Market Data Firm Spots the Tracks of Bizarre Robot Traders

[Winehole23]

Market Data Firm Spots the Tracks of Bizarre Robot Traders (http://www.theatlantic.com/science/archive/2010/08/market-data-firm-spots-the-tracks-of-bizarre-robot-traders/60829/)

Aug 4 2010, 8:01 AM ET | http://assets.theatlantic.com/static/front/images/icons/social/comments.gif Comment (http://www.theatlantic.com/science/archive/2010/08/market-data-firm-spots-the-tracks-of-bizarre-robot-traders/60829/#disqus_thread)
http://assets.theatlantic.com/static/mt/assets/science/assets_c/2010/08/Nanex%202-thumb-600x149-30683.jpg (http://assets.theatlantic.com/static/mt/assets/science/Nanex%202.jpg)

Mysterious and possibly nefarious trading algorithms are operating every minute of every day in the nation's stock exchanges.

What they do doesn't show up in Google Finance, let alone in the pages of the Wall Street Journal. No one really knows how they operate or why. But over the past few weeks, Nanex, a data services firm has dragged some of the odder algorithm specimens into the light.

The trading bots visualized in the stock charts in this story aren't doing anything that could be construed to help the market. Unknown entities for unknown reasons are sending thousands of orders a second through the electronic stock exchanges with no intent to actually trade. Often, the buy or sell prices that they are offering are so far from the market price that there's no way they'd ever be part of a trade. The bots sketch out odd patterns with their orders, leaving patterns in the data that are largely invisible to market participants.
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In fact, it's hard to figure out exactly what they're up to or gauge their impact. Are they doing something illicit? If so, what? Or do the patterns emerge spontaneously, a kind of mechanical accident? If so, why? No matter what the answers to these questions turn out to be, we're witnessing a market phenomenon that is not easily explained. And it's really bizarre.

It's thanks to Nanex, the data services firm, that we know what their handiwork looks like at all. In the aftermath of the May 6 "[URL="http://www.theatlantic.com/science/archive/2010/07/no-easy-tech-explanation-for-what-caused-wall-st-flash-crash/59766/"]flash crash (http://www.theatlantic.com/science/archive/2010/07/no-easy-tech-explanation-for-what-caused-wall-st-flash-crash/59766/)," which saw the Dow plunge nearly 1,000 points in just a few minutes, the company spent weeks digging into their market recordings, replaying the day's trades and trying to understand what happened. Most stock charts show, at best, detail down to the one-minute scale, but Nanex's data shows much finer slices of time. The company's software engineer Jeffrey Donovan stared and stared at the data. He began to think that he could see odd patterns emerge from the numbers. He had a hunch that if he plotted the action around a stock sequentially at the millisecond range, he'd find something. When he tried it, he was blown away by the pattern. He called it "The Knife." This is what he saw:

http://assets.theatlantic.com/static/mt/assets/science/assets_c/2010/08/BATCCMPW1-thumb-600x304-30679.png (http://assets.theatlantic.com/static/mt/assets/science/BATCCMPW1.png)

"When I pulled up that first chart, we saw 'the knife,' we said, that's certainly algorithmic and that is weird. We continued to refine our software, honing the algorithms we use to find this stuff," Donovan told me. Now that he knows where and how to look, he could spend all day for weeks just picking out these patterns in the market data. The examples that he posts online (http://www.nanex.net/FlashCrash/CCircleDay.html) are just the ones that look the most interesting, but at any given moment, some kind of bot is making moves like this in the stock exchange.



"We probably get 10 stocks in any 10 minutes where we see something like this," Donovan said. "It's happening all the time."



These odd bots don't really make sense within the normal parameters of the high-frequency trading business. High-frequency traders do employ algorithms to look for patterns in the market and exploit them, but their goal is making winning trades, not simply sending quotes into the financial ether.


Here's the way a stock trade is supposed to work: a buyer says they'll pay some amount for 100 shares of a company, a seller makes an ask for slightly more money, and the two of them usually meet in the middle. Perhaps a middle man (no joke intended) helps match buyer and seller and takes a cut. That's the role that a lot of high-frequency traders play: they help make markets work. Regulatory changes over the past several years have extended their usefulness and provided a nice business model for those that can move quickly to provide options for buyers and sellers.


