Rigged Wall St.Trading and the Guys Who Figured It Out

[Oldgamer]

Apparently the way the Wallstreet computers/servers and programs work is they can anticipate well before anyone else when the public might want to buy a product. Then the programs buy up all of that "said" product before anyone else then turn around and sell it to the public for an increased price. It kind of reminds me of ticket scalpers honestly. But I still think this sort of thing should not be legal.

 

[Oldgamer]

After all, the secret to a good con is knowing when it's over before the rube knows it's over, right? No one really knows what goes on inside these "dark pools", and if a bank goes with a fair exchange once one is available, what more can one ask of it? I do wonder though if some people couldn't be prosecuted for executing in-house orders it was directed to send to IEX.

Great article, Perknose. I had read a little about people using very high speed automated trading to buy up stock and offer it at a higher price knowing someone wants to buy, but I had no idea that it was in fact so systemic and basically dishonest.

Exactly.. but there are huge big banks that pay off politicians who dismantle all the banking regulations that proceed to fleece the public and pull the wool over everyone's eyes and do this little "shell game" where people think they know where and what is going on. In the meantime these big banks illegally foreclose on hundreds of thousands of people's homes, and make up false documents to do so, and we all get to pay higher prices on products and commodities because the banks have a monopoly on everything.

 

[Ns1]

well this is interesting

Federal agents are investigating whether high-frequency trading firms break U.S. laws by acting on nonpublic information to gain an edge over competitors.

The Federal Bureau of Investigation's inquiry stems from a multiyear crackdown on insider trading, which has led to at least 79 convictions of hedge-fund traders and others.

Agents are examining, for example, whether traders abuse information to act ahead of orders by institutional investors, according to an FBI spokesman. Even trades based on computer algorithms could amount to wire fraud, securities fraud or insider trading.

The FBI joins a roster of authorities examining high-frequency trading, in which firms typically use super-fast computers to post and cancel orders at rates measured in thousandths or even millionths of a second to capture price discrepancies. New York Attorney General Eric Schneiderman opened a broad investigation into whether U.S. stock exchanges and alternative venues give such traders improper advantages.

Regulators have focused for years on whether high-speed trading hurts market stability. More recent law enforcement investigations are shifting the focus to unfair practices and possible criminal activity.

Critics including some investors and regulators have said such trading, which captured the spotlight in the May 2010 flash crash that shook U.S. equities, serves little purpose, may distort the market and may leave individual shareholders at a disadvantage.

Schneiderman is examining the sale of products and services that offer faster access to data and richer information on trades than what's typically available to the public. Wall Street banks and rapid-fire trading firms pay thousands of dollars a month for these services from firms including Nasdaq OMX Group Inc. and IntercontinentalExchange Group Inc.'s New York Stock Exchange.

Robert Madden, a spokesman for Nasdaq, and Eric Ryan at the NYSE, declined to comment on the FBI's inquiry. Jim Margolin, a spokesman for Manhattan U.S. Attorney Preet Bharara, declined to comment when asked if the office was looking at high-frequency trading.

The FBI began focusing on high-frequency traders last year, before Schneiderman disclosed his inquiry this month. Market regulators have asked for years whether new restrictions on rapid-fire trading were needed.

Daniel Hawke, the head of the Securities and Exchange Commission's market-abuse unit, said in 2012 that the agency was examining practices such as co-location and rebates that exchanges pay to spur transactions. Last year, the Commodity Futures Trading Commission announced a review of speed trading and sought industry input.
Federal prosecutors have scored dozens of insider trading convictions in recent years, including several linked to SAC Capital Advisors, the hedge-fund firm run by Steven A. Cohen that is changing its name to Point72.

SAC agreed in November to pay a record $1.8 billion and plead guilty to securities fraud to settle allegations of insider trading. As part of the settlement, Cohen agreed to close SAC's investment advisory business.


http://www.latimes.com/business/la-fi-fbi-high-speed-probe-20140401,0,868118.story#ixzz2xepeO3xx

 

[Darwin333]

Nice, I didn't know CBS put these mini 60-minutes segments online.

I heard about this going on a few years ago, but nothing was ever done. Perhaps something will be now that the media has latched on to something worth latching on to.

This has been well known for quite a while now. We are talking about the elite of the elite siphoning off billions upon billions of dollars in a way that most people don't understand nor do they care even though it likely impacts them. These same elite assholes donate (read:bribe) fucktons of money to politicians. Even worse is that the story barely breaks the surface, they are doing much more and much worse.

