HFT skimming the market

[rlv99]

Its a bit more complex, as there are multiple schemes, and some of them do affect limit orders.

When you see an ask at 30.00 and you put in a bid at 30.00, and you see that instead of an instant transaction, the ask moves away from you, that can be the effect of a HFT guy screwing with you.  In fact, this scenario is the one that the Flash Boys book begins with.

I have not read the book yet, but I know that with limit orders you are not guaranteed the execution (instant or otherwise).  You are, however, guaranteed the price.

You can still get screwed, Fred.  Suppose the market moves to 29.50 due to HFT manipulations. You buy the stock at 30, the HFT pockets the 0.50.  It's a great book.  I direct my trades through IEX now.

[Half Right]

I direct identical limit orders through both IEX and Interactive Brokers BEST algorithm and I noticed yesterday I get fills earlier through BEST than IEX. Apparently not enough volume is being directed through IEX yet, but hopefully soon enough the volume will be there

[Fred93]

It's a great book.  I direct my trades through IEX now.

I was going to do same, but my brokers don't seem to offer that option.  Which brokers allow one to direct thru IEX ?

[Fred]

I have not read the book yet, but I know that with limit orders you are not guaranteed the execution (instant or otherwise).  You are, however, guaranteed the price.

You can still get screwed, Fred.  Suppose the market moves to 29.50 due to HFT manipulations. You buy the stock at 30, the HFT pockets the 0.50.  It's a great book.  I direct my trades through IEX now.

Not sure if I understand your comments.

If I put a limit order to buy at 30, getting an execution at 30 is fine (i.e., not considered being screwed).  The market may move down further to 29.50 -- whether there is HFT or not, but the execution (at 30) did not violate the order.

However, if I put a limit order to buy at 29.50, I don't think the exchange will execute the order at 30. Ever.

http://www.nasdaq.com/investing/glossary/l/limit-order

[thezfunk]

I have not read the book yet, but I know that with limit orders you are not guaranteed the execution (instant or otherwise).  You are, however, guaranteed the price.

You can still get screwed, Fred.  Suppose the market moves to 29.50 due to HFT manipulations. You buy the stock at 30, the HFT pockets the 0.50.  It's a great book.  I direct my trades through IEX now.

Not sure if I understand your comments.

If I put a limit order to buy at 30, getting an execution at 30 is fine (i.e., not considered being screwed).  The market may move down further to 29.50 -- whether there is HFT or not, but the execution (at 30) did not violate the order.

However, if I put a limit order to buy at 29.50, I don't think the exchange will execute the order at 30. Ever.

http://www.nasdaq.com/investing/glossary/l/limit-order

I don't want to speak for rlv99 but I think he is trying to say that if you have your limit order in for $30 and the stock is sitting at something lower than that...say $29...then a HFTer can sneak in front of you and buy it at the price you 'should' have gotten it at and sell it back to you at $30.  While technically you are getting what you want, you wound up paying more than you would have had HFT not happened.

[Fred]

... if you have your limit order in for $30 and the stock is sitting at something lower than that...say $29...

In this case, the limit order would have been executed at 29, no? (i.e., at the limit price or better).

[Fred93]

...but I think he is trying to say that if you have your limit order in for $30 and the stock is sitting at something lower than that...say $29...then...

First, there is no such thing as "the stock is sitting at...".  Stocks don't "sit".  The market has orders, which make "bids" and "asks".  There are "bids" and "asks" sitting out there, not stocks.  When you look at those bids and asks, you take away information, and reach conclusions, such as "the stock is selling at around this price".  The market makes the price.  But what if many (most!) of those bids and asks are fake.  They are thrown in there in massive quantity by HFT and 90% of them are removed seconds (or even milliseconds) later.  You are attempting to extract information from the bids and asks, under the PRESUMPTION that these are REAL bids and asks, that make a market.

If most of the bids and asks are fake, then where is the real market?  You can't be sure.  Therefore, the fakeout starts much earlier than the time you place your order.  You place a limit order at 30 because of your observation of what you believe are other real people wanting to do real transactions.  Perhaps you are wrong.  If so, the HFT can skim you, and his work on you began even before you placed the trade.

[Rob L]

Fred seems to be doing the heavy lifting here so let me attempt to add some support.
Yes, it is correct that stocks don't sit. But sometimes they move more quickly than others.  When they do the bid/ask widens, HFT or not.
It isn't a very good idea to attempt to buy or sell when things are moving quickly. This is where market makers. et.al. make the money to buy their yachts.
So, place a limit order at the price you want when things are quiet. Put it under the market at the bid if you like. Put it at the ask or more.  If it gets away; so be it. If you are filled, be happy.
Chasing the HFT'ers around is a fools errand. Pick your entry (and exit) price and be done with it. If you use a market order you are guaranteed to get a bad fill. Has always been so.
If you think you can "day trade" stocks be my guest. It would be simpler to mail a check to the pro's on the other side of your trades.

