A veteran programmer explains how the stock market became “rigged”

Here&#x27;s an animation showing the SIP vs Direct Feed issue: <a href="http://www.nanex.net/aqck2/4599.html" rel="nofollow">http:&#x2F;&#x2F;www.nanex.net&#x2F;aqck2&#x2F;4599.html</a><p>Much of the games being played no would no longer work if the SIP was the defacto source of &quot;real-time&quot; prices (as specified in Reg NMS). Sure, there would be new games, but we have rules specifying the SIP as the key to Reg NMS. At least there would be a decent audit trail if rules were being followed. People would be able to detect delays (currently obscured by the changing time stamp) and many games would be exposed.<p>It&#x27;s helpful to actually read Reg NMS - a link is provided on that animation page.<p>P.S. I&#x27;m the veteran programmer in that article.

This is not a case of the markets being rigged. This is a case of regulators (actually congress) failing to understand the CAP theorem.<p>But for obvious reasons, an article on WAPO can&#x27;t use words like &quot;partition tolerance&quot;.<p>The problem is that the SIP must be available and it must be consistent. As a result it sacrifices partition tolerance - high latency (which is equivalent to a network partition) causes things to break sometimes.<p>So for all the conspiracy theorists out there, here is the fundamental question: which two should be provided for the markets not to be &quot;rigged&quot;?

The exchanges do send the information to the SIP at the same time that they publish it on their own direct feed. NYSE actually got in trouble for not doing this properly. This isn&#x27;t actually an easy problem, because there is a TCP interconnect with the SIP, and if it gets bogged down, then the SIP packets can be backed up.<p>The real issue is that since the SIP (CQS&#x2F;UQDF) are cheap; and big&#x2F;sophisticated players don&#x27;t actually use them, no one cares about them. Beyond that the performance is necessarily slower than a direct feed, because if I wanted to learn the price of a NYSE listed-security on NASDAQ the path that the SIP would take is far less direct. Specifically, if I have a machine sitting in Carteret (Nasdaq), listening to the proprietary Nasdaq feed, the data from Nasdaq will be sent to me and the SIP at the same time. But to get it from the SIP it has to go to Mahwah and then back, instead of staying local to the data center.<p>Nasdaq makes its feed available to everyone, for a cost. Someone who is providing execution services, or market making, needs the direct feeds so they can provide good execution and know when to get out of the way. A small investor looking at a screen doesn&#x27;t care about the SIP or a direct feed. They are going to submit their order, and their broker is responsible for executing it.

I think there should be a new kind of logical fallacy: appeal to grandpa.<p>Today&#x27;s world is not the same as your grandfathers world, we use computers to do many that they are better at than humans, executing trading stragies in submicrosecond latencies is one of them.<p>Submitting an order to a market causes the price to change, submitting a large order means that you are likely trading against an informed trader, by making a bid they are disseminating information about price to the market, if you don&#x27;t adapt to the new information (by raising your price) you are an missing a huge opportunity.<p>In an ideal market to trade a large block you&#x27;d pay a risk premium less than the price of disseminating that information over a longer period and possibly paying more as supply of the stock at a given price evaporated.<p>Everyone can read the order book to see the market depth for a trade of a given size, if you showing your hand all at once is the same as showing it over a prolonged time as you eat through the depth and the market becomes shallow.<p>Essentially what the anti-HFT people are saying is that for a public company it&#x27;s rational to expect to buy the entire stock are the current market value, as anyone who has seen a takeover go down, the purchaser must offer a premium over the current market cap in order for a bid to be successful.<p>Simply making an offer usually causes the share price of the underlying company rise to a very similar to the offer discounted for likelihood of regulatory approval and the time value of money. HFT is expected market behaviour simply occurring over a time period of nanoseconds rather than minutes and hours.

A veteran geologist explains how the medical industry became &quot;rigged&quot;

Can anyone explain to me what wouldn&#x27;t be possible without HFT? Is HFT allowing for some useful types of investments&#x2F;capital?

&quot; they will signal up to their other machine to say, “Buy everything that’s available.”&quot;<p>This sentence is very problematic as it implies that HFT are injecting themselves between 2 intermediaries that don&#x27;t need the HFT in the first place. What is actually happening is the HFT is not buying or selling anything. They are changing the prices they themselves were offering originally. There is no intermediary involved.

Here&#x27;s an interesting counterargument: <a href="http://streetwiseprofessor.com/?p=8333" rel="nofollow">http:&#x2F;&#x2F;streetwiseprofessor.com&#x2F;?p=8333</a>

<i>A direct feed from one exchange could be $10,000 to $60,000 a month.</i><p>That&#x27;s way off the mark. It&#x27;s more in the $1k - $3k range.<p><a href="http://cdn.batstrading.com/resources/regulation/BATS_US_Market_Data_Price_List.pdf" rel="nofollow">http:&#x2F;&#x2F;cdn.batstrading.com&#x2F;resources&#x2F;regulation&#x2F;BATS_US_Mark...</a><p><a href="http://www.nyxdata.com/page/1084" rel="nofollow">http:&#x2F;&#x2F;www.nyxdata.com&#x2F;page&#x2F;1084</a><p><a href="https://www.nasdaqtrader.com/Trader.aspx?id=PriceListTrading2#itch" rel="nofollow">https:&#x2F;&#x2F;www.nasdaqtrader.com&#x2F;Trader.aspx?id=PriceListTrading...</a>

&quot;The market is a pendulum that forever swings between unsustainable optimism and unjustifiable pessimism.&quot; - Benjamin Graham

Those Washington Post articles are a pain to read on mobile. I will avoid them like the plague.