To top it off, they ARE breaking the law or at the very least the spirit of it. It is illegal to put an order that you have no intention of executing. Yet these machines put thousands upon thousands of orders a day and withdraw them a millisecond later, before there is any possibility of them to be executed. This is done to discover how much you are willing to pay so instead of getting the best price, as is the way the market is supposed to work, they figure out what you are willing to pay and pocket the difference.

Think of it like you are negotiating the price of a widget. The seller is willing to sell it for $90 and the maximum you are willing to pay is $110. Unfortunately the seller can read your mind without you knowing and knows that you are willing to pay $110 so instead of getting the widget for $90 you pay an extra $20 simply because he has an unfair advantage that you aren't even aware of.

 

[Attic]

http://www.cnbc.com/id/101544772

Worth watching if this topic interests you.

 

[Darwin333]

I don't see HFT as cheating, they are just using existing conditions of these markets to their advantage. Since many people do find it unfair, or unsavory at the very least, a market has popped up that purports to be able to remove some of the unfairness that HFT was taking advantage of. I don't see how that is cheating.

Now there are a lot of other aspects of Wall St. that are completely unfair to the rest of America and the world for the most part, but this isn't one of them.

Then you need to do some more research in HFT. Being able to determine your maximum price by issuing orders and then removing them before your buy can execute on it and then doing the same thing at a slightly higher price until they find your maximum purchase price is cheating anyway you look at it.

Being able to see what you want to buy and purchase it in front of you because they have a faster connection and then sell it to you at a higher price is cheating.

Issuing orders, and we are talking about tens of thousands a day or so, that they have no intention on executing is against the rules. Unless of course you can think of a reason to put in an order and remove it within 2 thousandths of a second (or less) is actually a good faith order?

 

[iGas]

The short version.

Canadian says ‘moral compass’ led him to solve unfair gaming of stock markets by high-frequency traders

Since 2007, the realm where stock trades are made no longer resembles the iconic image of a packed trading floor full of screaming alpha males. Thanks to new technologies, shares change virtual hands via lightning-fast electrical impulses over fiber optic wires stored in bulky servers.

With high-frequency trading, algorithms are used to read market activity and buy and sell securities in fractions of seconds. Some say this brave new financial world may have resulted in benefits for the market, such as greater liquidity and lower costs.

Critics argue it has created an uneven playing field in which the fastest machines and least-regulated players can disrupt trading in order to squeeze profits from tiny differences in prices across markets.

On Monday, the Federal Bureau of Investigation said it was probing whether high-frequency trading firms violate U.S. laws by acting on non-public information to gain an edge over competitors.

 

[blankslate]

Slap a 0.03% trading tax on transactions and use that to give the SEC and CFTC some real teeth to find shady deals and corruption on Wall Street.


Considering that a lot of trades are made with computer programs pushing much more stock than is humanly possible it would really add up.

http://www.usnews.com/opinion/blogs...-would-be-good-for-the-economy-and-the-budget

How small? Really, really small. A bill co-introduced by Sen. Tom Harkin, D-Iowa, and Rep. Peter DeFazio, D-Ore., calls for a tax of 0.03 percent – that's 30 cents per $1,000. Yet even at that exceedingly modest level, a Wall Street speculation tax (also known as a financial transaction tax or FTT) would generate more than $350 billion over the coming decade, according to a non-partisan analysis of similar legislation introduced in 2012.

Won't happen though....




.....

 

[BoberFett]

Slap a 0.03% trading tax on transactions and use that to give the SEC and CFTC some real teeth to find shady deals and corruption on Wall Street.


Considering that a lot of trades are made with computer programs pushing much more stock than is humanly possible it would really add up.

http://www.usnews.com/opinion/blogs...-would-be-good-for-the-economy-and-the-budget

Won't happen though....




.....

I've thought about that option, but that simply moves the money being sucked out of the economy out of the hands of high frequency traders and into the hands of a federal bureaucracy. I'm not sure that's a big improvement.

 

[thraashman]

I've thought about that option, but that simply moves the money being sucked out of the economy out of the hands of high frequency traders and into the hands of a federal bureaucracy. I'm not sure that's a big improvement.

Or it just forces them to stop their market manipulation tactics to avoid the tax.

