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Speedy New Traders Make Waves Far From Wall St. [HFT]
CNBC / NYTimes blog ^ | May 17, 2010 | Julie Creswell

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.

.....

(Excerpt) Read more at cnbc.com ...


TOPICS: Business/Economy; Extended News; Government; US: New York
KEYWORDS: auction; flash; flashcrash; getco; hft; hftrading; highfrequency; liquidity; market; markets; nyse; tradeworx; trading
High-frequency traders insist that they provide the market with liquidity, thus enabling investors to trade easily.

“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.


1 posted on 05/18/2010 12:53:48 PM PDT by CutePuppy
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To: CutePuppy

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.


2 posted on 05/18/2010 12:56:37 PM PDT by Wolfie
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To: Wolfie
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....

3 posted on 05/18/2010 12:59:36 PM PDT by r9etb
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To: CutePuppy

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.


4 posted on 05/18/2010 1:07:03 PM PDT by sheana
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To: CutePuppy
Big boys at NYSE are trying to catch up - they start to feel the need for speed:

NYSE trading floor empties out as trading moves to electronic exchanges - LAT, 2010 May 15, by Nathaniel Popper


5 posted on 05/18/2010 1:09:03 PM PDT by CutePuppy (If you don't ask the right questions you may not get the right answers)
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To: Wolfie
Market's and/or issue's liquidity and scale is one of the essential fundamentals that many of these quant algorithms either fail or can't really take into account.
6 posted on 05/18/2010 1:12:12 PM PDT by CutePuppy (If you don't ask the right questions you may not get the right answers)
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To: CutePuppy; dennisw
Trading firms put their money on poker experts - LAT, 2010 May 16, by Nathaniel Popper


7 posted on 05/18/2010 1:19:24 PM PDT by CutePuppy (If you don't ask the right questions you may not get the right answers)
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To: sheana
Ahhhh, so I am a high frequency trader except I don’t trade stocks, I trade index futures.

Have computer, will trade...
If you can see the order pipeline, you too, can be a High Frequency trader.

8 posted on 05/18/2010 1:22:37 PM PDT by CutePuppy (If you don't ask the right questions you may not get the right answers)
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To: CutePuppy

;)


9 posted on 05/18/2010 1:30:15 PM PDT by sheana
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To: CutePuppy
HFTs allow investment banker types to “probe” smaller investors for the highest price that they are willing to purchase a stock for and then execute a trade at that price. It's just one more way that the NY Stock Casino rigs the game in favor of the house.
10 posted on 05/18/2010 1:37:57 PM PDT by RC one (WHAT!!!!)
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To: RC one
HFTs allow investment banker types to “probe” smaller investors for the highest price that they are willing to purchase a stock for and then execute a trade at that price.

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?

11 posted on 05/18/2010 2:12:16 PM PDT by CutePuppy (If you don't ask the right questions you may not get the right answers)
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To: CutePuppy

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.


12 posted on 05/18/2010 2:25:31 PM PDT by dennisw (It all comes 'round again --Fairport)
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To: CutePuppy
"how is this different from other auctions, let's say eBay?"

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

13 posted on 05/18/2010 2:27:04 PM PDT by RC one (WHAT!!!!)
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To: CutePuppy
Doesn't he have a choice to walk away from the trade as well?

not when it's all automated via computers. The order executes automatically when the parameters are met.

14 posted on 05/18/2010 2:28:34 PM PDT by RC one (WHAT!!!!)
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To: CutePuppy

Almost all the successful WWII American, and quite a few Japanese commanders, played poker.


15 posted on 05/18/2010 2:31:12 PM PDT by Leisler
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To: RC one
not when it's all automated via computers. The order executes automatically when the parameters are met.

That's exactly how it's done on eBay, only the price spread is much wider, to make more profit for eBay itself (commissions).

16 posted on 05/18/2010 2:48:20 PM PDT by CutePuppy (If you don't ask the right questions you may not get the right answers)
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To: CutePuppy

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.


17 posted on 05/18/2010 2:56:39 PM PDT by RC one (WHAT!!!!)
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To: dennisw
announced a ban on all naked short-selling in European public debt, as well as shares in the country’s 10 largest financial institutions.

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"

18 posted on 05/18/2010 2:57:53 PM PDT by CutePuppy (If you don't ask the right questions you may not get the right answers)
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To: RC one
on ebay, the reserve price is a closely guarded secret.

