New York Attorney General Endorses Radical Change To The Way The World Trades Stock

[AsGoodAsItGets]

Schneiderman Endorses Batch Auctions - Business Insider



This morning, New York Attorney General Eric Schneiderman declared war on high-frequency traders, or HFTs, and what he called the "fundamentally unfair – and potentially illegal – situations that give elite groups of traders early access to market-moving information at the expense of the rest of the market."

Of course stopping this activity would require major changes — not just on the part of traders but also on the part of newswires that give HFTs an early leg up on information, and exchanges like the NASDAQ and the New York Stock Exchange.
To his credit, Schneiderman went to war armed with at least one strong suggestion — one that could drive exchanges completely up a wall.

"Stock exchanges as well as the Securities and Exchange Commission and other regulators should review the feasibility of the recommendations recently put forward by economists at the University of Chicago School of Business – an institution renowned for its commitment to free markets," Schneiderman said Tuesday.

The recommendations he refers to are actually a radical new way to match stock buyers with sellers called "frequent batch auctions." Professors Eric Budish, Peter Cramton, and John Shim laid it out in a paper titled "The High-Frequency Trading Arms Race: Frequent Batch Auctions as a Market Design Response" [PDF] in Decemeber.

Instead of trading stocks constantly throughout the day, with this method exchanges would sell them in auctions at intervals, such as once per second or once every tenth of a second.

Traders would not be able to see the prices at each auction; rather, the exchanges would collect the orders at the time of auction and execute them where bids match offers, thus consistently finding the right price without manipulation, according to the professors.

The hope is that this would reduce the arms race going on at high-frequency trading firms and the constant need to come up with faster and faster ways to trade, all of which complicate systems and gum up communication between exchanges and can, many say, cause flash crashes.

"I don't know if it would work," said Themis Trading's Sal Arnuk, an advocate of slowing down the speed of trading on stock exchanges. "It would certainly find resistance, as the majority of volume (not the same as liquidity) depends on arbitrage of the plumbing [communication between exchanges], and is such a substantial part of the exchanges’ revenues."

In other words, exchanges may not want to implement a change that would reduce the number of orders (filled or not filled) that go through their pipelines, because they make money on the orders they get.

Arnuk added: "I think that many tools are in place that, if regulated properly, allow all players to coexist peacefully. HFT plumbing arbitrage would arbitrage itself into extinction without payment for order flow like maker taker and retail order buying."
That's one issue. Another is what market-research firm Nanex CEO Eric Hunsader calls "the show-stopper," the fact that exchanges would have to invest in rewriting their systems to deal with a new batch auction regime.

That rewriting comes with additional problems beyond just cost. Lev Lesokhin, of software risk analysis firm CAST, told Business Insider that putting the brakes on the "unconstrained" race for speed is long overdue but that rewriting exchange systems to deal with auctions could make software more complex.

"If I have to build my systems to work with that kind of regiment, it makes my systems that much more complicated," said Lesokhin. "Now I have to think about — 'What does that mean in terms of trading?' ... If I'm trading, I'm going to want to know when is that [auction] second is happening because there's value to me to wait until that very last sliver of time before the trading happens."

In other words, traders could still want to wait until that last brief period before the auction happens to place their order. That in itself could lead to a whole new arms race.

"I think there's going to be ways to get around that speed limit," Lesokhin said. "And it's going to make systems more complex. This is problem with regulation. Once you think about how it's really going to get deployed, it's not as clear as regulators would like."

Remember, there's always the law of unintended consequences.

[sabang]

We used to call this 'Front running', and it was illegal and unethical. It should be made so again. Another simple answer is to put a small duty or tax on every trade- say 0.1%. That would vrtually eliminate front running/ HFT overnight, put much needed revenue in government coffers, and have virtually no effect on long term or value investors, who are actually investing in a company- not immorally making money based on insider foreknowledge of others buy and sell orders .

[Butterfly]

front running is one thing, HFT is a different issue and the AG is completely wrong about this issue, misplaced rant about HFT.

[Butterfly]

Another simple answer is to put a small duty or tax on every trade- say 0.1%

where have you been ? this is the topic of discussion within the EU for FTT, highly controversial because it will have a huge negative impact

and have virtually no effect on long term or value investors,

here is where you are wrong again, the FTT will kill liquidity, we have seen impact already in Italy and France in traded volume when some the FTT was introduced 2 years ago. Without volume, price will not reflect reality and you will find yourself with holding shares that nobody wants to buy because there will be no market for it. Same for the bond markets and the sovereign debt. Without an active Fixed Income market, no exit plan to resale your bonds or even issue new ones. These are quick examples, and the list goes on and on.

HFT is wrong but it will self destruct eventually (it does already in some markets), and the FTT is going to send the wrong signals to an industry that is still in recovery and being buried with new regulations.

[sabang]

front running is one thing, HFT is a different issue

No, it is the same thing- it is based on some peoples foreknowledge of the rest's buy and sell orders, and is executed before their ('the rest') trades. That's robbery, plain and simple. It means the rest pay more when they buy, and receive less when they sell.

[harrybarracuda]

The market is as bent as a nine bob note and everyone knows it, I doubt this would have any effect as they'd find some way to keep stiffing people and trousering as much cash as they can.

[Butterfly]

front running is one thing, HFT is a different issue

No, it is the same thing- it is based on some peoples foreknowledge of the rest's buy and sell orders, and is executed before their ('the rest') trades. That's robbery, plain and simple. It means the rest pay more when they buy, and receive less when they sell.

are you real ??? showing your complete misunderstanding how markets work, or maybe you forgot after all those years in Issaan rice fields.

