http://www.abc.net.au/news/2012-04-11/kohler-high-frequency-trade-parasites-at-heart-of-asx/3943052 By ABC's Alan Kohler Updated April 11, 2012 13:45:52 Photo: By operating at the speed of light high frequency traders can "feel" a buy order coming and can dart in front of them. (Rodolfo Clix, file photo: www.sxc.hu) In the Australian Securities Exchange's Sydney data room, which is about the size of a big lounge room, there are six "cuckoos". These are the banks of servers installed by high-frequency traders. They sit against the wall opposite the ASX servers and each is connected directly into the host by a fat fibre optic pipe. Each cable is precisely the same length by agreement with the ASX so that none gets an advantage; if one server is closer to the input, its cable is looped around to lengthen it. Think about that: one less metre of optic fibre carrying data at 299.8 million metres per second - that is, the speed of light - would give one share trader an unfair advantage over the rest. It suggests that something pretty quick is going on. The question is whether it's fair to the rest of us; whether those six parasites with their suckers fastened directly into the heart of the ASX should be allowed to get away with it. The ASX is no longer a regulator, just a business, so it says that if the practice is legal and it pays a fee not to mention a handy rent in the data room then it can't and won't stop them. For global regulators, it's actually too late: high-frequency trading accounts for as much as 70 per cent of the volume on American stock exchanges, including the NYSE; the time to control it was 10 years ago. What do the computers and their algorithms do? Well, as my relatively low-frequency brain can understand it, these machines constantly monitor order flow into the ASX servers, and the sophisticated programs can pick up patterns that indicate when a reasonably large order has been placed. What they then do, in effect, is "front-run" that is, they buy ahead of the order and make a small spread selling into it. In other words, by operating at the speed of light they can "feel" a buy order coming and can dart in front of them and ensure that the buyers pay a little bit more than they were going to, without noticing a thing. These operators begin each day owning no shares and end each day in the same position, but they make a lot of money by doing thousands of trades every day: it's a high-volume, low-margin business. It's not known how much money the HFT traders make, but whatever it is, they weren't making it 10-15 years ago, and stock market returns have not gone up in that time, so whatever they make has come out of someone else's pocket. That someone, of course, is you. The buy orders that the HFT operators are front running come from the superannuation funds in which ordinary people have their money. Now when they place an order, they usually end up paying a cent more than they would have because they are buying from someone who didn't own any of the shares 10 microseconds ago and only bought them to make that quick cent. HFT represents less than 10 per cent of the volume of the ASX, but in the United States it is much more, and there is no reason to think we won't follow the US. Should something be done to stop it? I think so, but it's too late. HFT firms like the privately owned and aptly named Getco (Global Electronic Trading Company), the world's largest HFT operator, produce a large amount of self-justifying research material based around the proposition that they help investors by providing extra liquidity in the market. This, plus presumably the hiring of expensive lobbyists, has snowed legislators and regulators and let the practice flourish, to the point where the parasites are taking over the host and it's too late to stop them. Stock exchanges the world over are now making a fortune from renting space in their data rooms to high-frequency computerised traders and would probably collapse without it (the ASX would not yet.) As a result, investors are abandoning the "lit" markets and using "dark pools" instead. This simply refers to off-market share trading away from the official stock exchanges provided by investment banks where big investors know they are not being picked off by high-frequency front runners. The problem with that is that these "dark pools" are not properly regulated or transparent. The joke is that in many cases, the same investment banks are doing both the high-frequency trading and running the dark pools; they are causing the problem and solving it, each for a handsome profit. Alan Kohler is Editor in Chief of Eureka Report and Business Spectator, as well as host of Inside Business and finance presenter on ABC News. View his full profile here. Topics:markets, business-economics-and-finance First posted April 11, 2012 13:00:56
Interesting post, thanks. I've heard of something like this before, but not having servers directly linked in the way you describe. Just another way we're getting screwed.
This. You and me won't notice it on our small, occasional trades but it would seriously hurt the margins on high frequency trading (and help pay for the damage when their algos crash the market). The extra liquidity argument is bullshit. More liquidity means more volatility and more volatility means guys who can afford millions of dollars worth of funky IT gear can gamble more.
"More liquidity means more volatility" - not always Sometime less liquidity means more volatility - the point is the balance of liquidity/volatility has been shot to sh#t therefore volatility is more certain, just like low liquidity makes volatility more certain. The idea of tax as a regulating entity is used by socialists as a wealth transfer vehicle - socialism and communism want to destroy capital (capital is the amount of money you have saved for the purpose of investing, which is NOT the money you use to live) - so the tax is to take from those who have capital. The Carbon Tax is perfect example, the GST taxes everyone! Not just 'big business'. So they are not comparable.