"Under the maker-taker model, market participants that offer to provide, or make, liquidity by posting an order to buy or sell a certain number of shares at a particular price receive a rebate," explained Michael Peltz in a June feature for Institutional Investor (http://www.emii.com/Articles/2595257/ExchangesandTrading/Exchanges-and-Trading-Articles/Inside-the-Machine-A-Journey-Into-The-World-Of-High-Frequency-Trading.aspx). "Those that execute against that order -- that is, take the liquidity -- have to pay a fee. Exchanges earn the difference between the rebate they pay and the fee they charge. The SEC limits taker fees to 0.30 cents a share; rebates tend to be lower for economic reasons, but for high frequency firms trading millions of shares a day, they can make for a pretty good living."



In a sense, they take nickel-and-diming down an order of magnitude or two. The advantage is that their trades are low-risk: they rarely hold positions for very long and any individual stock, future, or currency can't really sink the boat. High-frequency traders have become a target for all kinds of people, but most of them appear to make their money being a little faster and little smarter than their competitors. And if they are playing by the rules, they improve the quality of markets by minuscule amounts trade after trade after trade.


But the algorithms we see at work here are different. They don't serve any function in the market. University of Pennsylvania finance professor, Michael Kearns, a specialist in algorithmic trading, called the patterns "curious," and noted that it wasn't immediately apparent what such order placement strategies might do.


Donovan thinks that the odd algorithms are just a way of introducing noise into the works. Other firms have to deal with that noise, but the originating entity can easily filter it out because they know what they did. Perhaps that gives them an advantage of some milliseconds. In the highly competitive and fast HFT world, where even one's physical proximity to a stock exchange matters, market players could be looking for any advantage.



"They are moving the high-frequency services as close to the exchanges as possible because even the speed of light matters," in such a competitive market, said Stanford finance professor Peter Hansen.


Given Nanex's data, let's say that these algorithms are being run each and every day, just about every minute. Are they really a big deal? Donovan said that quote stuffing or market spoofing played a role in the Flash Crash, but that event appears to have had so many causes and failures that it's nearly impossible to apportion blame. (It is worth noting that European markets are largely protected from a similar event by volatility interruption auctions (http://www.morningstar.fr/fr/etfs/article.aspx?lang=fr-FR&articleid=90332&categoryid=656).)

But already since the May event, Nanex's monitoring turned up another potentially disastrous situation. On July 16 in a quiet hour before the market opened, suddenly they saw a huge spike in bandwidth. When they looked at the data, they found that 84,000 quotes for each of 300 stocks had been made in under 20 seconds.

"This all happened pre-market when volume is low, but if this kind of burst had come in at a time when we were getting hit hardest, I guarantee it would have caused delays in the [central quotation system]," Donovan said. That, in turn, could have become one of those dominoes that always seem to present themselves whenever there is a catastrophic failure of a complex system.


There are ways to prevent quote stuffing, of course, and at least one of the members of the Commodity Futures Trading Commission's Technology Advisory Committee thinks it should be outlawed.



"Algorithms that might be spoofing the market are something that should be made illegal," said John Bates, a former Cambridge professor and the CTO of Progress Software. But he didn't want this presumably negative practice to color the more mundane competitive practices of high-frequency traders.



"There is algorithmic terrorism and then there is reverse engineering, which is probably just part of good business practice," Bates said.



For now, Donovan plans to keep putting out the charts, which he calls "crop circles," of the odd trading algorithms at work. That's an apt name for the visualizations we see of this alien world of bot trading. And it certainly gets at a central mystery surrounding them: if trading firms aren't sending out these orders, how are they getting into the market?


On the quantitative trading forum, Nuclear Phynance (http://nuclearphynance.com/Show%20Post.aspx?PostIDKey=143403), the consensus on the patterns seemed to be that they simply just emerged. They were the result of "a dynamical system that can enter oscillatory/unstable modes of behaviour," as one member put it. If so, what you see here really is just the afterscent of robot traders gliding through the green-on-black darkness of the financial system on their way from one real trade to another.


No matter why the bots end up executing these behaviors, the Nanex charts offer a window onto a kind of market behavior that's fascinating and oddly beautiful. And we may never have seen them, if not for the mildly obsessive behavior of one dedicated nerd.


"Who looks at millisecond charts?" Donovan said. "You'd never see those patterns in any other fashion. The SEC and CFTC certainly weren't."