 

[theeedude]

I am a big proponent of more Wall Street regulation, but I am still trying to convince myself this is a wrong and not just a feature of the market. And I still haven't been able to do so conclusively, as long as there are multiple players competing.
For example, if I put an order for a stock, and a bunch of high frequency traders race to buy it and resell it to me, wouldn't competition drive their profit margin down until it's immaterial to me?
Now, you could argue these companies are paying the exchange for faster internet access and passing those costs on to me. But if they didn't pay the exchange, would the exchange accept lower profits or just jack up fees to make me pay them the same money? You could also argue that these companies are subsidizing the research into faster internet connections by being early adopters with money bags.
I think if you set a limit price and get the stock for that price or less, you get what you wanted. It's up to you to set the limit price to limit how much the high frequency traders can profit by reselling stock to you.

 

[BoberFett]

Or it just forces them to stop their market manipulation tactics to avoid the tax.

That doesn't even make sense.

A completed trade is still a completed trade. Part of the manipulation is trades that are never completed.

And do you really believe that a bureaucracy will just dry up and go away? Ever? If the budget can't be met at 0.03%, they'll increase the rate.

 

[Fern]

Slap a 0.03% trading tax on transactions and use that to give the SEC and CFTC some real teeth to find shady deals and corruption on Wall Street.


Considering that a lot of trades are made with computer programs pushing much more stock than is humanly possible it would really add up.

http://www.usnews.com/opinion/blogs...-would-be-good-for-the-economy-and-the-budget

Won't happen though....
.....

Sigh...

For some, more taxes are always the answer.

Fern

 

[BoberFett]

I am a big proponent of more Wall Street regulation, but I am still trying to convince myself this is a wrong and not just a feature of the market. And I still haven't been able to do so conclusively, as long as there are multiple players competing.
For example, if I put an order for a stock, and a bunch of high frequency traders race to buy it and resell it to me, wouldn't competition drive their profit margin down until it's immaterial to me?
Now, you could argue these companies are paying the exchange for faster internet access and passing those costs on to me. But if they didn't pay the exchange, would the exchange accept lower profits or just jack up fees to make me pay them the same money? You could also argue that these companies are subsidizing the research into faster internet connections by being early adopters with money bags.
I think if you set a limit price and get the stock for that price or less, you get what you wanted. It's up to you to set the limit price to limit how much the high frequency traders can profit by reselling stock to you.

I've had this discussion before, and some argue that these HFTs add liquidity to the market. I'm still not sure I buy that. The buyers and sellers that will exist, already exist. By probing the max buy and min sell points within milliseconds, these "traders" can pocket the spread. Even if it's a tiny amount per share, we've seen that it adds up to billions of dollars. That's a middleman injecting himself into a trade without the buyer and seller ever knowing, and that middleman takes a cut of what would have happened anyway, albeit potentially slightly slower.

Of course I believe the entire stock market to be a scam, not limited to HFT, but that's just me...

 

[HamburgerBoy]

Ronan Ryan didn’t look like a Wall Street trader. He had pale skin and narrow, stooped shoulders and the uneasy caution of a man who has survived one potato famine and is expecting another. He also lacked the Wall Street trader’s ability to seem more important and knowledgeable than he actually was. Yet from the time he first glimpsed a Wall Street trading floor, in his early 20s, Ryan badly wanted to work there. “It’s hard not to get enamored of being one of these Wall Street guys who people are scared of and make all this money,” he says.

Born and raised in Dublin...

Sounds pretty racist to me.

 

[werepossum]

I am a big proponent of more Wall Street regulation, but I am still trying to convince myself this is a wrong and not just a feature of the market. And I still haven't been able to do so conclusively, as long as there are multiple players competing.
For example, if I put an order for a stock, and a bunch of high frequency traders race to buy it and resell it to me, wouldn't competition drive their profit margin down until it's immaterial to me?
Now, you could argue these companies are paying the exchange for faster internet access and passing those costs on to me. But if they didn't pay the exchange, would the exchange accept lower profits or just jack up fees to make me pay them the same money? You could also argue that these companies are subsidizing the research into faster internet connections by being early adopters with money bags.
I think if you set a limit price and get the stock for that price or less, you get what you wanted. It's up to you to set the limit price to limit how much the high frequency traders can profit by reselling stock to you.

If that was all that was happening, I'd agree. Instead we have traders (and worse, brokers) who see what you want before the people who own the stock can see your offer and then buy it and sell it at a slightly higher price. No way that is fair trading as you get no opportunity to buy it at the lower price. Even worse are the dark pools, where brokers who are nominally selling you a service actually buy the stock you want and sell it at a profit before you can see the offers. You are making an offer contingent on a fair market exchange when in fact these people know what you are going to buy before your offer technically hits the exchange, allowing them to profit without risk. That is not a good faith free market, it's a gamed market, and the success of the IEX shows that sophisticated investors know it.

Sigh...

For some, more taxes are always the answer.

