pioneer98 wrote:It's pennies on hundreds of dollars...but to big places like Vanguard or Fidelity who are buying hundreds of thousands of shares it costs them a fortune. Add it up over our whole society and it acts like a hidden tax on all of our retirement funds. Stuff exactly like this is one reason people don't retire any more.
It has almost no impact on people with regular retirement accounts. The amount you will pay through ordinary mutual fund expense ratios and trading commissions utterly dwarfs anything that might be skimmed by front running HFTers, which is really only an issue for huge investors pulling giant trades anyway.
I think that HFT, like pretty everything that happens on Wall Street, is a giant waste of resources and a tool that empowers a tiny group of people to extract a lot of money while providing nothing of value (probably negative value, in fact). But stuff like this seems to imply that if you eliminated certain "cheaters", Wall Street would be fair. Nothing could be further from the truth.
Felix Salmon:
http://www.slate.com/articles/business/ ... iewed.html
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But for Lewis’ purposes, the banks and the HFT upstarts all have to wear black hats, while IEX and a few noble others fight for … well, for whom?
The answer, if Lewis is honest, is very rich investors. Flash Boys begins with Katsuyama working as a highly paid stock trader for a huge Canadian bank, putting through orders worth millions of dollars for the bank’s biggest clients. It ends with Katsuyama setting up his own stock exchange, bankrolled by the likes of David Einhorn, Bill Ackman, and Dan Loeb—all of them billionaire hedge fund managers extracting mind-boggling fees from their hugely wealthy clients—and all of them much richer than anybody who made his fortune in HFT. Hedge funds, still, are the place to make more money than God.
When 80 percent of the money in the U.S. stock market is owned by just 10 percent of the U.S. population, how is Lewis going to find a sympathetic victim? The answer is by pulling out every rhetorical device he can muster. He describes a fiber-optic cable running from Chicago to New York as “a living creature, a subterranean reptile.” He says that “what people saw when they looked at the U.S. stock market—the numbers on the screens of the professional traders, the ticker tape running across the bottom of the CNBC screen—was an illusion.” He pities “the average investor” with “his TD Ameritrade or E*Trade or Schwab account,” who should “think twice” before placing an order. He says that “slow-footed individual investors” are “easy kill” for high-frequency traders.
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Schwall tells Lewis that HFT is “ripping off the retirement savings of the entire country through systematic fraud,” and Lewis just allows the quote to sit there, damningly, even if he would never come out and put it that way himself. After all, the fact of the matter is that of all the various actors screwing your mom and pop out of the money in their retirement account, high-frequency traders are at the very bottom of the list. If, that is, they’re on the list at all.
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Retail investors don’t run into this problem. If they see a stock available for $50.00, they can buy it at $50.00—not $50.01 or anything higher. They get exactly what they want, at exactly the price they want, which is also the best price in the market, and they get it immediately, in a way that makes big investors rather jealous. (Which raises one of my factual quibbles with the book: On Page 78, Lewis says that a retail order was filled “at a higher price than originally listed”; I don’t believe it. I believe that the stock-market price rose as soon as the retail order was placed; I don’t believe that the retail order itself got front-run.)
If your mom or your pop buys or sells a stock, that order will almost certainly never make its way to any stock exchange: It will be filled by a high-frequency trading shop that is happy to pay good money for the privilege of doing so. The high-frequency traders do make money from the retail investors—but mainly they do so the old-fashioned way, just by being on the right side of the trade.
If an HFT shop simply fills every single retail order at the best price in the market, then over the course of a day, and certainly over the course of a year, it will make a decent profit. Retail investors, in aggregate, are dumb money: If you take the opposite side of their trades, you’re going to do just fine. Especially when you also buy stock off them for a penny or two less than you will sell the same stock to them. That’s called NBBO—the national best bid/offer—and it simply reflects the fact that there’s always a small gap between the highest price that someone is willing to buy, and the lowest price that someone is willing to sell.
That’s why HFTs love to give retail investors what they want: It turns out that retail investors are very good at making very bad decisions all on their own. What’s more, if you’re an HFT seeing what retail is doing at any given moment, you can use that information to inform your stock-market trades elsewhere. So mom and pop end up making you a lot of money, without your ripping them off in the slightest.
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But there’s always going to be a nonzero “round-trip cost” to buying $100,000 of a stock and then selling it a few seconds later. And it was not so long ago that $40 would be a veritable bargain for such a trade. Gates has good reason to feel preyed upon, given the way the market is supposed to work. But still, $40 for two $100,000 trades is hardly a rip-off. Especially when you consider the money that Gates himself is charging his 35,000 mom-and-pop customers.
When Gates was running his experiments, his flagship fund, the TFS Market Neutral Fund, had an expense ratio of 2.41 percent: For every, say, $100,000 you had invested in the fund, you would pay Gates and his colleagues a fee of $2,410 per year. That helps puts the tenth of a cent you might lose on Gates’ Chipotle test into a certain amount of perspective. TFS trades frequently, but even so, any profits that HFT algos might be making off its trades are surely a tiny fraction of the fees that TFS charges its own investors.
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