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High Speed Trading
I open up this thread because being watch on youtube about High Speed Trading by CNNMoney. It is quite interesting how those guys managed stocks trading in high speed or high frequency. Let's watch it. If anyone want to discuss about it feel free to do so.
http://www.youtube.com/watch?v=2u007Msq1qo
http://www.youtube.com/watch?v=cNWshKyfHBg
http://www.youtube.com/watch?v=itxbyXO67XY
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High-frequency trading
High-frequency_trading
High-frequency trading (HFT) is a type of algorithmic trading, specifically the use of sophisticated technological tools and computer algorithms to rapidly trade securities. HFT uses proprietary trading strategies carried out by computers to move in and out of positions in seconds or fractions of a second. Firms focused on HFT rely on advanced computer systems, the processing speed of their trades and their access to the market.
As of 2009, studies suggested HFT firms accounted for 60-73% of all US equity trading volume, with that number falling to approximately 50% in 2012.
High-frequency traders move in and out of short-term positions aiming to capture sometimes just a fraction of a cent in profit on every trade. HFT firms do not employ significant leverage, accumulate positions or hold their portfolios overnight; they typically compete against other HFTs, rather than long-term investors. As a result, HFT has a potential Sharpe ratio (a measure of risk and reward) thousands of times higher than traditional buy-and-hold strategies.
HFT may cause new types of serious risks to the financial system.[10][11] Algorithmic and HFT were both found to have contributed to volatility in the May 6, 2010 Flash Crash, when high-frequency liquidity providers rapidly withdrew from the market. Several European countries have proposed curtailing or banning HFT due to concerns about volatility. Other complaints against HFT include the argument that some HFT firms scrape profits from investors when index funds rebalance their portfolios.
History
Profiting from speed advantages in the market is as old as trading itself. In the 17th century, the Rothschilds were able to arbitrage prices of the same security across country borders by using carrier pigeons to relay information before their competitors. HFT modernises this concept using the latest communications technology.
High-frequency trading has taken place at least since 1999, after the U.S. Securities and Exchange Commission (SEC) authorized electronic exchanges in 1998. At the turn of the 21st century, HFT trades had an execution time of several seconds, whereas by 2010 this had decreased to milli- and even microseconds. Until recently, high-frequency trading was a little-known topic outside the financial sector, with an article published by the New York Times in July 2009 being one of the first to bring the subject to the public's attention. On September 2, 2013, Italy became the world's first country to introduce a tax specifically targeted at HFT, charging a levy of 0.002% on equity transactions lasting less than 0.5 seconds.
Market growth
In the early 2000s, high-frequency trading still accounted for fewer than 10% of equity orders, but this proportion was soon to begin rapid growth. According to data from the NYSE, trading volume grew by about 164% between 2005 and 2009 for which high-frequency trading might be accounted. As of the first quarter in 2009, total assets under management for hedge funds with high-frequency trading strategies were $141 billion, down about 21% from their peak before the worst of the crises. The high-frequency strategy was first made successful by Renaissance Technologies. Many high-frequency firms are market makers and provide liquidity to the market which has lowered volatility and helped narrow Bid-offer spreads, making trading and investing cheaper for other market participants. In the United States, high-frequency trading firms represent 2% of the approximately 20,000 firms operating today, but account for 73% of all equity orders volume. The largest high-frequency trading firms in the US include names like Getco LLC, Knight Capital Group, Jump Trading, and Citadel LLC. The Bank of England estimates similar percentages for the 2010 US market share, also suggesting that in Europe HFT accounts for about 40% of equity orders volume and for Asia about 5-10%, with potential for rapid growth. By value, HFT was estimated in 2010 by consultancy Tabb Group to make up 56% of equity trades in the US and 38% in Europe.
As HFT strategies become more widely used, it can be more difficult to deploy them profitably. According to an estimate from Frederi Viens of Purdue University, profits from HFT in the U.S. has been declining from an estimated peak of $5bn in 2009, to about $1.25bn in 2012.
High Frequency Trading Strategies
High-frequency trading is quantitative trading that is characterized by short portfolio holding periods (see Wilmott (2008)). All portfolio-allocation decisions are made by computerized quantitative models. The success of high-frequency trading strategies is largely driven by their ability to simultaneously process volumes of information, something ordinary human traders cannot do. Specific algorithms are closely guarded by their owners and are known as "algos". Many practical algorithms are in fact quite simple arbitrages which could previously have been performed at lower frequency—competition tends to occur though who can execute them the fastest rather than who can create new breakthrough algorithms. Some examples of standard arbitrages used in HFT are listed below.
Trading ahead of index fund rebalancing
Most retirement savings, such as private pension funds or 401(k) and individual retirement accounts in the US, are invested in mutual funds, the most popular of which are index funds which must periodically "rebalance" or adjust their portfolio to match the new prices and market capitalization of the underlying securities in the stock or other index that they track. This allows algorithmic traders (80% of the trades of whom involve the top 20% most popular securities) to anticipate and trade ahead of stock price movements caused by mutual fund rebalancing, making a profit on advance knowledge of the large institutional block orders. This results in profits transferred from investors to algorithmic traders, estimated to be at least 21 to 28 basis points annually for S&P 500 index funds, and at least 38 to 77 basis points per year for Russell 2000 funds. John Montgomery of Bridgeway Capital Management says that the resulting "poor investor returns" from trading ahead of mutual funds is "the elephant in the room" that "shockingly, people are not talking about."
Market making
Market making is a set of high-frequency trading strategies that involve placing a limit order to sell (or offer) or a buy limit order (or bid) in order to earn the bid-ask spread. By doing so, market makers provide counterpart to incoming market orders. Although the role of market maker was traditionally fulfilled by specialist firms, this class of strategy is now implemented by a large range of investors, thanks to wide adoption of direct market access. As pointed out by empirical studies. this renewed competition among liquidity providers causes reduced effective market spreads, and therefore reduced indirect costs for final investors.
Some high-frequency trading firms use market making as their primary trading strategy. Automated Trading Desk, which was bought by Citigroup in July 2007, has been an active market maker, accounting for about 6% of total volume on both the NASDAQ and the New York Stock Exchange. Building up market making strategies typically involves precise modeling of the target market microstructure together with stochastic control techniques.
These strategies appear intimately related to the entry of new electronic venues. Academic study of Chi-X's entry into the European equity market reveals that its launch coincided with a large HFT that made markets using both the incumbent market, NYSE-Euronext, and the new market, Chi-X. The study shows that the new market provided ideal conditions for HFT market-making, low fees (i.e., rebates for quotes that led to execution) and a fast system, yet the HFT was equally active in the incumbent market to offload nonzero positions. New market entry and HFT arrival are further shown to coincide with a significant improvement in liquidity supply.
Ticker tape trading
Much information happens to be unwittingly embedded in market data, such as quotes and volumes. By observing a flow of quotes, high-frequency trading machines are capable of extracting information that has not yet crossed the news screens. Since all quote and volume information is public, such strategies are fully compliant with all the applicable laws.
Filter trading is one of the more primitive high-frequency trading strategies that involves monitoring large amounts of stocks for significant or unusual price changes or volume activity. This includes trading on announcements, news, or other event criteria. Software would then generate a buy or sell order depending on the nature of the event being looked for.
Tick trading often aims to recognize the beginnings of large orders being placed in the market. For example, a large order from a pension fund to buy will take place over several hours or even days, and will cause a rise in price due to increased demand. An arbitreur can try to spot this happening then buy up the security, then profit from selling back to the pension fund. This strategy has become more difficult since the introduction of dedicated trade execution companies in the 2000s which provide optimal trading for pension and other funds, specifically designed to remove the arbitrage opportunity.
Event arbitrage
Certain recurring events generate predictable short-term responses in a selected set of securities. High-frequency traders take advantage of such predictability to generate short-term profits.
Statistical arbitrage
Another set of high-frequency trading strategies are strategies that exploit predictable temporary deviations from stable statistical relationships among securities. Statistical arbitrage at high frequencies is actively used in all liquid securities, including equities, bonds, futures, foreign exchange, etc. Such strategies may also involve classical arbitrage strategies, such as covered interest rate parity in the foreign exchange market, which gives a relationship between the prices of a domestic bond, a bond denominated in a foreign currency, the spot price of the currency, and the price of a forward contract on the currency. High-frequency trading allows similar arbitrages using models of greater complexity involving many more than four securities. The TABB Group estimates that annual aggregate profits of high-frequency arbitrage strategies currently exceed US$21 billion which conflicts with the findings in the Perdue study which estimates the profits for all high frequency trading to be $1.25bn in 2012.
News-based trading
Company news in electronic text format is available from many sources including commercial providers like Bloomberg, public news websites, and Twitter feeds. Automated systems can identify company names, keywords and sometimes semantics to trade news before human traders can process it.
Low-latency strategies
A separate, "naïve" class of high-frequency trading strategies relies exclusively on ultra-low latency direct market access technology. In these strategies, computer scientists rely on speed to gain minuscule advantages in arbitraging price discrepancies in some particular security trading simultaneously on disparate markets.
Another aspect of low latency strategy has been the switch from fiber optic to microwave technology for long distance networking. Especially since 2011, there has been a trend to use microwaves to transmit data across key connections such as the one between New York and Chicago. This is because microwaves travelling in air suffer a less than 1% speed reduction compared to light travelling in a vacuum, whereas with conventional fiber optics light travels over 30% slower.
In 2010, Alex Wissner-Gross at Harvard University proposed an optimally low-latency solution for statistical arbitrage of geographically separated financial instruments.
Effects
The effects of algorithmic and high-frequency trading are the subject of ongoing research. Regulators claim these practices contributed to volatility in the May 6, 2010 Flash Crash and find that risk controls are much less stringent for faster trades.
Members of the financial industry generally claim high-frequency trading substantially improves market liquidity, narrows bid-offer spread, lowers volatility and makes trading and investing cheaper for other market participants.
An academic study found that, for large-cap stocks and in quiescent markets during periods of "generally rising stock prices", high-frequency trading lowers the cost of trading and increases the informativeness of quotes; however, it found "no significant effects for smaller-cap stocks", and "it remains an open question whether algorithmic trading and algorithmic liquidity supply are equally beneficial in more turbulent or declining markets...algorithmic liquidity suppliers may simply turn off their machines when markets spike downward."
In September 2011, Nanex, LLC (a high-frequency trading software company) published a report stating the contrary. They looked at the amount of quote traffic compared to the value of trade transactions over 4 and half years and saw a 10-fold decrease in efficiency.[52] Many discussions about HFT focus solely on the frequency aspect of the algorithms and not on their decision-making logic (which is typically kept secret by the companies that develop them). This makes it difficult for observers to pre-identify market scenarios where HFT will dampen or amplify price fluctuations. The growing quote traffic compared to trade value could indicate that more firms are trying to profit from cross-market arbitrage techniques that do not add significant value through increased liquidity when measured globally.
More fully automated markets such as NASDAQ, Direct Edge, and BATS, in the US, have gained market share from less automated markets such as the NYSE. Economies of scale in electronic trading have contributed to lowering commissions and trade processing fees, and contributed to international mergers and consolidation of financial exchanges.
The speeds of computer connections, measured in milliseconds or microseconds, have become important. Competition is developing among exchanges for the fastest processing times for completing trades. For example, in 2009 the London Stock Exchange bought a technology firm called MillenniumIT and announced plans to implement its Millennium Exchange platform[55] which they claim has an average latency of 126 microseconds. Since then, competitive exchanges have continued to reduce latency, and today, with turnaround times of three milliseconds available, are useful to traders to pinpoint the consistent and probable performance ranges of financial instruments. These professionals are often dealing in versions of stock index funds like the E-mini S&Ps because they seek consistency and risk-mitigation along with top performance. They must filter market data to work into their software programming so that there is the lowest latency and highest liquidity at the time for placing stop-losses and/or taking profits. With high volatility in these markets, this becomes a complex and potentially nerve-wracking endeavor, in which a small mistake can lead to a large loss. Absolute frequency data play into the development of the trader's pre-programmed instructions.
Spending on computers and software in the financial industry increased to $26.4 billion in 2005.
May 6, 2010 Flash Crash
The brief but dramatic stock market crash of May 6, 2010 was initially thought to have been caused by high-frequency trading. The Dow Jones Industrial Average plunged to its largest intraday point loss, but not percentage loss, in history, only to recover much of those losses within minutes.
In the aftermath of the crash, several organizations argued that high-frequency trading was not to blame, and may even have been a major factor in minimizing and partially reversing the Flash Crash. CME Group, a large futures exchange, stated that, insofar as stock index futures traded on CME Group were concerned, its investigation had found no support for the notion that high-frequency trading was related to the crash, and actually stated it had a market stabilizing effect.
However, after almost five months of investigations, the U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission issued a joint report identifying the cause that set off the sequence of events leading to the Flash Crash and concluding that the actions of high-frequency trading firms contributed to volatility during the crash.
The report found that the cause was a single sale of $4.1 billion in futures contracts by a mutual fund, identified as Waddell & Reed Financial, in an aggressive attempt to hedge its investment position. The joint report also found that "high-frequency traders quickly magnified the impact of the mutual fund's selling."The joint report "portrayed a market so fragmented and fragile that a single large trade could send stocks into a sudden spiral," that a large mutual fund firm "chose to sell a big number of futures contracts using a computer program that essentially ended up wiping out available buyers in the market," that as a result high-frequency firms "were also aggressively selling the E-mini contracts," contributing to rapid price declines. The joint report also noted "'HFTs began to quickly buy and then resell contracts to each other — generating a 'hot-potato' volume effect as the same positions were passed rapidly back and forth.'" The combined sales by Waddell and high-frequency firms quickly drove "the E-mini price down 3% in just four minutes."As prices in the futures market fell, there was a spillover into the equities markets where "the liquidity in the market evaporated because the automated systems used by most firms to keep pace with the market paused" and scaled back their trading or withdrew from the markets altogether. The joint report then noted that "Automatic computerized traders on the stock market shut down as they detected the sharp rise in buying and selling." As computerized high-frequency traders exited the stock market, the resulting lack of liquidity "...caused shares of some prominent companies like Procter & Gamble and Accenture to trade down as low as a penny or as high as $100,000." While some firms exited the market, high-frequency firms that remained in the market exacerbated price declines because they "'escalated their aggressive selling' during the downdraft."
Risks and controversy
Various studies have reported that high-frequency reduces volatility and does not pose a systemic risk, and lowers transaction costs for retail investors, without impacting long term investors, However, high-frequency trading has been the subject of intense public focus and debate since the May 6, 2010 Flash Crash. At least one Nobel Prize winning economist, Michael Spence, believes that HFT should be banned.
