Posted on 05/18/2010 12:53:47 PM PDT by CutePuppy
Above the Restoration Hardware in this Jersey Shore town, not far from the Navesink River, lurks a Wall Street giant.
Here, inside the humdrum offices of a tiny trading firm called Tradeworx, workers in their 20s and 30s in jeans and T-shirts quietly tend high-speed computers that typically buy and sell 80 million shares a day.
But on the afternoon of May 6, as the stock market began to plunge in the “flash crash,” someone here walked up to one of those computers and typed the command HF STOP: sell everything, and shutdown.
Across the country, several of Tradeworx’s counterparts did the same. In a blink, some of the most powerful players in the stock market today — high-frequency traders — went dark. The result sent chills through the financial world.
After the brief 1,000-point plunge in the stock market that day, the growing role of high-frequency traders in the nation’s financial markets is drawing new scrutiny.
Over the last decade, these high-tech operators have become sort of a shadow Wall Street — from New Jersey to Kansas City, from Texas to Chicago. Depending on whose estimates you believe, high-frequency traders account for 40 to 70 percent of all trading on every stock market in the country. Some of the biggest players trade more than a billion shares a day.
.....
If high-frequency traders crave volatility, why did Tradeworx and others turn off their computers on May 6?
Mr. Narang said Tradeworx could not tell whether something was wrong with the data feeds from the exchanges. More important, Mr. Narang worried that if some trades were canceled — as, indeed, many were — Tradeworx might be left holding stocks it did not want.
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(Excerpt) Read more at cnbc.com ...
“The benefits of the liquidity that we bring to the markets aren’t theoretical,” said Cameron Smith, the general counsel for high-frequency trading firm Quantlab Financial in Houston. “If you can buy a security with the knowledge that you can resell it later, that creates a lot of confidence in the market.”
The high-frequency club consisting of 100 to 200 firms are scattered far from the canyons of Wall Street. Most use their founders’ money to trade. A handful are run from spare bedrooms, while others, like GetCo in Chicago, have hundreds of employees.
Most of these firms typically hold onto stocks for a few seconds, minutes or hours and usually end the day with little or no position in the market. Their profits come in slivers of a penny, but they can reap those incremental rewards over and over, all day long.
Well, at least the market is based on sound fundamentals, and serves as a conduit for good businesses to receive capital. Or maybe it isn’t.
lol....
Most of these firms typically hold onto stocks for a few seconds, minutes or hours and usually end the day with little or no position in the market.
Ahhhh, so I am a high frequency trader except I don’t trade stocks, I trade index futures.
I kind of like that name better than daytrader......and I sleep very well at night.
NYSE trading floor empties out as trading moves to electronic exchanges - LAT, 2010 May 15, by Nathaniel Popper
There was shouting and jostling. A few traders found themselves picking up the clunky black phones that had been relegated years before to serving as historical set pieces. The cause of all the excitement was the mysterious "flash crash" that sent the Dow Jones industrial average plunging 700 points in a matter of minutes, prompting the Big Board to stop its computers from automatically executing trades and forcing human traders to step into the breach. "People were running around like it was old days," Alan Valdes, the dapper director of floor activities for Kabrick Trading, said wistfully this week as fellow traders, with the panic behind them, stood nearby, reading the newspaper and gossiping. The irony of last week's frantic activity is that the frightening dive only highlighted the NYSE's loss of stock market dominance — a loss that has helped turn the Big Board's venerable trading floor, once the nerve center of American capitalism, into something often more akin to a TV news studio. Debates continue about what triggered the sell-off, but regulators suspect, in part, new trading venues that match sellers and buyers at warp speed, and without the human intervention that the Big Board values. The NYSE and Nasdaq — its longtime, all-electronic rival — are increasingly threatened by these upstart exchanges. Last year, the Big Board was responsible for only a third of all trades in the U.S., down from more than three-quarters four years ago. Nasdaq saw a similar decline in market share. At the same time, a growing portion of the transactions handled by the Big Board are processed entirely by electronic means. As a result, the NYSE trading floor has been emptying out. About 1,500 people work on the floor today, down from 3,000 a decade ago. The brokers on the floor are left entering trades into their electronic handsets and monitoring the progress while they occasionally wander around the trading floor. As traders have moved out, the media have moved in. More than 20 news organizations, including CNN, Bloomberg and even the BBC, use the floor as a backdrop to talk about a stock market that has no real location. Fox Business News operates from a vacant broker's booth. The last two additions to the floor: AOL's online news operation and local cable channel NY1, which took up residence in April in a post originally set up for a Big Board "market maker," or someone who matches buyers and sellers. ..... On the other hand, some experts say the NYSE's intentional slowdown during the crash may have exacerbated the collapse and restrained the rebound. ..... The Big Board hasn't been standing still. In a defensive move, it acquired the all-electronic Arca exchange in 2006. And on the NYSE itself, an all-electronic trade now takes only 3 milliseconds — three-thousandths of a second — to complete a trade on Arca. That's down from 300 milliseconds three years ago, but still not enough to keep up with the even newer exchanges that cater to so-called high-frequency traders. The NYSE also is setting up high-speed data centers in New Jersey and near London to accommodate the high-frequency practitioners, who want to be as close as possible to the trade-executing computer. Such electronic efforts could pay off for the Big Board — and many on the floor still believe that there will always be a place for some live humans. But Brenner, the trader turned finance professor, said he couldn't imagine the live floor lasting much longer. "It's almost like fighting the Industrial Revolution," he said. "This is progress. You cannot stop it." ..... For 15 minutes last week, the New York Stock Exchange was bustling like it was 1999.
