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"The Stock Market Is Rigged"

Posted by eibren z6PA (My Page) on
Tue, Apr 1, 14 at 15:53

It is always gratifying to find documentation vindicating viewpoints I had previously been challenged on in here!

"In the hands of a lesser writer, the story of how high-speed traders are skimming pennies off transactions on Wall Street could be mind-numbingly arcane. But Michael Lewis, the Vanity Fair contributing editor and best-selling author of Moneyball, Liar’s Poker, and The Blind Side, knows how to tell a story, even one that he freely admits is dauntingly impenetrable.

“If it wasn’t complicated, it wouldn’t be allowed to happen,” Lewis told Steve Kroft in a 60 Minutes segment that aired last night. “The complexity disguises what is happening.”

He added, “The stock market is rigged.”

In a nutshell, Lewis writes in his new book, Flash Boys: A Wall Street Revolt (itself an outgrowth of this Vanity Fair article from 2013), what’s happening is that some savvy, if unscrupulous, traders are using their ability to operate faster than everyone else to make some free money. The easiest technique to explain involves spotting someone else’s intention to purchase some stocks, jumping ahead of them to make the buy, and then selling the shares to the intended buyer at a slightly inflated price. (In fact, Lewis explains in this excerpt, these high-speed traders make a lot more money on something called “slow-market arbitrage”: “This occurred when a high-frequency trader was able to see the price of a stock change on one exchange and pick off orders sitting on other exchanges before those exchanges were able to react.”)"

On NPR just now, I heard Lewis state that this separates those trading on the stock market into prey and predators.

An awareness of this predatory behavior has led to a call for use of a fair exchange that will protect investors from exploitation by high speed traders, called the Investor's Exchange, which began in October, 2013.

Here is a link that is probably relevent:

http://www.iextrading.com/

It was just metioned on PBS that high speed high frequency trading is now being investigated by the FBI, etc.

Here is a link that might be useful: Vanity Fair Online Daily


Follow-Up Postings:

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RE: "The Stock Market Is Rigged"

The modern equivalent of the 17th. century Rothschilds using carrier pigeons to beat out the competition.


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RE: "The Stock Market Is Rigged"

Limit Orders. No rigging at all.


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RE: "The Stock Market Is Rigged"

IMO an investor's exchange is the best idea.

I'm tired of being played for a fool--I'm going to request that any deferred comp shares I have to sell off are sold on that exchange. Maybe if enough investors would do that the manipulators would be cut off.

They have made such excessive profits in the past, they will do or try anything to continue the excessive profits they have become accustomed to. These people are doing nothing for the economy; they are parasites.


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RE: "The Stock Market Is Rigged"

There are always positive and negative effects from any move forward and the advent of the digital age has allowed for this skimming...


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RE: "The Stock Market Is Rigged"

Saw that on 60 Minutes.

Pure greed.

Thankfully, there are some people thwarting them. So nice to see some honest people fighting the good fight. And not just for themselves, for all of us.


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RE: "The Stock Market Is Rigged"

Is it illegal yet to do this?
"in 1999 at the height of the tech craze, there were about 1,000 quotes per second crossing the tape. Fast forward to 2013 and that number has risen exponentially to 2,000,000 per second. And yet there are fewer market participants today and actually less trading. All this noise comes from the High Frequency guys trying to game each other or fool traders. Today, 90 to 95 percent of all quotes emanate from High Frequency machines…… This doesn't imply share volumes just quotes traveling on the tape."

When HFT’s buy stock, they make sure that there are other real bid’s to buy behind (waiting to buy) them. If they can’t sell on the offer, they can push a button and sell to one of the other bidders at the same price they bought in at and scratch the trade. So the High Frequency Traders of today are just like the old line human market makers except the speed at which they operate and the information advantages they have means they are only going to play when very high probability setups exist. They always want to make sure there are plenty of real bids or offers in line behind them to “lean” on so if markets start to gyrate they can exit the trade flat.

this is from a Forbes article in 2013..this subject has come up before.

Despite the enormous edge High Frequency firms enjoy they are starting to show significantly lower profitability. Exchange volumes from 2011 to 2012 are down from 7.8 billion shares per day to 6.5 billion or 17 percent. Another contributor is that, as has been stressed, High Frequency Trading is all about co-location or speed. These giant dominant HFT firms, like GETCO, Citadel, and Virtu Financial are all being forced to constantly upgrade their systems in the arms race to be fastest, to collate information closer and closer to the speed of light. GETCO reported in a 2012 SEC filing it spent $37 million upgrading or “building new trading strategies”. Lower volumes hurt the HFT’s because as fewer orders enter the markets there are just that many less opportunities to “scalp” the bid/offer spread. Another issue which gets overlooked in the media is that there are fewer traders exposing themselves to being gamed by the HFT’s.