In their joint report on the 2010 Flash Crash, the Securities Exchange Commission and the Commodity Futures Trading Commission stated that "market makers and other liquidity providers widened their quote spreads, others reduced offered liquidity, and a significant number withdrew completely from the markets"[64] during the Flash Crash.
Politicians, regulators, journalists and market participants have all raised concerns on both sides of the Atlantic. and this has led to discussion of whether high-frequency market makers should be subject to various kinds of regulations.
In September 22, 2010 speech, SEC chairperson Mary Schapiro signaled that US authorities were considering the introduction of regulations targeted at HFT. She said, "...high frequency trading firms have a tremendous capacity to affect the stability and integrity of the equity markets. Currently, however, high frequency trading firms are subject to very little in the way of obligations either to protect that stability by promoting reasonable price continuity in tough times, or to refrain from exacerbating price volatility." She proposed regulation that would require high-frequency traders to stay active in volatile markets.
The Chicago Federal Reserve letter of October 2012, titled "How to keep markets safe in an era of high-speed trading," reports on the results of a survey of several dozen financial industry professionals including traders, brokers, and exchanges. It found that
risk controls were poorer in high-frequency trading, because of competitive time pressure to execute trades without the more extensive safety checks normally used in slower trades.
"some firms do not have stringent processes for the development, testing, and deployment of code used in their trading algorithms."
"out-of control algorithms were more common than anticipated prior to the study and that there were no clear patterns as to their cause. Two of the four clearing BDs/FCMs, two-thirds of proprietary trading firms, and every exchange interviewed had experienced one or more errant algorithms."
The letter recommended new controls on high-frequency trading, including:
Limits on the number of orders that can be sent to an exchange within a specified period of time
A “kill switch” that could stop trading at one or more levels
Intraday position limits that set the maximum position a firm can take during one day
Profit-and-loss limits that restrict the dollar value that can be lost.
Flash Trading
Another area of concern relates to flash trading. Flash trading is a form of trading in which certain market participants are allowed to see incoming orders to buy or sell securities very slightly earlier than the general market participants, typically 30 milliseconds, in exchange for a fee. This feature was introduced to allow participants like market makers the opportunity to meet or improve on the National best bid and offer price to ensure incoming orders were matched at the most advantageous prices according to Regulation NMS.
According to some sources, the programs can inspect major orders as they come in and use that information to profit. Currently, the majority of exchanges either do not offer flash trading, or have discontinued it. In March 2011, Direct Edge ceased offering its Competition for Price Improvement functionality (widely referred to as "flash technology/trading").
Inside Trading
On September 24, 2013 it was revealed that some traders are under investigation for possible news leak and inside trading. Right after Federal Reserve announced its newest decision trades were registered in Chicago future market within 2 milliseconds. The information of such decision, calibrated to release at exactly 2 pm using atomic clock, takes seven millisecond to reach Chicago at the speed of light. Anything faster is not physically possible. (See Superluminal communication).
Advanced trading platforms
Advanced computerized trading platforms and market gateways are becoming standard tools of most types of traders, including high-frequency traders. Broker-dealers now compete on routing order flow directly, in the fastest and most efficient manner, to the line handler where it undergoes a strict set of Risk Filters before hitting the execution venue(s). Ultra Low Latency Direct Market Access (ULLDMA) is a hot topic amongst Brokers and Technology vendors such as Goldman Sachs, Credit Suisse, and UBS.[citation needed] Typically, ULLDMA systems can currently handle high amounts of volume and boast round-trip order execution speeds (from hitting "transmit order" to receiving an acknowledgment) of 10 milliseconds or less.
Such performance is achieved with the use of hardware acceleration or even full-hardware processing of incoming market data, in association with high-speed communication protocols, such as 10 Gigabit Ethernet or PCI Express. More specifically, some companies provide full-hardware appliances based on FPGA technology to obtain sub-microsecond end-to-end market data processing.
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In Defense Of High Frequency Trading via the ECB/
The electronically thundering herd that is the community of high-frequency traders has found a surprising ally: the European Central Bank.
AFP
The Frankfurt-based institution published a working paper on its website Tuesday which came down pretty firmly on the side of the much-maligned cyber-traders, agreeing with their long-held presentation of themselves as a force for efficient and competitive markets.
The authors of the report conclude that HFT generally goes in the direction of correct price signals and against “noise” or short-term volatility, promoting efficiency “both on average and on the highest volatility days.” That last claim is crucial, given the widespread belief among governments that the small-scale individual traders who are so active in HFT are wont to take their precious liquidity off the table at the first sign of volatility.
Before anyone gets too carried away, the view isn’t an official one: all the ECB’s working papers are presented as the opinions not of the bank, but of their authors — in this case Jonathan Brogaard, Terrence Hendershott and Ryan Riordan, three academics of transatlantic origin, all with a track record of defending HFT, and none of them permanently retained by the ECB. Moreover, a cynic would point out that the authors have drawn their data only from U.S. equity markets. One might be forgiven for thinking that the ECB would have given the paper a heavier edit if it had been euro-zone government bonds, rather than U.S. equities, that had melted down in a ‘”flash crash” at the height of the euro crisis.
So it isn’t like the spirit that moved the European Commission and the German government to regulate high-frequency hijinks has evaporated overnight.
But all the same, the ECB knows full well that anything that appears on its website is going to have the implicit imprimatur of Europe’s most powerful financial institution. And its support for efficient markets is of a piece with (if not directly connected to) its opposition to the EU’s proposed Financial Transaction Tax.
Against that background, the language in which the authors couch their conclusions is particularly striking.
“Our results have implications for policy makers that are contemplating the introduction of measures to curb HFT,” they write, stressing HFT’s usefulness to markets. “Introducing measures to curb their activities without corresponding measures to that support price discovery and market efficiency improving activities could result in less efficient markets.”
It’s surely no coincidence that this is coming out as the European Parliament thrashes out new regulations on HFT, due to be written into its updated “Markets in Financial Instruments Directive”, or MiFID 2, as it’s known.
Relations between the ECB and EU Parliament are, to say the least, pretty frosty at the moment, owing to some sharply divergent views over how much in “accountability” the ECB will owe the Parliament when it assumes the role of banking supervisor.
At times like that, it’s so much nicer, if you have to say that a particular legislative initiative is a misguided knee-jerk or just plain financially illiterate, to have some experts say it for you…
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High frequency trading in action
CNN's Maggie Lake gets a rare look inside the super-fast trading industry.
http://www.youtube.com/watch?v=WyPPaiZEYO4
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1 Attachment(s)
In Praise Of High Frequency Traders
in praise of high frequency traders/
Attachment 4021
On Thursday, the Investment Industry Regulatory Organization of Canada (IIROC) is scheduled to release its much-awaited study on high frequency traders. The standard image of the high frequency trader (HF trader) is that of a slavering troll working assiduously to destabilize world stock markets and laughing gleefully while prying gold fillings out of retail traders’ mouths. In the minds of many, HF traders caused or greatly contributed to the infamous U.S. “Flash Crash” of May 2010, when the Dow Jones plunged (and then recovered) 1000 points (roughly 9%) in a matter of minutes. HF traders also stand accused of increasing trading costs for both retail and institutional traders.
Academic evidence, however, suggests that HF traders sport toes, not cloven hoofs. Indeed, as noted by the European Commission, “HFT is typically not a strategy in itself but the use of very sophisticated technology to implement traditional trading strategies.” The essence of the “sophisticated technology” is speed. HF traders use highly refined computer algorithms to wade through reams and reams of data, spot profit opportunities, and execute trades to exploit these opportunities. HF traders also use “co-location” to enhance speed. This refers to the now-common practice of paying for the privilege of locating one’s servers in the same building as a trading venue’s computer matching engine (where trades actually get executed). This reduces system “latency” (the time it takes for a message to travel from the HF trader’s computer to the trading venue’s computer, and vice-versa) to a bare minimum.
The HF trader’s speed advantage in general, and co-location in particular, have been much vilified. But superior speed is neither new nor objectionable. Savvy stock traders have long enlisted the latest information technologies to gain an advantage over their rivals. At one time, carrier pigeons and optical semaphore systems were the preferred tools.These gave way, in succession, to the telegraph, the telephone, the Internet, dedicated data lines, and now, co-location. Being the first in line has been a source of profit as long as there have been tradable assets. That goes back not merely decades or centuries, but millennia.
While the clay-footed are never amused to see more fleet-of-foot rivals steal their business, a simple self-help strategy awaits – go out and get your own carrier pigeons. And indeed, more and more traditional players, such as sell-side institutions, are doing just that, putting their own servers in co-location facilities and competing head-to-head with HF traders.
But in any case, the corpus of academic evidence suggests that both retail and institutional traders have benefited from the presence of HF traders. Market making is a case in point. HF traders effectively “make a market” in particular stocks by posting limit orders to buy and sell on the books of various trading venues. However, they are able to quote much narrower bid/ask spreads than traditional market makers.
This is a direct result of their speed. HF traders have no interest in holding stock overnight. As soon as they purchase shares in a given company, they look to sell these shares, and often do so within milliseconds. The extremely short interval between the two legs of any round trip transaction (buy/sell or sell/buy) minimizes the extent to which the HF trader is exposed to what economists call “adverse selection risk,” which is the risk of adverse price movements between the first and the second leg of the round trip. This enables them to effectively quote very tight bid/ask spreads. The academic studies are virtually unanimous in suggesting that when HF traders arrive, bid/ask spreads shrink by a material amount. This benefits all other traders, whether retail or institutional.
HF traders have benefited from the now common practice of “maker/taker” pricing. This involves paying a rebate to the “passive” side of a transaction (the party who enters a limit buy or sell order on the books of a given trading venue) and charging a fee to the “active” side (a later-arriving order that is matched to the passive order, resulting in a completed trade). Speedy HF traders are more likely than others to be on the passive side of a transaction, and thus go home with the lion’s share of the trading rebates.
On the other hand, many non-HF traders (i.e. the ones who now disproportionately end up on the active side of the transaction) have seen their trading costs increase. Nonetheless, it is not clear if this increased trading cost is passed on to the client, as opposed to being partly or wholly absorbed by the market professional (as we would expect in a competitive market). But even if all of the cost is passed on to the trading client, reductions in bid/ask spreads more than compensate.
HF traders are associated with other improvements in market microstructure. For example, studies show that HF traders are more likely to be “informed” traders, and that their presence in a given market improves price discovery (the rapidity with which new information is impounded in the public share price). As against the charge that HF traders make financial markets more volatile, the studies show that when HF traders come calling, intraday price volatility (the degree to which stock prices fluctuate during the course of the day) actually diminishes.
And what of the Flash Crash? The Crash was triggered when a single U.S. mutual fund decided to liquidate $4.1-billion of something called the E-Mini S&P 500 (an equity futures contract based on the value of the S&P 500). Initially, HF traders absorbed some of this volume. However, when it came to executing the second leg of the round trip and selling the E-Mini to someone else, there was trouble. The volume of the mutual fund’s sale order was so large that it exerted a continual downward pressure on the price of the E-Mini. HF traders – just like traditional market makers – found that they could not buy cheap and sell dear. Many withdrew from the market, causing E-Mini liquidity to dry up. Even worse, the liquidity drought was transmitted broadly throughout the market, since the falling value of the E-Mini implied lower values of the stocks underlying the E-Mini contract – namely, the entire S&P 500. These stocks (and others) also went into a death spiral. The imbroglio was ended by a trading halt. Five minutes later, trading was restored, and the market recovered and marched stoically onward.
The Flash Crash is in indictment of HF traders only if we can conclude that they bailed from the market faster than traditional market makers. In fact, the evidence is precisely the opposite; some HF traders hung in until the bitter end. Moreover, numerous studies show that HF traders are slower than traditional players to run for the exits when the going gets rough. A market populated only by traditional market makers would not have avoided the Flash Crash.
Despite all of the favourable academic reviews, many institutional traders swear up and down that HF traders engage in a bevy of manipulative or otherwise unfair trading practices. One Canadian study by Cumming et al., however,finds that HF traders reduce the incidence of end-of-day price manipulation. A U.S. study finds that HF traders do not “front run” institutional orders, as has often been alleged. Nonetheless, the empirical record in this respect is not well developed, and there is certainly anecdotal evidence of dirty tricks being played by HF traders. Academics need to sharpen their pencils in this regard and Canadian regulators need to stay sharp and devise means of detecting these dirty deeds and punishing them accordingly.
A further caveat is that HF trading has led to an increasingly intense arms race with a view to shaving not merely milliseconds, but microseconds off system latency. At some point, the commitment of ever-larger sums of money to slicing ever-smaller fractions of time off trading times, just to be first in line, becomes socially counter-productive. In other words, the last chapter on HF trading has not yet been written.
Jeffrey G. MacIntosh is Toronto Stock Exchange Professor of Capital Markets, Faculty of Law, University of Toronto, and author of C.D. Howe Institute’s “High Frequency Traders: Angels or Devils?”
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A Cheat Sheet on European High Frequency Trading Firms : WSJ Blog
High frequency trading firms are a divisive lot. Blamed for using algorithms that can wreak havoc in the market, gaining early peeks into market-moving data, for trading on news faster than news can be disseminated, they’ve nevertheless found support from some unlikely quarters, such as traditional exchanges, and even this working paper on the European Central Bank’s website.
Through tough times they’ve remained highly revenue-generative and are looking for new opportunities to grow.
So who exactly are these firms?
Sister paper Financial News has put together this cheat sheet of the 10 European HFT firms widely acknowledged by market practitioners as the best of the bunch.
• Flow Traders
Based: Amsterdam
Ownership: U.S. private equity firm Summit Partners holds a significant minority interest, with employees owning the remainder
Key people: Roger Hodenius and Jan van Kuijk, co-founders and co-chief executives
Flow Traders was founded in 2004 by Roger Hodenius and Jan van Kuijk, two traders from rival Dutch firm Optiver. The firm now has a workforce of over 200, with offices in Asia and the U.S., and is a member of around 75 exchanges globally. It is regarded as a leading marketmaker in exchange-traded funds, but is active across multiple asset classes. It was one of the four founding members of HFT lobby group the FIA European Principal Traders Association in June 2011. Last year, it appointed Lazard as an adviser to oversee a strategic review of the business as investor Summit Partners reviewed its holding in the company. A potential sale of the business was considered with interested parties, but Dennis Dijkstra, its chief financial officer, said that was now “off the table”, as a price could not be agreed. He added that the company was in expansive mode: “We have around 200 full-time employees and are actively hiring. Our main opportunity to grow is in the U.S.”
