Quant turned whistle blower explains how the market is rigged [video]

http://tech.fortune.cnn.com/2013/11/11/video-the-wall-street-code/

by gpvos • 13 years ago

147 100 13 years ago

tech.fortune.cnn.com

willvarfar• 13 years ago

Early on in the video there is mention of Haim Bodek's first speech where the audience was astounded.

Does anyone have a link/vid for this speech? I've googled and youtubed without luck.

hft_throwaway3• 13 years ago

http://showyou.com/v/y-ItfAKguEdAE/haim-bodek-hft-is-an-arti... - this possibly?

Take it with a grain of salt. He claims one can just use these order types and be fast to basically print money, but glosses over the important parts like deciding how to price a market, when to add or remove liquidity, etc. When he says things like "HFTs use resting orders as insurance to exit at zero-risk", ask yourself how they make those decisions without having some kind of predictive abilities.

yummyfajitas5• 13 years ago

Is there a text explanation of this? I'm curious to learn what the allegation is, but I don't have 50 minutes to spend on what is likely a silly conspiracy theory.

The small amount of text present suggests someone is being allowed to jump the queue. Is that the allegation, or does it go beyond that?

hft_throwaway3• 13 years ago

It's an allegation. He's basically referring to Direct Edge's Hide-not-slide order type.

The only equities exchange I know of that lets you jump the queue is NYSE where DMMs and floor brokers can join a level and participate along with the front of the electronic book. DMMs have negative obligations though.

pheon• 13 years ago

didnt RTFM thus missed an important detail.

Put another way, hes so smart but losing money in the market thus the market is "wrong" and someone is cheating.

siegecraft• 13 years ago

I can't speak to the specifics in this video, but if you want a detailed, text-based explanantion of HFT shenanigans, there's tons of technical details at http://www.nanex.net/flashcrash/ongoingresearch.html (algos crashing exchanges, running wild and losing insane amounts of money only to have those losses rolled back [sometimes], algos reacting to news a few seconds before it's officially released, etc).

yummyfajitas5• 13 years ago

I've seen Nanex's pretty graphs, but I've never seen an explanation from them. All they do is highlight graphs with wild oscillations and then declare "ooh, evil!"

icebraining• 13 years ago

running wild and losing insane amounts of money only to have those losses rolled back [sometimes]

That seems the exchange's fault. Why do non-HFTs accept that?

hft_throwaway3• 13 years ago

What Haim's referring to are a set of order types used on many exchanges to allow traders to place orders on a level that can't be displayed for regulatory reasons. There's nothing nefarious about them.

Reg NMS prohibits exchanges from displaying quotes that would lock (bid==ask) or cross (bid>ask) another marketplace.

As an example, say BATS is 10.01 bid 10.02 offered and the 10.02 offer trades out completely. Some HFTs want to be the first to form the new 10.02 bid to earn the spread + liquidity rebate, so they send post-only bids at 10.02. BATS sees stale 10.02 offers on ARCA, so they re-price the trader's order to 10.01 bid, or reject it (behavior depends on the exchange). In response to this, HFT algos would repeatedly re-submit their orders until the exchange let them in. This led to enormous stress on their matching engines during price moves.

In response, exchanges created order types that would let the trader bid 10.02, but only display it once the away markets faded from their point of view. It's basically like having a callback API rather than a polling one. The end result is basically the same, except less load is placed on the exchange's matching engine.

There's nothing "rigged" about this behavior. Traders forming new price levels on public markets still incur substantial risk that the price will move against them when filled. There aren't any order types that let you get execution priority in front of a large queue like he describes.

These order types and their behavior were well-documented on public websites and anyone concerned with the microstructure of how their trades executed could easily use them. The game he's describing is of little concern to anyone other than HFT MMs and execution algos that depend on favorable queue position. The entire process of a level ticking away and a new price being formed in liquid tick-wide names plays out in microseconds these days.

phyalow• 13 years ago

I enjoy reading your comments.

I have read Patterson's book which scratches the surface in "Dark Pools", Haim's book "The problem of HFT" and his regular pieces on Zerohedge. I cannot help but feel that Bodek has an ulterior motive "for exposing the system"... I don't buy his narrative largely because all this so called adverse behaviour is widely described in literature especially in exchange/venue published documentation, support and educational material.

A prime example is on page 93 of his book [5] which is a scalping scenario based on inter-market sweep orders (he attributes to a significant loss of capital at Trading Machines) to this strategy... Come on Haim really? you never considered the adverse affects of placing vanilla limit orders? The books [1], [2] and [4] touch on these exact scenarios.

I don't buy for a second that he couldn't have picked up a phone and called his account manager/support technician at X venue, or his broker to ask why he was getting an abysmally low rate of fills, or seek colour on orderbook oddities. Despite his lofty background it appears he was out of his depth at "trading machines" and now is attempting to sell his ideas to anyone that will listen. I do commend him though on shedding light over the field and on getting me interested in HFT/execution.

For anyone interested in learning more, some books I would recommend:

[1] Dark Pools - Erik Banks (2010).

