Hacker News Reader

Comment by grandalf | Hacker News Reader

Wow this essay is totally off track.

There is no such thing as a "market price". To prove this to yourself, write a simple model of the stock market with buyers and sellers. Every order is a limit order.

What is the "market price"? Is it the last trade? Is it a weighted average of the last 10 trades? It doesn't actually exist.

At any price there will be a certain amount of liquidity. If you want to guarantee that you can buy a lot, then you have to pay extra b/c the counter party doesn't want to sell low so he hedges by adding a bit of spread.

The same applies to selling. If you want to sell a lot you have to discount a bit b/c the buyer will want a bit of insurance that he/she isn't overpaying.

The HFT algos do add liquidity b/c if the liquidity were there at the first price probed, then the algo would never really matter, the desired shares would have changed hands with some other counter party.

View on HN

Clearly, in his example, there are people out there willing to sell at $26.10. In the old days, you could put out an order from 100,000 shares, saying you would pay up to $26.40, and you would get most of these shares at the $26.10. If there were enough people willing to sell that many shares at that price.

Now, even though there may be people out there willing to sell you the shares at 100,000, these programs can find out your top price, and they will but the shares at $26.10, and sell them to you at $26.39, thus making a profit of the difference. Providing no extra services to you, or the market. They have just stepped in as the middleman with no risk.

This is how the article describes it, and this is how I understood it. Is this wrong? I think you are just arguing semantics about the term market price.

Are the shares worth 26.40? Then you should be happy to get them for 26.39. If they aren't worth it, then don't make that offer.

I don't see why you should care who sells you the shares. You either want them or you don't.

The ethical issue is that someone is deriving additional profit through an asymmetrical advantage. It's kind of an interesting ethical question actually.

Personally it just feels wrong in some hard to define way to algorithmically determine the other sides maximum/minimum price through some process they don't have access to. I can certainly understand why you would do it but it just doesn't feel quite right.

I don't think I have an ethical problem with using small orders to sound out the other party. Where it tips over into being unethical for me is if those exploratory orders are cancelled rather than fulfilled. I'm surprised its even possible to cancel your offer once someone else has accepted it.

Well, keep in mind that this is just an intermediary before the trades hit the rest of the market. If the HFT had not been allowed the advanced access, then the transaction would not have been filled in the local exchange and would (or would not) have been filled by the larger market.

If another participant besides the HFT algo on the local exchange had been willing to take the other side of the initial price offered, then the HFT firm would not benefit from "probing" for the price.

And, what's to stop the entity buying a large quantity of shares from strategizing to account for HFT strategies?

The core reason that exchanges offer an advanced look at trades is to try to pull liquidity out of parties that create no transaction fee overhead before passing it to the rest of the market. The price will never be worse than what would have occurred if the trade had been allowed to go out to the rest of the market.

The author of the article is essentially just complaining that his own crude algorithm has been outsmarted.

There is no way to send an 'exploratory' order as you describe and is is, as you suspect, impossible to cancel an order that has already been executed.

The only way the example in the article would be if there were no other available sellers at a price below 26.41 (in which case I'm curious why an algo would bother sounding starting at the low end instead of the high end. The only ways to get such a wide market would be for all the other sellers to have disappeared (in which case the buyer is not disadvantaged by the HF algo because he is getting his order done rather than not) or for the HT algo to have made a guess that other people would be willing to pay a higher price in the future for BRCM and bought all of the shares available up to and above 26.40 which is the definition of a short-term trading strategy and, I should also add, full of risk that the price that you just pushed .30 will fall back down without you having a chance to get out hence making it a losing trade.

It seems somewhat like people inflating bids on eBay by incrementing their max bid by odd amounts until they hit the other bidder's max.

Also, it is of note that such behavior is forbidden on eBay and many other marketplaces.

Not on stock exchange though.

You are missing the point. A few years ago, I wouldn't have had to pay so much, now I do. How is that good, that I now have to pay more for each transaction, while these companies make the difference?

It means I will buy less shares of other companies. I will have less money, for the same goods.

I think this is a bit off-the-mark. The point is not really a moral one from the point of view of the person getting the worse deal. Sounds illogical, but it's not: as an earlier poster said, the limit went in at 26.40, it doesn't matter to you why the market is more efficient (or whatever you want to call it), you were happy to buy at 26.39. From your point of view for that individual trade there is no case that you were scammed.

The problem is the larger perspective of the market structure being weighted in favour of certain participants. A particular class of investor is given a specific advantage by the supposedly neutral exchange, and they use it so systematically exploit an edge that doesn't exist for you or anyone else. That is wrong.

As anyone involved in bidding war with limited resources would tell you, "happy" is not a fitting word here. There is a reason why shill bidding (old-school name for what HFT does) is often prohibited or illegal.

I don't think this can possibly be right, though, unless I'm not understanding the claim, exactly - any limit orders in the queue at any price between $26.10 and $26.38 would be matched against the $26.40 limit order before an order at $26.40 or $26.45 would be, so how the hell could the HFT algo even probe your top price if the market is "full" in-between?

I think it more applies to situations where other liquidity providers would step in offering more shares somewhere near $26.10 if they had a chance to react, but the HFT algo beats them to the punch, buying up every share under $26.39 and then selling it to the big buyer at that price before anyone else can add liquidity.

Again, though, I have no idea how they could possibly figure out that demand cuts off at $26.40 with a full book under that price...I suspect there's something off with the explanation this article offered, it doesn't quite make sense to me except in highly illiquid markets.

Clearly, in his example, there are people out there willing to sell at $26.10

I am not sure where you are getting this. I don't believe it to be true based on my understanding of the mechanisms involved.

Reply on news.ycombinator.com