Where the HFT’s become really pernicious is on smaller more thinly traded securities when the bid/offer spread is wide, say 30 or even 50 cents. Say the bid/offer is $25.50/$25.80. The High Frequency computer is programmed to “step in front of” the real buyer willing to pay $25.50 and bid $25.51 or a penny more than the bona-fide buyer at $25.50. This “penny hopping” pushes the real buyer back in the queue so he will not get filled. If the real buyer cancels their bid, (the computers recognize this) then the HFT will withdraw its bid to buy as well. If the HFT gets filled at this price by paying up a penny more they will hold the shares and make an offer to sell at somewhere below the $25.80 offer price so they can once again be first in the selling queue. Now that the HFT owns the shares, machines will watch to make sure that the real buyer is still there so that if they can’t sell the shares within their timeframe they always can instantaneously sell to the real buyer at only a loss of a cent. They have a bid to “lean” on…….with potential loss of only a cent and a possible profit of nearly 30 cents.

"... it’s important to note that the great majority for High Frequency action occurs in only the top three dozen or so most liquid stocks. These are the “thickest”, meaning computers have the most bids and offers to “lean” on if markets collapse. The computers make money almost every time trading these stocks. Second, depending on who you believe 50 to 70% of all trading volume comes from the HFT’s yet 90 or 95 percent of all quotes come from them. HFT’s are constantly putting out bogus or fake quotes. This “quote stuffing” as it is referred forces other machines to slow down to assimilate the data thus maybe giving the “stuffer” a brief advantage. It is also used to flush out and see which bids are real. Also, an uninitiated trader may be fooled by thinking demand for a stock is there, when it is just noise."

One more thing about speed….. The National Market System (NMS) delineates how exchanges connect and how trading happens. How firms receive their data is something else. The SIP (Securities Information Processor) provides data to firms on a 10 gigabyte line. Both the NYSE and NASDAQ offer more specialized (think faster) quote platforms. NYSE “OpenBook” and NASDAQ “TotalView” offer data on a 40 gig line at prices ranging up to $60,000 a month. The NMS has regulations prohibiting one firm having a speed advantage over another. In 2012, the NYSE was fined $5 million for violating this rule and yet the practice is openly continued today.

What Does It All Mean?

At the end of the day High Frequency Traders in the large volume stocks probably are good providers of market liquidity and allow for average investors to easily transact. The “toll” is the penny bid/offer spread which is what you probably would have paid under the old specialist system. Some claim the HFT’s have caused bid/offer spreads in high volume securities to be tighter, thus benefiting investors. In times of turmoil and market corrections the HFT’s run for the hills and declines are exaggerated. This is scary and causes many investors to be wary of the stock markets. This is born out in the 17 percent volume decline over the 2011 to 2012 period.

That was pretty much Forbes take on the whole deal.

In spite of who goes down to Washington by private jet to testify they will have their backside kissed by both sides of the isle.

In spite of all of this someone will declare that this is hard work & that these people deserve every penny they can get their hands on.
That is unless someone can make a good case as to why this should be illegal.

Go way back to the definition of what a Market maker is?

"A market maker or liquidity provider is a company, or an individual, that quotes both a buy and a sell price in a financial instrument or commodity held in inventory, hoping to make a profit on the bid-offer spread, or turn"

There are Thousands of Market Makers!


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RE: "The Stock Market Is Rigged"

Limit Orders. No rigging at all.

Now go read Labrea's post. It's your order that the guys are "leaning" against. By the time your order gets filled, the "real market" is not where your order was filled.

I very rarely buy or sell. Buy and hold. But, in those few times that I'd buy or sell, I'd put in a "market order", (buy or sell at the best available price at the moment) BEFORE the NYSE market is open and ask that the trade be directed to the NYSE. (I don't think "directed" is necessary). Unless things have changed, there's ONE price at the OPENING. No one gets ripped off, no way, no how.

You should get the opening price. Call any broker and ask them the OPENING price on the NYSE. If by some wild chance you didn't get that price, call your own broker and explain and ask to speak to the Compliance Department.