[2] Empirical Market Microstructure - Joel Hasbrock (2007).

[3] Dark Pools - Scott Patterson (2012).

[4] HFT - Irene Alridge (2010).

Also if anyone is interested here is Haim Bodek's recently self-published book: [5] http://www.amazon.com/Problem-HFT-Collected-Frequency-Struct...

w0utert• 13 years ago

I'm not knowledgeble about HFT by any stretch of imagination, but I watched this epsiode of VPRO Backlight when it aired on dutch TV, and what I got from it (not just from Bodek himself, but also the Nanex guy) that initially, these 'special' order types had been a close-kept 'secret' only known by insiders. Maybe not their existence, but how they could be used to 1-up every other HFT algo that wasn't in on this trick.

The video isn't only interesting because of Haim Bodek's allegations by the way, there's quite a few fairly high-profile people (formerly) active in the HFT world commenting on how markets are effectively broken and unstable because of opaque HFT algorithms, stock exchanges actively promoting HFT to drive up the volume of trades (and hence their profits), and regulators not really doing anything to reduce the risk of flash crashes or penalize parties that completely break the market every once in a while.

yummyfajitas5• 13 years ago

I don't know how Hide-not-slide orders could possibly be described as a "close-kept secret":

http://bit.ly/17l8djU

Admittedly, just like Haim Bodek, DirectEdge uses an annoying voiceover format rather than just writing an easily skimmable document.

theorique2• 13 years ago

These order types are highly regulated by the SEC and FINRA. None of this is a secret - any new order type has to be submitted to the regulators in a public process before it is authorized. Exchanges and trading venues are required by law and regulation to be transparent.

lrm2422• 13 years ago

Exactly. The vast majority of "exotic" order types fall into generally two categories:

1) Orders that help deal with the asynchronous nature of the market. Removing the restriction on locked markets can reduce the need for these orders, but with that restriction in place these orders are a net benefit IMO.

2) Orders that help a participant control how an order is filled. Post only, etc, to ensure one gets a passive fill vs taking liquidity.

There are no secrets here. These orders are all public. Whether you can use them or not is up to how you get to the market.

kumarm• 13 years ago

Golden at 13:00. The dude brings up iPad like device he invented in 1980 (Touch screen none the less). Says he doesn't believe in patenting as it will stop other people from inventing.

csmuk• 13 years ago

Everyone has invented an iPad. This is not news. Even with ARM CPUs and touch screens... http://acorn.chriswhy.co.uk/Computers/NC.html#NewsPAD

minimax• 13 years ago

That dude is Thomas Peterffy who founded Interactive Brokers and is now worth something like $6 billion.

ddeck• 13 years ago

It's a long video (with an agenda), but despite the somewhat conspiratorial tone, there's some really interesting stuff in there.

For example, Thomas Peterffy (founder of Interactive Brokers) talking about how they built a robot typist during the 80's to get around NASDAQ rules that required all orders to be entered via the keyboard (14:25).

From another interview [1]:

"Q: What did that thing sound like when it was running?"

"A: Like a machine gun. Brrrrr. Because it was typing so fast."

[1] http://m.npr.org/story/159992076?url=/blogs/money/2012/08/27...

agravier• 13 years ago

That is sort of awesome. Developments in robotics not to overcome physics, but to overcome arbitrary man-made rules (outside of a robotics competition). I'd like to see more of that as long as it's not military or violent.

grandalf14• 13 years ago

Arguably assembly plant robots exist to overcome arbitrary man-made rules (labor laws)...

edit: not sure why this was downvoted.

f7t7ft7• 13 years ago

I imagine the machine would be like the robots in the band Compressorhead: http://www.youtube.com/watch?v=sc8mQyA2dw0

strongvigilance2• 13 years ago

Like many vocal HFT critics, he was trying to play the same game, and was outcompeted.

svantana• 13 years ago

It disgusts me how much talent is wasted on nonsense like this. Like Haim is alluding to in the documentary, imagine if all these smart people focused on real problems instead. If this isn't a good argument for a transaction tax, I don't know what is. Say all you want about increasing efficiencies etc, but it's pretty clear to me that what the world needs is investors, not day traders.

aet• 13 years ago

Algorithmic and HFT lowers costs for retail traders. Transaction taxes increase costs for retail traders.

ajays• 13 years ago

I hear that often.

If HFT is indeed lowering the cost, how come they are making the money and not the retail traders?

This last quarter I may have bought/sold on the order of 10K shares max. If there's a $0.0001 tax per share traded, it would've cost me $1. That's ambient noise level.

qubitsam• 13 years ago

raganwald shared a similar sentiment a while back [1] and was discussed here on HN [2].

[1] http://neighborhoodhacker.com/why-the-fuck-raganwalds-poster...

[2] https://news.ycombinator.com/item?id=5088815

theorique2• 13 years ago

And who's going to give those investors their shares and exits when they want to trade?

The question that needs to be answered is where trading stocks crosses over between moral to neutral to immoral.