2012 financials
Revenues at its Amsterdam office: down 20% to €62.4 million ($84.5 billion), while net profits down 35% to €19.9 million
• HRT Europe
Based: London
Ownership: Affiliate of New York-based Hudson River Trading
Key people: Landis Olson, European president
HRT was founded in 2002 by former traders from rival firm Tower Research Capital, where they ran a trading group called Hudson River. The firm now has 100 employees, with satellite offices in London and Singapore. The London entity houses primarily operational, compliance and market relations staff, numbering between 10 and 20, who support U.S. teams trading on European exchanges. In September it was formally authorized by the U.K.’s Financial Conduct Authority as a proprietary trading firm, in a move anticipating future European regulation and allowing it to pursue opportunities that require authorization. HRT takes a highly collaborative approach to developing new trading strategies, with a centralized group of trading and quantitative research teams in New York. Each August it takes on a new class of employees, typically straight out of university. Landis Olson, a former executive with Instinet and Nasdaq OMX, was appointed president of its European office in 2009. He is responsible for the firm’s trading systems and controls in Europe, and expanding the business into further geographies and asset classes.
2012 financials
Revenues: up 25% to £10.6 million ($17.1 million), while net profits down 32% to £214,177
• IMC
Based: Amsterdam
Ownership: Privately owned by individuals and staff
Key people: Rob Defares and Wiet Pot, co-founders and co-chief executives
IMC was founded in Amsterdam in 1989 by two marketmakers working on the open outcry floor of Europe’s first options exchange. It has grown rapidly and now has more than 500 staff globally, with offices in the U.S., Switzerland and Australia. It is an active member of more than 40 of the world’s largest exchanges. Last year was a turbulent one for the firm. It merged its trading operations in Hong Kong and Sydney, was fined by Hong Kong’s financial regulator for internal control failings and its chief financial officer, Osi Lilian, was forced to renounce his management role following a tax probe into his personal financial affairs. It was one of the four founding members of the HFT lobby group, the FIA EPTA, and last year took a minority stake in fledgling Dutch equity derivatives platform The Order Machine.
2012 financials
Revenues: undisclosed
• Jump Trading International
Based: London
Ownership: Affiliate of Chicago-based Jump Trading
Key people: Peter Deaner, head of European business development
Founded in Chicago in 1999, Jump’s strength lies in futures across multiple asset classes. It has actively traded in London since 2009 and last year moved to larger offices at One London Wall. That move was part of plans to continue to grow the European business, and “improve the firm’s overall infrastructure and business continuity plans from a global perspective”, Mr. Deaner told Financial News last year. In its most recent U.K. financial statements, the firm’s directors said the company had made a “significant investment in its London office and personnel to ensure the continued growth of the business.” It employs about 40 people in London, with recent hires including a team of former traders from Bank of America Merrill Lynch’s quantitative statistical arbitrage trading group. Jump operates around 19 trading teams globally, one of which is based in London. It operates a collaborative infrastructure model, whereby technology developed by individual trading teams can be used across the firm, a person familiar with the business said.
2012 financials
Revenues: down 4.5% to $14.7 million, while net profits down 86% to $1.2 million
• KCG Europe
Based: London
Ownership: Affiliate of New York-based KCG Holdings
Key people: Ryan Primmer, KCG’s global head of fixed income, currency and commodities, who oversees European trading
KCG was formed this year through a $1.4 billion merger between the Chicago-based high-frequency trading specialist Getco and brokerage Knight Capital. KCG’s executives are already steering the firm away from Getco’s high-speed trading roots, and building on Knight’s institutional and retail client business. Last month, Robert Smith, KCG’s head of Europe and the former head of Getco’s European business, left the firm. He was replaced by former Knight executive, Albert Maasland, who had been KCG’s global head of execution services and venue. The former Getco business remains a sizeable marketmaker on European exchanges, and is active across fixed income, equities, commodities and foreign exchange. One of the first movers in European high-speed trading, Getco was a founding member of the FIA EPTA and was a key supporter of alternative venues such as Chi-X Europe. It held a 14% stake in the venue before its 2011 sale to Bats Global Markets. As its results show, its revenues peaked in 2008 and have slumped since, as its technology has been usurped by that at rival firms, according to practitioners.
2012 financials
Revenues (Getco Europe): down 44% to $117.8 million, while net profits down 81% to $16 million
• Optiver
Based: Amsterdam
Ownership: Privately owned by partners, employees and former staff
Key people: Johann Kaemingk, founder and chairman
Optiver was founded in 1986 as a marketmaker on the Dutch options exchange, and its strength has traditionally lay in trading equity derivatives and equity indexes-linked derivatives. It now operates across asset classes, with close to 700 staff globally, with main offices in Chicago and Sydney. In addition to being an electronic marketmaker, it is also a big participant trader in Europe’s “call-around” listed options market, a voice-driven business. It was also one of the four founding members of lobby group the FIA EPTA and a backer of alternative venue Chi-X Europe, holding a 5% stake before its sale to Bats Global Markets in 2011. More than half of Optiver’s revenues came from outside the European Union for the first time last year. The firm opened a Shanghai office at the beginning of this year, adding to smaller presences in Taipei and Hong Kong. The company remains in expansive mode. Hans Pieterse, a European managing director, said: “We are continuing to hire high quality trading staff, as well as IT, compliance and risk professionals.”
2012 financials
Revenues: down 24% to €370.1 million ($501.2 million), while net profits down 11.4% to €141.6 million
• RSJ Algorithmic Trading
Based: Prague
Ownership: Privately owned by individuals and employees
Key people: Karel Janecek, founder and chief executive and Bronislav Kandrik, head of trading
RSJ was founded in the Czech city of Plzen in 1994 by maths whizz Karel Janecek. Mr. Janecek’s other achievements include writing acclaimed software enabling professional blackjack players to optimise their playing strategy. RSJ has historically traded interest rate futures, and is one of the largest participants on NYSE Liffe, the futures exchange now owned by IntercontinenalExchange. It is also a member of ICE’s exchanges, CME Group and Deutsche Börse’s Eurex derivatives market. It has gradually been expanding its range of asset classes and this year made its first step outside futures by trading on-the-run US Treasuries on eSpeed, the Nasdaq-owned fixed income market and BrokerTec, Icap’s bond platform, Kandrik said. The company employs about 65 people, and typically adds a handful of staff each year. Kandrik told Financial News: “RSJ takes a collaborative approach, we don’t have internal teams competing with one another.”
2012 financials
Revenues: undisclosed
• Spire Europe
Based: London
Ownership: Affiliate of New York-based Tower Research Capital
Key people: Alan McGroarty, chief executive
Spire has rapidly become one of Europe’s most active high-speed firms. It is an affiliate of Tower Research Capital, which was founded by Mark Gorton, a former Credit Suisse prop trader. The group has traditionally focused on equities and Spire began actively trading on European stock exchanges in 2009. Since then, its revenues have grown from £5 million, to £73 million in 2012. Spire describes itself as a “proprietary trading firm dealing in equities, futures and foreign currencies”, according to its most recent accounts. It employs between 20 and 30 people in London, a figure which has doubled in recent years, a person close to the business said. Recent hires have included traders and researchers from defunct firm Eladian Partners and McGroarty, a former Citadel, Goldman Sachs and Merrill Lynch executive, as its chief executive. Brook Teeter, a former Getco and Credit Suisse executive, was this year appointed to head its Asian operations. Tower has about 35 trading teams globally. Individual teams can develop their own strategies, while benefiting from a centralized infrastructure.
2012 financials
Revenues: down 24% to £73 million ($122.3 million), while net profits down 40% to £23.7 million
• Sun Trading International
Based: London
Ownership: Affiliate of Chicago-based Sun Holdings
Key people: Asad Samar, managing director and Simon Dove, head of business development
Chicago-based Sun Holdings was founded in 2002 by Jeff Wigley, a former Chicago Board Options Exchange trader. It appointed ex-MF Global chief Bernie Dan as president in December 2010, and since then has been expanding into new regions and products. The group’s U.K. operation was established in 2006 and has been steadily growing since and has a workforce of around 20. It attributed its relatively strong performance last year to revenue diversification efforts begun in 2011. Chris Malo, Sun Trading’s chief financial officer, told Financial News last month that the firm had been “pursuing strategies to diversify our trading across asset classes and geographies, which has helped us to minimize the impact of weaker volumes.” Simon Dove joined the firm in April 2010 from the London Stock Exchange to head its European business development and became part of Sun’s three-person management team in London last year. He oversees the firm’s relationships with trading counterparts, venues, clearers and vendors and is driving the firm’s aggressive growth plans into new asset classes and regions, including Asia.
2012 financials
Revenues: down 1.5% to £18.1 million ($29.3 million) , while net profits down 2.6% to £3.3 million
• Virtu Financial Europe
Based: Dublin
Ownership: Affiliate of New York-based Virtu Financial
Key people: David Furlong, European managing director
Virtu was founded in 2008 by Vinnie Viola, a graduate of US military academy West Point, a former chairman of the New York Mercantile Exchange and the new owner of NHL team Florida Panthers. Virtu merged with another of Viola’s firms, Madison Tyler, in 2011. To streamline the business after that deal, Virtu this year closed its London office and consolidated its European operations into a single HQ in Dublin. It has between 20 and 30 people working in the Irish capital, although that figure is expected to grow beyond 30, a person close to the business said. Virtu is a registered marketmaker across several European exchanges, including the London Stock Exchange. It is active in equities, foreign exchange, fixed income and commodities, the person said. Last September it acquired the marketmaking business of Dutch trading firm Nyenburgh, bolstering its presence in European exchange-traded funds, in which it is highly active.
2012 financials
Revenues: up 307% to €71 million ($98.9 million) , while net losses narrowed from €4.1 million to €2.3 million.
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1 Attachment(s)
New Research Find HFT Improves Market Fairness
New research from the Capital Markets Cooperative Research Centre (CMCRC) has found that the presence of high frequency traders improves market fairness by reducing end of day price dislocation
Based on study of data from 22 exchanges from around the world, from 2003-2011
Study found that the presence of HFT decreases the probability of end-of-day (EOD) price dislocation by 21%
Says:
End of Day (EOD) price dislocations are troublesome for markets and any market structure change which mitigates the incidence of such changes should be seen as a positive outcomes for the marketplace
HFT was associated with a decrease in the total trading value surrounding each suspected dislocation, by the most conservative estimate of 42% relative to the average size of the total trading value, suggesting that the mere presence of HFT participants in a marketplace may discourage EOD dislocation
The study also examined specific dates when EOD price dislocation was most likely to be manipulated, eg. dates when options expire and end of month/quarter calendar dates. The data showed that in the presence of HFT, EOD price dislocation was less pronounced on these dates as well
“There is an established negative relationship between liquidity and EOD prices (i.e. the higher the liquidity the harder it is to manipulate or the less prices will move) and that HFT by either providing additional liquidity at these points (or because market participants know that HFT are present in a marketplace) appears to reduce EOD dislocation”
A copy of the research paper attached.
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I like the strategy of high speed trading but the financial requirements are severe. Generally, trading especially in forex should not last long.
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High-Speed Traders Form Trade Group to Press Case
High-frequency traders are going on defense.
To counter what they say is the industry's unfair reputation as a disruptive force in the markets, a group of high-frequency trading firms have hired a pair of heavy-hitting political strategists and formed a trade group to press their case with regulators and lawmakers.
The strategists, Kevin Madden and Erik Smith, last week submitted paperwork to found a group called the Modern Markets Initiative, with headquarters in Washington, D.C. Backed by four high-speed firms, it plans to bolster a website Tuesday that will include a video arguing that high-frequency traders have made the financial markets cheaper and faster for investors, a blog to respond to critics and links to academic research.
Mr. Madden helped run Mitt Romney's 2012 presidential campaign, and Mr. Smith was a senior adviser to Barack Obama's 2008 and 2012 campaigns.
The move highlights how the upstart computer-driven trading firms, once a marginal, little-known segment on Wall Street, have grown into a mature industry looking to shift the perception of their activities.
High-frequency traders move rapidly in and out of stocks and commodities to capture fleeting shifts in prices. Their activities first drew broad scrutiny after the May 6, 2010, "flash crash," when many of the firms pulled out of stocks, a move some critics say helped worsen a sharp drop in the market.
High-frequency trading firms are responsible for about 50% of trading in the U.S. equities market, according to Rosenblatt Securities, which advises institutional investors on trading.
That number has been relatively stable over the past several years. However, during the second half of 2008 and first half of 2009, at the peak of the financial crisis, that number was closer to 66%, Rosenblatt said. High-frequency trading increases during times of heightened volatility.
An initial goal for the group is to create a new name for the industry. They prefer "automated professional traders" to high-frequency traders.
"One of the things that has been a problem with the phrase high-frequency trading is that it has become a catch-all for anything people don't like," said Peter Nabicht, spokesman for the new group. Mr. Nabicht is a former executive vice president of Chicago-based high-frequency firm Allston Trading LLC.
The industry is under increased scrutiny. The Financial Industry Regulatory Authority, in a letter last week outlining its enforcement priorities for 2014, said it plans to focus on high-frequency trading, known as called HFT. "Although many HFT strategies are legitimate, some are not and may be used for manipulative purposes," Finra said in the letter.
Several regulators, including some with the Securities and Exchange Commission, recently called for a broad review of computer-driven markets amid concerns that trading has become too complex and plagued by glitches. A 40 to 45 minute trading snafu in 2012 by Knight Capital Group that cost the firm nearly $500 million raised concerns that high-speed markets are vulnerable to mistakes that could spread to regular investors.
Not all high-frequency traders employ the same strategy, but they commonly use proprietary algorithms, state-of-the-art computers and ultrafast connections to exchanges. Critics say they take advantage of large institutions, such as mutual funds, by running up prices at lightning speeds once they detect a big buyer or seller in the market.
"There is no doubt that the computerization of Wall Street has been incredible, but there are a lot of problems that need to be investigated," said David Lauer, a former high-frequency trader who now consults on market structure.
High-frequency firms say they have reduced the cost of trading for all investors and made the markets more efficient. The new group plans to spread that message more widely.
"There are a lot of noisy opponents of high-frequency trading, but there hasn't been an organized rebuttal, and that is going to change," said Ari Rubenstein, managing partner of Global Trading Systems LLC, New York, one of the four founding firms of the new group.
The other founding firms are some of the oldest high-frequency traders in the industry: Tower Research Capital LLC and Hudson River Trading LLC, in New York, and Quantlab Financial LLC, in Houston. The group is seeking additional members. The initiative won't be the first to push high-speed traders' agenda. In 2010, about 30 high-speed firms formed the Principal Traders Group, part of the Futures Industry Association trade group, to help shape policy in Washington.
Modern Markets Initiative has already started reaching out to lawmakers, sending a two-page introduction to the group around the Capitol and an email address for contacting its leadership.
