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1215095 will lead you to the truth
June 18, 2014 8:42 PM   Subscribe

Michael Lewis's expose of high frequency trading, Flash Boys, has already been mentioned on the blue, but, unusually for a work of non-fiction it ends with a cliffhanger. At the end of the book, Lewis stares up at a microwave tower in central Pennsylvania that had created a new, faster link between financial markets in Chicago and the East Coast: "I noticed, before we left, a metal plate attached to the fence around the tower. On it was a Federal Communications Commission license number: 1215095. The number, along with an Internet connection, was enough to lead an inquisitive person to the story behind the tower. The application to use the tower to send a microwave signal had been filed in July 2012, and it had been filed by . . . well, it isn’t possible to keep any of this secret anymore. A day’s journey in cyberspace would lead anyone who wished to know it into another incredible but true Wall Street story, of hypocrisy and secrecy and the endless quest by human beings to gain a certain edge in an uncertain world. All that one needed to discover the truth about the tower was the desire to know it.” Now we know that truth.

The book has caused a stir, leading to SEC investigations. The main hero of the book, Brad Katsuyama, and one of the main villains, the CEO of the BATS Exchange, recently yelled at each other for 20 minutes on CNBC in a fascinating exchange (transcript on the side).

Some insiders are dismissing the impact of HFT, since, for the average investor, HFT "cheating" amounts to less than $.50 per $10,000 traded. Though even defenders of HFT worry about market stability.

If you are just interested in the mystery of the infrastructure of the microwave towers, Gizmodo has you covered.
posted by blahblahblah (56 comments total) 49 users marked this as a favorite

 
Man, this looks super fascinating if I could make heads or tails of it.
posted by Mr.Encyclopedia at 8:53 PM on June 18 [13 favorites]


So the game is that the owner of the tower is selling bullet-proof vests to the cops and bullet-proof vest-killing bullets to the robbers? Chutzpah.
posted by Snarl Furillo at 8:59 PM on June 18 [13 favorites]


That sounds sort of bonkers.
posted by jpe at 9:09 PM on June 18 [1 favorite]


I heard a thing about this on Marketplace (I think) in the last couple of days. A guy was interviewed who said he didn't see what the problem was, and the interviewer said well, the problem is that for [reasons covered earlier in the story], your trade might not take place at all. Interviewee said something like "Well, that's never happened to me!" and I thought yeah, there it is: If it's not a problem for you, then it can't possibly be a problem.
posted by rtha at 9:11 PM on June 18 [7 favorites]


I mean, really. There's something pure in the avarice of the thing, right? "Those bullets can't hurt you, but if they could wouldn't you want to be wearing this here vest?...Hey, look, I'm not saying the Feds have a new style of body armor that's like trying to shoot through the Hoover Dam with a Nerf gun, but if I were saying that, I'd think you'd want these hollow-point rounds I've got, I can get you a deal on a gross." It takes double-dealing to delightfully despicable new lows.
posted by Snarl Furillo at 9:12 PM on June 18 [1 favorite]


Where's Moist von Lipwig when you need him?
posted by rouftop at 9:27 PM on June 18 [15 favorites]


I really liked this Fresh Air interview with Lewis.
posted by univac at 9:35 PM on June 18 [2 favorites]


Can anyone explain to me in small words why the SEC cares about speed? Does the SEC do some kind of real-time monitoring? I would have expected their work to be much more about thorough logging and after-the-fact audits of those logs.
posted by d. z. wang at 10:01 PM on June 18


dz wang:
Suppose you heard from a friend that BigCorp X was about to buy a million units of Stock Y. You could possibly take advantage of this information by buying a bunch of Stock Y to sell to BigCorp X at a slightly inflated price, before they make their move. If you did indeed hear this from a friend working at BigCorp, it would likely fall afoul of insider trading laws.

What a bunch of the HFT algorithms do, though, is listen for BigCorp to put out its order, then use high speed trading to suck up all the stocks that BigCorp wants to buy, to sell to them at an inflated price. Straight up market fixing, really.