You need a better algorithm...

19 posted on 05/18/2010 3:00:15 PM PDT by CutePuppy (If you don't ask the right questions you may not get the right answers)
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To: Leisler
Almost all the successful WWII American, and quite a few Japanese commanders, played poker.

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

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.

20 posted on 05/18/2010 3:48:24 PM PDT by CutePuppy (If you don't ask the right questions you may not get the right answers)
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To: CutePuppy

GetCo in Chicago

“They are probably the biggest market maker in the U.S. stock market,” said Justin Schack, a vice president at Rosenblatt Securities Inc.
~~~~~~~~~

Since its founding a decade ago, the firm has risen to become one of the five biggest traders measured by volume....
~~~~~~~~~

... often accounts for 10% to 20% of the daily trading volume of many U.S. stocks, the company has said, including highly traded names such as General Electric Co., Oracle Corp. and Google Inc.

Aug. 27, 2009

http://online.wsj.com/article/SB125133123046162191.html


21 posted on 05/18/2010 5:55:12 PM PDT by thouworm
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To: CutePuppy
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?


A very good point, and one that is too often overlooked.

Markets Don't Fail, small

bumper sticker
22 posted on 05/18/2010 6:01:26 PM PDT by Oceander (The Price of Freedom is Eternal Vigilance -- Thos. Jefferson)
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To: thouworm
Thanks. They are private but are larger than many small public HFT/DAT firms, like Terra Nova. Also seem very responsible regarding leverage or defensive trading in very liquid large volume names or instruments, since they trade mostly with their own money.

..... Getco has increased its contact with the SEC and others as it seeks to influence policy decisions on matters such as rules governing options markets.

Getco's founders, former floor traders in Chicago's futures and options pits, say a lot of confusion surrounds the industry they helped pioneer.

"Electronic markets have been the best-performing parts of the financial markets" in the past few years, said Dan Tierney, a co-founder of the company with Stephen Schuler, in a rare interview. By contrast, many securities and derivatives traded over the counter, such as credit default swaps, malfunctioned amid the credit crisis, with devastating consequences. .....

One day last October, Getco juggled about two billion shares, representing more than 10% of the volume in U.S. equities, according to a person familiar with the firm.

Without high-frequency traders, Mr. Tierney says, the market's losses could have been much steeper. The Dow Jones Industrial Average plunged 14.1% that month.

All this has been profitable for Getco, which earned about $400 million in 2008, trading mostly with its own money, people familiar with its finances say. Getco, which stands for Global Electronic Trading Co., declines to comment on its profit. .....

At Getco, traders stare at enormous high-definition screens stacked to the ceiling that display trades in virtually every financial instrument traded electronically on exchanges. Large white boards, thick with scribbled formulas and intricate diagrams, line the walls of its expansive trading hub on the second floor of the office tower that houses the Chicago Board of Trade.

Unlike traditional Wall Street firms, the company holds relatively few securities by the time markets close for the day. Nor does it use much leverage, or borrowed money, to amplify the effects of its trades. .....

If the trade works, Getco will make money on that tiny spread. Sometimes they don't; the challenge then is to get out as quickly as possible. .....

Getco depends on the success of its proprietary complex algorithms to help it make money on the transactions more often than not. It also can pick up tiny rebates that some exchanges offer to firms willing to take the other side of trading orders. The company focuses on hiring top computer programmers and technicians, as well as traders.

Messrs. Tierney and Schuler founded Getco over a handshake in a small office at the Chicago Mercantile Exchange on a Friday afternoon in October 1999. .....

Their goal was to create an all-electronic market-making business. By 2001, Getco employed about 20 people and had branched into exchange-traded funds.

Around that time, stock exchanges switched to decimalization, pricing stocks in dollars and cents rather than dollars and fractions, a change that narrowed spreads and boosted the importance of swift trading to capture gains. .....

Today, Getco operates in electronic exchanges around the world. It has offices in New York and London and has about a dozen employees in Singapore, where it expects to expand soon.

A priority now is trading more on options exchanges. The company says regulations currently in place restrict the ability of options investors to get the best price. If options markets are more open to high-frequency traders, that will make the market more competitive, increase volumes and give investors better deals, it says.


23 posted on 05/18/2010 8:43:23 PM PDT by CutePuppy (If you don't ask the right questions you may not get the right answers)
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