Here are a few more bots at work with explanations of what's going on.

http://assets.theatlantic.com/static/mt/assets/science/assets_c/2010/08/1%201%20Nanex-thumb-600x148-30681.png (http://assets.theatlantic.com/static/mt/assets/science/1%201%20Nanex.png)


Here we see a "flag repeater" being executed on the BATS Exchange (http://batstrading.com/), the third-largest equity market after the NYSE and NASDAQ. 15,000 quote requests were made in 11 seconds in a repeating pattern. Each iteration upped the quote a penny until $9.36, and then the algorithm went down the same way, a penny at a time.


http://assets.theatlantic.com/static/mt/assets/science/assets_c/2010/08/Nanex%202-thumb-600x149-30683.jpg (http://assets.theatlantic.com/static/mt/assets/science/Nanex%202.jpg)


This is an extreme closeup of just one second of trading of the stock SHG, the Shinhan Financial Group. This is 760 quotes from a total of 10,000 made in 12 seconds.


http://assets.theatlantic.com/static/mt/assets/science/assets_c/2010/08/iau_071210-thumb-600x348-30685.png (http://assets.theatlantic.com/static/mt/assets/science/iau_071210.png)


This chart shows a different kind of strategy. It represents 56,000 quotes in one second all at the same price (the top chart) but with the size of the order increasing by one (i.e. 100 shares) all the way up to 40,000.


http://assets.theatlantic.com/static/mt/assets/science/assets_c/2010/08/stubby%20triangles-thumb-600x149-30687.jpg (http://assets.theatlantic.com/static/mt/assets/science/stubby%20triangles.jpg)

Finally, we see what Donovan calls the "stubby triangles" chart. It shows high quotes being made and then immediately followed by a stub order of $0.01 (basically canceled in most contexts). The quote is then remade at a lower price and followed with another stub quote. This cycle happened at the rate of 380 quotes a second. [This last description was clarified thanks to the kindness of author Joe Flood.]

[boutons_deux]

Lloyd Blankfein, whose Goldman Sacks dominates high-speed trading, says he's doing God's work and providing liquidity. :lol

High-speed trading is nothing but a pump-and-dump fraud.

[TeyshaBlue]

My head asplode.:depressed

[Winehole23]

High-speed trading is nothing but a pump-and-dump fraud.The author of the OP reaches no such conclusion. How did you?

Care to show us your math?

[boutons_deux]

the computer sees a price bid, the computer bids a "bit" higher, other computers see the same action, make their itsy bitty teeny weeny bids, price pumps up,

Whoever Dumps First, Wins.

[Winehole23]

Explain the stubby triangles then. That's a repetitive descending pattern.

[LnGrrrR]

Did anyone else see the move Pi? Has the author started looking for the Golden Spiral?

Or maybe it's just that these machines have developed consciousness and are trying to destroy us monetarily in order to assist the takeover...

[Drachen]

Explain the stubby triangles then. That's a repetitive descending pattern.

I don't agree with B_D's explanation, however if you have a repetitive downward pattern, then shorting can explain that.

[balli]

Did anyone else see the move Pi? Has the author started looking for the Golden Spiral?

Or maybe it's just that these machines have developed consciousness and are trying to destroy us monetarily in order to assist the takeover...

I'm not smart enough to know anything about finance markets, but I'm really into self organizational patterns/coherency. I don't know what all this means, but I do find it fascinating.

[LnGrrrR]

I'm not smart enough to know anything about finance markets, but I'm really into self organizational patterns/coherency. I don't know what all this means, but I do find it fascinating.

You should check out Pi then. It's pretty much all about finding patterns.

[Winehole23]

I don't agree with B_D's explanation, however if you have a repetitive downward pattern, then shorting can explain that.Maybe so.

[Winehole23]

Creating confusing noise for the competition makes more sense to me, but who knows.

[CosmicCowboy]

It's an interesting phenomenon

Maybe trolling and hoping someone else's automated system goofs? Bidding much lower than going price and with a goof a trade gets made which then moves the market as the automated systems follow and bid/ask with each other?

[Drachen]

Creating confusing noise for the competition makes more sense to me, but who knows.

I also agree, when the speed of light actually matters, this could have big implications for the competition.

[boutons_deux]

I know a guy who writes algorithms for D.E.Shaw, a "quant". He's not a trader, has a master's in math. He's worth many, many $Ms by age 40.