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Speed Traders Get an Edge : The Wall Street Journal
WASHINGTON—High-frequency traders have been paying to get direct access to market-moving news releases, a practice that can give firms the ability to trade fractions of a second ahead of less fleet-footed investors.
The traders are getting news releases from Business Wire, which distributes corporate-earnings releases and economic reports such as the Philadelphia Federal Reserve's monthly manufacturing survey, and from Marketwired, a Toronto company that distributes earnings releases and the ADP monthly employment report.
Such direct access isn't illegal. By paying for direct feeds from the distributors and using high-speed algorithms to crunch data and enter orders, traders can get a fleeting—but lucrative—edge over other investors, according to traders and people familiar with the practice. The reason: tiny lags between the time the distributors release the news and when media outlets send them out to the public, including other investors.
Investors typically receive earnings reports and other news releases from media companies such as Bloomberg LP and Dow Jones & Co., a unit of News Corp, NWSA which owns The Wall Street Journal, or websites such as Yahoo Finance. Those financial-news outlets get most of these releases from distributors such as Business Wire, which is owned by Warren Buffett's Berkshire Hathaway Inc., BRKB and Marketwired, majority-owned by OMERS Private Equity Inc., an arm of the Ontario Municipal Employees Retirement System.
Business Wire says it doesn't discriminate between clients in the interest of fair access.
"Anyone can get a direct data feed if they want," including high-speed trading firms, said Tom Becktold, a spokesman for Business Wire, which also distributes releases to financial companies such as fund-management firms, Wall Street banks and retail brokers, according to its website. Company spokesman Neil Hershberg said what happens after Business Wire hands off releases is "beyond our control."
Some high-speed firms have had direct access to news releases for at least the past few years, according to people familiar with the situation. These firms typically are paying thousands of dollars a month to get the news releases.
The trend, previously unreported, could help explain what happened on the afternoon of Dec. 5, when Ulta Salon Cosmetics & Fragrance Inc., ULTA a cosmetics retailer based in Bolingbrook, Ill., released its earnings. At 4 p.m. EST, Ulta's stock was changing hands for about $122 a share. Business Wire issued the company's earnings, which missed analysts' forecasts, about 150 milliseconds after 4 p.m., according to a person familiar with the timing of the release. A millisecond is one-thousandth of a second.
Within about 50 milliseconds, nearly $800,000 of Ulta's stock was sold on stock exchanges in a series of rapid trades. But major news wires hadn't yet distributed Ulta's earnings, according to the news wires. Bloomberg News issued the release 242 milliseconds after 4 p.m. Dow Jones issued it 464 milliseconds after 4 p.m. Thomson Reuters Corp. TRI.T -0.05% issued the release about one second after 4 p.m.
About 700 milliseconds after 4 p.m., Ulta's stock reached its closing price of $118 a share on the Nasdaq Stock Market, NDAQ which incorporated the orders placed immediately after Business Wire and other news services distributed Ulta's earnings, according to data analyzed by Nanex LLC, a market-data provider, and people familiar with the trading. Stocks often settle a few tenths of a second after 4 p.m. as Nasdaq's computer systems seek to reconcile all trades.
Such delays between the time Business Wire distributes releases and when wire services send them to the public are standard. Market experts say it typically takes from a hundred milliseconds to several seconds between the time news wires receive a news release and when it is published.
Market volatility in the seconds after the 4 p.m. Eastern time stock-market close has increased in recent years as high-speed firms race to trade on market-moving information such as earnings reports, which are often released immediately after the closing bell, according to Eric Hunsader, founder of Nanex. Swings of at least 0.3% in Nasdaq stocks within the first second after 4 p.m. rose about 30% in the two years ended Dec. 31, 2013, from the previous two years, according to Nanex data.
The ability of high-speed firms to trade on market-moving news before other investors highlights how gaining an edge in today's lightning-fast markets can come down to a split-second advantage. It also shows how trading fueled by state-of-the art computers and communication networks is challenging regulators whose rules were largely carved out in an era dominated by human traders.
The Securities and Exchange Commission's fair-disclosure rule, Regulation FD, requires that public companies issue material information about their businesses to the broader public at the same time it is disclosed to market professionals. The SEC passed the rule in 2000 amid concerns that companies were selectively revealing material information to Wall Street analysts and certain privileged investors. The rule, written before the era of high-speed trading, doesn't address whether fractions of a second matter in terms of when information is distributed.
While public companies use news-release distributors such as Business Wire to help fulfill their disclosure obligations, the distributors aren't directly overseen by the SEC.
Marketwired says it provides clients with "a service that enables them to comply with their Reg FD and associated regulations, which require full and fair simultaneous disclosure of information."
Business Wire's competitor, PR Newswire, says it doesn't provide trading firms access to its "Disclosure Feed" despite frequent requests. The company says it provides the news feed to clients with the understanding that information provided won't be used for trading purposes.
"Though it might be a 'wish-list item' for many, we don't supply the Disclosure Feed to any stock trading portal, high speed or otherwise," said Bradley Smith, director of marketing at PR Newswire, a unit of U.K. media company UBM UBM.LN PLC.
Business Wire's clients include Chicago's Chopper Trading LLC and Spano Trading LLC, a Miami Beach, Fla., high-speed trader. Chopper Trading declined to comment.
Public companies typically post releases on their websites at roughly the same time the information is distributed to Business Wire clients. While anyone can grab that data from a company's website, traders say getting the information through a direct feed is faster.
Joseph Spano, founder of Spano Trading, said an advantage of subscribing to Business Wire is that news releases are "pushed" to his firm's computers, which he said is much faster and more reliable than getting the data from a company's website. "The faster you want the data, the more it costs," he said in an email. "I guess this is capitalism."
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High Speed Trading Said To Face N.Y Probe into fairness
New York’s top law enforcer has opened a broad investigation into whether U.S. stock exchanges and alternative venues provide high-frequency traders with improper advantages, a person with direct knowledge of the matter said.
Attorney General Eric Schneiderman is examining the sale of products and services that offer faster access to data and richer information on trades than what’s typically available to the public, according to the person. Wall Street banks and rapid-fire trading firms pay thousands of dollars a month for these services from firms including Nasdaq OMX Group Inc. and IntercontinentalExchange Group Inc.’s New York Stock Exchange.
The attorney general’s staff has discussed his concerns with executives of Nasdaq and NYSE and requested more information, said the person, who asked not to be named because the inquiry hasn’t been announced. Schneiderman’s office is also looking into private trading venues, known as dark pools, and the strategies deployed by the high-speed traders themselves.
“This new breed of predatory behavior gives a small segment of the industry an enormous advantage over all other competitors and allows them to use new technologies to reap huge profits based on unfair advantages,” according to a draft of Schneiderman’s speech to be delivered today at New York Law School. A copy was obtained by Bloomberg News.
Disrupting Strategy
The investigation threatens to disrupt a model that market regulators have openly permitted for years as high-speed trading and concerns about its influence have grown. Trading firms pay to place their systems in the same data centers as the exchanges, a practice known as co-location that lets them directly plug in their companies’ servers and shave millionths of a second off transactions. They also purchase proprietary data feeds, which are faster and more detailed than the stock-trading information available on the public ticker.
“We publicly file with the SEC for each and every one of these services, and we’re always engaged with government officials around the world,” Robert Madden, a spokesman for New York-based Nasdaq, said in a phone interview, referring to the U.S. regulator. He and Eric Ryan, a spokesman for NYSE, declined to comment on Schneiderman’s investigation.
Dark pools, including Goldman Sachs Group Inc.’s Sigma X and Credit Suisse Group AG’s Crossfinder, operate without the same regulatory oversight as the public exchanges and disclose little about their trading or the participants. Michael DuVally, a spokesman for New York-based Goldman Sachs, declined to comment, as did Drew Benson, a spokesman for Zurich-based Credit Suisse.
Mounting Concern
Special services have helped fuel high-frequency trading, in which computer programs execute orders in a fraction of a second and take advantage of fleeting discrepancies in security prices across trading venues. High-frequency activity represented more than half of all U.S. stock trading in 2012, according to Rosenblatt Securities Inc.
Critics including some regulators and market participants say that such trading, which captured the spotlight in the May 2010 flash crash in U.S. equities, serves little purpose, may distort the market and may leave retail investors at a disadvantage.
Computer-driven trades can be executed in about 300 microseconds, according to one study. At that speed more than 1,000 trades can be made in the blink of a human eye, which lasts 400 milliseconds. At their peak, algorithms shot out about 323,000 stock-trading messages each second in the U.S. last year, compared with fewer than 50,000 for the busiest period in 2007, according to data compiled by the Financial Information Forum.
Some Advantages
Andrew Brooks, head of U.S. equity trading at Baltimore, Maryland-based T. Rowe Price Group Inc., told a Senate hearing in late 2012 that the quest for speed has threatened the market.
Proponents say that high-speed trading actually increases the availability of shares in the market and that interfering with such programs would lead to higher costs and be harmful to financial stability. Indeed, the rise of computers in stock trading has helped squeeze out specialists and market makers, who had long facilitated transactions.
The current market structure, which has led to more participants, has lowered the cost of trading for investors, said Peter Nabicht, a spokesman for Modern Markets Initiative, an industry group formed last year by firms including Quantlab Financial LLC, Hudson River Trading and Global Trading Systems.
“Speed of decision-making and execution, often associated with high-frequency trading, gives traders more confidence in their interaction with the market, which allows them to efficiently make more competitive prices” and better meet investor demands, Nabicht said.
‘Tremendous Victory’
Schneiderman has previously voiced disapproval of services that cater to high-speed traders and give them a potential edge. When Business Wire, the distributor of press releases owned by Warren Buffett’s Berkshire Hathaway Inc., said last month it would stop sending the statements directly to high-frequency firms, Schneiderman called it “a tremendous victory.”
Taking his concerns public may help Schneiderman push the exchanges to alter practices, as Business Wire did, even without enforcement action. Among the powerful tools at his disposal is the Martin Act, an almost century-old law that gives him broad powers to target financial fraud in the state.
Exchanges Vulnerable
Targeting the exchanges could be the most straightforward way to deal with any ill effects of speedy trading, said James D. Cox, a securities law professor at Duke University in Durham, North Carolina.
“The exchanges are much more vulnerable to state and federal regulatory enforcement than the market participants,” Cox said. “They have a broad statute to maintain orderly markets and to do so in an ethical manner.”
The 1934 securities law that set up regulatory oversight of the U.S. financial markets specifies that exchanges enact rules to protect investors and the public’s interest, to promote equitable practices and to prevent fraud and manipulation.
Regulators have signaled concerns in recent years on how U.S equity markets operate. After the Dow Jones Industrial Average briefly lost almost 1,000 points in the flash crash, the chairman of the Securities and Exchange Commission, Mary Schapiro, said she planned to increase scrutiny of high-frequency traders.
In an effort to avoid another flash crash, the SEC worked with exchanges to create price curbs designed to prevent losses in a single stock from snowballing into a marketwide rout. The current chairman, Mary Jo White, said in January the SEC would soon publish a review of research on high-frequency trading.
Regulator’s Dilemma
Cox, the Duke professor, said New York’s attorney general is the only law enforcement body or regulator likely to target the exchanges.
“The SEC wants to protect investors, but also strengthen and promote U.S. capital markets,” Cox said. “These twin functions conflict with each other, which is why they have so far turned a blind eye on this issue.”
Some in the trading business, like Joe Saluzzi, a partner and co-head of equity trading at Themis Trading LLC in Chatham, New Jersey, have called for restraining services. Saluzzi said he’s wary of the private feeds because they’re far more detailed than public data, showing when and how a stock order was changed or canceled, which can give an insight into a particular strategy.
“Inside these data feeds is information which allows folks to read it and re-engineer the behavior of others,” Saluzzi said. “A lot of high-frequency strategies are built on modeling the behaviors of someone else.”
Price Discrepancy
The private feeds also reach traders more quickly than the public-quote system because they are sent directly from each exchange to paying customers. Public feeds build in an additional step: Price data from dozens of venues where U.S. stocks change hands are sent to a central place for processing before that information is publicized. Bloomberg LP, the parent of Bloomberg News, provides its clients with access to some proprietary exchange feeds.
A study published in January co-authored by Terrence Hendershott, associate professor of finance at the University of California, Berkeley, found the average time difference was 1.5 milliseconds between calculating a stock’s price using the exchange’s proprietary data and waiting for the public information. That’s more than enough time for a speedy trader to recognize an advantageous price and execute a trade against someone using the slower feed.
Policing Profits
The draft of Schneiderman’s speech refers to an academic paper that suggests segmenting the trading day into thousands of auctions in an effort to prevent the quickest firms from jumping ahead of others.
The paper’s co-author, Eric Budish, associate professor of economics at the University of Chicago’s Booth School of Business, told Bloomberg News in February that non-stop markets create a race between speed traders.
Operating different data feeds has led to past disciplinary action. NYSE Euronext agreed to pay the SEC $5 million in September 2012 to resolve claims it violated rules by giving some customers a head start on trading information. NYSE sent data through proprietary feeds to paying customers before relaying the same information to the public feed, regulators said. The exchange said the incident was “not from intentional wrongdoing.”
The exchanges have a variety of duties and responsibilities not just to the public, but to members and shareholders. NYSE and Nasdaq are required to police their members’ activities. In the past decade, they have moved from member-owned utilities to publicly traded companies with an eye on generating returns for shareholders.
European Crackdown
Nasdaq said in an investor presentation last week that it had close to $40 million in revenue from U.S. proprietary market data in the fourth quarter last year. The company does not reveal how much it receives from co-location of servers.
The use of high-frequency trading strategies has come under scrutiny outside the U.S.
European Parliament lawmakers reached a draft deal with national governments to curb high-frequency trading as part of tougher rules for the bloc’s financial markets, said the chief legislator working on the plans in October. The draft requires algorithms to be tested and authorized by regulators and calls for circuit breakers, among other measures.
“The negotiation team achieved a significant breakthrough on this issue,” Markus Ferber, the lawmaker leading the measures, said in an e-mail at the time. “The area of high-frequency trading is lacking suitable regulation.”
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High-Frequency Trading Mainly Hurts The Traders And Short-Term Investors
Not to deflate the highly admirable “Flash” book of Michael Lewis, but front-running on Wall Street, which is what high-frequency trading is all about and what it really intends to be, is old news. Front-running is one of the oldest tricks in the market, closely following the more notorious and widespread illicit insider trading.
What’s new is that speedy price scalping is now accomplished much faster, within nanoseconds, thanks to the latest technology and help from smart algorithm manipulations – and its continued free reign in the otherwise closely regulated industry. Where are all the market sleuths and regulators that have been so blind to what Michael Lewis has uncovered?