[sabang]

showing your complete misunderstanding how markets work,

Yes BF, of course. How would I know, I mean I was only a licensed stockbroker in Oz, the USA & HK, also a registered options principal, and qualified in futures in the USA too. Lets not even bother with the academic/ qualification/ management stuff.

You can't put lipstick on a pig- HFT is front running, plain and simple. Using inside information (legally though, these days), it acts so that buyer pays slightly more, and seller receives slightly less- so that invisible middlemen can cream off some profit for themselves, effectively risk free and with no money down. It is a grand example of the decline in standards and ethics of the investment banking/ finance biz. And therein lies a large part of the reason for the disastrous GFC of 2008 onwards- a decline in morals and standards.

[leemo]

We used to call this 'Front running', and it was illegal and unethical. It should be made so again. Another simple answer is to put a small duty or tax on every trade- say 0.1%. That would vrtually eliminate front running/ HFT overnight, put much needed revenue in government coffers, and have virtually no effect on long term or value investors, who are actually investing in a company- not immorally making money based on insider foreknowledge of others buy and sell orders .

Fully agree with the principles, and zero sympathy for the marketeers that start off on the inside track and still need every other advantage to complete their level playing field. But 0.1% would likely turn the process into a government protection racket.

They could make it illegal with stiff penalties, on a par with insider trading which it is in a diluted form, but this would invariably result in the big money finding or creating loopholes to drive through and effectively sidestep regulation.

Taxing everyone because of the actions of a few never works, and would likely create more problems that it resolves.

Off the top of my head and I haven't thought through the implications, might be worth considering a tax or fee based on the time difference (seconds/minutes) advantage that a subscribing trader gets per wire over the rest of the trading community in their obsession for poll position. At least this gives them a choice.

[leemo]

front running is one thing, HFT is a different issue

No, it is the same thing- it is based on some peoples foreknowledge of the rest's buy and sell orders, and is executed before their ('the rest') trades. That's robbery, plain and simple. It means the rest pay more when they buy, and receive less when they sell.

Not just robbery but institutionalised, and with the full knowledge and therefore consent of our masters.

[The Ghost Of The Moog]

Read 'The Trade' online for free -
The Trade and Trade Asia, for all your specialised trading and execution breaking news/comments - in Asia and worldwide.

Attorney General: HFT crackdown “too late”

Attorney General HFT crackdown

[harrybarracuda]

showing your complete misunderstanding how markets work,

Yes BF, of course. How would I know, I mean I was only a licensed stockbroker in Oz, the USA & HK, also a registered options principal, and qualified in futures in the USA too. Lets not even bother with the academic/ qualification/ management stuff.

ButtTard fecks up again!

[Butterfly]

Yes BF, of course. How would I know, I mean I was only a licensed stockbroker in Oz, the USA & HK, also a registered options principal, and qualified in futures in the USA too. Lets not even bother with the academic/ qualification/ management stuff

you haven't been in the business for 10 years, how the fuck would you know what the markets are these days. There have been dramatic changes over the last 10 years, you have no fucking idea, again. And being a licensed stockbroker is about "sales", not market structure on STP and Automatic Trading, so stop branding your licenses as some kind of authoritative qualification on that topic, because it's not. My current US stockbroker for my personal investment has been licensed for the last 30 years and still has no clue on all those topics and don't intend to learn about those as it's above his understanding.

It's not a "Sales" topics, it's a market structure question and it goes above "marketing people" paygrade.

It is a grand example of the decline in standards and ethics of the investment banking/ finance biz.

oh boy, completely clueless as usual. The decline in standards has been before HFT came to be. Licensed brokers incidentally being part of the equation for that declining standard. Dramatic changes since 2009, ethics is everywhere and there is no money to be made, and the "sales" people blame HFT and everyone else for it instead of blaming themselves for creating such a situation. Bunch of hypocrite.

[Butterfly]

showing your complete misunderstanding how markets work,

Yes BF, of course. How would I know, I mean I was only a licensed stockbroker in Oz, the USA & HK, also a registered options principal, and qualified in futures in the USA too. Lets not even bother with the academic/ qualification/ management stuff.

ButtTard fecks up again!

shutup harry, above your paygrade, go back to your XBOX in your mom basement

[Butterfly]

Not just robbery but institutionalised, and with the full knowledge and therefore consent of our masters.

typical ignorance non-sense, you and sab could make great grand mothers

Off the top of my head and I haven't thought through the implications, might be worth considering a tax or fee based on the time difference (seconds/minutes) advantage that a subscribing trader gets per wire over the rest of the trading community in their obsession for poll position. At least this gives them a choice.

Regulators have already addressing that issue by proposing to force some time delays on IOI and consecutive submit/cancel orders.

Attorney General HFT crackdown

maybe Sab needs to read that one too,

[Butterfly]

HFT is front running, plain and simple.

IOI is not front running, the information is shared and available to anyone looking for it.

Front running is trading on "knowledge" of pending trades without disclosing it to regulators or your clients.

Internal crossing of trades where firms are acting as both principal and agent could be considered "front running", but it has nothing to do with HFT, since slow trades are also affected.

[Gilbert]

I was thinking the other day the following;

"I wonder if the prices listed at stock markets, FOREX etc are really as a result of true market forces (demand / supply dictating the price) or if instead, the numbers are just punched in to the display to ensure that on every trade, a certain group of people win".

[Butterfly]

The SEC is now running the MIDAS project, a HFT trading tool to detect distortion in prices and volume, so HFT is all about public information, nothing else. It's not front running and insider trading as some would like to call it. Different issues.

Front running on Wall Street does exist and strangely, it's mostly in slow trades by "licensed" traders with access to all "clients" books within their firm.