[Drachen]

I know a guy who writes algorithms for D.E.Shaw, a "quant". He's not a trader, has a master's in math. He's worth many, many $Ms by age 40.

Yep, these quants are secretive and rich from everything I have read about them.

[Wild Cobra]

maybe someone found out how to take advantage of rounding errors, to make money.

Remember Gus Gorman getting rich when he had all the companies 1/2 cents moved to his paycheck?

[Nbadan]

This is very interesting...it must have been purposely written into the trading algorithm of a major trading firm because of the number of shares that are being moved around...why? hard to tell...sinister? Will it give someone a unfair advantage? whom?

[ElNono]

Inserting short bursts of predictability into what's supposed to be a fairly unpredictable medium. Think about that for a second, and the implications.

[Nbadan]

inserting short bursts of predictability into what's supposed to be a fairly unpredictable medium. Think about that for a second, and the implications.

I guess you could look at it that way, or you could look at it as inserting instability into the market..perhaps I just don't see how going up and coming down in short ripples versus a smooth natural bell curve gives anyone an advantage...

[ElNono]

I guess you could look at it that way, or you could look at it as inserting instability into the market..perhaps I just don't see how going up and coming down in short ripples versus a smooth natural bell curve gives anyone an advantage...

Creating non-predictable noise is actually pretty simple these days. Plenty of entropy sources. I've uses DOD level RNGs in the past. To insert instability you would insert random noise. When you're inserting clearly defined patterns you're inserting predictability.

[ElNono]

Which also ties in with why would you need faster-than-light connections to the exchanges. The only reason I can think of where you need such speed is because you need major precision. If you're doing trades down to the millisecond, then you need all the speed you can get.

[baseline bum]

You should check out Pi then. It's pretty much all about finding patterns.

I thought it was more about the perversion of science by magical thinking and the tragic story of a completely wasted career.

[baseline bum]

http://assets.theatlantic.com/static/mt/assets/science/Nanex%202.jpg

My best guess would be trying to raise concurrency bugs in other systems and fishing for arbitrage opportunities from them. You'd have to be pretty damn confident in your own code though.

[baseline bum]

maybe someone found out how to take advantage of rounding errors, to make money.


I believe financial math involving actual trades is always done with rational arithmetic, as round-off would be completely unacceptable in this case.

[Nbadan]

High Frequency Trading Is A Scam


In less than half a second, high-frequency traders gained a valuable insight: the hunger for Broadcom was growing. Their computers began buying up Broadcom shares and then reselling them to the slower investors at higher prices. The overall price of Broadcom began to rise.

Soon, thousands of orders began flooding the markets as high-frequency software went into high gear. Automatic programs began issuing and canceling tiny orders within milliseconds to determine how much the slower traders were willing to pay. The high-frequency computers quickly determined that some investors’ upper limit was $26.40. The price shot to $26.39, and high-frequency programs began offering to sell hundreds of thousands of shares.

But then the NY Times gets the bottom line wrong:

The result is that the slower-moving investors paid $1.4 million for about 56,000 shares, or $7,800 more than if they had been able to move as quickly as the high-frequency traders.

Market ticker (http://market-ticker.org/archives/1259-High-Frequency-Trading-Is-A-Scam.html)

[Winehole23]

http://www.bloomberg.com/news/2012-01-03/wall-street-trades-at-speed-of-light-need-traffic-cops-view.html

[boutons_deux]

cops?

I think it would better to place sales tax on all stock trades.

It would be better if the taxpayers got a slice of the financial sector they bailed out of bankruptcy than the traders pocketing all as fees (much of which are secret and not itemized).

[Winehole23]

cops?try reading next time

[cantthinkofanything]

I know a guy who writes algorithms for D.E.Shaw, a "quant". He's not a trader, has a master's in math. He's worth many, many $Ms by age 40.

I wonder if he ever mentions his crackpot friend that spends all day rambling on SpursTalk.

[Wild Cobra]

I didn't pay attention to the tactics, but restoring the short sale rule eliminated a few years ago will help. Maybe not this specific type of manipulation, but others.

[Wild Cobra]

One more think. To make profits like this, someone has to be buying and selling too.

[boutons_deux]

Wall St is unethical, criminal, sociopathic, rigged, and you guys want to hand SS $Ts to Wall St banksters.

The banksters have been drooling over SS $Ts so you know reflexively the pensioners will be screwed hard, fast, and deep.