The flash traders aren’t in hiding. They are in fact proud of what they have been able to achieve in the stock market that has bewildered a lot of people. But who really gets hurt from such so-called high-frequency trading?
Not so much the small individual investor, to be sure. But the largest victims are the professional traders and short-term investors among the institutional investors who are major heavyweights in stock investing, and whose strategies matter most to the market. It is the insight and advanced peek into these big investors’ massive scale of buying and selling that high-frequency traders lust after as it’s pure gold to their bottom lines.
Both traders and short-term investors who invariably whirl in and out of financial securities are victimized in that they end up paying a higher price over a short window or limited time for what they buy. But for long term investors, the impact is much less and not as dramatic on their total returns since they don’t depend on quick returns.
Long-term investing has proved to be the most rewarding investment strategy, come high- or low-frequency trading. What counts the most to the long-term investors is the quality of earnings and attractive fundamentals that drive revenues and profits. In most cases, their stock portfolios spiral higher in the span of five years to 10 years, or more.
Unless the individual investors are short-term oriented or engage in market timing, the impact of the higher-frequency trades on their transactions are pretty much insignificant. And the small investors’ market behavior matters much less to the fast traders as their transactions are miniscule compared with those of the large managers of mutual funds, private and government pension funds and major activist investors.
To repeat, front-running is old hat, but what’s new is the sudden decision by government agencies such as the FBI, Securities and Exchange Commission, and the New York Attorney General to suddenly launch separate investigations to ferret out possible criminal behavior among the fast traders.
One aspect of the probe is to detefmine whether these front runners are in fact guilty of insider trading. No doubt it’s admirable that they have started to probe into fast trading and its impact and legitimacy, but one wonders where they have been all these many decades when front-running has been among the most lucrative trickeries in the market.
The paramount question is what is enabling and abetting high-frequency trading? A major source of data that the flash traders pounce on can be traced to the major stock exchanges which in fact share such proprietary material to high-frequency trading companies that aims to stay ahead of everyone else in trading securities. If that source of premium information that aren’t otherwise available to everyone else is plugged or banned, a big part of the problem would be resolved.
It’s that simple. Simply stop the exchanges from sharing and deploying such material information in violation of the privacy of investors. Clearly, if there are areas of the market that need to be urgently regulated, high-frequency trading is one of them.
So is the stock market rigged?
That’s a far-fetched assumption and difficult to prove — and a gross exaggeration. But what’s clearly visible is that most investors continue to make money from stock investing despite the market’s volatility. Over the years, investors have made tremendous retuns from the market powered by the persistent climb by the Dow Jones industrial average, S&P 500-stock index, and NASDAQ.
True, there have been all kinds of market irregularities, illegal trading and distortions, and crashes along the way. Insider trading, for one, is singularly a dark side of the market that continues to bedevil investors and the market.
But then again, if you track the market’s various major stock price charts over these many years, they have all been on the rise and climbing to new all-time highs – rigged or not.
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FBI Said To Probe High Speed Traders Over Abuse Of Information ~ Bloomberg
Federal agents are making an unusual public plea for the financial industry to bare its secrets.
The Federal Bureau of Investigation has openly solicited traders and stock-exchange workers to blow the whistle on possible front-running and manipulation via high-speed computers.
The FBI joins a roster of authorities examining high-frequency trading, in which firms typically use super-fast computers to post and cancel orders at rates measured in thousandths or even millionths of a second to capture price discrepancies. The strategy to invite whistleblowers was prompted in part by the complexity of proving any misconduct, according to a person with direct knowledge of the matter.
Whistleblowers are ready to step forward from stock exchanges, Michael Lewis, author of “Flash Boys,” said today in an interview on NBC’s Today Show. The FBI is encouraging anyone with knowledge of possible misconduct to contact them, according to an FBI spokesman.
The FBI’s inquiry stems from a multiyear crackdown on insider trading, which has led to at least 79 convictions of hedge-fund traders and others. Agents are examining, for example, whether traders abuse information to act ahead of orders by institutional investors, according to the FBI. Even trades based on computer algorithms could amount to wire fraud, securities fraud or insider trading.
New York Attorney General Eric Schneiderman opened a broad investigation into whether U.S. stock exchanges and alternative venues give such traders improper advantages.
Regulators have focused for years on whether high-speed trading hurts market stability. More recent law enforcement investigations are shifting the focus to unfair practices and possible criminal activity.
Critics including some investors and regulators have said such trading, which captured the spotlight in the May 2010 flash crash that shook U.S. equities, serves little purpose, may distort the market and may leave individual shareholders at a disadvantage.
Schneiderman is examining the sale of products and services that offer faster access to data and richer information on trades than what’s typically available to the public. Wall Street banks and rapid-fire trading firms pay thousands of dollars a month for these services from firms including Nasdaq OMX Group Inc. and IntercontinentalExchange Group Inc.’s New York Stock Exchange.
Robert Madden, a spokesman for Nasdaq, and Eric Ryan at the NYSE, declined to comment on the FBI’s inquiry. Jim Margolin, a spokesman for Manhattan U.S. Attorney Preet Bharara, declined to comment when asked if the office was looking at high-frequency trading.
The FBI began focusing on high-frequency traders last year, before Schneiderman disclosed his inquiry this month. Market regulators have asked for years whether new restrictions on rapid-fire trading were needed.
Daniel Hawke, the head of the Securities and Exchange Commission’s market-abuse unit, said in 2012 that the agency was examining practices such as co-location and rebates that exchanges pay to spur transactions. Last year, the Commodity Futures Trading Commission announced a review of speed trading and sought industry input.
Federal prosecutors have scored dozens of insider trading convictions in recent years, including several linked to SAC Capital Advisors LP, the hedge-fund firm run by Steven A. Cohen that is changing its name to Point72.
SAC agreed in November to pay a record $1.8 billion and plead guilty to securities fraud to settle allegations of insider trading. As part of the settlement, Cohen agreed to close SAC’s investment advisory business.
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1 Attachment(s)
High Frequency Trading Explained Simply
High frequency trading has been in the news more, thanks in part to Michael Lewis’ new book, Flash Boys. This article presents a simple explanation of how and why high frequency trading works, and why it is good for small investors.
We will begin by imagining a market with lots of small individual traders. Then we will look at how large institutional investors change the market. Next we will look at high frequency trading. Finally, we’ll explain how small investors are impacted.
Start by imagining a stock with no particular news about it. The price is stable, but there are lot of small trades. Some investors have enjoyed gains but now think the stock is overpriced. Other investors have seen gains and have decided to jump on the bandwagon. Some investors have been watching it, and now have money to invest. Others have owned it and are happy with the stock but need some cash. So lots of orders are coming in, pretty evenly mixed between buy and sell orders. The price trend for the stock looks perfectly steady.
Attachment 6588
Now consider that the traders are not all small investors. Large institutional traders are doing the same thing—some buying and some selling—but there’s a difference between them and individual investors. When a large mutual fund or pension fund places a buy order, it could be for a million shares, not a hundred shares. Similarly, sell orders from institutions come in very large quantities.
Over the course of the day, these large institutional orders cause a lumpy pattern. The chart shows what such a price line looks like. There is no noticeable trend up or down, but each institutional order moves the market up or down, and it takes a while for the price to return to the underlying trend line. That’s illustrated with the red line in the accompanying chart.
High frequency traders try to profit from the price movements caused by large institutional trades. When a mutual fund sells a million shares of a stock, the price dips—and HFTs buy on the dip, hoping to be able to sell the shares a few minutes later at the normal price. When a pension fund buys two million shares, the HFTs short-sell the stock, hoping to close their position at a profit. (Short selling is selling stock you don’t own; you borrow the shares from a stockbroker, sell them, and then later buy the stock to return the borrowed shares.)
HFTs are buying when the price is below trend and selling when the price is above trend. This tends to reduce the price fluctuations. When they are successful, prices look like the blue line on the chart. The blips are smaller and shorter-lived.
HFT is not as easy as this simple explanation sounds. First, there are many HFTs. If one is slow, the profit opportunity may have been captured by other HFTs. Second, not every blip is just a blip. If the stock is impacted by an downward trend in the overall stock market, the HFT would buy lots of different stocks—and then watch them all go down further. A good HFT has to be fast, but not so fast as to get caught be a surprise. In practice, the HFTs are no longer just looking at just one stock in isolation. They are looking at all the prices coming in, including stocks, bonds, commodities, futures and options. This massive data crunching helps them identify what are likely to be short-term blips but not long-lasting trends.
In the early days, it was fairly easy. As more companies got into the business, the easy trades were quickly taken by others. HFTs needed to move faster and faster, while crunching ever more data to avoid losing trades. Much of the attention they have received lately is due to their extreme efforts to reduce their reaction time, which is measured in milliseconds. This effort is not made to be faster than individual investors or institutional investors; HFTs are already faster than them. Instead, the effort is made to be faster than competing HFTs.
Now, how does high frequency trading impact those of us who are small investors? Look at that chart. If I place a simple buy or sell order, I may get lucky or unlucky. My buy order may be at a downward blip, but it may also be at an upward blip. I don’t want to get lucky if it means a chance of being unlucky; I’d rather trade at that underlying trend price.
Further, investors face a spread between the price at which they buy (the “ask” price) and the price at which they sell (the “bid”). This bid-ask spread compensates the market makers for executing trades at exactly the time that I want to trade. The more volatile the stock price usually is, the wider the bid-ask spread. HFTs tend to narrow the bid-ask spread by protecting the market makers from bad news while they hold their positions. Thus, my trading costs get lower.
High frequency trading is secretive and mysterious, but not at all evil. It make the stock market more efficient and helps small investors who trade at random times over the day. I could almost feel sorry for them being misunderstood—until considering that they have made far more money than I have.
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1 Attachment(s)
The Idiots Guide to High Frequency Trading
The Idiots Guide to High Frequency Trading
Attachment 7703
First, let me say what you read here is going to be wrong in several ways. HFT covers such a wide path of trading that different parties participate or are impacted in different ways. I wanted to put this out there as a starting point . Hopefully the comments will help further educate us all
1. Electronic trading is part of HFT, but not all electronic trading is high frequency trading.
Trading equities and other financial instruments has been around for a long time. it is Electronic Trading that has lead to far smaller spreads and lower actual trading costs from your broker. Very often HFT companies take credit for reducing spreads. They did not. Electronic trading did.
We all trade electronically now. It’s no big deal
2. Speed is not a problem
People like to look at the speed of trading as the problem. It is not. We have had a need for speed since the first stock quotes were communicated cross country via telegraph. The search for speed has been never ending. While i dont think co location and sub second trading adds value to the market, it does NOT create problems for the market
3. There has always been a delta in speed of trading.
From the days of the aforementioned telegraph to sub milisecond trading not everyone has traded at the same speed. You may trade stocks on a 100mbs broadband connection that is faster than your neighbors dial up connection. That delta in speed gives you faster information to news, information, research, getting quotes and getting your trades to your broker faster.
The same applies to brokers, banks and HFT. THey compete to get the fastest possible speed. Again the speed is not a problem.
4. So what has changed ? What is the problem
What has changed is this. In the past people used their speed advantages to trade their own portfolios. They knew they had an advantage with faster information or placing of trades and they used it to buy and own stocks. If only for hours. That is acceptable. The market is very darwinian. If you were able to figure out how to leverage the speed to buy and sell stocks that you took ownership of , more power to you. If you day traded in 1999 because you could see movement in stocks faster than the guy on dial up, and you made money. More power to you.
What changed is that the exchanges both delivered information faster to those who paid for the right AND ALSO gave them the ability via order types where the faster traders were guaranteed the right to jump in front of all those who were slower (Traders feel free to challenge me on this) . Not only that , they were able to use algorithms to see activity and/or directly see quotes from all those who were even milliseconds slower.
With these changes the fastest players were now able to make money simply because they were the fastest traders. They didn’t care what they traded. They realized they could make money on what is called Latency Arbitrage. You make money by being the fastest and taking advantage of slower traders.
It didn’t matter what exchanges the trades were on, or if they were across exchanges. If they were faster and were able to see or anticipate the slower trades they could profit from it.
5. This is where the problems start.
If you have the fastest access to information and the exchanges have given you incentives to jump in front of those users and make trades by paying you for any volume you create (maker/taker), then you can use that combination to make trades that you are pretty much GUARANTEED TO MAKE A PROFIT on.
So basically, the fastest players, who have spent billions of dollars in aggregate to get the fastest possible access are using that speed to jump to the front of the trading line. They get to see , either directly or algorithmically the trades that are coming in to the market.
When I say algorithmically, it means that firms are using their speed and their brainpower to take as many data points as they can use to predict what trades will happen next. This isn’t easy to do. It is very hard. It takes very smart people. If you create winning algorithms that can anticipate/predict what will happen in the next milliseconds in markets/equities, you will make millions of dollars a year. (Note:not all algorithms are bad. Algorithms are just functions. What matters is what their intent is and how they are used)
These algorithms take any number of data points to direct where and what to buy and sell and they do it as quickly as they can. Speed of processing is also an issue. To the point that there are specialty CPUs being used to process instruction sets. In simple terms, as fast as we possibly can, if we think this is going to happen, then do that.
The output of the algorithms , the This Then That creates the trade (again this is a simplification, im open to better examples) which creates a profit of some relatively small amount. When you do this millions of times a day, that totals up to real money . IMHO, this is the definition of High Frequency Trading. Taking advantage of an advantage in speed and algorithmic processing to jump in front of trades from slower market participants to create small guaranteed wins millions of times a day. A High Frequency of Trades is required to make money.
There in lies the problem. This is where the game is rigged.
If you know that by getting to the front of the line you are able to see or anticipate some material number of the trades that are about to happen, you are GUARANTEED to make a profit. What is the definition of a rigged market ? When you are guaranteed to make a profit. In casino terms, the trader who owns the front of the line is the house. The house always wins.
So when Michael Lewis and others talk about the stock market being rigged, this is what they are talking about. You can’t say the ENTIRE stock market is rigged, but you can say that for those equities/indexs where HFT plays, the game is rigged so that the fastest,smart players are guaranteed to make money.