The Compliance Officer is then left with a decision. Give you, the customer, the few pennies difference or assign a lawyer to the case. What do you think will happen?

There is absolutely nothing new here. It's the same ole, updated to the digital age. It's the nature of progress.

IT"S THE NATURE OF PROGRESS!!

There's absolutely nothing evil about this.

You think otherwise? They have a name for people like you.

Hay


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RE: "The Stock Market Is Rigged"

"Posted by haydayhayday (My Page) on Wed, Apr 2, 14 at 9:37

Limit Orders. No rigging at all.
Now go read Labrea's post. It's your order that the guys are "leaning" against. By the time your order gets filled, the "real market" is not where your order was filled.

I disagree because limit orders often aren't filled within minutes of when they are placed. Good til cancelled...the market comes to me.


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RE: "The Stock Market Is Rigged"

"There's absolutely nothing evil about this.

You think otherwise? They have a name for people like you.

Hay"

Name caller.

:o(


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RE: "The Stock Market Is Rigged"

Some regulation may have to come about but not because the game is rigged (in the sense of the news) but because the mounting costs of creating faster & faster competing programs will hit a wall eventually and the outcome may be a bump down. Bigger than any fat finger error. Automated trades set in motion by such a bump can cost a bit.

Ticker tape made quotes more timely but it took years for the speed to build with Western Union taking over so the quotes were more timely
. Think of the classic movie scenes of the moguls screaming buy buy or sell sell based on the quote of the moment.

Thursday, October 24, 1929. 12,894,650 shares traded hands a mix of buys & sells more than likely mostly buys The Day after the crash Volume over $16 Million the ticker was running for hours after the market had already closed! (Hands really no longer involved)
Thousands of operators taking information relaying information on buy & sell orders (quotes)
Faster Faster faster through the 40's 50's 60's 70's
up to faster today's almost real time quotes & someone else is still a bit faster.
When the market crashed in 1929 the quotes from the ticker had a 2 and one half hour lag time due to the volume.

This post was edited by labrea on Thu, Apr 3, 14 at 13:10


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RE: "The Stock Market Is Rigged"

"Good til cancelled...the market comes to me."

The important thing is how the market reacts AFTER you complete your order.

If I buy some very active stock AT THE NYSE OPENING PRICE today and then turn around and sell it tomorrow at the opening price, then, except for market movements and except for the commission costs, I'd expect to BASICALLY break even. No?

Now, do it your way with placing limit orders. I'd be willing to bet a big part of my IRA account that, over time, on average, you'd come out way behind my trading. No? Then become an off floor market maker.

Go read the Forbes article that Labrea is quoting from in his first post. It's a round table discussion with some pros in the business.

Relevant to our discussion and exactly what I'm talking about:

"Another issue which gets overlooked in the media is that there are fewer traders exposing themselves to being gamed by the HFT’s.

Richard: Can you elaborate on that last sentence?

Mr. Dick: I made a video in 2012 which gives an example of how traders who have limit orders floating out there in the marketplace get “picked off” or gamed by the HFT’s. It is called “adverse selection” risk and here is how it works. My example focuses on the S&P E-mini contracts and the release of the Friday morning monthly unemployment reports. When the number came out at 8:30 EST there were hundreds of bid limit orders to buy the S&P E-mini’s representing thousands of contracts. The actual employment number was very bad, meaning claims were higher than anticipated, and the market gapped down over 7 points instantly. But even faster were the High Frequency algorithms which hit hundreds of bids (they sold stock to the bids) before the clock had moved one second……it was still 8:30 sharp not even close to 8:30.01. Traders with limit orders could not withdraw their orders before they were filled by high frequency computers in a matter of micro seconds. In the blink of an eye, the HFT’s bought back shares that they had sold at much lower prices reaping millions in profits. This is information arbitrage where High Frequency Traders take advantage of just released data and profit from it. They react far quicker than any human possibly can. Given this advantage, traders have much less incentive today to place limit orders. The adverse selection risk is simply too high.

Mr. Hunsader: I might add that today in 2013, it is any “limit” orders where the retail investor potentially gets shafted. Say Bank of America (BAC) is trading $13.93 bid and $13.94 offer. The retail investor has very little chance of being able to buy on the bid at $13.93. That person is typically at the back of the queue, behind all the HFT’s. The only time they get filled is when the quote rolls over them (the bid becomes the offer). In most cases, for the retail investor it is better to buy BAC at the $13.94 offer, get filled and not risk the market moving and not get filled at all……just pay what amounts to a one penny “toll” to get filled. In the old days of human NYSE market makers, or specialists as they were known, the retail investor had a much better chance of buying on the bid."


