Economics and similar, for the sleep-deprived
A subtle change has been made to the comments links, so they no longer pop up. Does this in any way help with the problem about comments not appearing on permalinked posts, readers?
Update: seemingly not
Update: Oh yeah!
Tuesday, April 01, 2014
An absurdly simplistic point about High Frequency Trading
This seems like such an obvious point that it surprises me I haven't seen it being made over and over again, presumably in industry publicity material. The central anecdote of Michael Lewis's book (and a story that very often forms the centrepiece of an article about high frequency trading), goes as follows:
"Before RBC acquired this supposed state-of-the-art electronic-trading firm, Katsuyama’s computers worked as he expected them to. Suddenly they didn’t. It used to be that when his trading screens showed 10,000 shares of Intel offered at $22 a share, it meant that he could buy 10,000 shares of Intel for $22 a share. He had only to push a button. By the spring of 2007, however, when he pushed the button to complete a trade, the offers would vanish."
To make his point, he asked the developers to stand behind him and watch while he traded. “I’d say: ‘Watch closely. I am about to buy 100,000 shares of AMD. I am willing to pay $15 a share. There are currently 100,000 shares of AMD being offered at $15 a share — 10,000 on BATS, 35,000 on the New York Stock Exchange, 30,000 on Nasdaq and 25,000 on Direct Edge.’ You could see it all on the screens. We’d all sit there and stare at the screen, and I’d have my finger over the Enter button. I’d count out loud to five. . . .
“ ‘One. . . .
“ ‘Two. . . . See, nothing’s happened.
“ ‘Three. . . . Offers are still there at 15. . . .
“ ‘Four. . . . Still no movement. . . .
“ ‘Five.’ Then I’d hit the Enter button, and — boom! — all hell would break loose. The offerings would all disappear, and the stock would pop higher.”
At which point he turned to the developers behind him and said: “You see, I’m the event. I am the news.”
Fair enough. But … tell me about the other side of this trade. Brad Katsuyama, in this story, had to pay a few fractions of a cent more for the 100,000 shares of AMD stock he wanted to buy, because high frequency trading firms saw his order coming and took out the sellers. But if he paid a few fractions of a cent more, then someone else who was selling the stock received a few fractions of a cent more. Here's a story you don't ever see told.
"One day, he came into work and started trying to sell a block of stock at $15 a share. There wasn't much interest at that price and a bunch of offers at $14.9995. Brad knew he needed to get the trade finished, so he sighed and got ready to lower his quote. Just as he was about to press the button, though, a shoal of high frequency traders took out all the offers below him and an institutional investor paid up the full $15! He said hurray".
Nobody would think that way. If you put in an order and get a fill which has a bit more slippage  in it than you were expecting, then you start looking around for explanations of why this thing could have happened. If you get an unexpectedly good fill, then you tend to presume that this is just because you're such a great trader.
All of which certainly isn't my general view on HFT; I have always thought that the whole business of payment for order flow was hinky in the first place, and I've always been suspicious of entities which behave like liquidity providers but don't commit to providing liquidity when it's needed. But by definition, when the price moves away from one trader, it's moving toward another one. So I don't think that estimates of the "cost" of the presence of high frequency traders can be supported based only on anecdotes of bad fills.
("slippage" = "the difference between the price you saw on the screen when you made the decision to trade, and the price where the order actually gets filled")
this item posted by the management 4/01/2014 11:59:00 PM