Fern

LOL Quite true.

Sounds pretty racist to me.

+1

 

[Fern]

I wonder what's going on over at the commodities market?

I read they're on the same FIX protocol/system as the stock markets.

Fern

 

[blankslate]

Sigh... For some, more taxes are always the answer. Fern

Oh I'm sorry I guess that allowing Wall Street CEOs to fix certain deals on Wall Street is a much better solution...


More taxes aren't always an answer it's certainly better the fix that's in now.

Yes too much taxation can be stifling but a fraction of a percent tax on computerized trading? Too much?
Sorry there's not too much (if anything at all wrong) with less than a one percent tax automated trades or high frequency trading. Nothing at all. People who do that aren't exactly investing in the company so much as leverage large volumes of stock or commodities make money on transactions.

Every once in a while it backfires spectacularly.
http://www.businessweek.com/articles/2012-08-02/knight-shows-how-to-lose-440-million-in-30-minutes

If it makes you feel better it could be specified that any funds taken in by a transaction tax over than what the SEC and CFTC needs to enforce regulations can be used to fund more weapons programs for the military.


.....

 

[Fern]

Oh I'm sorry I guess that allowing Wall Street CEOs to fix certain deals on Wall Street is a much better solution...


More taxes aren't always an answer it's certainly better the fix that's in now.

Yes too much taxation is stifling but a fraction of a percent tax on computerized trading? Sorry there's not too much if anything wrong with that.

If it makes you feel better it could be specified that anything over than what the SEC and CFTC needs to enforce regulations can be used to fund more weapons programs for the military.


.....

A problem should be fixed, not taxed.

Fern

 

[blankslate]

A problem should be fixed, not taxed.

Ok just outlaw High Frequency trading.


No taxes needed on them then.

I know this goes against the very nature of every fiber in your being but sometimes sometimes the problem fix does involve a fraction of a percent of taxes.

.....

 

[Fern]

Ok just outlaw High Frequency trading.


No taxes needed on them then.

I know this goes against the very nature of every fiber in your being but sometimes sometimes the problem fix does involve a fraction of a percent of taxes.

.....

What's the cause of the problem?

Fern

 

[blankslate]

As far as I know too many High Frequency trades being made. Stocks and commodities being traded for speculation or to make more money from the transactions instead of the actual value of what is being traded.

Buggy software can turn that into a huge loss, seeing as how much of it is automated.

Either eliminate them or slow them down. either of those options are going to require some sort of regulation. But oh yeah regulation is bad. So oh well nevermind.



....

 

[Fern]

As far as I know too many High Frequency trades being made. Stocks and commodities being traded for speculation or to make more money from the transactions instead of the actual value of what is being traded.

Buggy software can turn that into a huge loss, seeing as how much of it is automated.

Either eliminate them or slow them down. either of those options are going to require some sort of regulation. But oh yeah regulation is bad. So oh well nevermind.

I think the problem lies with the FIX system/protocol.

Latency allow for the system to be gamed. This problem didn't exist when we had floor traders.

I'm not a tech guy, and when I play one it has only to do with hardware, but I suspect the FIX system can be fixed by those who are.

I prefer a fix to outlawing HFT. The vulnerability will still exist and somebody will break the law. There's too much money at stake.

I think the entire FIX system should be reviewed. When a new system is implemented efforts are made to identify vulnerabilities. Too often they're not all caught. Now that (at least) one has been identified the system should be (re)checked for any others.

Fern

 

[werepossum]

As far as I know too many High Frequency trades being made. Stocks and commodities being traded for speculation or to make more money from the transactions instead of the actual value of what is being traded.

Buggy software can turn that into a huge loss, seeing as how much of it is automated.

Either eliminate them or slow them down. either of those options are going to require some sort of regulation. But oh yeah regulation is bad. So oh well nevermind.



....

Somebody did not read the article before stating that more taxation would fix the problem.

 

[LegendKiller]

There's a big difference between HFT and what they are trying to hit at, which is scalping, front running and order stuffing.

Do HFTs add liquidity? No, they don't, since it is not meaningful liquidity.


Do they rig the market through the aforementioned means? Absolutely.

Do they create a financial tax of their own, solely for the benefit of the .01%? Absolutely.

Do they create algorithms that do nothing but screw the individual investors? Absolutely.

Should HFT be outlawed? No. However, violators should be fined massively, as in multiples of their earnings. That will stop the practice pretty quickly.

For as much as ZH gets wrong, this is one they have pegged perfectly. All you have to do is read some of the Nanex analysis to know that there is a lot more to HFT than liquidity.