Great article i love it
One more thing that jumps out to me as I read this is Pension and Retirement Funds and how they can fair in this fixed world unless they turn to IEX.
The idea of Pensions and Retirement Funds was based on good faith in the American Investment system and that continual investment of participants' (they do pay money into it), and fair investment practices would lead to continued earnings growth and the ability to pay out benefits. These "dark pool" investment practices and the rape of the public by the Medical industry, have both served to besmirch and cripple these good faith strategies to help John Q public.
The sooner we start recognizing that Greed trumps all and only elect representatives who see this and are willing to act against it, the better off we will be as a nation and people.
Co-location sold by the exchanges and dark pools have been written about in the NYT for years. How is it that regulators do nothing to look into it? The maxim on Wall Street is profits are to be made circumventing the intent of regulation. If the exchanges and the banks get into something in a big way, then it is a red flag and regulators should shine a light on it.
Kudos to Brad Katsuyama, who stands to profit from fairness..... now that's a novel idea.
Common sense+inquiring minds+ingenuity+ethical motive= breaking the paradigm of gaming Wall Street trading systems. Hooray!
We have the stooges of wall st to blame: people like Alan Greenspan who insisted the markets and banks are self regulation. He takes us all as fools, and contributed greatly to the massive 2008 recession. It's time we insist that no one from the thoroughly corrupt finance world work for government. Instead, install educated, intelligent business people with no experience or ties to the industry, in key areas (lke the Treasury). If they cant understand what's going in the hedge funds, banks and private equity, then stop it, simplify it, and put in on open exchanges for transparency. Complexity and secrecy is a curse that segregates society, perpetuates the unfair status quo, and turns democracy into a plutocracy.
I hope Brad Katsuyama becomes filthy stinking rich. He will both deserve every penny, would probably give a lot of it away, and would make damn sure that the money he did give away was used effectively and efficiently.
You have the answers right there, my friend. You solve the problem and then realize that too many people have their fingers in the pie. It's a great solution, however.
This morning, only a few hours after this story was shown on 60 minutes, the CNBC early morning crew was right there talking about how this was no big deal--minimizing the effect of the high speed trading issues. Led by Joe Kernan, all three hosts said it was no big deal because the trading advantage used by some firms only got them pennies on trades. I'm used to hearing the CNBC hosts shill for Wall Street all day long, but I expected that they were capable of math--not even higher math, but basic arithmetic. As Senator Dirkson said a while ago: a billion here, a billon there, it starts to add up. Just more drivel from the crew that shills for all major players of the financial world, but can't imagine how it affects the tens of millions of little people screwed over on a mortgage or on their retirement accounts. No, let's bail out the big guys and minimize their malfeasance and corruption. Don't these guys have a conscience?
If only the brilliance of these technicians could be put to more productive ends...
60 Minutes ran an abbreviated version of this story last night. Brad comes avross just as you'd hope- a really good guy.
They filmed the coiled fiber optic cable - what ingenuity.
Stock Market is rigged?! This is news?! If Mr. Lewis or the Times were to ask any thoughtful bloke who has worked in the Operations areas of Wall Street (those so called and looked down upon departments of Wall Street called the Back Office where the overwhelming majority of workers in the industry toil and actually know the show!) in the past seventy five years, especially those who have worked in the Margin or Purchase and Sales Departments, as I did for nineteen years, you would have been told the same thing! ( Without the glamour, media hype, or need to resort to ask a few twentysomethings who have never worked long in the industry...).
In theory, this information ought to prompt outrage across the political spectrum. It will be extraordinarily revealing to see what actually happens.
In old days, the huge bid offer spreads were eaten by Art History majors (Michael Lewis). What Michael is complaining is how science graduates took over their jobs. The story of Katsuyama and his colleagues is exactly how better algorithms are able to help investors from regular HFT traders. This competition is at least is based on who can code better (or has math or logic background). Better than old boys network of "Oh! I studied Art History at Princeton" and hence deserve better at my uncle's brokerage charging huge bid-offer spreads. This is pure creative destruction at work. Someone beating HFTs. Pure capitalism at work!
Some FX exchange will only allow HFT firm to update orders 4 times per second (per FX pair). At this pace, everybody has a fair change to react to the price change and news event, not to worry about being ripped off by front-running HFT traders. There is no drain of liquidity due to limit on the trading frequency as HFT often complain. In fact, FX is the most liquid market on earth. The equity market don't need HFT to prosper either. If we allow everyone the fair chance to buy/sell, everybody will be better off, instead of the few HFT trader.
To Nick,
Front running is a major problem when it happens...it is effectively trading on insider information...i.e. buying something when you KNOW that a big buy trade is coming. HFT is not front running, it is reacting very quickly to activity that has already occurred in one public arena. A good metaphor for what the Carlin software was effectively doing was showing the price from 5 or 6 different bookies on one screen. When Katsuyama entered his order he was effectively trying to walk into 6 bookies at the same time and bet heavily on the same horse. Some of the bookies managed to lay off because Katsuyama's 6 orders left for the bookies at the same time which gave the bookies enough time from when the first order arrived to change the prices or lay off in other bookies. Note this is exclusively a reaction to market flow...not front running. Katsuyama simply figured out a way to make sure his orders arrived at all 6 bookies at the same time and so he could get the better price on his entire bet. Front running is dishonest, immoral, illegal and totally unfair. Reacting to market activity is not. Incidentally the reason you combine those order books in the first place is to try and guarantee yourself the best price to try and make profit.
Capitalists all like to talk about "free markets." These markets will adjust for the benefit of all, is what we're told. (Yeah, right.)
But the whole point of capitalism is to tilt these "free markets" in a subtle institutionalized way so that certain market participants always make money.
The point is there is no such thing as a "free market."
The other point is a country can regulate these markets in such a way as to make them as "free" and unfettered as possible. (It's not easy, but the truth is you can do what the Icelanders did. Fire the management, nationalize virtually all the banks, and throw the criminals out on their butts.)
Why do you think the .1%ers are always screaming about the need to de-regulate everything? Because regulations interfere with their theft of other people's money.
It's that simple.
Ameritrade knows that its customers are upset about this. They throw a sop to their customers by paying them "order flow rebates", in other words they cutting them in on the bribe that Citadel is paying them.
60 minutes had a report about this subject last night. It didn't surprise or shock me at all. But where is the outrage? Where are the legislators? Where are the laws and regulations to prevent this type of abuse in the future?
Few things are as powerful and shocking as an honest, knowledgeable person sharing the observation that the emperor is actually naked.
