tag:blogger.com,1999:blog-14963913.post8695595489696624047..comments2023-10-27T20:27:57.900-04:00Comments on Kid Dynamite's World: You Really Shouldn't Care So Much About Flash TradingKid Dynamitehttp://www.blogger.com/profile/17475987512856310577noreply@blogger.comBlogger13125tag:blogger.com,1999:blog-14963913.post-73994215801433668062009-09-28T16:03:55.495-04:002009-09-28T16:03:55.495-04:00Good point re market orders. I haven't used a...Good point re market orders. I haven't used a market order in years.Danielhttps://www.blogger.com/profile/15018793399599951413noreply@blogger.comtag:blogger.com,1999:blog-14963913.post-71188696154090464632009-09-27T17:44:23.943-04:002009-09-27T17:44:23.943-04:00Richard - points taken. One thing I have trouble e...Richard - points taken. One thing I have trouble explaining to people is that there wasn't really ever any incentive for me to act illegally when i was trading - it's the textbook example of killing the golden goose. <br /><br />I make the same argument for why it didn't make sense for us to just get long a billion dollars on day one and hope the market went up and we'd get rich: it wasn't worth it, even though it's not "my money" at risk. The price of being wrong was losing that golden ticket. In other words - you don't have to cheat and steal to make money on wall street. You don't have to bet the house's money in such a way that will bring down your bank if you're wrong. It just doesn't work like that - even though there are always bad applesKid Dynamitehttps://www.blogger.com/profile/17475987512856310577noreply@blogger.comtag:blogger.com,1999:blog-14963913.post-75852864472049191722009-09-27T17:15:29.922-04:002009-09-27T17:15:29.922-04:00Kid,
Btw, it can be remarkably difficult to find ...Kid,<br /><br />Btw, it can be remarkably difficult to find out if a broker is using flash orders. One part of my company, not involved in high frequency, uses brokers in the US (top 3 in US market share). When the orders became news, they tried to find out if the brokers were using them. The sales contacts didn't know. Their first line trading support didn't know. After a couple of days, their trading developers (rather grudgingly) admitted that, yes, they were using them on our orders. When asked why, they responded that we'd never instructed them not to. This was on trading lines set up several years earlier, before flash orders existed. And they'd not seen fit to update us when they started using the orders. We're now using a broker whom we're hoping gives better disclosure.Richardnoreply@blogger.comtag:blogger.com,1999:blog-14963913.post-37091100896922262182009-09-27T17:06:30.754-04:002009-09-27T17:06:30.754-04:00Kid,
Unfortunately, my guess based on what I know...Kid,<br /><br />Unfortunately, my guess based on what I know about traders and also on the recent financial market crisis is that you're being a bit optimistic if you think collective self-interest will overcome individual self-interest in finance. Think tragedy of the commons. Then again, Akerlof's rather elegant proof of the impossibility of the used car market ran up against the existence of enough stupid/complacent/otherwise non-profit maximizing sellers.<br /><br />At any rate, I work in high frequency trading. I focus on non-US markets, so flash orders are not an issue for me personally. But I can tell you that the argument that taking advantage of these orders would eventually result in their elimination would only spur us on to take advantage of them sooner; get while the getting is good. Our rationale would be that, if it was legal, someone else would take this advantage if we didn't. Also, we're quite used to the concept that a trade will eventually decay and become overbroked, and we'll have to move on to a new trade.<br /><br />I happen to agree with you that finance is governed by caveat emptor. And I also believe that is the way it should be. So I'm against banning flash orders. However, I am very much in favor of educating users about the pros and cons, and asking them to make an explicit decision. And I do believe the cons are likely to outweigh the pros for many, if not most, investors. But I'm happy for them to make up their own minds, as long as they're aware of the issues.Richardnoreply@blogger.comtag:blogger.com,1999:blog-14963913.post-78031563400185652732009-09-27T17:03:14.396-04:002009-09-27T17:03:14.396-04:00i guess my point, richard, is that there are lots ...i guess my point, richard, is that there are lots of things in the market that can hurt people if they are not used properly (leveraged ETF's, MARKET ORDERS!), but that doesn't mean we should ban them.<br /><br />i think the number of investors who are hurt (on price gaps) by using market orders probably DWARFS the number of investors who are hurt by using flash trading - yet no one is suggesting we ban market orders.Kid Dynamitehttps://www.blogger.com/profile/17475987512856310577noreply@blogger.comtag:blogger.com,1999:blog-14963913.post-49101049656954021552009-09-27T16:31:33.541-04:002009-09-27T16:31:33.541-04:00Richard - i see you point - the bottom line is tha...Richard - i see you point - the bottom line is that everyone also has a responsibility for their own orders right? that was one of the first points: IF flash orders are being taken advantage of them, THEN don't send flash orders. it's not rocket science. and "i'm not sending them, my broker is sending them on my behalf" is no excuse - find a broker who isn't sending them! <br /><br />it's just like if you want to buy a billion shares of IBM, your broker doesn't go out and show a bid for a billion shares - if he does, everyone in the market owns him and trades in front of him. If your broker does that, you find a new broker. <br /><br />one reason that the flash receivers might not use the info unethically/illegally (And yes - i absolutely think it should be illegal to take the information from a flash order and trade ahead of the order) would be that that would end the flash orders, and the flash receivers find the flash orders beneficial.<br /><br />it's an unarguable fact that there are certain people - mostly smaller professional day traders, who want the ability to send flash orders because it saves them money. they should be allowed to.Kid Dynamitehttps://www.blogger.com/profile/17475987512856310577noreply@blogger.comtag:blogger.com,1999:blog-14963913.post-26329254542665089442009-09-27T15:44:32.743-04:002009-09-27T15:44:32.743-04:00Kid,