[rlv99]

It's a great book.  I direct my trades through IEX now.

I was going to do same, but my brokers don't seem to offer that option.  Which brokers allow one to direct thru IEX ?

I sent an email to IEX (info@iextrading.com) and asked them what brokers are currently working with them.  They sent me an email with a full list as well as a form letter to your broker which asks them to place your trades through IEX.  I also asked my broker to confirm that each trade was made through IEX.  I am not usually a day-trader, btw.

[Emmanuel]

I have to disagree with the original poster when he says the stock market is like a casino.  Long term, the course of the market is set by investors, not day traders and HFTs.  Sure, they can manipulate the market a bit day to day, and even apparently cause a "flash crash", but if you are in the market long term, and an actual investor, as the stock market was intended to be used, the HTFs will have little affect on your returns.  If you buy and sell once or twice a quarter, like I do, they may get me for a couple cents a year, but they are not having any real affect on my investment returns.

100% agree. Any retail investor really affected by HFT is trading too frequently. Day-trading is fun, but it's not investing.

[Fred93]

Any retail investor really affected by HFT is trading too frequently. Day-trading is fun, but it's not investing.

That's a pretty darn broad statement. 

I trade very slowly.  My average holding time is many years.  However, that does not make me insensitive to the price at which I buy or sell.  If I'm getting skimmed I care about it. 

I think you need to read the book.

[Emmanuel]

I think you need to read the book.

Paying a stock $45.42 instead of $45.41 does not REALLY affect long-term returns.
But of course, none of us like be skimmed!

I did read the book, by the way, and it's quite entertaining. But it doesn't bring anything that hasn't been already denounced and described years ago by Sal Arnuk and Joseph Saluzzi. It also fails to point that the original sin is the National Market Systems Plan of 1975.

[Fred93]

Paying a stock $45.42 instead of $45.41 does not REALLY affect long-term returns.
But of course, none of us like be skimmed!

The effect can be bigger than 1 cent.

These days when I see a stock 40.00 bid 40.06 ask, and I bid 40.03, I immediately see the ask move to 40.09 .  Then when I decide to just take the ask, so up my bid to 40.09, I see the ask suddenly move to 40.11 .   The traders are all trying to game me.  Even if I had been able to take the ask at 40.06 or 40.09, it likely would have been for 100 or 200 shares.  I'm buying in much bigger size than that.  The only tool I have is patience.  I can put the bid in at 40.05 or whatever and go away for a few hours.  If the traders (be they human or computer) see I'm not anxious, then they stop trying to game me, or perhaps they just stand aside until someone takes my bid.  However, when you do that the stock can move while you're away.  You may intend to hold for many years, but first you have to complete the purchase!  My belief, from my own experience, is that this is much more work than it used to be.  I'm the opposite of a day trader.  I don't want to sit at the computer watching and playing games.  Don't have time for it.  When they make me spend my time on this stuff I'm unhappy.

[core]

If you're going to leave a limit order sitting out there for "a few hours" you might as well hang a sign on your back that says "Lean On Me".  You are the kind of person I like to trade with.  Whether it's stock, sports in-running betting, Folio, you-name-it, the best trading money to be made is from those who place orders and leave em there.  Free insurance even if the market doesn't move, free cash when it does.

The traders are all trying to game me.

Hrmm I could swear I've heard paranoid talk like that around here before.  Who was it...

[rawraw]

I have to disagree with the original poster when he says the stock market is like a casino.  Long term, the course of the market is set by investors, not day traders and HFTs.  Sure, they can manipulate the market a bit day to day, and even apparently cause a "flash crash", but if you are in the market long term, and an actual investor, as the stock market was intended to be used, the HTFs will have little affect on your returns.  If you buy and sell once or twice a quarter, like I do, they may get me for a couple cents a year, but they are not having any real affect on my investment returns.

100% agree. Any retail investor really affected by HFT is trading too frequently. Day-trading is fun, but it's not investing.

The individual impact is small -- but it's the sum of the individuals that cause the opportunity to exist.  For example, if someone found a way to insert $1 charges on every credit card.  It'd be immaterial, but I'd hope the collective still corrected it and didn't let that guy's gravy train continue