Algo Trading / BBC article

[trendie]

http://www.bbc.co.uk/news/business-32250122

The author regards algo-trading as unfair to ordinary investors.

If the algo-trader knows the prior demand, isn't that a form of front-running?
Isnt front-running illegal?

Is it the same as knowing Fund X is planning to buy Stock A at price P, and gets in ahead and results in the price going to P.pp, and the algo makes the .pp?

Can the scale of algo-trading be quantified?

 

[TechQuant]

Trendie, in any competitive situation you will find there are those that will seek any route to find an edge even if it is outside the rules. Lance Armstrong. Then there are those that also seek an edge but do so through intellectual brilliance and pristine execution within the law. Mitch McDeere (The Firm – Grisham).

There is no excuse for the former. They deserve to be caught and punished. The latter? These are the very entrepreneurs that we need. Those that work within the law and game the soft spots. Each raft of regs from the SEC has sought to close existing loopholes. The brains then apply their skills to finding the next loophole which very typically has been created from the very regs that sought to close previous ones. There is no absolute morality. The Universe has no absolute morality. Morality is a function of time and place. If you suddenly discovered a system that would yield a consistent profit from playing slot machines – would you use it, or would you inform the slot-machine operators so they could plug the hole? How about sell them the information to plug the hole? Better? Same? Worse?

The people that scream foul the loudest are those that have put the least effort into managing their affairs. The smart brains get not only the kudos but also the financial awards that attend exceptional brilliance. In a place such as this, I’m surprised to find any that will champion the indolent, the stupid and the naïve over those that confirm survival of the fittest. Trading and the financial markets are not a government sponsored socialist experiment to ensure equitable distribution of wealth – they are a sirens’ call to the greedy, the witless, the lazy and the stupid.

Never ante up in a game where you don’t know the rules. And if you don’t know if you don’t know the rules, you don’t know the rules.

Do you really think Lewis is doing this as part of a moral crusade? He was part of the machinery jamming bad deals through schmucks before he, and his bosses, realised he wasn't that good at it. So he decided to game the situation by writing about it. I've not read any of his work but I'm guessing he makes out his decision to write rather than trade was a moral one rather than one based on lack of natural ability to trade. He's gaming the very same system from a different perspective and apparently doing quite well. Good luck to him.

 

[NVP]

Michael Lewis is selling a book ..........
Algo-traders play Russian roulette profiting until the next faster gun comes to town

so - find your edge - leverage it until it disappears - move on to next idea

N

 

[0007]

It's a shame that the politicians don't understand this when considering this & other situations.

 

[TechQuant]

Worth bearing in mind that algos/HFT only skim investors/traders i.e. those that choose to enter into the game. Politicians skim all of us and we have absolutely no choice in the matter. Having a politician comment on the morality of bankers/hedgies etc is always an amusing irony.

 

[alexaherself]

Can the scale of algo-trading be quantified?

I don't think the answer to this question, whatever it is, is really relevant to your question above about whether or not this is front-running, Trendie? From either a moral or a legal perspective (and let's not imagine that the two will necessarily correlate) that isn't a quantitative issue, I think?

Michael Lewis is selling books, as NVP mentions above, but I also suspect from having read some of his earlier ones that there may be some element of "moral crusade" motivating him.

My own perspective is that if this is done with software/facilities which are available to any investor/trader (who can afford them), or developable by them, then there probably isn't a real moral problem, here? There might be if its operation rests on information not available to "outsiders"? That seems to me to be the moral distinction (and I'd like to think it's the legal one, too.)

 

[hhiusa]

http://www.bbc.co.uk/news/business-32250122

The author regards algo-trading as unfair to ordinary investors.

If the algo-trader knows the prior demand, isn't that a form of front-running?
Isnt front-running illegal?

Is it the same as knowing Fund X is planning to buy Stock A at price P, and gets in ahead and results in the price going to P.pp, and the algo makes the .pp?

Can the scale of algo-trading be quantified?

Interesting point of fact, according to the SEC, %73 of all trades placed were done so algorithmically. Additionally, your brokerage firm is essentially allowed to do a form of front-running as allowed by the SEC. If you place a market order for Apple @ 125.00 at 09:30:00, the broker has 5 seconds to find a better price in order to arbitrage your trade. If at 09:30:05, Apple is @ 125.10, then your market order will go through @ 125.10 and your brokers makes $0.10/share from you on your trade. Front-running is a grey area. This is why I recommend using a DMA instead of online ones.

 

[counter_violent]

http://www.bbc.co.uk/news/business-32250122

The author regards algo-trading as unfair to ordinary investors.

If the algo-trader knows the prior demand, isn't that a form of front-running?
Isnt front-running illegal?

Is it the same as knowing Fund X is planning to buy Stock A at price P, and gets in ahead and results in the price going to P.pp, and the algo makes the .pp?

Can the scale of algo-trading be quantified?

I listened to the interview and it immediately struck me that there was no reference at all to what happens when all these algo's stop trading and are turned off. Liquidity becomes severely diminished to non existant and can result in a flash crash where stops would be utterly useless anyway as protection to your average trader.

This drying up of liquidity has to be the biggest risk to trading as a consequence of algo trading.

Just my $0.2

 

[hhiusa]

How is that "drying up liquidity"? I pay to see what everyone is doing and it is perfectly legal to watch the limit order book. If I see online traders (TDA and the like) placing orders into the limit book then it is a race to the liquidity; thus, colocation is extremely important. If I place an order, which transacts in 50ms then that's give my algorithm 450ms to buy ahead of the $500-account-traders and push the price up and sell out a few cents (pence) higher, dropping out the floor.