Fast Traders' New Edge

Discussion in 'Wall St. News' started by gwb-trading, Jun 4, 2010.

  1. Fast Traders' New Edge

    by Scott Patterson
    Friday, June 4, 2010
    Wall Street Journal

    Investment Firms Grab Stock Data First, and Use It Seconds Before Others

    Some fast-moving computer-driven investment firms are getting an edge by trading on market data before it gets to other investors, according to market players and researchers who have studied the trading.

    The firms gain that advantage by buying data from stock exchanges and feeding it into supercomputers that calculate stock prices a fraction of a second before most other investors see the numbers. That lets these traders shave pennies per share from trades, which when multiplied by thousands of trades can earn the firms big profits.

    Critics all the practice the modern day equivalent of looking at share prices listed in tomorrow's newspaper stock tables today.

    "It is a rigged game," Sal Arnuk, co-founder of brokerage firm Themis Trading, said Wednesday at a Securities and Exchange Commission roundtable discussion in Washington, D.C., referring to the trading activity, which some call "latency arbitrage."

    While legal, the practice pushes the envelope of what is fair, critics say, and raises questions about the advantages some fast-moving traders are gaining in the market.

    The SEC roundtable convened executives from trading centers and firms across Wall Street as the agency continues to probe high-frequency trading and the growth of dark pools, trading venues where trades take place away from the main exchanges.

    High-frequency trading has come under greater scrutiny since the May 6 "flash crash," when some high-frequency firms along with a number of other active traders withdrew from the market, arguably exacerbating the stocks' swift downdraft that day.

    High-speed trading, now estimated to account for about two-thirds of U.S. stock market volume, takes many forms, some entirely proper. Defenders say it reduces trading costs for all investors by adding volume to the market. Latency arbitrage is a type of trading that relies on ultrahigh speeds; it's not clear which firms engage in it or how pervasive it is.

    Some firms pay tens of thousands of dollars a year to individual exchanges for premium access to their price feeds, industry players and exchanges say.

    The SEC, in a broad review of market structure earlier this year, said information from trading-center data feeds "can reach end-users faster than the consolidated data feeds."

    The latency arbitrage trade aims to game the so-called national best bid and offer price on a stock, which sets the price most investors use to trade.

    The ability to estimate price moves ahead of the national best bid and offer price, which is consolidated electronically from exchanges, can give traders an advantage of about 100 to 200 milliseconds over investors who use standard market tools, according to a November 2009 report on such trading activities by Jefferies & Co.

    An advanced look at exchange data and order flow can provide firms "the ability to forecast future prices" and "make adjustments to their orders in the market or send new orders which are based on this information," the report found.

    Some investors are searching for ways to protect themselves. Rich Gates, co-founder of TFS Capital LLC, started becoming concerned about latency arbitrage in early 2009 after a Wall Street bank pitched the trade to his firm.

    In hundreds of tests, TFS has found that some of its trades were getting picked off by firms exploiting the time-delay wrinkle. That was costing the firm money.

    To learn more, TFS, which manages about $1.1 billion in mutual funds and hedge funds, devised a method to essentially bait firms into engaging in the trade. In effect, TFS proved that some traders were wise to a movement in a stock's price before it happened.

    On a March afternoon, a TFS trader sent an order to a broker to buy shares of Nordson Corp., a maker of fluid dispensing equipment. The trader sent an instant message to the broker: "please route to broker pool #2," a request to send the order to a specific dark pool.

    The trader told the broker not to pay a price higher than the midpoint between what buyers and sellers were offering, which at the time was $70.49.

    Several seconds after the dark pool order was
  2. promagma


    This article was written by someone who doesn't know jack about HFT for people who don't know jack about HFT. There are some real issues, and people think they understand it, but 99% don't know jack.
  3. they know they are being ripped off and frontrun, apparently they know more than you know.
  4. schizo


    This is not a fucking edge, it's a scam!

    Above all, shame on those exchanges that cater only to the big institutions.
  5. "Tomorrow's Newspaper Today" is an old concept.

    Google Trader666 for a thorough misunderstanding.
  6. "....supercomputers that calculate stock prices a fraction of a second before most other investors see the numbers. That lets these traders shave pennies per share from trades...."

    Pennies per share, BS. Taken from investors, BS.

    Seeing the price milliseconds before someone else is not seeing the future.

    What is an investor going to do with data that is 50 ms earlier when the bid-ask is one cent anyway?
  7. There you go lying again Jack, just like you lie about being able to routinely take 3X daily range out of the market.

    "Tomorrow's Newspaper Today" is actually YOUR misunderstanding of the price, volume relationship.

    I tested buying YOUR "0 to 7 turn" per page 8 of YOUR paper (attached) on the P,V relation on 1000 stocks from 2000 to 2005 -- a total of 5000 stock-years -- using spydertrader's code for the scoring and exiting 5 days later and got the equity curve below.

  8. Here's how some of Jack Hershey's disciples have done:

    Jack Hershey from Tucson AZ
    Pied pipered to noobs on ET
    But in spite of his claims
    They all went down in flames
    As penniless market debris

    nwbprop -- flamed out under Jack's direct tutelage and hasn't posted since Jan 2007. Unfortunately, that thread was deleted but there are some who remember it.

    Neoxx -- Jack said Neoxx was doubling his money every three days when he was actually losing money. Hasn't posted since July 2009.

    ScottD -- hasn't posted since March 2009 when he said "Cash Cow" (as certified by Jack) isn't profitable.

    RoughTrader -- Jack's claims about his trading deflated each time I called him on it and he hasn't posted since May 2009.

    04-23-09 01:26 PM
    "For SCT like trading, rough trader takes 1500 dollars to 94,000 dollars"

    04-26-09 06:51 PM
    "Bottom line: looks like roughtrader makes 20,000 a month on two contracts average while scaling out of entries on his ATS"

    05-22-09 07:28 PM
    "Rough trader is only making a couple thousand a month on a couple of contracts. He needs to make one adjustment to make 20,000 a month. He needs to add 18 contracts to his trading cars"