ISO limits that create a new price are usually given better priority than Hide-not-slide orders entered with the equivalent working price, even if they were accepted before the ISO limit. Depends on the exchange obviously.
448 karma · joined January 24, 2015
Wholesalers make things even better for the retail buy and hold guy by filling them inside the bid/ask spread. The kickbacks they pay to brokers mostly translate into very low brokerage fees. Now you can trade stocks for a few dollars at a penny spread but it was $50 or $100 in commission years ago, with spreads of eighths or quarters, which can really eat into your savings when you're investing a small amount.
The main things I'd say to be wary of are:
a.) Trying to compete with professional intraday traders. Even if you have a good feel for the market, someone faster and smarter is going to beat you to the punch most of the time. The markets are much, much tougher for day traders, and the complex structure makes it easier for sophisticated automated traders to take advantage of them. It's just a waste of time and money.
b.) Trading when the markets are in a crisis mode. Automated market makers don't have as much capital as the big banks did because there's simply less "juice" in the business, so they won't be there buying forever in a falling market. No market maker ever would, but when they were earning quarters instead of pennies, there was more incentive to take on risk because the market had a built-in edge. Computers also have a lot of safety logic that can make them leave the market due to bad data during extreme events. You should always set a reasonable limit price on your orders, avoid trading around volatile times like the open or economic releases, and avoid market stops or other order types that can make you trade in an illiquid market at the worst time.
c.) Putting your money into things that are either risky like individual "hot" companies where you're competing with the best hedge fund analysts or products that are inherently bad to buy and hold (leveraged ETFs, commodity/volatility ETFs often have time decay or lose money rolling futures).
Hate to link to the Themis blog, but they cite the SEC here describing how internalizers, not retail brokerages, routed sell orders out to exchanges on May 6th: http://blog.themistrading.com/2010/10/the-internalizers-and-...
Doing it off-exchange for a minimal improvement is less clear to me. In some markets regulators have limited off-exchange trading to block trades or substantial price improvement as a way to incentivize displayed liquidity and price discovery. That seems more fair but also subsidizes informed traders at the expense of uninformed ones. Spreads tighten as market makers compete to trade with some retail flow, but informed spread-crossers also get cheaper trading with these tighter spreads since market makers lose their option to price differently.
The KCG and Citadel business is called wholesaling. A broker like Schwab has market orders or marketable limit orders from customers. They make an agreement with a wholesale market maker like Citadel to fill all of those orders up to a certain size possibly, within the NBBO, in exchange for a fee and some price improvement requirements.
So imagine you're Citadel. You have a stream of incoming orders that you commit to fill at the current market prices with a bit of improvement. If the order flow is small, you just sit on the delta waiting for flow in the other direction or trade out patiently on exchange to make a spread. If the flow becomes largely imbalanced, you can liquidate the delta aggressively on the public market to hedge at a very small cost. Say the NBBO is 100.50 bid 100.51 offer and you just sold 500 shares at 100.5099 and bought 2000 at 100.5001. You can dump the 1500 residual on the exchange bid or in dark pools, whatever, and all you lose is the price improvement you gave and fees, which are smaller than the spread you make on a "good" trade.
In effect, the wholesaler is cherry picking and getting a cheap option to make a spread. All the small retail trades that are easy to capture spread on get siphoned off the exchanges, and they're left with only the imbalanced toxic ones. This is good for the wholesaler, good for the retail trader (he gets a bit of price improvement and lower trading commission), bad for the exchanges, and bad for on-exchange market makers like most HFT firms.
It's arguably "fair" to price uninformed flows differently, it's very common in some markets like FX, but locking that up behind opaque pricing agreements where only a handful of firms participate isn't. Most market making firms would gladly compete to offer even more sub-penny price improvement to retail trades, and there are even a few exchange programs that tried to do this but never got much traction.
FWIW, every successful HFT trader I know does this type of "market analysis" driven trading backed by very fast execution. Speed alone is no longer an edge in most markets. Most are holding risk for more than microseconds or single seconds. Trade direction is auto-correlated in short timescales so even being front of the line you are unlikely to buy and sell to earn the spread so quickly.
You are right that the actual execution algorithms aren't doing super complex analysis in real-time. Usually that is done offline through simulation to generate rule sets, decision trees or factor weightings. That work is definitely quantitative. Aside from pure arbitrage, most HFT strategies have a statistical edge, not a mechanical one.
If you're just a "cog in the machine" doing research or writing software for a trader, and he ends up sucking, the firm will probably shuffle you around to work under someone else. You have generally useful technical skills, cost less than the trader, and recruiting good technical people is expensive.
If you're a supposedly brilliant trader but cost the firm money taking stupid risk or fail to make any profit to justify your inflated salary and bonus, there's not really much they can do with you.
Getting to that level is like making partner in a law firm. You have to do much better than "well" and anyone who gets there would be a fool to retire and likely wouldn't want to anyway due to the personality traits/defects required to get there in the first place.
Anyone deliberately interfering with licensed radio transmissions would probably get a knock from some guys in black suits pretty quickly anyway.
