Asian Flash Boys Debate HFT and market micro-structure

Katsuyama VS Narang



Video link:

Not quite as visceral as a Guile VS Sagat, or indeed, a Honda VS Dhalsim, FIGHT!, but still funny to see a Japanese-Canadian and Indian-American go at it, drilling down into a debate on technical market micro-structure, while the North Americans sitting at the same table watch gaped-mouthed, including the writer and creator of this Flash Boy narrative himself, Michael Lewis. Like Lewis said, twenty minutes on a TV spot is not the best forum to judge the merits of either side or even to make sense of this knotty issue; but if the two Asian guys with their quant teams can square up on each side with their powerpoint slides and reams of data and we have hours to spare…

In the end, it is a moot debate. Of course the markets are rigged, of course there is ‘legal front-running’ going on.

But this is simply quantitative algorithmic methods paired with physical network infrastructure built over flawed regulatory and incentive structures at the regulators and exchanges:
Regulatory/market-structure arbitrage, courtesy of Regulation NMS blowback.

The Narangs and Tradeworxs and GETCOs and Virtus and dark pools of the world will always do what they do: sniff out inefficiencies/grey areas in markets (derived from flawed regulation or otherwise) and find ways to exploit them to derive a profitable edge.

Kudos to Lewis for highlighting this problem and Katsuyama and his team at IEX for doing what they think provides a ‘speed-bumped’ solution to the problem. But a problem of flawed or grey regulation in the end still requires a regulatory solution; though in this case, the problem is overly-complex regulation to begin with, so … …

Here’s a sober perspective, from the older version of a HFTer, a floor trader:

I Hate to Say it, But… from Gary Phillips

I hate to say it, but i don’t see that much difference between yesterday’s human-driven liquidity providers (floor traders) and the machine-driven liquidity providers of today. Except that as a local in the pit, I often possessed exogenous information, yet to be incorporated in the market. Predatory algorithms must rely on their endogenous actions to trigger the desired outcome.
[Hmm, think Lewis was actually making the point that HFTs possessed exogenous information (eg. through ‘market-taker’ rebate schemes to pay to have first looks at market orders and be able to react to and front-run them.)
But predatory algorithms with their endogenous actions (eg. ‘quote-stuffing’)… Right or wrong, hmm…]

Of course, in my own version of strategic sequential trading, I would often hit bids and lift offers, in search of stops, only not quite as fast or unemotionally. Yet all of this was easily rationalized as our due privilege for the risk incurred while providing liquidity. Ceteris paribas, we did this for the same reason a dog licks his balls… because we could.
[Yep. And a nice graphic analogy there.]

Perhaps, if Goldman wasn’t Obama’s largest campaign contributor, and SEC officials didn’t have a quid pro quo for job placement in place with the private sector b&ds and law firms, and the exchanges hadn’t gone for-profit, we might not be discussing this topic.

This quote from this article sums it up best:

Trading Rebates Skew Markets, NYSE and Allies Tell SEC

ICE’s call to abandon maker-taker could face opposition from other exchanges, including Bats, the broker-owned operator of four exchanges that is challenging NYSE for the most market share. In an interview, Bats President William O’Brien said maker-taker is “regulated pretty well today” and doesn’t “create any truly irrational outcomes in the marketplace.” Bats spokesman Randy Williams declined to comment on ICE’s meetings.

“Everybody’s got a whole different set of vested interests here are really hard to untangle,” Tabb said. “I’m not sure that anything happens quickly on the SEC side.”

Tsk tsk…Ah, Mr O’Brien
Regulation NMS:

Market-taker Rebates:


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