Norway Wealth Fund Outsmarts Flash Boys as Algorithms Abandoned

http://www.bloomberg.com/news/2014-11-16/norway-wealth-fund-outsmarts-flash-boys-as-algorithms-abandoned.html

by dataminer • 12 years ago

45 44 12 years ago

phaefele• 12 years ago

Content free - there is really no information in this article outside of the fact they say Norway's Sovereign fund use "Block Trades" which is really what dark-pools are supposed to be all about. Dark pools and block networks have been around for at least the last 5 years, and introduce their own set of issues (not getting your orders filled, showing Goldman Sachs your order on their promise that they won't don't anything with that information :-)

tptacek5• 12 years ago

A block trade is simply a large coherent set of orders; it's the purchase or sale of a big number of tradable instruments, which usually requires a lot of little orders to execute.

This is pure pedantry on my part, but I wouldn't want the thread to leave the impression that "block trades" are some technological feature of electronic markets. They're a fundamental problem of trading.

yummyfajitas• 12 years ago

Well, they do point out why you don't want to be a little player on IEX:

“Trying to find liquidity without having an impact when you’re doing it is an over-arching challenge we will always have,”

Huge players don't want to have a price impact before they trade - they want the price impact to happen after. I.e., it'll happen to the little guy rather than to them.

tptacek5• 12 years ago

Galactically enormous state-sponsored buy-side firm thwarts tiny sell-side firms. Implications for broader market contemplated.

jellicle• 12 years ago

"But flash trading isn't about front-running" -- standard HN apologist

tedunangst2• 12 years ago

"I have no idea what front running actually is" -- standard HN complainer

TrainedMonkey• 12 years ago

When a large buy order comes in price rises. Front running would be buying before that large order can execute, and selling immediately after it completed and moved market price up.

encoderer4• 12 years ago

Everybody always cries "front running!" I believe front running is an overblown issue. I also believe that most defenses of HFT as "liquidity providers" overlooks a large share of prop firms and hedge funds using HFT for speculation and are not in fact liquidity providers.

But the firms that do play liquidity -- the firms that compete with one another for your order after it comes thru your broker -- aren't hurting anybody by front running. In fact, they value your order flow so much (for their own info) that they price-improve for you so they capture more/all of the order. IIRC over 60% of stock trades are price-improved.

tptacek5• 12 years ago

As I understand it: provision of liquidity is not a function of intent. Liquidity is a property of the market, not of a trading strategy. Some strategies (happen to) add (sell) liquidity, and some remove (buy) it.

The term "front-running" is terribly misused in these discussions (I can't tell from your short comment if you were, though). You "front-run" someone if they reveal their trading intent to you, and front-running usually involves an agency problem (ie, your broker and their responsibility to you as a client).

hnnewguy2• 12 years ago

front-running usually involves an agency problem

Historically, in the HFT world, it also involved getting ahead of big orders in the order book by taking advantage of how orders are systematically queued or prioritized.

encoderer4• 12 years ago

The point about "front running" being misused correlates with my point that every time HFT gets discussed, ppl cry "front running" and blame HFT for various ills.

About liquidity providing... brokers don't generally route orders directly to an exchange. In most cases your order will get routed to a 3rd party liquidity provider, a firm who agrees to buy at the bid and sell at the ask and do so quickly. Often, these guys will pay the broker for order flow or price-improve your order to capture all of it, or both. Competition between these firms goes a long way towards guaranteeing the NBBO price that your broker is obligated to provide.

Connecting the dots leads you to a conclusion that the order flow is valuable enough to them (for purposes of their own prop trading, strategic option selling, etc) that they act as market makers.

snowwrestler• 12 years ago

Speculation is providing liquidity. I don't understand how you could do one without the other.

encoderer4• 12 years ago

Speculation is providing liquidity.

Right, but the inverse isn't true. Not all liquidity is speculative. And third party market makers are surely making money from providing liquidity but not by taking the other side of a trade.

wdewind4• 12 years ago

I don't want to seem pedantic, but it's explicitly not front running, despite this articles misuse of the term. Front running is when you trade in front of your clients' trades based on the information they provide you, not your competitors'.

jeffreyrogers• 12 years ago

Managing that much money must be an enormous challenge since there are so few places where you can put a substantial amount of it.

PhantomGremlin2• 12 years ago

They could be putting substantially more into real estate. They're at 5% allocation, which seems low to me. I suspect that in the USA, most people are at either 0% (renters) or 50%+ (homeowners).

fleitz• 12 years ago

“We’re trading less using algorithmic trading now than we did some years ago and are doing much more trading in large block sizes to avoid pattern-reading.”

Interesting... given that large blocks are what HFTs feed on.

How exactly is a party suppose to drastically increase supply / demand for a stock without impacting price?

