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Author Topic: Is this essentially electronic insider trading?  (Read 1842 times)

Offline cheryl j

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It amazes me how Wall street keeps finding advantageous loop holes in regulation, inventing new unregulated financial activities (as with credit default swaps), or other ways to stack the deck in their favour.

Yesterday NPR interviewed Micheal Lewis about his book Flash Boys. "Flash Boys is about the form of computerized transactions known as high-frequency trading, in which the fastest computers with the highest connection speeds get the information first, and make the trade before anyone else can."

That doesn't sound so sinister - what's wrong with having good equipment and better, faster access to information? But it doesn't sound like simple access so much as interception. Why is it legal?  Here is a description of how it works:

...when he looks at his trading screens, his screens will tell him, say, that there are 10,000 shares of Microsoft offered at $30 a share if he wanted to buy them. And normally, up to this point in his life, if he hit his button and said "buy," he'd get the shares for $30 a share. But all of a sudden, when he hits the button on his computer terminal, the shares disappear. It's like someone knows he's trying to buy Microsoft and the price of Microsoft goes up before he can get it. He doesn't understand why this is happening, and that's the beginning of the story.


.....When he pushes the "buy" button, the signal from his computer travels up the fiber optics along the west-side highway of Manhattan and through the Lincoln Tunnel. On the other side of the Lincoln Tunnel is one of the 13 stock exchanges, called the BATS Exchange founded by high-frequency traders. They're sitting there, and they get the signal that he wants to buy first. ... They can see what he wants to do. They discern his desire to buy Microsoft, and they have faster connections to the 12 other exchanges that are scattered across New Jersey, and they race him to the other exchanges, buy all the Microsoft in front of him, and sell it back to him at a higher price....."

My poor knowledge of finance is rivaled only by my knowledge of computers, so I just wondered what other here might have to say about it.

http://www.npr.org/2014/04/01/297686724/on-a-rigged-wall-street-milliseconds-make-all-the-difference
« Last Edit: 09/04/2014 15:16:46 by cheryl j »


 

Offline CliffordK

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Re: Is this essentially electronic insider trading?
« Reply #1 on: 09/04/2014 16:57:48 »
I'm not sure I've noticed an offer just "vanish" like you're suggesting. 

However, say you're watching some small-cap XYZ, and it appears to be trading between $29.95 and $30.05.

So, as a savvy investor, you plug in a limit order that you wish to buy it at $29.95.  You notice that it never drops back down to that value again, and in fact may jump to $30.00 to $30.10. 

As the stock appears to be rising, you quickly adjust your limit to $30.00, and what do you know, the limits adjust to $30.05 to $30.10.

Insider trading? 

Not really?

What one quickly learns is that to buy something, one has to actually bid at the sell price (the higher of the two numbers) as the buy price may not represent actual transactions.

The other thing that happens.  Say I wish to sell the XYZ stock.  Bob is already offering to sell it for $30, so the logical choice is to just slightly underbid Bob, say to offer it for sale at $29.99.  However, once Bob notices that you've underbid him, he'll change his bid too, say to $29.98, and suddenly the price of the whole stock starts drifting. 

One of the issues, and I think it is a valid complaint. 

If you are required to buy and sell the stock on penny increments.  However, Bob, on the other hand can use smaller increments.  So, when you offer your stock for $29.99.  Instead of offering his stock at $29.98, Bob offers to sell his at $29.989. 

Now the system will prioritize his offer ahead of yours which then gives the algorithmic trader an unfair advantage.

The other thing I've seen happen.  Say I offer my XYZ at $30.  I might see the market jump around a bit, and watch actual sales come in for my offer price, $30.  Yet, the sales never seem to get directed to me. 

Now, it may be that I'm at the back of the queue, and everyone in front of me must be cleared out before the sale comes to me.  However, I have to wonder if there may be a bug in the system in which someone else offers it for $29.999, jumps ahead of me, then the system automatically rounds it back up to $30, which I see come across my screen. 

Anyway, I have no problem with algorithmic trading, and don't see it as inherently fraudulent.  However, I think the big question is whether or not there are unfair practices as part of it.

1) Jumping ahead of the queue?  All sales should be done in a first-come, first-serve basis, and the stocks should have enforced minimum increments.

2) Do trades get routed first to the flash bidders, then second to the "queue"?

3) Any buy/sell offers should have a minimum duration.  1 Second?  3 seconds?

4) All buy/sell offers should be listed on the exchange.  There should be no "dark" offerings.

5) Perhaps any one stock should only be offered on a single exchange.  It just makes it to complicated to distribute the stock across a half a dozen exchanges.

If the exchange prioritizes some customers ahead of others, then it is FRAUD.
« Last Edit: 09/04/2014 16:59:19 by CliffordK »
 

Offline evan_au

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Re: Is this essentially electronic insider trading?
« Reply #2 on: 11/04/2014 08:39:52 »
As I understand it, "Insider Trading" implies that you know something that other people don't because you have access to information which has not been released to the public (perhaps because you are an employee of the company concerned). You use this priveleged information to make a profit that would not be accessible to someone outside the company.

High-frequency trading uses information which is (theoretically) available to everyone on the stock exchange - only human traders are too slow to react, and the trading software has already noticed the trend and moved to profit from it.

So "high-frequency trading" would not be "insider trading", because it is not using priveleged information.

I heard that in these warehouses attached to the stock exchange computers, they are careful to make all the cables the same length, so that no-one in the warehouse has a speed-of-light advantage over other traders in the same warehouse.

High-frequency trading is now moving to profit from differences between different stock exchanges, eg New York and Chicago. This has resulted in the construction of several communication links which are faster than traditional links - because they take a straighter path, or because they use propagation through air, which is faster than laser propagation through optical fiber glass.
 

Offline CliffordK

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Re: Is this essentially electronic insider trading?
« Reply #3 on: 13/04/2014 01:54:15 »
I can get stock quotes and data accurate to about a second or so.  I probably can not get it much faster though, but even second-by-second data is difficult to react to. 

Various stock analyses can cause rapid shifts in the stock market, and some of the e-trader systems are tied into news streams. 

I've seen dramatic shifts in the market so I start scanning for a cause, and it is only a half an hour later that I find it. 

The NPR story asked whether the E-traders actually get the news faster than the news (which would be illegal insider trading).  There is a lot of effort in predicting what will be said, and the market often shifts based on "better than expectations" or "worse than expectations". 

No doubt that the better e-trading programs can grab the news, electronically analyze the content, and react in less than a second (before I can even get the download started, let alone get a significant number of nibbles and bytes).

One thing that would level the playing field would be to stream deliver critical government documents at 300 baud, or about the speed an ordinary person could read them.  And, also allow individuals with different bandwidths to get the documents at about the same time.

Make sure that companies like Wall Street Journal do not allow some kind of super-premium access. 

Another question is how many traders are actually making the news?  And, how do they profit from the news they make? 

It is not uncommon to see a news story, Bank X has downgraded (or upgraded) stock Z, at which point the stock either plummets or skyrockets.  Did the bank profit by their announcement? 
 

Offline syhprum

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Re: Is this essentially electronic insider trading?
« Reply #4 on: 13/04/2014 08:23:25 »
I may be a luddite but I fully agree with the data slow down scheme proposed by CliffordK
 

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Re: Is this essentially electronic insider trading?
« Reply #4 on: 13/04/2014 08:23:25 »

 

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