[DarrinS]

Interesting TED talk on same subject

http://www.ted.com/talks/kevin_slavin_how_algorithms_shape_our_world.html

[Winehole23]

interesting link.

thanks for posting. :toast

[Winehole23]

But for the big banks and brokerage houses, self-regulation is vastly preferable to onerous and costly government regulation. That’s why Wall Street’s own self-appointed regulator, the Financial Industry Regulatory Authority (FINRA), is keen to show that it is alert to any new risks that might threaten the financial system. FINRA released its regulatory priorities for 2014 (http://www.finra.org/web/groups/industry/@ip/@reg/@guide/documents/industry/p419710.pdf) yesterday (Jan. 2), and it’s keeping an eye on everything you’d expect it to: insider trading, complex structured products, funds investing in opaque and politically unstable “frontier” markets, and brokerages staffed by people who have already been busted by authorities.





But one area of focus that piqued our interest was FINRA’s concern about the abuse of algorithmic and high-frequency trading. FINRA highlighted the use of “momentum ignition strategies,” also known as “spoofing” or “layering.” Essentially, these are when a high-frequency trading system floods the market with buy orders above the current price or sell orders below it, in an attempt to make it look like there is buying or selling interest and induce others to trade at the artificially high or low prices. When the market price accordingly moves up or down, the trader quickly takes the other side of the spoof order, at a (slightly) better price than it would otherwise have achieved.




There has been a lot of concern (http://www.valuewalk.com/2013/10/hft-news/) about spoofing among traders. The practice is, of course, illegal, but FINRA said it continues to see variations of spoofing strategies, with different prices and sizes of fake orders, which is worrying in itself. The Commodity Futures Trading Commission laid its first charges for the activity in June last year (http://www.sec.gov/News/PressRelease/Detail/PressRelease/1365171484972#.UsXaOWTSNcQ), and the Securities and Exchange Commission also clamped down on the practice in 2012. (http://www.sec.gov/News/PressRelease/Detail/PressRelease/1365171484972#.UsXaOWTSNcQ)http://qz.com/162943/wall-street-is-finally-acknowledging-that-bogus-trades-are-a-problem-in-its-own-way/

[boutons_deux]

FINRA, keeping the "self-regulated" financial industry prim and proper! :lol

[Winehole23]

This month marks the fifth anniversary of the current bull market on Wall Street, making it one of the longest and strongest in history. Yet U.S. stock ownership is at a record low and less than half of Americans trust banks and financial services. And in the last two weeks, the New York attorney general and the Commodities Futures Trading Commission in Washington have both launched investigations into high-frequency computerized stock trading that now controls more than half the market.

The probes were announced just ahead of a much anticipated book on the subject by best-selling author Michael Lewis called "Flash Boys." In it, Lewis argues that the stock market is now rigged to benefit a group of insiders that have made tens of billions of dollars exploiting computerized trading. The story is told through an unlikely cast of characters who figured out what was going on and have devised a plan to correct it. It could have a huge impact on Wall Street. Tonight, Michael Lewis talks about it for the first time.


Steve Kroft: What's the headline here?


Michael Lewis: Stock market's rigged. The United States stock market, the most iconic market in global capitalism is rigged.


(http://www.cbsnews.com/videos/lewis-explains-how-the-stock-market-is-rigged)

Steve Kroft: By whom?

Michael Lewis: By a combination of these stock exchanges, the big Wall Street banks and high-frequency traders.


Steve Kroft: Who are the victims?


Michael Lewis: Everybody who has an investment in the stock market.

http://www.cbsnews.com/news/is-the-us-stock-market-rigged/

[Winehole23]

claims HFT allows brokerages to front run your trade:


"Fast" is the operative word. Machines with secret programs are now trading stocks in tiny fractions of a second, way too fast to be seen or recorded on a stock ticker or computer screen. Faster than the market itself. High-frequency traders, big Wall Street firms and stock exchanges have spent billions to gain an advantage of a millisecond for themselves and their customers, just to get a peek at stock market prices and orders a flash before everyone else, along with the opportunity to act on it.


Michael Lewis: The insiders are able to move faster than you. They're able to see your order and play it against other orders in ways that you don't understand. They're able to front run your order.