And often, BigCorp is a pension fund, retirement plan, or other public good, as the actual BigCorps were buying agreements and setting up secret systems to avoid abusing one another.
posted by kaibutsu at 10:08 PM on June 18 [14 favorites]


I grow weary.
posted by wrapper at 10:19 PM on June 18 [11 favorites]


Watching the CNBC interview, my consensus is that I'd rather fling my money out the window than let any of these assholes, especially William O'Brien of BATS, anywhere near my trades.
posted by zachlipton at 10:24 PM on June 18


Bizarre. Five minutes ago I was sitting at the table reading about this in the (print) LRB. Online, too—Scalpers Inc.
posted by whyareyouatriangle at 10:47 PM on June 18 [1 favorite]


What a bunch of the HFT algorithms do, though, is listen for BigCorp to put out its order, then use high speed trading to suck up all the stocks that BigCorp wants to buy, to sell to them at an inflated price.

So basically one big corporation is preventing another big corporation from making easy profits.
posted by empath at 11:14 PM on June 18 [2 favorites]


No, retail trades are aggregated and those transactions are front-run by HFTs too. It's an artificial premium on everyone's trades gained by forcibly inserting themselves into it as middlemen. It's a MITM attack. In the most reductive view.
posted by snuffleupagus at 12:04 AM on June 19 [15 favorites]


Serious question: are the majority of people who work at the SEC well meaning, or is the whole institution rotten at this point? What are the best proposals for reforming this toothless regulator?
posted by benzenedream at 12:12 AM on June 19


Well, sure, but you're talking about pennies for most people that invest. If you're buy and hold like most people, it means essentially nothing for you. If you're talking about people doing massive amounts of trades daily, they're basically pulling the same kind of shit the HFT people are doing, but aren't as good at it.
posted by empath at 12:13 AM on June 19 [4 favorites]


What are the best proposals for reforming this toothless regulator?

For any regulator the answer is higher pay and banning them from ever working in the industry they regulate.
posted by empath at 12:14 AM on June 19 [9 favorites]


Shades of Milo Minderbinder...
posted by NorthernAutumn at 12:34 AM on June 19 [2 favorites]


or is the whole institution rotten

Read about that little ponzi scheme by an insider named Madoff. I just can't imagine that there is anyone at that agency that is not basically on the payroll of Mr Big or perhaps multiple Mr Bigs.
posted by sammyo at 3:38 AM on June 19


The whole institution has always been rotten. The stock market has always been an elaborate ruse for relieving "the retail investor" of their cash, for the advantage of the brokers, exchanges, banks, etc.

But when collusion or front running or whatever other misdeed happens on the trading floor in open outcry, there's no record, there's no verifiability.

It's just like advertising: It's always been a scam. Computers just make it obvious.
posted by PMdixon at 3:45 AM on June 19


No, retail trades are aggregated and those transactions are front-run by HFTs too.

No they're not. Retail trades don't go near the markets; you just buy from your broker.
posted by jpe at 4:45 AM on June 19 [1 favorite]


I highly doubt that most people buying stocks on the retail market even know what the price is. Most of them just decide: "I like Disney" and buy. A fraction of a percent here and there means little to them, especially since they're going to hold it for 5 or 10 years or even longer.
posted by empath at 4:56 AM on June 19 [1 favorite]


How does this effect me?

Is my pension doing any of this day-trading nonsense? I'd hope they're even more committed to buy-and-hold than I am. When they're increasing their position in something they ought to be doing it using averaging techniques rather than all at once.

It sure seems to me that HFT is an example of one speculator picking another speculator's pocket. I get why Lewis, with his ear to the ground with Wall Street, would see this as traditional rich guys getting beat by the new rich guys. And I get that flash crash stuff can be difficult to code against. But seriously: I pay pretty close attention to these issues and I haven't yet heard the systemic problem with HFT identified in a way that didn't just sound like one market bully complaining about a bigger bully.
posted by anotherpanacea at 5:13 AM on June 19 [1 favorite]


And I get that flash crash stuff can be difficult to code against.

It's really not, in the way most people mean flash crash.
posted by PMdixon at 5:15 AM on June 19


I highly doubt that most people buying stocks on the retail market even know what the price is.