6. Is this bad for individual investors ?
If you buy and sell stocks, why should you care if someone takes advantage of their investment in speed to make a few pennies from you ? You decide, but here is what you need to know:
a. Billions of dollars has been spent to get to the front of the line. All of those traders who invested in speed and expensive algorithm writers need to get a return on their investment. They do so by jumping in front of your trade and scalping just a little bit. What would happen if they weren’t there ? There is a good chance that whatever profit they made by jumping in front of your trade would go to you or your broker/banker.
b. If you trade in small stocks, this doesn’t impact small stock trades. HFT doesn’t deal with low volume stocks. By definition they need to do a High Frequency of Trades. If the stocks you buy or sell don’t have volume (i dont know what the minimum amount of volume is), then they aren’t messing with your stocks
c. Is this a problem of ethics to you and other investors ? If you believe that investors will turn away from the market because they feel that it is ethically wrong for any part of the market to offer a select few participants a guaranteed way to make money, then it could create significant out flows of investors cash which could impact your net worth. IMHO, this is why Schwab and other brokers that deal with retail investors are concerned. They could lose customers who think Schwab, etc can’t keep up with other brokers or are not routing their orders as efficiently as others.
7. Are There Systemic Risks That Result From All of This.
The simple answer is that I personally believe that without question the answer is YES. Why ?
If you know that a game is rigged AND that it is LEGAL to participate in this rigged game, would you do everything possible to participate if you could ?
Of course you would. But this isn’t a new phenomena. The battle to capture all of this guaranteed money has been going on for several years now. And what has happened is very darwinian. The smarter players have risen to the top. They are capturing much of the loot. It truly is an arms race. More speed gives you more slots at the front of the lines. So more money is being spent on speed.
Money is also being spent on algorithms. You need the best and brightest in order to write algorithms that make you money. You also need to know how to influence markets in order to give your algorithms the best chance to succeed. There is a problem in the markets known as quote stuffing. This is where HFT create quotes that are supposed to trick other algorithms , traders, investors into believing their is a true order available to be hit. In reality those are not real orders. They are decoys. Rather than letting anyone hit the order, because they are faster than everyone else, they can see your intent to hit the order or your reaction either directly or algorithmically to the quote and take action. And not only that, it creates such a huge volume of information flow that it makes it more expensive for everyone else to process that information, which in turn slows them down and puts them further at a disadvantage.
IMHO, this isn’t fair. It isn’t a real intent. At it’s heart it is a FRAUD ON THE MARKET. There was never an intent to execute a trade. It is there merely to deceive.
But Order Stuffing is not the only problem.
Everyone in the HFT business wants to get to the front of the line. THey want that guaranteed money. In order to get there HFT not only uses speed, but they use algorithms and other tools (feel free to provide more info here HFT folks) to try to influence other algorithms. It takes a certain amount of arrogance to be good at HFT. If you think you can out think other HFT firms you are going to try to trick them into taking actions that cause their algorithms to not trade or to make bad trades. It’s analogous to great poker players vs the rest of us.
What we don’t know is just how far afield HFT firms and their algorithms will go to get to the front of the line. There is a moral hazard involved. Will they take risks knowing that if they fail they may lose their money but the results could also have systemic implications ?. We saw what happened with the Flash Crash. Is there any way we can prevent the same thing from happening again ? I don’t think so. Is it possible that something far worse could happen ? I have no idea. And neither does anyone else
It is this lack of ability to quantify risks that creates a huge cost for all of us. Warren Buffet called derivatives weapons of mass destruction because he had and has no idea what the potential negative impact of a bad actor could be. The same problem applies with HFT. How do we pay for that risk ? And when ?
When you have HFT algorithms fighting to get to the front of the line to get that guaranteed money , who knows to what extent they will take risks and what they impact will be not only on our US Equities Markets, but also currencies, foreign markets and ? ? ?
What about what HFT players are doing right now outside of US markets ? All markets are correlated at some level. Problems outside the US could create huge problems for us here.
IMHO, there are real systemic issues at play.
8. So Why are some of the Big Banks and Funds not screaming bloody murder ?
To use a black jack analogy , its because they know how to count cards. They have the resources to figure out how to match the fastest HFT firms in their trading speeds. They can afford to buy the speed or they can partner with those that can. They also have the brainpower to figure out generically how the algorithms work and where they are scalping their profits. By knowing this they can avoid it. And because they have the brain power to figure this out, they can actually use HFT to their advantage from time to time. Where they can see HFT at work, they can feed them trades which provides some real liquidity as opposed to volume.
The next point of course is that if the big guys can do it , and the little guys can let the big guys manage their money , shouldn’t we all just shut up and work with them ? Of course not. We shouldn’t have to invest with only the biggest firms to avoid some of the risks of HFT. We should be able to make our decisions as investors to work with those that give us the best support in making investments. Not those who have the best solution to outsmarting HFT.
But more importantly, even the biggest and smartest of traders , those who can see and anticipate the HFT firms actions can’t account for the actions of bad actors. They can’t keep up with the arms race to get to the front of the line. Its not their core competency. It is a problem for them, but they also know that by being able to deal with it better than their peers, it gives them a selling advantage. “We can deal with HFT no problem”. So they aren’t screaming bloody murder.
9. So My Conclusion ?
IMHO, it’s not worth the risk. I know why there is HFT. I just don’t see why we let it continue. It adds no value. But if it does continue, then we should require that all ALGORITHMIC players to register their Algorithms. While I’m not a fan of the SEC, they do have smart players at their market structure group. (the value of going to SEC Speaks :). While having copies of the algorithms locked up at the SEC wont prevent a market collapse/meltdown, at least we can reverse engineer it if it happens.
I know this sounds stupid on its face. Reverse engineer a collapse ? But that may be a better solution than expecting the SEC to figure out how to regulate and pre empt a market crash
10…FINAL FINAL THOUGHTS
i wrote this in about 2 hours. Not because i thought it would be definitive or correct. I expect to get ABSOLUTELY CRUSHED on many points here. But there is so little knowledge and understanding of what is going on with HFT, that I believed that someone needed to start the conversation
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1 Attachment(s)
The Problem of HFT - Collected Writings on High Frequency Trading & Stock Market Structure Reform
The Problem of HFT - Collected Writings on High Frequency Trading & Stock Market Structure Reform : Haim Bodek
Attachment 8219
This book explores the problem of high frequency trading (HFT) as well as the need for US stock market reform. This collection of previously published and unpublished materials includes the following articles and white papers:
1. The Problem of HFT - explains how HFTs came to dominate US equity markets by exploiting artificial advantages introduced by electronic exchanges that catered to HFT strategies
2. HFT Scalping Strategies - describes the primary features of modern HFT strategies currently active in US equities as well as the benefits these strategies extract from the maker-taker market model and the regulatory framework of the national market system
3. Why HFTs Have an Advantage - explains the critical importance of HFT-oriented special order types and exchange order matching engine practices in the operation of modern HFT strategies
4. HFT - A Systemic Issue - a discussion of the latest industry and regulatory developments with regard to exchange order matching practices that serve to advantage HFTs over the public customer
5. Electronic Liquidity Strategy - proposes a conceptual framework for institutional traders to achieve superior execution performance in HFT-oriented electronic market venues
6. Reforming the National Market System - proposes a 10-step plan for strengthening the operation of the US equities marketplace in order to serve the needs of long-term investors
7. NZZ Interview with Haim Bodek - addresses current topics and proposals for US equities market structure reforms
8. TradeTech Interview with Haim Bodek - addresses the current status of the HFT special order type debate
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How high frequency trading works
High frequency trading has roiled the stock and bond markets. The machines have taken over, and they can do far more business than a human can. But HFT has plenty of risk attached, as this short video explains.
http://youtu.be/f2cbylOElm0
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Sean Gourley – High frequency trading and the new algorithmic ecosystem
http://youtu.be/V43a-KxLFcg
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Money & Speed: Inside the Black Box (Marije Meerman, VPRO)
Money & Speed: Inside the Black Box is a thriller based on actual events that takes you to the heart of our automated world. Based on interviews with those directly involved and data visualizations up to the millisecond, it reconstructs the flash crash of May 6th 2010: the fastest and deepest U.S. stock market plunge ever.
Money & Speed: Inside the Black Box is developed by filmmaker Marije Meerman in close collaboration with design studio Catalogtree. This explorative documentary is a marriage of strong storytelling and meticulous visual analysis. A rare opportunity to experience what is happening inside the black boxes of our rapidly evolving financial markets.
http://youtu.be/aq1Ln1UCoEU
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WEEKLY DIGEST for High Frequency Trading Review 2014, October 19 - 26
High-frequency trading gives players the edge on JSE. A FIFTH of the JSE’s equity activity came from high-frequency computerised trading earlier this week, CEO Nicky Newton-King says. When the JSE launched its co-location centre in May, it accounted for about 5% of equity activity. In the past month co-location activity had accounted for 18%-20% of the JSE’s equity trading, Ms Newton-King said.
SEC Likely Won’t Enact Stand-Alone High-Frequency Trading Rules.
For all the controversy over the problems associated with high frequency trading, regulators don’t seem like they’re in much of a rush to fix things.
The FOX Business Network learned the Securities and Exchange Commission has all but ruled out enacting a separate set of laws to combat improprieties involving high-frequency trading. Instead, Wall Street's top cop will likely enact a broader set of market reforms to deal with a myriad market-structure issues, including the high-speed trading, sometime next year.
“I think that the big banks are going to wake up and now in the era of billion dollar fines they’re going to find that the money they make from their dark pools is so small and the regulatory risk is so large, I think a lot of people are going to say it’s not worth it,” Seth Merrin, the chief executive of Liquidnet, a global institutional trading network said.
High Frequency, Fat Target - Michael Lewis misses the competitive benefits of computerized Wall Street trading.The book review.
For the last five years, the press has been sounding alarms about high-frequency trading (HFT), a practice in which investors use fast computers driven by secret algorithms to rapidly trade securities. Time wondered in a 2012 headline whether the practice is "Wall Street's Doomsday Machine." Mother Jones in 2013 worried it could "set off a financial meltdown." In March of this year, 60 Minutes aired an infomercial-toned segment promoting the new Investor's Exchange (IEX) trading venue, which, according to IEX's website, is "dedicated to institutionalizing fairness in the markets" by slowing down trades.
Now we have Flash Boys, Michael Lewis' highly lauded attempt to explain the dark ways of Wall Street to the masses.
SEC announces first-ever market manipulation case against high-frequency trading firm.
On October 16, 2014, the US Securities and Exchange Commission (SEC) announced a settlement in the amount of US$1 million with Athena Capital Research LLC to resolve claims of market manipulation involving Athena’s use of complex trading algorithms to manipulate the closing prices of thousands of stocks by flooding the market with massive numbers of buy or sell orders during the final seconds of the trading day, a manipulative practice typically known as “banging the close.”1 This action represents the first-ever market manipulation case brought by the agency against a high-frequency trading (“HFT”).
Swiss Banks Letter, Canadian HFT Rules, Tesco Chair: Compliance. The article.
High Frequency Trading or Insider Trading? Is Michael Lewis just a disgruntled investor, or is there any merit to his claim? It would appear that more than just his harsh criticisms have moved federal agencies to dig deeper into the mystery.
What Is High Frequency Trading?
The Truth Behind High Frequency Trading And Its Impact On The Small Investo. The article.
TMX Group to install ‘speed bump’ to slow HFT traffic, ahead of Aequitas launch. Toronto Stock exchange owner TMX Group Inc. is introducing a “speed bump” to counter high-frequency traders.
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The Alchemists of Wall Street
Quants: The Alchemists of Wall Street - A Documentary about algorythmic trading
50 minute dicumentary video
http://www.youtube.com/watch?feature=player_embedded&v=OINqYdkhOAw
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1 Attachment(s)
High Frequency Trading Review for 2014, November 02 - 09
Attachment 10727
High-frequency trading and the $440m mistake. Computers and clever maths enable traders to buy and sell in the blink of an eye. But does high-frequency trading make matters worse when things go wrong?
Major exchanges seek to dismiss high-frequency trading lawsuit. "Major U.S. stock exchanges have asked a federal judge to dismiss a lawsuit accusing them of costing ordinary investors billions of dollars by rigging markets to benefit high-frequency traders."
London Stock Exchange to freeze trading at midday to fend off high-frequency traders.
"Trading on the London Stock Exchange will be halted mid-session for the first time in more than 200 years in a bid to protect its biggest customers from “flash boy” high-frequency traders. The LSE has two “auction” periods at the beginning and end of the day’s trading when share orders are submitted, but stock prices are frozen while buyers and sellers are matched to fix an opening and closing price."
SEC's White: High Frequency Trading May Need New Rules. The video: SEC Chairman Mary Jo White speaks with Stephanie Ruhle about bank and market regulation under the governance of Dodd-Frank legislation, the market impact of high-frequency trading, and what the commission is focusing on in 2015. She speaks from the SIFMA conference on “Market Makers.”
What's to Be Done About High Frequency Trading? The article: "Instead of a financial transaction tax or a change in SEC rules, perhaps the first thing we should be thinking about to solve the high frequency trading problem and a plethora of similar criminal incursions into our economy is a massive effort to achieve campaign finance reform, probably through a constitutional amendment."
High-frequency trading: Considerations and risks for pension funds. "Potential negative effects of the subset of automated algorithm-based trading known as high-frequency trading have recently generated significant attention, including congressional hearings, regulatory investigations, lawsuits and widespread media coverage."
High frequency trading profiles on LinkedIn. Just in case you need someone.
How is algorithmic trading related to high frequency trading?
A. Algorithmic trading
1) What is an Algorithm?
an algorithm is a step-by-step procedure for calculations.
2) What is algorithmic Algorithmic trading?
Algorithmic trading is the use of electronic platforms for entering trading orders with an algorithm which executes pre-programmed trading instructions whose variables may include timing, price, or quantity of the order, or in many cases initiating the order by automated computer programs.
B. High-frequency trading
What is it?
High-frequency trading (HFT) is the use of sophisticated technological tools and computer algorithms to rapidly trade securities.
High-Frequency Trading (HFT): How does it work?
- HFT firms choose the exchange they want to place the order on. Since they have direct access, they are not required to employ the services of a broker. They make the decisions pertaining to the trade on their own. Cutting out the middleman is what enables them to save time.
- HFT firms then execute their trades themselves or have a computer with a set of instructions programmed into it to do it for them. Of course, in case there are any variances, a trader has to manually execute the trade. That being said, it still enables them to make traders faster than is manually possible.
- Having intricate knowledge of how the market works and how trades are executed is important. You need to know how orders are placed and processed as you cannot get any additional help or assistance. Therefore, it is a given that HFT firms have the requisite knowledge to benefit from HFT
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Flash Boys beware - The Securities and Exchange Commission chills high-frequency trading
Flash Boys are getting put into the slow lane.
Attachment 10920
The Securities and Exchange Commission adopted new rules on Wednesday to keep exchanges and so-called “dark pools” safer by requiring more safeguards — a shift that will put more regulation on high-frequency trading platforms.