Steve Kroft: What do you mean front run?
(http://www.cbsnews.com/videos/lewis-rigged-stock-market-is-bigger-than-a-scam)

Michael Lewis: Means they're able to identify your desire to, to buy shares in Microsoft and buy 'em in front of you and sell 'em back to you at a higher price. It all happens in infinitesimally small periods of time. There's speed advantage that the faster traders have is milliseconds, some of it is fractions of milliseconds. But it''s enough for them to identify what you're gonna do and do it before you do it at your expense.

Steve Kroft: So it drives the price up.


Michael Lewis: So it drives the price up, and in turn you pay a higher price.

same

[boutons_deux]

but it's too long, don't read it

The Wolf Hunters of Wall Street

http://mobile.nytimes.com/2014/04/06/magazine/flash-boys-michael-lewis.html?from=homepage

the financial sector is totally corrupt, is the best working assumption

[Winehole23]

Back in 2008, Katsuyama was 30 years old and running the Royal Bank of Canada's stock desk in New York with 25 traders working for him. Every time one of them tried to buy a large block of stock for a client their order would only be partially filled and the price of the stock would go up. It kept happening over and over again.

Brad Katsuyama: The best analogy I think is that your family wants to go to a concert. You go onto StubHub, there's four tickets all next to each other for 20 bucks each. You put in an order to buy four tickets, 20 bucks each and it says, "You've bought two tickets at 20 bucks each." And you go back and those same two seats that are sitting there have now gone up to $25.


Steve Kroft: What'd you think the problem was?


Brad Katsuyama: I had no idea. I couldn't get answers.


At first, Katsuyama thought the technology at RBC was slow, until he went to Stamford, Conn., and paid a visit to one of the largest hedge funds in the world.


Brad Katsuyama: The same thing that I was experiencing as a trader, one of the most sophisticated hedge funds in the world was also having the same problem. Then the light bulb goes off. You say, "Holy cow, this is, this is a huge problem."


Steve Kroft: You were determined to get to the bottom of it?


Brad Katsuyama: Yeah.


Steve Kroft: Why?


Brad Katsuyama: 'Cause it just didn't feel right. It didn't feel right that people who are investing on behalf of pension funds and retirement funds are getting bait and switched every single day in the market.


Katsuyama suspected that the problem had something to do with plumbing, the way the trades were routed through fiber optic cables from his trading desk in lower Manhattan to the 13 public exchanges in northern New Jersey. But no one would tell him exactly what happened to his orders once he hit the buy or sell button. So he put together a team of technical experts, traders and most importantly, an Irish telecom guy named Ronan Ryan, who was an expert on high-speed fiber optic networks.


Ronan Ryan: I knew nothing about trading until my first day at RBC when I sat in that three hour meeting on algorithms. I called my wife afterwards. And I'm like, "Holy crap, I have no idea what they just said."


Ryan had done work for the high-frequency traders. He knew what they were building and he knew about the colossal amounts of money they were prepared to spend. He told Brad about a company called Spread Networks that had laid a high-speed fiber optic cable from the futures market in Chicago to the exchanges in New Jersey. They spent $300 million just to shave three milliseconds off the fastest route and were leasing access to high-frequency traders at $10 million a pop.

same

[Winehole23]

Although the many of the US’s 13 stock exchanges are nominally based in New York, they really live in New Jersey, where their servers occupy nondescript data centers.





Servers for BATS, the closest exchange by distance to New York City, live in a data center in Weehawken, right across the Hudson River from downtown Manhattan. DirectEdge—another electronic exchange—stores its servers 4.6 miles away in Secaucus. Nasdaq’s servers are in Carteret, and those of the New York Stock Exchange (NYSE) are, ironically, the farthest away, in Mahwah. An order placed at the same time in New York will arrive at each of these in sequence (see above).




When Ronan Ryan, now IEX’s chief strategy officer, joined RBC Capital in 2009, it took a signal from RBC’s Manhattan router about three milliseconds to travel to NYSE. He and his colleagues soon discovered the reason for Katsuyama’s frustrations.




