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weaker

Hft: Stock Exchange Bats Allows Scalping

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"BATS Admits CEO Lied About HFT On CNBC" - Zero Hedge

So, the BATS CEO had been forced to admit that Direct Edge exchange has been using the slow consolidated feed (SIP) to price trades in the matching engine. That has allowed the HFT boys to scalp you, your pension funds, basically everybody is affected. It isn't just BATS. The HFT guys do NOT add liquidity; they take it. When they see a slow exchange, they can essentially operate on the slow exchange as if they know the future.

Entities like pension funds are the 'dumb money' when it comes to HFT. They put in an order and they DONT get the best price. In fact what happens is the HFT guys pick off bits of the order, and arbitrage it somewhere else where they can get a better price using a faster feed. They KNOW they will make money on every bite they take out of the pension fund order, and the only limit to profits is how fast they can grab a piece of that order and sell it somewhere else.

One of the images from the ZH article below beautifully illustrates what I'm talking about:

20130603.SPY_.1.gif

Imagine you are a pension fund and you are getting prices from the consolidated feed.

Say you are trying to buy some SPY at the beginning (left hand side) of this chart. The HFT boys know where the price is going (down!!) because they can see the "direct feed" - and thus, they will sell to the pension fund rapidly, and buy from the "direct feed" participants. This process continues at breakneck speed; as many as 100 trades per second will 'scalp' the pension fund order selling to them at a stale, high, price and buying at the lower "direct feed" price.

Here is a great article:

http://www.zerohedge.com/news/2014-04-03/bats-admits-ceo-lied-about-hft-cnbc

As well as other interesting things I have done in my career, I developed an HFT algo, arbitraging a certain yellow metal market nearly a decade ago. I stopped the algo, believe it or not, because of the insane profits and immorality of what I was doing. At first, it was just a computing exercise. After it took someone's bid for $4,000/Kg over spot (i think it was a fat-finger and they meant to make an offer at $4000 over spot) during the financial crisis and instantly filled my offer for spot somewhere else, I realised how evil this game was. I expected a telephone call from the exchange to nullify my trades, but the call never came.

Edited by weaker

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It doesn't surprise me.

All you need to do is the design a program that looks for buyers and sellers - and take a cut from both*. Your risk is very small because you're not betting on direction. This kind of program can run 24-7 whilst you, play golf, travel the world, or whatever takes your fancy.

I believe the Oligarch.com did something like this on the foreign exchange markets..

*Estate Agents do a similar thing, they just don't get a cut from the buyer!

Edited by 200p

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It doesn't surprise me.

All you need to do is the design a program that looks for buyers and sellers - and take a cut from both*. Your risk is very small because you're not betting on direction. This kind of program can run 24-7 whilst you, play golf, travel the world, or whatever takes your fancy.

I believe the Oligarch.com did something like this on the foreign exchange markets..

That's exactly what my algo did. It never lost. Ever. When I see that JPM had 1267 profitable trading days out of 1267, I know why.

I would literally come back from my day out and look to see how much profit the HFT machine I built had made.

Edited by weaker

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How is it fundamentally different do you think from market makers in the past controlling the book?

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Amazing how latency introduced in a few km fibre spool at various points in a network will defeat billions invested in software by the HFT skimmers.

Katsuyama and Ryan have hopefully started a trend.

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That's exactly what my algo did. It never lost. Ever. When I see that JPM had 1267 profitable trading days out of 1267, I know why.

I would literally come back from my day out and look to see how much profit the HFT machine I built had made.

How were you getting direct feeds that were faster than the rest of the market? The HFTs are having to pay hefty feeds to be close to the exchanges for this kind of speed?

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How is it fundamentally different do you think from market makers in the past controlling the book?

I take your point, but for a start, the exchanges themselves are owned in large part by the firms which use HFT. Massive conflict of interest.

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How were you getting direct feeds that were faster than the rest of the market? The HFTs are having to pay hefty feeds to be close to the exchanges for this kind of speed?

I paid a few exchanges. Not very much either, at the time. I recouped my outlay in one week.

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I take your point, but for a start, the exchanges themselves are owned in large part by the firms which use HFT. Massive conflict of interest.

Ys that's not good. Am wondering why the Pension funds don't set up together and do the same thing, or operate their own exchange.

It's perhaps the case that despite the profits to be made by these HFT scalps it's not material to longer-term buy/hold pension funds in terms of their total assets.

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So what is stopping pension funds using the consolidated feed, or are they 'in' on it?

By the way. Here is the CNBC segment. It was very entertaining.

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

Sadly CNBC have chopped down the video considerably since I first watched it.

Edited by aSecureTenant

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So what is stopping pension funds using the consolidated feed, or are they 'in' on it?

By the way. Here is the CNBC segment. It was very entertaining.

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

Sadly CNBC have chopped down the video considerably since I first watched it.

Pension funds are the whipping boys for the financial world.

They get screwed over every way that it's possible to be screwed over but their fund managers get well paid so they don't care if a bunch of schmuck clients get a cruddy pension decades down the line, long after they've retired early themselves or moved on to another nice well paid position somewhere else.

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How is it fundamentally different do you think from market makers in the past controlling the book?

Market makers competed against each other for business.They would squeeze margins to drive volume.

HFT intercepts you on the way to the market makers if you will,taking a bit off you and a bit off the market maker.A bit like getting mugged for your shrapnel on the way to a U2 gig.

Ys that's not good. Am wondering why the Pension funds don't set up together and do the same thing, or operate their own exchange.

It's perhaps the case that despite the profits to be made by these HFT scalps it's not material to longer-term buy/hold pension funds in terms of their total assets.

Who sits on the boards of the banks and who sits on the boards of the pension funds?

It's not really material to the long term pension funds as they charge their fees whatever they invest in at whatever price.

Edited by Sancho Panza

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Ys that's not good. Am wondering why the Pension funds don't set up together and do the same thing, or operate their own exchange.

It's perhaps the case that despite the profits to be made by these HFT scalps it's not material to longer-term buy/hold pension funds in terms of their total assets.

From what I can see its scalping, and I'd have thought pension funds were into the longer term.

One suspects its the retail day trader getting schmucked.

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