If we assume:

nanoseconds = worse than Hitler

decades = saintly Warren Buffett

then there must be some timescale at which trading becomes good or evil.

The challenge is that the faster traders operate as counterparties for the slower ones (and for each other). They absorb risk, provide liquidity, and establish definitive prices.

One way to enforce a speed limit would be to have a crossing auction every second (similar to what they do prior to the open, or when a stock is halted, or for an IPO). If you wanted to be an active trader, you would participate in many such crossing auctions during the day.

grandalf14• 13 years ago

Who should decide what is a "real problem" and what is "nonsense"? Simply being indignant about it does little to further the discussion.

AkimChristine4• 13 years ago

Human beings with a brain, in discussion with other humans, creating the kind of world they want to live in. Just like everything else in the world is decided.

It makes no sense at all to pretend that humans are too stupid to understand what is and is not good for our planet. The whole point of having language and intelligence is that it should be used, not just discarded with some discredited hand wave that "if we just do nothing, everything will work out for the best!"

stygiansonic• 13 years ago

It's really a balance - you say the world needs "investors" and not "day traders". By this, I am assuming you mean those who purchase shares using a buy-and-hold strategy as opposed to those who seek to profit off of short term swings.

It's difficult to have one without the other. Day traders and speculators supply the liquidity that enables long-term investors to buy in when they choose to do so. This does improve the efficiency of the markets, as there has to be another side to every trade.

To take it to the extreme: If everyone was a buy-and-hold investor, what would happen? IPOs and infrequent sells from buy-and-holds existing would be the only supply of stock. Would this be efficient? (Note: I'm not asking this as rhetorical question as I actually don't know the answer)

I am not arguing for or against HFT, as I've read both sides (from "they provide liquidity and lower spreads" to "they are akin to parasitic front-runners") and am not sure of where the truth lies. Instead, I'm just arguing against this concept that "day trading" provides no value.

diydsp• 13 years ago

investors, not day traders.

Yes, did you see the angst when that one trader got stuck with a stock "overnight" ? He acted like having a stock overnight was the stupidest possible thing. Imagine holding a stock for 12 months! Goodness!

dragontamer• 13 years ago

Day traders help stabilize the prices and ensure liquidity. Sure, they screw over other day-traders to get that position, but long-term investors overall benefit from this sort of squabbling.

These HFT guys are complaining about fractions of a penny. Meanwhile, illiquid markets such as the Bond Market have real issues going on, where bid/ask spreads are completely opaque, and pricing on the same bonds are vastly different from broker to broker. (with differences measured in hundreds of dollars... not fractions of a penny)

newsmaster• 13 years ago

Is it possible for a non-finance orientated coder to get into the industry? Or does one need to be a math genius as well as a coder?

lrm2422• 13 years ago

There are plenty of regular old software engineers in the industry. You don't have to be a math genius or a finance oriented guy. Doesn't mean you'll be trading or working directly with quants, but the amount of code required to make this work end to end is quite large and requires a lot of good software engineers.

ollieglass• 13 years ago

Related, what's the fin-tech equivalent of Hacker News? Is there one?

guiomie• 13 years ago

zerohedge maybe ? It is not really tech, but a blog on economy and finance, and it does talk about HFT often.

makerops• 13 years ago

http://www.automatedtrader.net/ not sure if it is 1 to 1, but it's pretty decent.

chollida1• 13 years ago

http://www.wilmott.com/

Welcome to the site.

anonymoushn• 13 years ago

You can just apply to an HFT firm. I work at one, and the email address in my profile will reach me.

radikalus2• 13 years ago

Definitely. A bunch of HFTs even post on Who's Hiring here on HN.

It's a rather diverse industry in terms of the type of developers being sought. People with skills ranged from low level hardware design all the way up to Haskell/Scala are pretty constantly in demand.

augustuz• 13 years ago

See this: http://tabbforum.com/opinions/the-secret-world-of-algos-a-hi...

rlwolfcastle• 13 years ago

Bodek ... is famous among traders for having broken the Street's omertà and complained to the Securities Exchange Commission in 2011 -- after his own HFT firm, Trading Machines, crashed and burned

More disgruntled trader than whistleblower?

6thSigma• 13 years ago

If Haim Bodek couldn’t beat the system, what chance do ordinary Apple investors have?

Trading != investing

jaynos• 13 years ago

Ordinary Apple investor beating the system? Not sure what that would entail, but I do know that if you invested in Apple in 10 years ago, your investment would be worth a lot more today.

tedunangst4• 13 years ago

If you bought AAPL at $10.45 ten years ago, you'd have made $511 today. That's with one trade.

But in 10 years of 252 trading days of 6.5 trading hours, there are 58968000 seconds. If you'd traded AAPL a million times every second, you'd have made $30132648000000000. That's a lot more money. See how unfair it is?

snarfy• 13 years ago

Can someone explain to me how HFT is different than front running? I fail to see the difference.

ffrryuu• 13 years ago

The age of heroes.

Quant turned whistle blower explains how the market is rigged [video]

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