The rules come about eight months after the publication of “Flash Boys,” a book by Michael Lewis that argued that some tech-savvy brokers rig the stock market by taking advantage of the fastest trading technology.
The new rules, officially called Regulation Systems Compliance and Integrity, or Reg SCI, require more cybersecurity and backup systems, as well as more reporting to the SEC during market disruptions.
They affect exchanges like the New York Stock Exchange and the lightly regulated dark pools, like Credit Suisse’s Crossfinder system.
“The [SEC] simply cannot adequately exercise its oversight over market-impacting issues in the complex, high-speed systems of 2014 using a dated — and voluntary — framework,” SEC Chair Mary Jo White said in a statement.
The new rules are also aimed at preventing market mishaps, like Nasdaq’s botched Facebook IPO in May 2012.
Companies have almost a year to comply with the new rules, the SEC said.
The rules were first proposed in March, but were pushed back after being criticized by some commissioners as too broad.
Kara Stein, one of the SEC’s commissioners, argued that the new rules don’t go far enough in making the trading venues more transparent.
“We should be doing more in this rule,” Stein said in a statement. “I am disappointed in this missed opportunity because so many important trading centers are left out.”
the source
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Eric Hunsader of NANEX - High Frequency Trading - interviewed by Max Kaiser
In this episode of the Keiser Report, Max Keiser and Stacy Herbert discuss the fact that we are all Jack Johnson now - bankrupted by those we trust or, in the case of the central banks - distrust - all in the name of property speculation and other non-wealth producing speculative pursuits. In the second half Max interviews the founder of Nanex, Eric Hunsader, about high frequency trading, market making and scalping markets.
http://youtu.be/xPTEGISNIII
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The Problem of HFT - Collected Writings on High Frequency Trading & Stock Market Structure Reform
The Problem of HFT - Collected Writings on High Frequency Trading & Stock Market Structure Reform
by Haim Bodek
Attachment 12143
This collection of previously published and unpublished materials includes the following articles and white papers:
1. The Problem of HFT - explains how HFTs came to dominate US equity markets by exploiting artificial advantages introduced by electronic exchanges that catered to HFT strategies
2. HFT Scalping Strategies - describes the primary features of modern HFT strategies currently active in US equities as well as the benefits these strategies extract from the maker-taker market model and the regulatory framework of the national market system
3. Why HFTs Have an Advantage - explains the critical importance of HFT-oriented special order types and exchange order matching engine practices in the operation of modern HFT strategies
4. HFT - A Systemic Issue - a discussion of the latest industry and regulatory developments with regard to exchange order matching practices that serve to advantage HFTs over the public customer
5. Electronic Liquidity Strategy - proposes a conceptual framework for institutional traders to achieve superior execution performance in HFT-oriented electronic market venues
6. Reforming the National Market System - proposes a 10-step plan for strengthening the operation of the US equities marketplace in order to serve the needs of long-term investors
7. NZZ Interview with Haim Bodek - addresses current topics and proposals for US equities market structure reforms
8. TradeTech Interview with Haim Bodek - addresses the current status of the HFT special
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2 Attachment(s)
Forex Forecast: Quant vs Chart Reading
Quantitative Forecast
Attachment 12623
Technical Forecast
Attachment 12624
- The quantitative forecast sees the USD as strengthening against the Euro, British Pound, and Japanese Yen, but weakening against the Swiss Franc.
- The technical forecast is slightly different, seeing the U.S. Dollar as likely to fall against the Japanese Yen, due to bearish price action.
the source
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it is very interesting thank you
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'The market is rigged' - Interview with Flash Boys author Michael Lewis
Mr Munger said that high-frequency trading was "the functional equivalent of letting a lot of rats into a granary".
Attachment 12952
The central thesis of Flash Boys, which is published, with an updated final chapter, in paperback this week, is that electronic trading has rigged the market against ordinary investors, particularly in America.
Computer algorithms allow high-frequency trading (HFT) firms to "get ahead" of institutions investing on behalf of our pension funds and savings schemes.
Because HFT firms execute deals in tiny fractions of seconds they are able to "front run" human traders who are buying stocks and make a small "skim" on the deal by pushing prices up or down.
Although each "skim" is tiny, the overall effect, according to Mr Lewis, is that billions of dollars are being lost by investors to HFT firms which have inserted themselves into the market.
This, Mr Lewis says, is tantamount to rigging the market. When his original book came out last year Entertainment Weekly said: "If you own stock you need to read Flash Boys - and then call your broker."
"It is inserting itself everywhere," he said.
"High-frequency traders pay for an advanced look at [market] information so they are in an unfair position. They know the prices before the ordinary investors they are trading against.
"If you can trade at light speed, you can make thousands and thousands of trades in a second.
"It is offensive to me that you have essentially rich traders skimming off of middle class savers. Weaving that unfairness into the financial markets especially at a time when inequality is a problem seems crazy to me."
Rebecca Healey, of the market expert Tabb Group, said in a blog last December: "Lewis did highlight the issue of predatory HFT activity [but] many participants have already addressed this issue and have adapted trading strategies and their use of technology in order to engage with HFT constructively.
"Automation delivers choice and fosters lower commissions - which benefit the end investor.
"The claims that the buy side have been ripped off for years may have held sway a decade ago, but I have sat in countless meetings with buy-side and sell-side firms and vendors - all working together to improve the market place.
"Here in Europe if you are not endeavouring to fix the problem, you are part of the problem."
Mr Lewis is not convinced, saying that perverse incentives to make ever greater profits means that culture change in financial services is glacial, if happening at all.
"When the incentives are screwed up the behaviour is screwed up," he said. "And it creates a culture where screwed up behaviour is normal, it is even praised because it increases profits.
"Unless you change the incentives, you won't change anything else."
http://youtu.be/XfKxD5WzjG8
the source
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1 Attachment(s)
Mystery Trader Rewrites Flash Cash Story
Attachment 12975
From a modest stucco house in suburban west London, where jetliners roar overhead on their approach to Heathrow Airport, a small-time trader was about to play a hand in one of the most harrowing moments in Wall Street history.
Navinder Singh Sarao was as anonymous as they come -- little more than a day trader by the standards of the Street.
But on that spring day five years ago, U.S. authorities now say, Sarao helped send the Dow Jones Industrial Average on the wild, 1,000-point ride that the world came to know as the flash crash. By regulators’ account, he was responsible for a stunning one out of five sell orders during the frenzy. On Tuesday, he was arrested by Scotland Yard and charged in the U.S. with 22 criminal counts, including fraud and market manipulation.
The following day, the 36-year-old Briton appeared in London court to contest the extradition bid, a move that could delay the U.S. case for years. Clad in a long-sleeved yellow t-shirt and white sweatpants, he told Judge Quentin Purdy that he wouldn’t consent to the U.S. request.
The news of his arrest left many grasping for answers. Sarao has no record of having worked at a major financial firm in the U.S. or the U.K. At the time of the flash crash, Sarao was renting space from a proprietary-trading firm and clearing his transactions through MF Global Holdings Ltd., the now-defunct firm headed by Jon Corzine, said a person with knowledge of the matter. One of Sarao’s neighbors in Hounslow, 11 miles from central London, said what neighbors so often say: He was quiet, kept to himself, never caused trouble.
US $40million Illicit Profits
That picture, according to U.S. authorities, belies a years-long history of lightning-quick computer trading that netted Sarao $40 million in illicit profits.
Sarao didn’t cause the flash crash single-handedly, authorities say. Nonetheless, Tuesday’s developments fly in the face of the prevailing narratives of what happened. Regulators initially concluded that a mutual fund company -- said to be Waddell & Reed Financial Inc. of Overland Park, Kansas -- played a leading role. Many in the industry countered that a confluence of several forces, including high-frequency trading, was probably behind the crash.
By all accounts, the flash crash was more than a mere technical glitch. It raised fundamental questions about how vulnerable today’s complex financial markets are to the high-speed, computer-driven trading that has come to dominate the marketplace.
Whistle-blower Tip
Little is known about Sarao and his trades, beyond what was said in London court and contained in a complaint filed by the U.S. Department of Justice. A related civil suit filed by the U.S. Commodity Futures Trading Commission provides a few additional glimpses into his supposed activities. The case stemmed from a whistle-blower who brought “powerful, original analysis” to the CFTC’s attention, said Shayne Stevenson, a Seattle lawyer representing the whistle-blower.
According to U.S. authorities, Sarao spent the past six years thumbing his nose at regulators while using software designed to manipulate markets. In addition to fraud and manipulation, he was charged with spoofing -- an illegal practice that involves placing orders with the intent to cancel before they’re executed.
In May 2010, Sarao’s actions created imbalances in the derivatives market that then spilled over to stock markets, exacerbating the flash crash, according to the CFTC.
Introverted Trader
“We do believe and intend to show that his conduct was at least significantly responsible for the order imbalance that in turn was one of the conditions that led to the flash crash,” Aitan Goelman, the CFTC’s director of enforcement, told reporters Tuesday.
When he was trading, Sarao kept to himself, often tuning out noise and distractions with headphones, according to a person who knew him. Sarao’s computer screen almost always flashed futures data tied to the Standard & Poor’s 500 Index and his interactions were typically limited to workers installing new trading algorithms, said the person, who spoke on the condition of anonymity.
When he started his allegedly manipulative trading in 2009, Sarao used off-the-shelf software that he later asked to be modified so he could rapidly place and cancel orders automatically. At one point, he asked the software developer for the code, explaining that he wanted to play around with creating new versions, according to regulators.
Canceling Orders
In the year leading up to the flash crash, Sarao popped up on regulators’ radar. Exchanges in the U.S. and Europe saw he was routinely placing and then quickly canceling large volumes of orders, according to an FBI affidavit unsealed Tuesday by a federal court in Illinois.
The CME Group Inc., which operates an exchange for one of the most common derivatives tied to the S&P 500, contacted Sarao about his trades after concluding that some of his activities appeared to have had a significant impact on opening prices.
Sarao explained some of his conduct to the CME in a March 2010 e-mail, as “just showing a friend of mine what occurs on the bid side of the market almost 24 hours a day, by the high-frequency geeks.” He then questioned whether CME’s actions regarding his activity meant “the mass manipulation of high frequency nerds is going to end,” according to the FBI affidavit.
Spoofing Markets
On May 6, 2010, the day of the flash crash, CME sent Sarao another message. All orders to CME’s electronic exchange were to be “entered in good faith for the purpose of executing bona fide transactions,” CME said, according to the FBI affidavit.
That same day, Sarao and his firm, Nav Sarao Futures Limited Plc, used “layering” and “spoofing” algorithms to trade thousands of futures S&P 500 E-mini contracts. The orders amounted to about $200 million worth of bets that the market would fall, a trade that represented between 20 percent and 29 percent of all sell orders at the time. The orders were then replaced or modified 19,000 times before being canceled in the afternoon.
The imbalance on the exchange due to Sarao’s orders “contributed to market conditions” that saw the derivatives contract plunge and later also the stock market, according to the CFTC.
The crash spooked investors, became front-page news around the world and left regulators wondering how it happened.
About three weeks later, Sarao told his broker that he had just called the CME and told them to “kiss my ass,” the affidavit said.
No one put an end to Sarao’s trading for another five years. Among the nearly two dozen charges, one is tied to trades from March 2014.
Wire fraud is punishable in the U.S. by maximum prison term of 20 years, commodities fraud by a sentence of as long as 25 years, and commodities manipulation and spoofing by terms of as long as 10 years or a $1 million fine.
Source : Bloomberg
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Goldman Gets Serious About High-Speed Trading
Attachment 14107
Goldman Sachs Group Inc., which called for reform of high-speed stock trading before Michael Lewis’s “Flash Boys” spurred an outcry last year, is diving back in.
The bank’s electronic equity-execution unit is hiring executives including Keith Casuccio from Morgan Stanley and investing in software, trading infrastructure and its dark pool, according to people with knowledge of the plan.
Goldman Sachs emerged last year as an early supporter of the U.S. stock platform created by IEX Group Inc., portrayed in Lewis’s book as an antidote to the perceived ills of the super-fast, multi-venue electronic trading in today’s market. Now, after few major changes in the way stocks are traded, the investment bank is seeking to execute faster, catching up with competitors and leveling the playing field for its clients.
Goldman Sachs is one of the world’s top equity-trading banks, climbing to No. 1 by revenue in the first quarter after ranking second in 2014, when it produced $6.74 billion. The latest push, which included hiring Raj Mahajan as head of equity electronic-execution services this year, shows it’s focused on establishing itself as one of the top players in automated trading in particular.
In March 2014, the bank’s president, Gary Cohn, wrote an op-ed in the Wall Street Journal calling for the industry and regulators to improve the market’s structure as risks were “amplified by the dramatic increase in the speed of execution and trading communications.”
Shutdown Weighed
Goldman Sachs said in a memo after the op-ed that markets would be well-served if IEX achieved “critical mass,” even if that meant reduced volume at its own dark pool, Sigma X. The firm’s focus had shifted away from the electronic business, with Greg Tusar, who had led the unit for Goldman Sachs, leaving in the first half of 2013.
Similar groups across Wall Street faced scrutiny because of concerns that their platforms were too opaque and that high-speed traders were siphoning off profits from everyday investors -- issues that have led to probes by New York’s attorney general, the Securities and Exchange Commission and Justice Department.
Goldman Sachs’s latest effort is an acknowledgment that clients still need the fastest means of execution possible, including through dark pools and high-speed strategies. And it shows the pressure the bank faces after rivals such as Morgan Stanley and Credit Suisse Group AG invested in their platforms.
Adding Specialists
Goldman Sachs plans to pitch its improved systems to customers by highlighting fill rates, the percentage of orders that are executed, according to one of the people, who asked not to be identified talking about internal strategy. Part of the focus will be on winning business from quantitative hedge funds that already are clients of other parts of the bank, such as the prime brokerage.
Casuccio, an executive director at Morgan Stanley, will join Goldman Sachs as a managing director reporting to Mahajan later this year, the person said. Tiffany Galvin, a spokeswoman for New York-based Goldman Sachs, declined to comment. Casuccio didn’t return a phone call to a listed number seeking comment.
Mahajan, the first partner-level hire in the bank’s equities group in more than a decade, was recruited in January from high-frequency trader Allston Trading to guide the overhaul.
The electronic group aims to add more people in coming months, specifically technology specialists, according to the person. Upgrading Sigma X also is on the agenda, said the person, who added that the company believes the group could achieve a double-digit growth rate if the changes are successful.
Read more...