I don't buy stocks. The company my employer hired to manage my 401K does. You know - my retirement fund. If that "big corporation" is fucked over and dicked around to shave billions from its investment returns, it directly and immediately affects me, and anyone else who has a retirement account. Remember, even index funds are just mutual funds or ETFs - they require massive stock purchases, and they can underperform, usually because of mismanagement or baloney like this. HFT is taking money from your retirement and giving it to well connected gazillionaires.
posted by Slap*Happy at 5:23 AM on June 19 [16 favorites]


Could you explain the exact mechanism by which an index fund would lose money to an HFT? When I look at Vanguard it doesn't seem to be suffering from a lag compared to the underlying assets it tracks, which is what you've described.
posted by anotherpanacea at 5:28 AM on June 19 [1 favorite]


My understanding is that when a fund makes a large purchase to fill out its index portfolio, it will be subject to the HFT thing where faster actors hoover up all available stock to spike the price. This means that fund managers are not able to purchase stock at its true value - so the fund will underperform the market, or the management costs will increase, either way takes money out of my pocket. (Or the management company can eat the cost of the HFT spike and lower its profits... hahahahahahaha! No, it's coming out of my pocket.)
posted by Slap*Happy at 5:48 AM on June 19 [1 favorite]


No they're not. Retail trades don't go near the markets; you just buy from your broker.

And where is the brokerage/dark pool getting the shares from? Assumedly, it's not buying the 50 shares I ordered individually, so at some point there was a larger trade made, no?

I'm not claiming to be an expert, but the reporting I've read (including both books) suggested otherwise w/r/t impact on retail trades.
posted by snuffleupagus at 5:56 AM on June 19


Still can't figure out what benefit HFT provides.
posted by fullerine at 6:03 AM on June 19


This means that fund managers are not able to purchase stock at its true value - so the fund will underperform the market

And yet this hasn't happened with the major Vanguard indexes or pension funds. That seems to falsify your claim.
posted by anotherpanacea at 6:14 AM on June 19


This means that fund managers are not able to purchase stock at its true value

Whatever price they're willing to pay is the true value.
posted by empath at 6:24 AM on June 19


Not Manoj Narang again.

j/k I have no idea.
posted by marienbad at 6:45 AM on June 19 [1 favorite]


That seems to falsify your claim.

I seem to recall there being an "or" in my claim, just after the part you quoted. Maybe Vanguard administrates your index for free as a community service, I dunno, or perhaps this HFT thing makes money out of pixie dust and wishes and not market manipulation.

It's being sliced from somewhere. The only question is if the slice and volatility is offset by value HFT brings in terms of liquidity. It's a pretty important question.
posted by Slap*Happy at 6:58 AM on June 19


I seem to recall there being an "or" in my claim

The one that ended "hahahahahahaha! No, it's coming out of my pocket."? I didn't think you actually meant that.

There actually is another possibility, the one I originally proposed: HFT takes money from slow speculators and day traders, leaving pensions and index funds that don't speculate or day trade mostly untouched. Of course, this could mean that if your pension has some money in "actively traded" funds and hedge funds, it's losing money. But those active traders were always already taking money from the passive traders and each other, so it could be a wash for the kind of investing that matters to me and most regular people: buy-and-hold.
posted by anotherpanacea at 7:05 AM on June 19


There's always been a middle man when you're making a trade -- that's how the markets work. You don't decide, hey, I want some Disney stock, and then call Joe up and he sells you the Disney stock that he owns. In fact, there's a lot of middle men, because you call your broker, who will match your order with a sell order he got from Steve if he can, but if not he'll pass your order on to some company who actually trades on the market. Before HFT, that company would then get their order to the person who was the Market Maker, who'd take your trade if they had to provide liquidity, or try to match you (or your giant batched order up) with some other seller). All along the chain up and down are middle men. In the current setup, that Market Maker is mostly replaced by HFT firms providing liquidity, selling you your 10 shares, and making a cent or so profit on it.