I have a particular bugbear with agents who ...Kid,<br /><br />I have a particular bugbear with agents who do not act in the best interests of the principals. Sadly, after nearly two decades in the finance business, I'm pretty convinced that's most of them.<br /><br />I'd love to know what fraction of DirectEdge's flash orders are sent by principals and what fraction by agents. If it's all by principals, then I have nothing more to say. If it's mostly by agents....<br /><br />The thing is, I can't see any reason why a party with the technical capabilities - who are getting rather numerous - wouldn't take advantage of the information granted by the flash orders. And this WILL cause worse execution for the beneficial users. Whether or not the worse execution outweights the fee savings is unclear.<br /><br />What if the SEC mandates that all beneficial users of direct orders sign a statement acknowledging that the scenario I described is both possible and legal, and that they still wish to use them? Sort of a health disclaimer, like "Smoking while pregnant can cause birth defects in babies".Richardnoreply@blogger.comtag:blogger.com,1999:blog-14963913.post-11479130326958130422009-09-25T09:33:45.885-04:002009-09-25T09:33:45.885-04:00yes Richard - the scenario you laid out is possibl...yes Richard - the scenario you laid out is possible. I actually don't know if it's blatantly illegal - probably not, but if it is happening, then it's exactly why people want to blan flash orders, and justifiably so. It's definitely not the intended use of flash orders.<br /><br />However, the moral of the story is - 1) if this is happening to you, find a new broker! 2) if you are getting taken advantage of on your flash orders, do NOT FLASH THEM!Kid Dynamitehttps://www.blogger.com/profile/17475987512856310577noreply@blogger.comtag:blogger.com,1999:blog-14963913.post-16412581136538038442009-09-25T09:22:03.963-04:002009-09-25T09:22:03.963-04:00Kid, I put this comment on Clusterstock but I'...Kid, I put this comment on Clusterstock but I'm also putting it here in case you're not checking that post anymore. <br /><br />I agree that flash order are inoffensive if they are used by principals, but I disagree if they are used by agents. If a prop trader is willing to accept having his order broadcast in exchange for reduced routing fees, fine. But what happens when a broker working an agency order uses flash orders? The broker gets reduced routing fees, allowing him either to offer lower explicit comms to his client and win more business or else pocket the difference. It's the client who pays for any potential "front-running" in poorer execution. I use "front-running" in quotes because my understanding is that it is not illegal for a third party who sees flash orders to trade on that information.<br /><br />In the example from your post, if GE is 16.50-51 on NBBO but 52 offered on Direct Edge, a broker working a buy order can flash a buy at 51. A third party's machine monitoring these orders on Direct Edge has 30ms (ok, a little less) to go out into the market and buy at 51, knowing that there's will shortly be another bidder at 51. Do you concur that this can happen legally, or do you assert that this would be illegal?<br /><br />Over time, a broker who uses flash orders for customer orders will show worst execution. However, most customers focus on the explicit commission costs, some look at the cost relative to market (unfortunately, the "front-running" cost won't show up here since market/VWAP also moves) and only a few really look at the total costs including market impact.Richardnoreply@blogger.comtag:blogger.com,1999:blog-14963913.post-75101633965544363062009-09-24T18:37:28.873-04:002009-09-24T18:37:28.873-04:00that is absolutely correct, Anon... yet their offe...that is absolutely correct, Anon... yet their offer still was not traded through. I completely understand your point - but that's a drawback with market fragmentation.Kid Dynamitehttps://www.blogger.com/profile/17475987512856310577noreply@blogger.comtag:blogger.com,1999:blog-14963913.post-40750155975105802772009-09-24T14:58:21.435-04:002009-09-24T14:58:21.435-04:00the problem i see with your reasoning is this: NMS...the problem i see with your reasoning is this: NMS was intended to level the field amongst market venues. The rules attempt to ensure that the best bid and best offer on ANY venue (be it Arca or Nasdaq or DirectEdge) is protected from being 'traded through.' In your GE example, the best offer on ISLD does not get filled because of the flash order. If the GE seller wants to sell at 16.51 let him offer 'out loud' at .51 and he will get filled. Using a flash quote in this case dis-advantages the ISLD offer at .51 which should have been filled. The whole concept behind NMS is to 'level the playing field,' flash orders create an advantage for the members of a specific market center.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-14963913.post-69862239690674911752009-09-22T23:25:35.235-04:002009-09-22T23:25:35.235-04:00Kid,
I appreciate your level-headed view on this ...Kid,<br /><br />I appreciate your level-headed view on this and related topics. I've exchanged some posts with you on zero hedge, but haven't posted there in a while as the mindless cheerleading has become overwhelming. Its comments like the ones you have been getting on Clusterstock and ZH today that deter me from even bothering to try and inject some logic into what I'll generally call the electronic trading debate (flash, hft, dark pools, algorithmic trading, etc...). Its like trying to argue abortion with the pope.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-14963913.post-44855508852820078522009-09-21T08:24:44.929-04:002009-09-21T08:24:44.929-04:00Thank goodness there is at least one blogger who i...Thank goodness there is at least one blogger who is willing to try to make the effort to understand what "flash trading" is... having read a lot of otherwise intelligent bloggers' commentary, I have had to scratch my head and wonder if they've completely forgotten what frontrunning means.<br /><br />You get bonus points for understanding that there are various exchanges and considering actual scenarios for how order routing might work in the real world (other than "OMG we send our orders to NYSE, where Goldman flashes our orders and makes a quarter of a penny, the bastards!")Anonymousnoreply@blogger.com