It was a final test, and Fargis was relieved. The 30-year-old never went to business school or even took a finance class. But he knew poker. He had made a living playing the game online for six years from his Manhattan apartment, betting on up to eight hands at a time. Within a few days, Fargis — with no Wall Street experience — was offered a position trading stock options, a job that entails making multimillion-dollar gambles. His poker skills sealed the deal. "If someone's been successful at poker then there's a good chance they could be successful in this business," said Toro partner Danon Robinson. "If you have no interest, that's almost a red flag.... It's almost the equivalent of not reading the Wall Street Journal." There's a part of Wall Street — investment banking in particular — that looks for recruits with sterling family connections and impeccable educations, and that favors sturdy young men and women who played college team sports such as lacrosse and rugby. Toro Trading is not that Wall Street. Instead, it's one of the new breed of high-speed trading desks that are revolutionizing the financial markets, and making their money on the fractional gains from buying or selling a split-second ahead of their rivals. They look for job candidates who are quick-thinking, have nerves of steel and a head for numbers — the very skills that lead to success in online poker. "There's a certain maturity and ability to deal with risk that is hard to get any other way — unless you put the money on the table at some point in your life," said Aaron Brown, a hedge fund executive and author of the 2006 book "The Poker Face of Wall Street." Susquehanna International Group, a 1,500-employee trading firm based in a Philadelphia suburb, has made the card game a central part of its training program. New hires are given copies of "The Theory of Poker" and "Hold 'Em Poker" and spend one full day a week studying the game by playing it. "We are trying to teach people how to be good decision-makers under uncertainty," said Pat McCauley, who runs the training program. "It's not the stereotypical stuff with bluffing — it's real science." ..... Chris Fargis thought his big job interview was over. But when the partners at Wall Street upstart Toro Trading finished with their questions, they broke out a deck of cards and a green-felt card table. Mind playing a few hands of poker?
Have computer, will trade...
If you can see the order pipeline, you too, can be a High Frequency trader.
;)
If you are not talking about frontrunning, how is this different from other auctions, let's say eBay?
With the spreads now down to the penny, if that's the highest price a "smaller investor" is willing to buy, why is it bad if that's the price that his order fills? Doesn't he have a choice to walk away from the trade as well?
More of those HFT rascals....Germany just banned Euro shorting——>>>
Market chaos warning after German ban on shorting
Traders are predicting chaos on the world’s second-largest government bond market after the German authorities on Tuesday announced a ban on all naked short-selling in European public debt, as well as shares in the country’s 10 largest financial institutions.
using that analogy, it would kind of be like using a computer program to hack ebay in order to find a sellers reserve price and then using that info to your own advantage. It's not a perfect analogy though. Regardless, your highest price on a particular stock is supposed to be a secret. Furthermore, HFTs were not created to allow one group of investors to place others at a disadvantage:
these programs were put in place and are allowed under the claim that they "improve liquidity." Hogwash. They have turned the market into a rigged game where institutional orders (that's you, Mr. and Mrs. Joe Public, when you buy or sell mutual funds!) are routinely screwed for the benefit of a few major international banks. http://seekingalpha.com/article/151173-hft-the-high-frequency-trading-scam
not when it's all automated via computers. The order executes automatically when the parameters are met.
Almost all the successful WWII American, and quite a few Japanese commanders, played poker.
That's exactly how it's done on eBay, only the price spread is much wider, to make more profit for eBay itself (commissions).
on ebay, the reserve price is a closely guarded secret. If I have gamed the system and found that a seller’s reserve price is $1,000 and I know the deal will be sealed the moment that price is reached, I’m not going to bid $1,100. In this way, I have used my priveleged information to screw the seller out of $100. It’s not a perfect analogy but it’s pretty close.
If something is worth doing (and banning naked short-selling is a no-brainer) it's worth doing for entire market, not just a few select stocks.
"We learn from history that we learn nothing from history"
"Those who do not learn from history are condemned to repeat it"
You need a better algorithm...
Harry Truman and Poker in the White House - Bluffing at the Highest Levels - A new book on the history of poker finds a card shark in the White House - WSJ (free), 2009 November 7, by James McManus
Waiting to sail home after the Armistice was signed in November, Truman and his comrades passed that autumn in the mud near Verdun, much of the time in poker games that went on for decades after they were demobilized. The collection of army gear preserved at the Truman Library includes three dog-eared poker decks. ..... Throughout his 88 years, Truman used poker as both a personal and political means of expression. His motto, "The buck stops here," refers to the dealer's button or placeholder, because during the 19th century hunting knives with buckhorn handles often served that function. ..... Churchill had downed five scotches before the action began, and now he pretended that he hadn't the foggiest idea how to play. That night Churchill lost steadily—so much, in fact, that when the great Brit left the table for a moment, Truman told his companions to let up a bit. "But, Boss, this guy's a pigeon," said General Vaughan. "If you want us to play our best poker for the nation's honor, we'll have this guy's pants before the evening is over." ..... The Cold War was just weeks away. The ability to read who was bluffing and who wasn't would be more important than ever. ..... In France seven years later, Lieutenant Truman played about as much poker as Carl Grothaus, Bill Gill, Herb Yardley, Dwight D. Eisenhower and a million other doughboys did while in Europe. Truman received further artillery training in Montigny-sur-Aube, mastering the specs and capabilities of a new French 75mm cannon called the "Devil Gun" by the Germans, though he also had time to play stud and tour the Burgundian countryside.
From Deal Someone In - WSJ, 2009 July 13, by Brett Arends:
Barack Obama, notes Holden, is the first poker-playing president since Nixon. He may be the keenest card player in the White House since Truman.
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