And then they do it a few million more times if they can, sometimes gaining a cent or even two, occasionally losing a cent or two.
posted by garlic at 7:25 AM on June 19


Is my pension doing any of this day-trading nonsense? ... When they're increasing their position in something they ought to be doing it using averaging techniques rather than all at once.

Organizations with tens of billions of cash to invest (for example: retirement funds, unions, insurance companies, certain hedge funds) hire their own quants [Quantitative Finance Phds] and economists to determine how much of it to invest in equities (instead of fixed income, mortgages, real estate, commodities, etc) and how much of that to spend on which exact stocks on what exchanges around the world.

Then they use the services of a brokerage to execute their trades for them. They usually stick with a dedicated relationship with a particular firm, but the firms compete with each other to try to win over the big accounts from their rivals. They compete not just based on fees, but also on "trade execution quality": speed and price.

Let's say they want to buy $150 million worth of IBM stock. Today. Faster is obviously better: sometimes they want to buy it immediately because...well their quants know their reasons, you don't question someone who's spending this much on a couple different symbols simultaneously, and competitive execution speed is measured in sub-milliseconds. Easy enough for the top brokerages who spend the big bucks keeping their technology divisions up to date.

But the other competitive metric is price. Putting up a single order for that much will move the market and the investor (fund, union, etc) gets fewer stocks for their money. So what brokerages are really selling is their expertise in filling huge orders without moving the price. They do this with several approaches: their own dark pools (ie. trading one of their customers who wants to buy directly against one of their other customers who wants to sell), splitting up the order into small lots purchased over the course of the trading day, splitting up the order into small lots routed to different electronic exchanges simultaneously, relationships with other customers that they can convince to take the other side of the trade, automatic execution systems that spot an unusually good price on the market and pounce on it before anyone else, or even just by waiting until the point when the stock is at it's intra-day low (or so they predict) before slamming that huge buy (or sell, if working in the other direction) onto the market and getting a better price than the daily close. They have a better chance to get a better price if the customer allows them to take the whole day (or just the morning, or a few hours) to fill the order.

Or maybe their expertise is in finding/inducing liquidity on a stock that's not normally that active, for a client that's trying to sell off a huge position quickly. Or maybe the brokerage negotiates and guarantees a price for a big enough order and eats the difference. The brokerages of course have their own quants and economists because they would love to make a profit by figuring their customer's motivations and hedging against them, but I digress.

HFT shops and daytraders are basically the opponents of brokerages trying to get good execution. They have their ways to notice, for example, that someone out there is buying lots of IBM today, and trying their best to become a middleman and take a cut of that order for themselves.

Whether this competition affects the bottom line of brokerages (who will lose customers to their competitors if they underperform) more or less than their clients, I have no idea.

/just a lowly tech with some program-trading experience
posted by ceribus peribus at 7:29 AM on June 19 [14 favorites]


Even another possibility is that the HFT transaction cost is is now baked into the price of the index that a indexed mutual fund tracks. Then there would be no contradiction between "the index fund track its index" and "the index fund is not making the money it could because of HTF".
posted by bdc34 at 7:34 AM on June 19


This book was written in 1940.
posted by bukvich at 7:44 AM on June 19 [4 favorites]


this double-dipping nonsense is why the rich get richer.
posted by rebent at 8:25 AM on June 19


I thought I made a comment earlier?

Themis - the main blog quote here is not a fair actor here. They are a business that has been destroyed by HFT - for the better for the rest of us. Its not something that a FPP post should be built around.

My understanding is that when a fund makes a large purchase to fill out its index portfolio, it will be subject to the HFT thing where faster actors hoover up all available stock to spike the price. This means that fund managers are not able to purchase stock at its true value - so the fund will underperform the market, or the management costs will increase, either way takes money out of my pocket. (Or the management company can eat the cost of the HFT spike and lower its profits... hahahahahahaha! No, it's coming out of my pocket.)


This isn't correct at all if you are referring to an ETF, and if its a traditional index fund 1) It isn't rebalancing very often as the indexes don't rebalance all the time so the actual costs are only incurred with inflows and outflows 2)The costs associated with HFT losses replaced a different set of costs associated with traditional market makers. There may more may not be evidence that HFT costs are higher in the long run because they won't provide liquidity at times of stress (When you shouldn't be selling your index funds anyway) but in the normal course of business the evidence is that the costs are lower than those associated with the old way of doing business.

