Thanks for the cite and I agree with you about HFT. They claim it adds liquidity, but it’s fake liquidity – if things are going south and liquidity is needed, they back away.
For an idea of what the above would entail for a US derivative package, may I present to you the Eye of Satan:
(Bolding mine, JT)
Having read the other replies, I wanted to add that none of the “products” described are what I, or my contacts, would have described as “complicated” products.
For example, collateralized mortgage products are not complicated. They aren’t even risky. They didn’t fail from being risky or complex: they failed from being dishonestly labeled and sold. Like buying A-grade beef and getting pork instead.
And collateralized mortgage products weren’t bought by buyers that misunderstood the product: they were bought by buyers who didn’t realize that they were being lied to.
edit: CDO cubed products meets my criteria for ‘complex’. I was referring to earlier posts
It’s been a long time since I’ve read that book, but doesn’t Lewis use Germany as a counter example about how they avoided the pitfalls of the other countries because they are figuratively and literally obsessed with closely examining their own shit? Other countries ignored their shit no matter how bad it smelled and didn’t notice the problem until the whole body started to fall apart.
No - he pretty much says the German banks fucked up because they played by the rules and didn’t understand that other people would fail to and would lie. He cites various instances when institutions were marketing compete shit and wondering who would buy it - with the answer being the Germans.
But a huge difference is the Germans’ motivations and responses. The German bankers did not get paid the millions that Wall Streeters received. And afterwards, were treated as criminals and pariahs.
To be fair, this is very much in keeping with the stereotypical German character, especially the sort of German who would choose to work in a conservative rule-based institution like a bank.
Yeah, it’s a stereotype. But it doesn’t come from nowhere.
I like Michael Lewis books generally, but Flash Boys is an absolutely horrible book (which I assume is where you got this information). It is full of inaccuracies and half-truths. If you really want me to, I can get into the weeds of the mechanics of retail stock order routing and market making (including why your example isn’t realistic), but it should probably be a different thread. I recommend this book if you want a detailed dissection of Lewis’ claims.
Do high-frequency market makers make money? Yes, but a tiny amount compared to the rest of the finance world. The amount of ire they draw is extremely disproportionate. Also, the old system used to be worse for investors - not better. There was never a “good ole days” when investors were treated better by professional market makers. The big Wall St. banks would love it if we nuked all algorithmic traders tomorrow and the banks could step in as the only market makers.
Just like every other market maker - human or computer.
I disagree. They purposely put in bids they never plan on executing on, and when someone tries to hit it, they change it. They spend the rest of their time front-running real investors, which they can do because of their physical proximity to the exchanges. They add zero value and constantly bleed the system of money.
Actually, when the NYSE was an actual useful thing, there really were market makers who were their to make markets as a last resort. Of course, spreads were much higher back then, but they were there when needed.
Nope. Doesn’t happen. If a firm were to be shown to “back away” from a firm quote they would absolutely be fined. The architecture of the modern stock market doesn’t even allow for such a thing to happen.
Please explain this in detail. Exactly how do they do this? What order routing and by what mechanism? I’ve been a professional trader for 15 years and I don’t see this.
Do you just not like market makers? How are human market makers any different besides making the spread slower?
Still there. I know some and deal with them daily.
I’m glad to hear they’re still around on the NYSE. I have nothing against market makers, but HFT firms are not that. Anyway, this is really off-topic for this thread.
Yes, there still are humans on the floor that can manually step in. I’ve got to disagree that HFT firms aren’t market makers - that’s what almost all of them are. One of the largest of them, Virtu Financial, is a publicly traded company (ticker: VIRT) that has to provide the same audited financials and disclosures to the SEC that all public companies must. If people think they’re just drowning in free money, buy some stock and own them. Though, since their IPO in 2015 they’ve returned about 35% vs the S&P index return of nearly 95% (including dividends).
Agreed, this is a hijack and we should drop it.