_delirium• 12 years ago

It's hard to tell much in detail about their reasons from the article. I read it as just a change in tactics in how they move large blocks of stock. They seem to feel that, currently, moving a large amount of money using their previous algorithmic strategies has become too easy for other traders to read (perhaps also algorithmically), and then interfere with in ways that are detrimental to their trades. And they believe that negotiating large outright block trades is a better strategy in the current market, given their current goals. Maybe true, maybe not; it seems like a very fact-specific decision, hard for someone without the data to evaluate just from general principles of markets.

jrehor2• 12 years ago

I don't understand this article at all. The pension fund uses block trades. Who takes the other side of those trades and how are they compensated?

I suspect that an equity desk takes the block, parcels it out into lots of small pieces, and works the market to get it off their books. Of course, they charge for that service, both in commissions and spread. So effectively, instead of paying HFT firms for providing liquidity, they're paying an investment bank equity desk. Does this really save money? If it does, why all the hoopla about HFT if you can avoid them by going through an equity desk?

Don't tell me that they just put their block on IEX and the tooth fairy fills it without price impact. That would be some serious magic.

wdewind4• 12 years ago

I agree with you, and I think the author, like most people who are writing against the "flash boys," fundamentally misunderstands what's going on.

I think the "black and white" rule that the large firms who feel they are being hurt by HFT want is the ability to execute a full trade before it impacts the market (since otherwise it's impossible to describe the exact moment they feel their trade is a signal to be traded off of). I think that's highly unreasonable, but if you do believe that I think IEX is probably relatively successful at it. It's totally possible that a block could be fully sold off on IEX before the 350ms latency allows that information to escape to the outside world and be traded against, no? Market impact is ultimately about the same, just delayed enough to allow the seller to escape.

I would happily be correct on any of this, since I don't work in finance.

lrm2429• 12 years ago

IEX only delays the order entry side of the system. Market data (they are dark atm so no quotes/book feed of course) and trade reporting is not delayed. The magic shoe box is there to stop a very specific situation from occuring: IEX pricing pegged orders against stale market data.

jrehor2• 12 years ago

It is possible that a block would be sold within 350ms, but how likely is it? That's a function of block size. If you have 100 shares, you'll get it done 100% of the time. 1,000 shares? Somewhat less than 100%. 100,000 shares? Rarely.

These guys are ginormous. $100m block is about a 0.01% position for them. You can't just put a limit order on IEX (or any other exchange for that matter) when you're dealing with this magnitude. You need a team of specialists working full time disguising the order and parceling it out to multiple venues, and it will usually take days to get it done.

The other way of moving a block this size is by finding a natural counterparty and negotiating a deal directly with them. The trade will then get booked through a broker-dealer for reporting and settlement purposes. Those kinds of negotiations take days, too, and you can't avoid showing your hand. Plus, it's not a very scalable solution.

lrm2429• 12 years ago

It's 350us btw. Micros.... not millis.

lrm2429• 12 years ago

Sell side traders or block crossing networks (where the other side is taken by another block trader).

Sell siders are compensated because they will build into the price the expected impact. The pension fund gets a known price impact with essentially 0 variance and the sell sider takes on the risk of execution to offset the trade, and essentially earn a spread between what the pension fund paid them for the risk transfer and their 'skill' in getting the trade done in the market.

It obviously can and will be more complicated than that with varying benchmarks and compensation schemes, but that is the jist of it.

jim_greco• 12 years ago

Very odd indeed. This is a complete regression to how the market was traded 20 years ago when every bank used to have a NASDAQ market making desk that would make a principal market in any security you wanted. Those desks all got wiped out when spreads collapsed because HFT firms could do it for a fraction of the cost.

lrm2429• 12 years ago

They had a big hand in wiping themselves out when they got caught colluding.

lrm2429• 12 years ago

Look, all this guy is saying is that he is paying someone else to take on the risk of executing his large orders. Block crossing networks and sell-side traders have existed for a long time. Hell, that's what Brad (IEX CEO and Flash Boys protagonist) did prior to starting IEX. This guy is saying: rather than use an order execution algo to get my trade done, I'm just doing a cross upstairs with some sell-side guy, paying them a known amount, and letting them deal w/ how to handle it on their side.

They aren't outsmarting anyone. They're simply transferring execution risk, and they pay handsomely for it, trust me.

wdewind4• 12 years ago

So why do they care so much? Are they literally paying more because the idea of HFT burns their cookies?

lrm2429• 12 years ago

Because they suck at technology. Its easier and more justifiable to pay someone else to take on the risk and pension fund gets less variance in their execution costs.

lrm2429• 12 years ago

Since Flash Boys keeps coming up in these threads I want to provide an alternate reference for those curious. A recent rebuttal has been published called "Flash Boys Not So Fast". If you're interested in the topic, I highly suggest you pick it up. http://www.amazon.com/Flash-Boys-Insiders-Perspective-High-F...

chollida12• 12 years ago

I posted that book awhile ago.

https://news.ycombinator.com/item?id=8577237

It didn't really get any attention.

Norway Wealth Fund Outsmarts Flash Boys as Algorithms Abandoned

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