Nearly everyone you see in the investment management business (and I paint an extremely broad brush in terms of including people in the investment management biz) who objects to this usually falls in a few broad groups.

1) Guys at big firms who run execution for whom tiny apparent changes in the prices shares get executed can have massive impacts on their compensation. You might hear the head of execution at Wellington complain, you won'd see the General Partner going to the hill - because for him its just not material. If they thought it actually impacted performance even by a % it would be totally worth it for them to fight it. Using that example - they've got 800 bil in AUM, they make about lets say 90 bps on that. So that's 7.2 bil in revenue. If you thought the drag from HFT was even a % the cost to just that one firm in terms of fees is roughly 1% of 4 billion - and thats 40 mil in revenues for just one firm - and thats like the 10th biggest AM firm in the US. The leakage would be tremendous - and those are some very rich folks who know how to lobby.

2) Firms that specialized in executing trades that have basically been hoovered up by HFTs *Themis is one of these

3) High turnover shops that are not quite as high speed - these guys are speculators - who cares if they get out speculated?


Even another possibility is that the HFT transaction cost is is now baked into the price of the index that a indexed mutual fund tracks. Then there would be no contradiction between "the index fund track its index" and "the index fund is not making the money it could because of HTF".
This doesn't really make sense given the claimed disruptions by HFTs are small price movements through the course of day and indexes are priced off of the close. Not to mention the impact of HFTs doesn't persist in making a stock higher or lower over time. If it rips people off (and I don't think it does but that's not the point) it rips them off on executing a trade at a price different from the one they think the market is offering.
posted by JPD at 8:36 AM on June 19 [4 favorites]


There are many many many many many "where are the customers yacht's" things going on in the AM world. This isn't one of them
posted by JPD at 8:37 AM on June 19


Serious question: are the majority of people who work at the SEC well meaning, or is the whole institution rotten at this point?

Never attribute to malice that which is adequately explained by stupidity. I see no reason to believe that most of the employees at the SEC, or any given Evil Corp or governmental Dept of Evil, are anything but ordinary human beings trying to spend as much of their time making goofy website comments and drinking coffee rather than doing actual work.
posted by maryr at 8:38 AM on June 19 [1 favorite]


The SEC is so understaffed and so under compensated its a miracle they do as well as they do.
posted by JPD at 9:04 AM on June 19 [1 favorite]


-Of darkish pools
-Currency Probe Widens as U.S. Said to Target Markups
-Ex-Goldman Trader Says Bonus Cut to $8.25 Million Unfair
-Retirees Suffer as $300 Billion 401(k) Rollover Boom Enriches Brokers
-A quarter of all public company deals may involve some kind of insider trading
posted by kliuless at 9:45 AM on June 19 [1 favorite]


empath: So basically one big corporation is preventing another big corporation from making easy profits.

Sure, as long as you think of the retirement income of most of the people you know as just another big corporation.

And since corporations are always "evil", that means if HFT steals from the corporation investing your own money, it's OK if you retire eating dog food. Because corporations are evil.

And everything is black-and-white.

Enjoy your kibble.
posted by IAmBroom at 9:47 AM on June 19 [2 favorites]


Except for this JPD comment re SEC, a tremendous amount of misunderstanding here. Some is wrong, some is holy fucking shit someone believes that? I don't really know where to start and no time now so I'll just leave it. What Lewis is talking about is is somewhat true, bad actors using arcane technical details to disadvantage some players for a short time. All in all, versus say 1985 or so, markets much fairer and more transparent these days. More stuff being done all the time, and yes, the regulatory burden is pretty significant, and as paranoid as you might be, there are bad aspects to that. Its easy to go from accurate to way too simplistic pretty quickly in this topic.