Hay


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RE: "The Stock Market Is Rigged"

"Mr. Hunsader: I might add that today in 2013, it is any “limit” orders where the retail investor potentially gets shafted."

Hay: ..today in 2013? I might add that this has been going on forever in marketplaces. In the days before the HFT became the whipping boys, the specialist and the floor traders standing around the pits would be the ones "picking off" your limit orders.

Same ole, same ole, updated to the digital age.

Hay


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RE: "The Stock Market Is Rigged"

I have a relative who is a stock analyst. He told DH last June that the market is rigged. He is very disillusioned with the market. Not like what it was when he first started his career.


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RE: "The Stock Market Is Rigged"

"I have a relative who is a stock analyst. He told DH last June that the market is rigged."

My cousin, Vinnie, who works in the meat department at the local grocery store told me that stock analysts are pretty worthless sources of good advice in the stock market. He said, "buy and hold a good broad based index mutual like the the Vanguard 500 which aims to replicate the S&P and you're GUARANTEED to beat more than half the people out there."

Guaranteed, I said? Yes, because it's pretty close to representing all the market, the AVERAGE, then on average, you'll beat half the people. Throw in the savings from the commissions because you're not buying and selling all the time and not putting in limit orders to get picked off, and not paying taxes, you'll actually beat MORE than half.

My cousin Vinnie is smarter than your relative.

Hay


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RE: "The Stock Market Is Rigged"

Warren Buffet must have consulted my cousin, Vinnie. In this year's annual letter, (track it down), as I pointed out somewhere recently, this is essentially how he wants his wife's money to be invested if he should die.

Warren and Vinnie. Smart people.

Hay


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RE: "The Stock Market Is Rigged"

People NEED to believe the markets are rigged against them.

Explain that to me.

The "speculators" are probably breathing a sigh of relief not to be the whipping boys today.

Hay


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RE: "The Stock Market Is Rigged"

"The Stock Market"
Which one which country who get to rig it & how?
World Markets in Billions of share traded in 2013

If your speaking about robots trading based on algorithms it's hardly a fix & more a system again with a lot of players & it changed the market and yes it traded how information was used & combined to determine buy & sell signals that the program will operate according to.

It's not SKY NET YET? For those who don't get the reference it's the idea behind the terminator movies. artificial intelligence taking over.
Of course a glitch a rogue trade could be a big bump down triggering a lot of other high speed bumps or crashes.., Linkage linked to links linked to link ooooops!


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RE: "The Stock Market Is Rigged"

"Of course a glitch a rogue trade could be a big bump down triggering a lot of other high speed bumps or crashes.., Linkage linked to links linked to link ooooops!"

It's the nature of progress. Always going to be bumps on the road, especially when you're in uncharted territory.

Orville Wright, five years after Kitty Hawk, crashed and injured himself badly. The passenger was killed. A propeller gone bad. Emilia Earhart. The spaceship Challenger.....Today, I can fly in relative security millions of miles if I want. The nature of progress.

The Titantic.

Three Mile Island, Chernobyl.The Flash Crash, 1987 stock market plunge, The Great Depression, Bhopal....

There will indeed be glitches. In the 60's, I saw the other day that it would cost more than $800 to buy a thousand shares of a stock. That's not counting the spread between the bid and ask price. Today I can buy a thousand shares for less than a tenth of that price and the spread might be one penny.

Buy the S&P index at Vanguard and there's almost no cost. 500 stocks, just like that, in an instant.

The nature of progress.

Competition is a wonderful thing. If someone finds that they could indeed rig a marketplace and pick off a customer for a dollar, you just know that there's someone else who will come up with a better plan that will give the customer a better deal and only rip him off for 50 cents for the same service. We're down to pennies because of people like these HFT.

God bless free markets. Cue the patriotic tunes. "God bless America, my home sweet home..."

Hay


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RE: "The Stock Market Is Rigged"

Glitches along the road.

If you're still have a problem understanding that, go google "Obamacare".

"These people are doing nothing for the economy; they are parasites.

Parasites, huh? I like that term. I may use it sometime for people I know who are doing nothing for the economy.