If a client wanted to buy 10,000 shares of Netflix, Katsuyama might send an order out to all these exchanges to buy shares at $330.00. Some of these orders would be filled almost immediately at BATS. But servers belonging to HFT firms “co-located” (housed in the same data center) with each exchange, registering that Netflix was trading for this price, would send a blast of orders ahead to DirectEdge, Nasdaq, and NYSE, and beat Katsuyama’s trade to the punch; despite heavy investments in hardware, RBC’s infrastructure was still slower than that of the HFTs. These new orders would boost the price of Netflix shares to $330.01, and Katsuyama’s order would come back only partly fulfilled. He’d send the order back out to buy at $330.01, knowing that high-frequency firms were likely making a pretty penny by boosting the share price.
+


The team at RBC Capital soon developed a solution—a new trading technology dubbed THOR. To prevent high-frequency firms from jumping ahead of their trades, they staggered the timing of their orders to different exchanges. An order sent to NYSE, the farthest exchange, would go out without a lag, but the same order to a nearer exchange like BATS would be timed to go out microseconds later, so that they would arrive at all the exchanges simultaneously. The technology, launched in January 2011 (http://blogs.wsj.com/marketbeat/2011/01/14/thor-enters-the-high-frequency-trading-arms-race/) (paywall), effectively neutralized the HFTs’ faster wiring.




THOR was an immediate success. “We took on 450 new clients in just those first 18 months,” recalls Ronan, who joined RBC Capital in 2009. “That’s unheard-of.” Katsuyama says he returned to fulfilling almost 100% of his orders. “We were explaining to [clients] why they had been getting screwed. It was really easy to sell [RBC's services],” he told Quartz. http://qz.com/138388/how-the-navy-seals-of-trading-are-taking-on-wall-streets-predatory-robots/

[Winehole23]

IEX’s solution for keeping HFTs at bay is remarkably elegant. It doesn’t ban them. It merely slows them down a tiny bit.





Most exchanges allow broker-dealers and HFTs to house their servers right next to the exchange’s own servers that carry out the trades. The result is an almost instantaneous transmission of information about what trades are executing. That gives HFTs a momentary advantage that they combine with raw processing power to get an edge over other players.




IEX has space for broker-dealers and HFTs to store their servers too. But not next to the trading servers; farther away, in another building. This adds a crucial delay. It takes orders 350 microseconds to travel from one building to the other, 250 microseconds to execute, and another 350 microseconds to send back confirmation. All told, that’s 950 microseconds, or just under one millisecond. IEX thinks it’s enough to stop HFTs from peppering the exchange with orders that can help it predict investor behavior.




IEX also eliminated all but four of the hundreds of order types exchanges offer brokers.




“We’re trying to put the greatest number of people on equal footing,” says Katsuyama. “There’s a huge swath of participants that these [950] microseconds is meaningless to but it has huge meaning to a very small group [the HFTs],” he adds. The point is not to prevent HFTs from doing a lot of the things they normally do—such as trading on small differences between a gold exchange-traded fund and gold futures, for example. It’s just to stop the predatory strategies that make them money at the expense of real investors. same

[Winehole23]

Katsuyama's IEX to become an exchange?

http://www.institutionalinvestor.com/article/3533057/banking-and-capital-markets-trading-and-technology/iex-groups-bradley-katsuyama-crusades-for-fairer-markets.html#/.Vt26QObW7DU

[Winehole23]

Nasdaq threatens to sue the SEC over the speedbump (350 microseconds) and the IEX application to become an exchange:

http://www.businessinsider.com/nasdaq-law-suit-threat-iex-sec-2016-5

[Winehole23]

Similar theme, the investigation started under Trump


A slow-burning regulatory probe of big share sales on Wall Street has kicked up a notch as watchdogs examine whether banks and hedge fund traders are improperly profiting at the expense of institutional sellers and retail traders.


The US Securities and Exchange Commission first started asking banks with large equity trading arms about “block trades” during the Trump administration, according to two people with direct knowledge of the probe.


Since then, Morgan Stanley, which is a leading provider of block trade services, has received multiple requests for information. The regulator has also contacted other market participants including hedge funds that trade equities.


The SEC probe is looking at whether other traders are getting advance word of these large sales — either directly from the banks or in some other way — and improperly profiting by shorting the shares in expectation that prices will fall.


No enforcement action is imminent, and it not clear that any will result, the people said…


Under chair Gary Gensler, the SEC is making a push to prevent large traders from unfairly benefiting from information that is not available to ordinary investors. While much of this comes in the form of new disclosure proposals, the SEC enforcement arm is also part of the drive.
https://www.ft.com/content/da23c81e-b6cd-4026-9eef-ff9116dddd8e

https://www.wsj.com/articles/regulators-probe-block-trading-at-morgan-stanley-goldman-other-wall-street-firms-11644875448