HFTs are one sub-segment of proprietary trading business (trading for you own account) and there is a segment (of course) where HFT techniques and technology are used for brokers doing agency business. Algorithmic traders are another somewhat overlapping segment. Lots of nuance here, remember, you probably have about as much chance of benefiting from any imbalance here as being 'ripped-off.' For instance, Fidelity might manage a fund in your 401k or IRA. Their trading for for funds might go through their own Capital Markets operation which 'might' be using the same tools and techniques as a small predatory HFT prop shop. I didn't have any hand in designing that system so I don't know. ;-)

Just FYI - I am incredibly liberal, work for a broker that does retail and institutional business - all agency - which means we don't trade for own account, and run their trading back end systems and have traded my own account, so I know something, not everything about this topic. Most of what you've been reading from both sides is a) outright lies b) nugget of truth wrapped in an agenda c) truth with overblown impacts. Its part of the clickbait culture.
posted by sfts2 at 9:58 AM on June 19 [4 favorites]


It's not clear that HFTs are taking from retirement funds. It is pretty clear they're depriving tradtitional market makers, though.
posted by jpe at 9:59 AM on June 19


Which is more about decimalization than HFT...
posted by sfts2 at 10:17 AM on June 19


Still can't figure out what benefit HFT provides.

It's been explained several times in this thread: getting to be the middleman faster than the actual middleman nets you more money.
posted by feckless fecal fear mongering at 10:46 AM on June 19 [3 favorites]


I'd argue decimalization made market-making a mid to low teens ROE business. HFT made it a five ROE biz.

The aggregate economic profit of the HFT world is probably lower than the market makers was even as a mid low teens ROE biz. Its my understanding that most of the HFT prop guys earn pretty low ROEs with the VIX this low. But that's second hand.
posted by JPD at 3:15 PM on June 19


Some of my coworkers used to work in HFT firms. Basically the justification for HFT is that it fixes "market inefficiencies". The reasoning being that trades could happen at light speed so they should. If big investment firms aren't smart enough to already have HFT systems to combat the systems developed by these HFT firms, then so be it – that's capitalism. Which... I mean, I guess it's at least internally consistent?

Articles like this give you the impression these people are all mad scientists working with supercomputers in all-white laboratories with glass walls. But from what I've heard, more often there's an Excell spreadsheet on Don the investor's laptop that manages all the accounts, and the egghead engineers who build the HFT system just have an API to talk to the Excell spreadsheet. So it looks like a giant death ray on the outside but the inside is all bubblegum and duct tape.
posted by deathpanels at 5:07 PM on June 19 [1 favorite]


kaibutsu, sorry, "cares about" was unclear. I was asking why the SEC wanted their own fast feed,

From the last link before the jump: MIDAS, if you recall, is the data solution involving fast feeds that gives the SEC its ability to monitor quotes and trades at the same speeds the HFT firms do. Tradeworx not only provides the SEC with the fast feeds to view the limit order book as HFTs do, it also provides the analytic tools, and the framework and context to draw conclusions.

I was surprised that the SEC was subscribing to these fast feeds because I had thought that they worked mostly by auditing trades after the fact, rather than trying to monitor the situation in real-time. Do you know why the SEC wants a fast feed?
posted by d. z. wang at 6:24 PM on June 19


Sure, as long as you think of the retirement income of most of the people you know as just another big corporation.

We've already pretty thoroughly established that this has negligible impact on buy-and-hold investors. We're talking fractions of a penny for most people.
posted by empath at 8:23 PM on June 19


Can someone ELI5.
posted by uni verse at 9:20 PM on June 19


uni verse, click here.
posted by IAmBroom at 10:11 AM on June 20


Articles like this give you the impression these people are all mad scientists working with supercomputers in all-white laboratories with glass walls. But from what I've heard, more often there's an Excell spreadsheet on Don the investor's laptop that manages all the accounts, and the egghead engineers who build the HFT system just have an API to talk to the Excell spreadsheet. So it looks like a giant death ray on the outside but the inside is all bubblegum and duct tape.

deathpanels, I'd like to believe that, but since they could easily implement a C++ (or whathaveyou) front end for about 0.1% of the cost of that fiber/microwave infrastructure... your assertion makes no sense.
posted by IAmBroom at 10:14 AM on June 20


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