Hay


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RE: "The Stock Market Is Rigged"

Whether or not HFT is in place or not, whether or not trades are closed via a handshake (as they were 100 years ago), the real market is represented by a bid and offer at one instant in time. If my limit order is filled in that one instant, and it reflects the price I am willing to execute at, then why wouldn't I be pleased?

Using the BAC example, if the market is 13.93/13.94, and I am willing to buy at 13.50...if leaning on happens and I get filled at 13.50, I am happy. Note, I am not making any judgment about the process that gets the market to where I am willing to transact.

Separately, I believe that markets have become more efficient with HFT. And efficient has nothing to do with fair.


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RE: "The Stock Market Is Rigged"

Hay, did you ever decide to sign up for any health insurance after all, rather than doing without any at all?
I recall the discussions in here, trying SO hard to urge you to get some, even a little of the most basic health care coverage, though you were very, very resistant to the idea.
I hope forum members were finally able to encourage you to reconsider your choice to do without any.
I used to worry something dreadful would happen, regarding your health. People with no health insurance would eventually get some kind of basic treatement in our system (especially in emergency situations) but too often in the case of physical disease rather than "broken bones" injuries, the care would be substandard.

So many tax payers resent having having their own tax dollar used to covering hospital bills because some didn't get their own health care insurance.
Perhaps the ACA has provided you something, or ( not knowing your age) you finally qualified for medicare?

At any rate, I hope you have that base covered now and that even with reasonable health care coverage, you remain in fine shape for as long as you ever want to go out on Saturday nights and dance with your beautiful women.


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RE: "The Stock Market Is Rigged"

"Whether or not HFT is in place or not, whether or not trades are closed via a handshake (as they were 100 years ago), the real market is represented by a bid and offer at one instant in time. If my limit order is filled in that one instant, and it reflects the price I am willing to execute at, then why wouldn't I be pleased?"

"real market". I used the phrase in a post above to suggest that the bid and offer at that instant are not the "real market". Now you're trying to quibble over "real market". Call it what you want.

"why wouldn't I be pleased?

If you're set to buy a house and are in the process of signing the papers and I tell you that I just got news that the dam holding back the mountain of water upstream from you just broke and will wipe out in the house in a few minutes, you going to "be pleased" and continue signing the papers or would you rather have pulled your bid on the house?

"Now, do it your way with placing limit orders. I'd be willing to bet a big part of my IRA account that, over time, on average, you'd come out way behind my trading. No? Then become an off floor market maker."

Believe what you want. My bet is still sitting on the table. Pick me off.

Do you really think that you're so clever in the market that you think BAC in your example is worth 13.50 when it's trading at 13.93? You should be as rich as Warren.

Repeating from above, think about the dam image.....

"My example focuses on the S&P E-mini contracts and the release of the Friday morning monthly unemployment reports. When the number came out at 8:30 EST there were hundreds of bid limit orders to buy the S&P E-mini’s representing thousands of contracts. The actual employment number was very bad, meaning claims were higher than anticipated, and the market gapped down over 7 points instantly. But even faster were the High Frequency algorithms which hit hundreds of bids (they sold stock to the bids) before the clock had moved one second……it was still 8:30 sharp not even close to 8:30.01. Traders with limit orders could not withdraw their orders before they were filled by high frequency computers in a matter of micro seconds. In the blink of an eye, the HFT’s bought back shares that they had sold at much lower prices reaping millions in profits."

Believe what you want. HFT's love people like you.

Hay


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RE: "The Stock Market Is Rigged"

"Hay, did you ever decide to sign up for any health insurance after all, rather than doing without any at all?"

Hay's in his golden years and all you younin's are going to be taking care of me for the rest of my long, long life. Enjoy it.

"very resistant to the idea"... You people all convinced me that health insurance was a big rip off, so I took your advice and, for something like 25 years, socked my insurance money away. It's been one of my best investment decisions. You do the math. What does a year of your insurance cost you?

"So many tax payers resent having having their own tax dollar used to covering hospital bills because some didn't get their own health care insurance.

Taxpayers, other insurance buyers....We've been through this conversation before. I saved the money that I could have used to buy insurance. If I'd gotten deathly ill with huge expenses, I'd have gone through these savings and MORE before the taxpayers or the other insurance people could have been asked to help. EXACTLY, except for the MORE, in the case of my giving the money to the insurance company. You do the math.

" as long as you ever want to go out on Saturday nights and dance with your beautiful women."

Saturday, Friday, Monday, Tuesday....I want to thank all you youngin's for these golden years. Stay healthy!

Hay


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