The trader they study reduced the bid/offer spread and trades 80% passively (he is primarily providing liquidity in the order book for others to trade with). His limit orders are more informative about "hard" news such as changes in the index future price than other traders, meaning he tries to buy stocks that are cheap and sell those that are expensive relative to the overall market, steering them toward their correct prices. This is just a simplistic HFT from almost a decade ago, modern prop traders have teams of researchers building prediction models with many more inputs.
And for all that, he earns a realized spread of 0.72 basis points, before paying for computers and employees. 1 basis point is 1/100 of 1%. That's in 2008, a time when HFT was relatively new and competition was less fierce, margins are considerably lower these days, not like making 0.72 basis points is exactly robbing widows and orphans to begin with. No human would make a market for such low margins, no human could react nearly instantaneously to changes in the index/stock prices to set his quotes, and no human could trade hundreds of stocks at once.
How do you think HFTs cause flash crashes? If you look at the middleman's net position on page 3, he never accumulates more than 10000 shares in one direction, and his position mean reverts every few minutes. How could a trader who primarily trades passively (others choose whether to elect his orders sitting on the book), never accumulates a significant directional position, quotes both buy and sell prices on the order book, and who aims to flatten his trades relatively quickly (whatever selling pressure he could create is quickly turned into buying pressure after he's given a short position) have such a large impact on prices?
I don't think trading off news feeds is a typical HFT trade. Some market makers may use these feeds to get out of the way during announcements. Maybe it's an automated trade for hedge fund types, but it's a high-risk, high-reward infrequent type thing. If a trader is incorrectly predicting prices long enough, they'll lose money and go out of business.
So some of the 3000 people were literally standing on the platform, but many of them may have been new customers or time-shifted rides that didn't even exist before.
All of this seems like a very micro optimization to eek out efficiency in peak throughput. The bigger macro problem is that transit is centered around sharp peaks due to inflexible work/life schedules. Moving everyone in London or New York around is tough enough, but doing it in a few hours each day is a nightmare and you have to massively overbuild infrastructure.
-These trucks have no HAZMAT signs to alert first responders to the dangers within.
-There is no separation between driver and cargo, so things like smoking or even electrical sparks could ignite the gasoline.
-These bladders don't appear to be commercially engineered or fit for this purpose. They could easily leak.
-The trucks pictured are running well over their rated payload capacity and are 10+ years old. 500 gallons of gasoline weighs 3125 lbs and even the large Excursion shown is only rated for 1500-2000 including driver and legitimate fuel.
-The drivers are incentivized to run away from police at the scene of an accident and their insurance won't cover criminal activity. If a commercial fuel truck catches fire and someone gets injured due to burns, they'd have to pay.
-The drivers aren't properly trained for handling hazardous materials. They could do things like stall on railroad tracks and kill hundreds of people.
To me, the risk seems much higher than a hobbyist with a custom hot rod or a legitimate tanker truck.
"Figure 9 shows the HFT participation as a fraction of all transactions and value. Compared to the main market, HFT activity in TSXV stocks is lower, with only 20% of transactions and less than 10% of value involving an HFT on the passive side (aggressive volume is negligible). As Panel C indicates, however, they submit about 55% of all orders, and they are thus noticeable in these securities. Panel D highlights the share of HFT and other traders’ orders relative to best prices. HFTs generally submit more than half of the orders that are submitted at the best price or that are improving the best price." [1]
1: http://docs.iiroc.ca/DisplayDocument.aspx?DocumentID=048AE40...
50-70% of auto transactions are between dealers who don't even drive their cars and only own them for weeks!
50-70% of bread transactions are between distributors and supermarkets who don't even eat bread and want to sell it in days or even hours!
A lot of this even has ties to the real physical economy. With a tight liquid market on the screen, commodity producers/consumers can adjust their oil/grain/gas hedges in real-time, retailers can manage their foreign exchange exposures and make live adjustments as orders arrive, and so on. Just makes the economy more efficient and reduces "slop" where end users built up risk exposures they didn't really want because hedging it was so expensive.
And I agree the HFT is creating value, especially market-making HFT. Absent his bid or offer, you would either lose more money paying a higher spread, or lose more in opportunity cost wasting time to wait for another trader on the other side. People who trade with them "lose" like people buying insurance "lose." Not everyone has the same utility function.
Very few games that we'd call gambling (e.g. blackjack) are 100% chance though. Maybe dice games? Lotteries? Even in games where the house always has edge, you can lose less by playing optimally.
Also, FWIW, and I'm sure this wasn't your intent, but "Shylock" is considered an Anti-Semitic slur by many people.
If you believe this is just a "socialist" thing, what about commercial contract agreements between property owners in a co-op? Should they be allowed to all agree to not engage in short-term rentals? Many condo and co-op board contracts have provisions for this, not enforced by some maladaptive government, but by negotiations between equals. It's a common desire and short-term renters aren't a protected class.
Also, simply being aware that such a service exists and can release information at certain times would let uninformed traders exit the market during releases. Right now insider traders can arrive randomly at any time.