And the biggest high frequency traders are the system banks that the governments support and bail out, because they are their instruments of theft. They steal from people that save their property as fiatcurrency on a bank account. They inflict them a guaranteed loss of purchasing power to then try to make them change their status from bank saver to speculant. Then those newbie speculants arrive on high frequency markets, while the big system banks already bought the prices higher, let the newbies pay the higher prices, to then do a mass dump to bring all the newbies into the red. And that's why you have so many fluctuations on these high frequency stealing markets during crises. High frequency trading acts like a constant vampiric drain, sucking out the blood of the markets. But there is a way against them: don't pay the higher prices. Look at the amount positions, and if its historically seen high, its because the system banks sit ready. Buy big when they exited and before they re-take their positions. How to know what a too high price is? Look at fiatcurrency inflation and its end result price increasings. Don't pay more than an inflation-translated past low price.
Should have clarified: more liquidity means more volatility in the context of high frequency trading. The last couple of "fat finger/flash crash" episodes have shown how quickly those trading platforms can sell down positions in response to someone else's trading platform selling down their position.
That 'flash crash', 2010, was due to software that allowed to configure the speed at which to dump positions. It was set too low, and the speedy dumping was picked up by other bots, and some seconds later the entirety of the markets started to move at that speed. Later on they changed the limits so that they couldnt be changed, and added some programs/bots to break the sequence in such situations. See, these high frequency trading markets actually aren't about trading at all. Trading is exchanging a product or service with another entities product or service where both sides are given the chance to think about the product and the price. This high frequency theft is all about frontrunning others in buying selling, using derivatives instead of the real product, where every gain implies a pain elsewhere, it's just a shift from property without permission. And look at these 'markets', systemic entities/big players, with lots of positions rule them. And their existence and presence isnt even to make a gain from the small paperplaying fish. Why would those free dollars interest them? They can create electronically and/or print as many they want. They purely use these derivative "markets" for price manipulation, to make the real products (and not just their derivatives) more expensive than what real supply/demand justifies, at the moments it suits their fiatcurrency-based theft system. See, they don't care about higher prices, because they are the debt side of the game, higher prices decrease the amount production they have to do in order to pay the debt back. And when it becomes clear that their theft hit limitations of the part of the population that has to produce everything for everybody, they drastically increase their fiatmoney creation rate, and widen the gap between price inflation and intrest rate on bank account savings even more, and use special fantastical lower intrest rates for their systemic buddy banks/states (< 1%), and even just erase their debt in direct one time operations (alike Greeces debt cut and/or fiatcurrency devaluation). And why? Because then they acquite much sooner total ownership of the real world properties they bought with other peoples money/purchasing power. And this being their end goal. They actually don't care about their fiatcurrencies themselves, they just use them as a means to take someone elses property, in a legalized way.
Its true - computer programs work on technical indicators and are programmed to sell/buy given certain combinations of technical flags. The sheer volume of money being 'dumped' on the market combined with buy orders being retracted from underneath the price - ENSURE a 'crash' (however you define that) under certain circumstances. High frequency traders are like a set of waves crushing the surfer and then the algorithms from the computer programs do the rest. All these things combined destroy the integrity of the market.
I'm sure they fixed those particular trading programs to handle that particular scenario better, but the whole idea of high frequency trading relies on being fast than the other guy. All the high speed traders are always looking for an edge over each other because then they can front-run the front-runner on a normal trade (or front-run the front-runner to the front runner) so they're all constantly innovating with new code and new hardware. Its inevitable that sooner or later something will end up breaking in a new and interesting way that nobody thought of.
I dont know how people can play with stocks when things like this can happen, just too risky for me, iether that or I just dont know enough yet http://www.zerohedge.com/news/skynet-wars-how-nasdaq-algo-destroyed-bats
[youtube]http://www.youtube.com/watch?v=sDriNz8oAlc[/youtube] "The bottom box (SIP) shows the National Best Bid and Offer. Watch how much it changes in a second. Watch High Frequency Traders (HFT) at the millisecond level jam thousands of quotes in MasterCard Stock through our financial networks on May 16, 2012. Video shows about 5 seconds of time. If any of the connections are not running perfectly, High Frequency Traders can profit from the price discrepancies that result. There is no economic justification for this abusive behavior. Each box represents one exchange. The SIP (CQS in this case) is the box at 6 o'clock. It shows the National Best Bid/Offer. Watch how much it changes in a fraction of a second. The shapes represent quote changes which are the result of a change to the top of the book at each exchange. The time at the top of the screen is the time of the last quote or trade update in Eastern Time HH:MM:SS:mmm (mmm = millisecond). We slow time down so you can see what goes on at the millisecond level. A millisecond (ms) is 1/1000th of a second. The blink of an eye is about 200 ms. Note how every exchange must process every quote from the others -- for proper trade through price protection. This complex web of technology must run flawlessly every millisecond of the trading day, or arbitrage (HFT profit) opportunities will appear. It is easy for HFTs to cause delays in one or more of the connections between each exchange."
