HFT and C. Rose

Guys,

A must see.

http://charlierose.com/watch/60368500

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Thanks for sharing the link. Interesting.

Have you looked into trading through the IEX exchange (the exchange created by the Brad Katsuyama, focus of Lewis’ book)?

IEX has a form letter you can download and send to your brokerage requesting them to route your trades through IEX:

http://iextrading.com/insight/letter/

I might call my brokerages (scottrade, tradeking, optionshouse) just to see what they have to say about it.

-Brandon

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http://iextrading.com/insight/letter/

I might call my brokerages (scottrade, tradeking, optionshouse) just to see what they have to say about it.

-Brandon

Hi Brandon,
No I haven’t traded there but I will look at that site and thank you for the link. I’ll call IB, the platform I use well, Tradeking also, to see what they say. My understanding of all this until I read the book is on moral grounds I should DO something different though I’m not sure they would waste the electricity to intercept one of my puny contracts. hahaha

So we’re probably safe although I am quite sure the HFT puts an unknown strain on the system which would affect us all.

Plus it is damn un American.
Mykie

Mykiemon,
Thank you for posting.
I am currently reading the book and it is interesting to say the least.
It seems that we are all getting front run but the HFTs. Even if our cost is only slightly higher (they mention 0.1% in the book), it is the principal behind this.
Will the average person say NO to Wall Street because of this?
What will the SEC do about it now that it is out in the publics view. The argument from the SEC before was that HTFs were adding liquidity to the market place.
Bottom line, it is a mess, Erik

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Erik,
Thanks and I agree, even though it’s just a few pennies, it makes me feel like a rube. Additionally, it makes no sense to KNOW there’s a tilted playing field and just let it continue on. Do tilts get righted on their own or are they more apt to tilt further? That’s an easy one, just look at Lewis’ book, the Big Short, for the normal direction and end game when there’s a lack of transparency.

I’ve watched more interviews of Michael Lewis than I have time for but he’s really smart and I believe, honest and straight talking. We’re lucky to have guys like that around, watching, writing and elaborating while we are focused on making money.
Mykie

Mykie, this writeup makes some interesting counter-points, though he has a pretty acerbic writing style.

http://scottlocklin.wordpress.com/2014/04/04/michael-lewis-s…

Here are a few excerpts:

Brad Katsuyama is the hero of the book… Katsuyama was an old school block shopping sell side trader. If you remember my previous pieces on HFT [High Frequency Trading] nay sayers: Joe Saluzzi was also a sell side block shopper. Old fashioned sell side guys have obsolete jobs. Their jobs are to find liquidity for “buy side” customers buying into or liquidating a large position. Katsuyama’s anger at the idea that “the market is rigged” seems the simple rage of a man who has been assigned a task he is not qualified for. There are tales of he and his team wasting hundreds of thousands in RBC money executing bad trades to see what happens. They seemed shocked, shocked, that the market would move away from their ham-fisted dumpings of huge blocks of shares to someone else’s routing system.

Back in the days of pit traders, if you threw a huge order at the pit, you might get a fill on a couple of round lots. The rest of the pit is going to change their prices, because they figure anyone swinging 10,000 or 100,000 share orders around must be informed traders. If they’re informed traders, they need to pay for their immediacy. Informed traders may be criminal insider-trader creeps, they may be people with really good trading strategies; it doesn’t matter – they’re informed somehow: they know stuff. If the market maker doesn’t adjust their prices in front of an informed trader, the market maker will go bankrupt. That’s market economics 101.

Immediacy costs money. Markets have always moved prices away from large orders. Market participants have always been able to cancel or move a limit order. That’s one of the features of the limit order. If Katsuyama didn’t understand these simple facts, he had no business collecting a $2 million a year paycheck shopping blocks for his customers, because he didn’t understand the basics of his profession. It’s possible that Lewis simply misunderstood something Katsuyama explained to him. It’s also possible that Katsuyama is a shark who told Lewis a lot of bull to get good press for IEX [Katsuyama’s new stock exchange].

Doing a bit of investigation into who owns IEX: we have the $13.2 billion activist shareholder fund Pershing Square, owned by Bill Ackman, another “underdog” worth $1.2 billion. We have the $6.7 billion Senator Investment Group. Scoggin Capital is only worth $1.8 billion; they do distressed debt and mergers, and have managed to only have one down year in 25. Another investor is venture capitalist Jim Clark, net worth $1.4 billion. He is particularly noteworthy as being a pal of Michael Lewis, and almost certainly the guy who made the introductions to the “flash boys” at IEX. Brandes Investment Partners is an old $29 billion AUM politically influential money management firm doing value investments, and is run by another billionaire. Third point, a hedge fund with $15 billion, also working in special situations aka “distressed debt and mergers,” run by Danny Loeb (who also miraculously has only one down year). Another investor in IEX is a little place called Capital Group Companies, the biggest buy side investors in the world, with $1.15 trillion AUM. Capital Group has been more or less scientifically proven to be one of the most powerful and influential corporations in the world.

You get the idea… It is owned by very rich and powerful “buy side” people. People who find the present system of liquidity provision inconvenient. Buy side has always found liquidity providers inconvenient; they had to pay old school “sell side” traders like Katusyama to work the trades for them at the very least. There wasn’t much they could do about it until now. Now that they own almost everything, they can open their own damn stock exchange and buy some cheap brokerage flow.

I don’t really know who is right and who is wrong. My guess is it’s somewhere in the middle. But at the end of the day, it doesn’t impact my investing.

Neil

Mykie, this writeup makes some interesting counter-points, though he has a pretty acerbic writing style.

Hi Neil,
Here’s another point of view that pretty much expresses my sentiments. True, not much but there’s a cancer and it’s small but might be aggressive and spread…so to speak. Plus many of the big boys are behind this, TD Ameritrade, GS, etc. They sort of have no option since the unfairness, though paltry to we beggars, is still unfair and that is flatly not the way the system is supposed to work.

http://www.advisoranalyst.com/glablog/2014/04/04/mark-cubans…

he unfairness, though paltry to we beggars, is still unfair and that is flatly not the way the system is supposed to work.

I guess I’m not sure what the cancer is. That someone else is making money that we can’t make? The world is full of that. Warren Buffet is a super honest guy, but I assure you that he has access to deals and terms you and I will never have. That’s just life.

None of this HFT stuff impacts you as an investor. When you decide to buy a stock, you decide on a price that you believe is a worthwhile value. You place a limit order for that price. You either get it or you don’t. If some HFT trader pushes up the market price a few pennies above your limit, you don’t pay that. If nobody else is willing to pay it, the market price comes back down and your limit fills at the price you agreed to pay.

The market is just an auction. No sales can take place unless there’s a willing buyer. No buys can take place unless there’s a willing seller. Both parties have to be willing to make the trade at the agreed-upon price. Some HFT guy can only make a profit pushing the price up if someone is willing to pay the higher price, and in that case it should be higher. That’s how auctions work – things go to the person who is willing to pay the most at the time. But, importantly, nobody ever forces you to take a price you don’t want against your will (unless you use a “market” order, which is just plain silly).

Anyway, that’s my 2 cents. I’ll shut up now.

Neil

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