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High Probability Trade Entries and Exits by James Chen
High Probability Trade Entries and Exits by James Chen
James Chen, CMT, Chief Technical Strategist for City Index Group teaches high probability technical trading strategies that employ confluence principles for maximizing trade entries and exits.
http://youtu.be/wd7kkQodGYY
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For those serious in the online day trading efforts, you will notice an abundance of providers offering up to the minute reports on the latest information hitting the world's stock markets.You need to choose a reliable provider ,i myself chose Alpari. Many online day traders use reports as a method for buy and sell signals with 'buy the rumor, sell the fact' playing out every single day. When reports hit the market, volatility comes in to play and with volatility comes opportunity, especially for those looking to make money from the world's best job online.
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3 Attachment(s)
Some publications, white papers and research about high frequency trading.
High-Frequency Trading - Better Than its Reputation? ~ Deutsche Bank Research
Attachment 16551
High-Frequency Trading In The Foreign Exchange Market ~ Bank For International Settlements
Attachment 16552
High-Frequency Trading - A White Paper ~ IRRC Institute / Stevens Institute Of Technology
Attachment 16553
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High-Frequency Trading: technology, business, Illegal practices, and more
High-Frequency Trading: technology, business, Illegal practices, and more
Attachment 16987
High-frequency trading (HFT) firms use sophisticated computer programs to execute thousands of trades in a second. In fact, a second is slow by HFT standards: Traders often measure time by microseconds, or one-millionth of a second.
In the decade or so since this high-tech form of trading zoomed onto the Wall Street scene, it's generated plenty of controversy. Critics argue that high-frequency trading creates or perpetuates unfair advantages while proponents say that HFT provides much-needed liquidity, or the ability to quickly buy or sell a security, to the markets.
The technology
Technology is the driving force behind high-frequency trading. Key tech-related terms in the HFT world include:
- Algorithmic trading, algo-trading, or automated trading: High-frequency trading belongs to a larger category of trading known as algorithmic, electronic, or automated trading. In algorithmic trading, firms use computers programmed with specific algorithms -- sequences of steps -- to identify trading opportunities and execute orders..
- Low latency: In the context of high-frequency trading, latency refers to the amount of time it takes for information to reach a trader's computer, for him or her to place an order in response to that information, and for the order to be received by an exchange. Technology marketed as "low-latency" or "ultra low-latency" is what enables high-frequency traders to place their orders at unfathomably fast speeds.
- Co-location: In a largely digital world, sometimes physical proximity still matters. To reduce latency and to drive down the time it takes to execute a trade -- even by milliseconds -- high-frequency traders (among others) pay to place their computers in the same data centers as an exchange's computer servers, a practice known as co-location. To ensure that no trading firm's computer has an advantage over the other, some exchanges have mandated that the cords connecting various firms' computers to an exchange server be the same length. The SEC has generally requested comment on the practice of co-location, among other issues affecting equity market structure, but it noted that co-location fees must be filed publicly with the SEC and not unfairly discriminatory.
The business
Here are just a few of the terms that describe the day-to-day activities and strategies used by high-frequency trading firms.
It is important to note that these features of modern trading may not be inherently good or bad. Some of these practices may promote better functioning markets, while other practices (or even the same ones, in different circumstances) may cause harm. Much of the debate today aims to distinguish constructive trading practices from those that may impose unnecessary risk or extract unreasonable value from the marketplace.
- Market-making: In investing, market makers are firms that simultaneously make offers to buy (a "bid") and sell (an "ask") securities at specific prices, effectively providing liquidity to other market participants. Such firms seek to profit from the "bid-ask spread" of these securities -- the difference between the (lower) price at which they buy a security and the (higher) price at which they sell it. To encourage market-makers, many exchanges offer rebates or other benefits for their services, coupled with certain market responsibilities.The rebates they earn typically equal just a fraction of a penny per share, but since high-frequency traders buy or sell huge numbers of shares, those tiny rebates can add up to big bucks. Since 2000, the number of traditional market-makers -- firms that rely on humans rather than computer programs to make buy and sell offers -- has shrunk significantly, leaving the more automated firms to dominate the field.
- Dark pools: Stocks that are listed on a particular exchange do not need to actually trade on that exchange. In fact, much of modern trading takes place not on public exchanges but in so-called dark pools, private trading platforms, sometimes sponsored by major banks, in which buy and sell orders are matched anonymously and prices are'ot displayed publicly until after the trade is executed.Large investors, such as institutional investors, may choose to trade in dark pools to reduce the risk of their large orders influencing the markets in ways that could prove costly to them. Though some investors initially sought to trade in dark pools to avoid doing business with high-frequency trading firms, HFT firms ultimately emerged as major providers of liquidity in some private platforms. While dark pools may offer an alternative to public exchanges, they are dependent on the public exchanges to set the prices at which securities trade -- the "price discovery" process -- since they generally are prohibited from executing trades at prices that are inferior to the publicly set price.
- Pinging: To find large buy orders, high-frequency trading firms may place small sized "immediate-or-cancel" orders for a security to determine whether there's interest in buying or selling it in dark pools and other corners of the investing world largely invisible to the general public. As the Securities and Exchange Commission has noted, pinging can be part of a "normal liquidity search," but some have questioned the legality of pinging, at least in some circumstances.
- Statistical arbitrage: When a security's price is lower or higher than certain statistics indicate it should be traders can profit from such a discrepancy by, for instance, buying an undervalued stock and then later selling it when its price rises to its expected level. One form of statistical arbitrage is pairs trading, in which traders identify two stocks that typically move together -- that is, experience similar rises and falls in share price -- and then take long and short positions on those stocks if they suddenly begin moving in opposite directions.Traders can profit from pairs trading if the stocks ultimately return to similar price levels. High-frequency trading firms engaging in statistical arbitrage sometimes hold securities for very short periods of time -- often minutes or less -- before taking profits. In such cases, it's typically up to an HFT firm's algorithmic trading technology -- rather than a human trader -- to detect a statistical arbitrage opportunity and quickly act on it.
- Latency arbitrage: Latency arbitrage is a strategy through which high-frequency traders target differences between a stock's price on various trading platforms. For instance, if an HFT firm's algorithmic trading program detects that a stock's price has risen on one exchange, while remaining the same on another, the program can automatically buy the stock at its lower price at the second exchange while selling it at the higher price at the first. For high-frequency traders, the speed at which such trades occur is critical. Acting too slowly means a stock's price discrepancy between exchanges can disappear before a trader has a chance to profit from it.
Illegal practices
In recent years, the Securities and Exchange Commission (SEC), the Federal Bureau of Investigation, and other regulators have announced crackdowns on suspected wrongdoing by high-frequency traders. The potential offenses include:
- Front-running: Generally speaking, front-running refers to making a trade based on non-public advance knowledge of a large transaction. The SEC and FINRA have banned this practice. In the debate around HFT, some have used the term "front-running" to characterize a practice where HFT firms deploy algorithmic trading technology to detect large incoming orders for a security, and then automatically buy the security before the original large orders are completed. Almost immediately after they buy the securities, the HFT firms can then profit by selling the securities to the original investors at higher prices. While such conduct may not be unlawful if not based on material non-public information, there are questions about the value it provides and the extent to which it should be regulated.
- Spoofing: Spoofing is an illegal trading tactic that involves the manipulation of a security's price in order to profit off the resulting price movement. Here's how it works: The spoofing trader puts in a large order to buy or sell a security at an artificial price. Market participants who see that order may also offer to buy or sell the security at the same price. In the meantime, the trader cancels his or her order and takes advantage of others' offers, buying the security at a below-market price and selling it at an above-market price.The practice was explicitly addressed by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, and even before then FINRA rules prohibited the use of manipulative or deceptive quotations, but published reports indicate that spoofing continues to distort securities pricing. While spoofing isn't exclusive to high-frequency trading, the first criminal spoofing case announced by lawmakers did involve a high-frequency trader: Prosecutors in Illinois charged a Chicago trader with spoofing futures markets in 2014.
- Layering: Layering is a form of spoofing in which a trader (or an algorithmic trading program at his disposal) will place multiple orders at varying price points, to create a false impression of the amount of interest in that security. The trader places new buy or sell orders to take advantage of the artificially low or high prices. As with general spoofing, following the beneficial execution, the trader then cancels those orders after they've helped artificially inflate or deflate the security's price. Because of ever-evolving technologies, such major market manipulation can occur within fractions of a second. But also as with general spoofing, layering is generally unlawful and prohibited by FINRA rules.
the source
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If anyone wants to trade with scalping, then Fresh provides ECN-account, which has the fastest execution. Spread is from 0 points and virtually no re-quotes. This is the best choice for scalping. I would advise to take EUR / NZD for this strategy. This pair has a good volatility.
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With regular fast trading the identity of who is making the high speed trade is known. However, with naked access, their identity is not known. This is made possible by regulated brokerage firms cutting deals with high frequency trading firms or other hedge funds firms, and letting them use their computer access codes to execute high speed trades.
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1 Attachment(s)
Regulators Protect High-Frequency Traders
Attachment 19177
The alternative trading system IEX continues to gain market share and has been referred to as the fastest growing securities market in U.S. history. In order to scale its ability to protect more investors, IEX needs approval from the Securities and Exchange Commission to operate as a stock exchange. But the company is facing a surprising level of opposition, with some even calling the company “un-American.” Brad Katsuyama, IEX’s CEO and co-founder explains:
Jared Meyer: Why was IEX started and how is it different from the existing stock exchanges?
IEX: IEX was started because many of our employees, including me, worked at banks, exchanges, or high-frequency trading (HFT) firms and we all saw, from our different vantage points, how the stock market had become an uneven playing field for regular investors. Stock exchanges were selling data and technology advantages to a small group of HFT firms. These advantages earn the exchanges hundreds of millions of dollars in fees, and give certain purchasers of these advantages the ability to scalp regular investors. Exchanges went from being places that focused on matching buyers and sellers to platforms that create and sell high-frequency trading products. IEX is a market response that eliminates the speed advantages and looks out for the interests of long-term investors.
IEX’s top priority is investor protection—which makes us very different from the other exchanges. We created a “speed bump” of 350 millionths of a second, which has caused a great deal of concern for people who sell speed (the major exchanges) or need speed to make money (select HFT firms). This is why we face opposition. While large segments of the marketplace, including investors both large and small, support IEX, the major exchanges and some high-frequency traders are trying to block us, saying that we should not have the right to compete with the incumbent exchanges.
JM: Is the extent of HFT the problem with the current model? I always thought that it made markets more efficient and responsive.
IEX: HFT is too vaguely defined to give a yes or no response—because it can be beneficial or harmful. The beneficial aspects come from firms that post bids and offers, provide liquidity, and contribute to more efficient markets. Firms such as Sun Trading and Virtu (which wrote a comment letter in support of IEX) do not care about a 350 microsecond speed bump. However, there are also HFT firms who believe that 350 microseconds is critical to what they do, as they look to pick up trading signals so that they can race ahead and pick off trades from regular investors.
One of the benefits of IEX being a market-based solution is that we designed a platform that didn’t have to decide which HFT was beneficial or harmful—we invited all HFT firms to participate. But given the speed bump, many predatory aspects of HFT are deterred and minimized on IEX.
JM: Some people, including former SEC commissioner Paul Atkins, argue that Congress should revise antiquated securities laws before the SEC approves IEX. What do you think of this idea?
IEX: First, lobbying to change the rules before letting a new entrant compete is a common way to delay new competition. It’s a very old tactic. What you see now are some people asking the SEC to revise Regulation National Market System (Reg NMS), which has been heavily debated for the past ten years and will most likely take many more years to update. IEX’s opponents want us to sit on ice for that amount of time, which is a pretty clever way to stifle innovation and competition. We think IEX fits within the current rules and we firmly believe we should have a chance to compete.
Second, regulation cannot solve this problem alone. It is difficult, if not impossible, to effectively regulate rapidly-changing technology . I am sure that many aspects of Reg NMS made sense when they were adopted. For example, under the rules a broker can bypass quotes on an exchange that doesn’t respond immediately, where immediate is defined as one second or less. But one second in today’s marketplace is an eternity, so in ten years that particular exception has become obsolete. Market-driven innovation will be far better at adapting to technological changes than regulation can, as long as new entrants are given that opportunity.
JM: To continue to operate, does IEX need Congress to pass any new laws or the SEC to make any more rules? Or does the company only need the SEC’s approval?
IEX: We are not asking for new laws or rules. Our position all along has been that our model fits within the existing regulatory structure, yet it has the potential to rectify many market structure issues that have emerged.
The irony is that IEX was designed to serve the same principles that exchange regulations were put in place to uphold. IEX is helping to return integrity to the public markets. We do this by prioritizing the investor: we protect them from latency arbitrage on IEX as well as on other exchanges when trading through our router. In fact, the router’s ability to protect investors imposes costs on predatory HFT by forcing them to honor their bids and offers across the market, not just on IEX—which is why some HFT are so upset.
the source
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1 Attachment(s)
Former nuclear physicist Henri Waelbroeck explains how machine learning mitigates HFT: Harmful HFT, Alpha Profiling, Noisy data
Henri Waelbroeck seems to fit the popular image of the scientist transplanted into the world of high finance and hedge fund trading, the sort of stereotype found in books like "The Fear Index" by Robert Harris.
Attachment 19769
Waelbroeck, director of research at machine learning-enhanced trade execution system Portware, was previously a professor at the Institute of Nuclear Sciences at the National University of Mexico (UNAM). His areas of expertise include: complex systems science, quantum gravity theories, genetic algorithms, artificial neural networks, chaos theory.
The impression Waelbroeck conveys is one of precision. He explains that algorithms have grown in complexity since being introduced to the world of trading around 2000. This has made it increasingly difficult for traders to understand each vendor's full algorithm platform and how to optimally select an algorithm for each particular trade that comes in from a portfolio manager. Portware leverages artificial intelligence to help traders use execution algorithms and in some cases provides automated execution solutions that select the optimal control parameters on algorithms.
"Our work really has focused on two objectives: the first is to find an optimal execution schedule for each trade, and the second is to interact with the order flow more efficiently to avoid the harmful effects of high frequency trading (HFT)," Waelbroeck told IBTimes.
the source
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1 Attachment(s)
Ultra-high-frequency trading, financial institutions are turning to artificial intelligence to improve their stock trading performance
Attachment 20044
In the age of ultra-high-frequency trading, financial institutions are turning to artificial intelligence to improve their stock trading performance and boost profit.
One such company is Japan's leading brokerage house Nomura Securities. The company has been pursuing one goal: to simulate the insights of experienced stock traders with the help of computers. After years of research, Nomura is set to introduce a new stock trading system for institutional investors in May.
The new system stores vast amounts of price and trading data in its computer. By tapping into this reservoir of information, it will make assessments -- for example, it may determine that current market conditions are similar to a moment two weeks ago -- and predict how share prices will be trending a few minutes down the line.
the source