prices shoot to the sky.
 
As a govt, there are other considerations and the interests of the people, the rich and the poor, at stake. A govt cannot allow property prices to run crazy except those who have a vested interest to want it so. There were some missteps by the govt by allowing property prices to spiral out of control and causing a lost of hardship, and an extremely high price system that is no longer sustainable. The property prices are way too high against the income of the average citizens and are eating away their income.
 
Fortunately the govt is having second thought in spite of the pressure from the property developers. If the property developers are allowed to set the agenda, the rich of the world and property speculators would all be here to buy up everything and we just don’t have enough properties to sell to them. They could literally buy up the whole island in a laissez faire, anything goes system.
 
We are just too small to play the property investment game in the world market. The govt must review its policies on the property market and come out with a clear policy direction it wants to take. Unless it can create a dual market where the citizens can be protected from the world’s super rich, to be able to afford properties within their means and not priced out of reach, allowing a free and unrestrained property market will create a very grave situation for the average citizens.
 
The govt may want to introduce more cooling measures instead, to keep properties at a sustainable level for the citizens and not to allow cheap money to create havoc to the lives of its citizens. We may have reached a saturation point in the amount of properties we can afford to sell to the speculators and investors of the world. To bring in the speculators of the world into this island is sheer madness and irresponsible.
The property developers must not be allowed to call the shot on how the property market should develop. Their only concern is profit and do not have to bother about the lives of the citizens and how an uncontrolled property market could make life unbearable and unaffordable to the ordinary citizens. They don’t have to care.
 
They should go and compete in the world market, develop their properties all over the world in the same way Singaporeans are told to go overseas. The sheer size of our population will create a squeeze that will be unbearable if the property market is as open as our immigration policies. The average citizens will be screwed real hard and skewered by the property developers and speculators. This simply cannot be allowed.

Kopi Level - Green

What is SMRT thinking?

Commuters and the public are not amused by the latest SMRT initiatives to make commuting more relax and fun. SMRT is going to encourage buskers in the stations, paint the trains according to themes of the day, like football season and more. These frivolous things cost money and will eventually be passed to the commuters.
 
What is making the commuters and public seeing red is the obvious disconnect in the thinking of the SMRT management and the needs of the commuters. The commuters are not asking for the sky or pole dancing in the train cabins. All they are asking for are smooth, fast, clean, not smelly and less jam packed trains. Are these too difficult to understand?
 
The frills that the SMRT are planning to roll out are an astounding piece of ‘out of touch’ work, totally oblivious of their mission and the needs of the commuters. Who could come out with such ideas, some foreign talents or someone living in the ivory tower?
 
It is amazing, really amazing, that top dollars are being paid for this kind of queer thinking. Oops, don’t say that. No need to be rude. The SMRT is public transport and not a circus.

Kopi Level - Green