I agree with you. This is why I often state that HFT has become a catch all phrase and that we need to distinguish the specific problems with our market structure from everything else that is considered HFT. I was simply rewording your statement, which included the word HFT. I could have left that part out and named names: Citidel, GS, Timber Hill, Knight, Getco, etc. The average algorithmic shop, proprietary trading company, hi volume or hi speed market makers and the like add value to the trading public. Better? I will go ahead and agree with you completely on this. There is a real threat of congress implementing some idiotic regulation that sounds nice to the ignorant masses, such as data speed bumps, tforced limit order freezes, and the like. It would be prudent for all of us, me included, to direct our criticisms at the exact issues in the marketplace instead of using the generic term HFT.
This is a fantastic summary of exactly what is wrong with our current regulatory structure. Agreed. There's some cleanup that needs to be done (as I've said I think flash, internalization, and dark pools should be gotten rid of altogether--one simple rule: bids and offers get posted), the biggest problem is the conflict of interest for profit-maximizing agency brokers. I hate the coarseness of it, but fiduciary duty and public confidence in the markets are the most important thing, and agencies should be held to a very simple, customer-based standard: best execution, period. Yes, the brokerage companies are screwing over their customers, but they are doing it by 1) siphoning off internalized trading profits and valuable order flow information to their HFT partners... You've demonstrated that you know this is not the fault of the HFT counterparties. Saying this only makes the morons think they're right re: HFT being automatically bad. Any HFT *not* trying to get involved in that game isn't optimizing their opportunities. Like I said before, execution games may be silly, but until they're illegal someone is going to make that money. Being "too cool" for it isn't a business plan. Interactive Brokers grew out of Timber Hill. They are owned by the same individual. Citidel owns Etrade. The Etrade customer order flow is valuable enough that Citidel shelters its internalizing engine profits (what they call their market making business) from any potential market losses from it's hedge fund. IBKR is publicly traded, but Peterffy does own a huge chunk. Actually Wikipedia says IB was formed in 1977, so I'm not sure of the details of the lineage (though I can tell you Timber Hill was a laughing stock in the early '90s, using colored blocks outside of pits so their traders could make markets without anyone seeing their values--who's laughing now?). I don't think CIG owns ETrade outright, they just get their flow (in exchange for a cash infusion when ETrade almost blew up on mortgages). CIG segments the MM business for the same reason any other business unit is segregated anywhere else. And it is indeed very profitable.
There is a real threat of congress implementing some idiotic regulation that sounds nice to the ignorant masses, such as data speed bumps, tforced limit order freezes, and the like. It would be prudent for all of us, me included, to direct our criticisms at the exact issues in the marketplace instead of using the generic term HFT. Hah. Well then you can ignore most of what I just wrote.
WinstonTJ- i appreciate you extremely detailed comments regarding HFT and i agree on some points you made here. it would be impossible for me to argue without going into deep details of my trading(which i prefer not to, on public forum with 100K+ members)
Its great to be able to discuss things like this and do it factually versus speculating on unknowns. Jerkstore and brownegg know quite a bit more than I do on the technicals and specifics however I hope I was able to try and explain in a down to earth way that everyone can understand. Cheers!
Not an answer. From who's pocket ? The mechanism is not the source of funds. This is obfuscation at its finest.
from the themis trading blog. I have made this exact comparison myself. more fuel for my fire. SOES Bandits Revisited Today we are going to do a little electronic trading history lesson. Who remembers Sheldon Maschler? Harvey Houtkin? They were the original SOES Bandits. Sheldon headed up the infamous Datek Securities. In 1989, with the help of two boy wonders, Jeff Citron and Josh Levine, they created Watcher, a software program that allowed day traders to take advantage of a weakness in the SOES systemârelatively slow updating of price quotes (sound familiar to anyone?). SOES was intended for small orders but Datek was using the system for large trades, buying stocks and then selling them again within seconds. Datek was very successful at scalping trades and by 1996, they had 500 traders, many of them freshly out of Ivy League schools but already making as much as $750,000 a year (hmmm, take the brightest minds out of the best schools and have them perform a function with no economic value so they can earn obscene salariesâ¦again, sound familiar to anyone?). In 1997, Citron and Levine developed the Island ECN and with the strategy of paying rebates for posting of liquidity, Island grabbed 15% of NASDAQ trades by 1998. They tried to take Datek public but a series of criminal and regulatory investigations prevented them from doing so. Island was later bought by Nasdaq. The data feed that Nasdaq now uses, ITCH, was originally created at Island. Harvey Houtkin was another famous SOES Bandit. In 1998, his firm All-Tech also created an ECN called Attain. In 2005, Attain was sold to Knight Trading. Knight renamed it Direct Edge. Knight then sold stakes in Direct Edge to Goldman Sachs, Citadel Investments and the ISE. So where are we going with this? On Wednesday, Direct Edge officially became the fourth stock exchange in the US. It is truly amazing that an ECN that still employs pre-routed or âflashâ orders was granted exchange status. They can now compete directly with the other big boys, NYSE, NASDAQ and BATS. They have set their sights on the lucrative proprietary market data space. These data feeds are the lifeblood of the HFT industry. Think of them as the fuel that runs the Lamborghini. They said they will begin selling this data to industry participants, most likely HFT firms, over the next few months. They also have amped up their speed to 300-400 microseconds which should make the HFT traders very happy. And one final thing, they have also announced their intentions of a future IPO of the company. The similarities between SOES and HFT are striking and history is truly repeating itself now.
Obfuscation? Your "source" for "data" is the guys at Themis. Funny enough, I was out to dinner last night with two guys who worked with the Themis guys in the mid '90s at Instinet and are still close with them. The Themis guys deserve a lot of credit for some great marketing; I'm sure their revenues have benefited. But they're pretty much just clueless rumormongers who happen to have a single well-placed mole. re: where does the money come from, that's easy. The exchanges share a huge piece of their fees with liquidity providers. It's not hard to find trades where a "scratch" makes money. The real source of the "game-ability" is the lazy idiot institutions who submit a VWAP order or something and then go to lunch. Oh wait, those are the same guys who are Themis customers. Go figure.