90 of 133 people found the following review helpful
Manipulative, factually wrong,
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This review is from: Broken Markets: How High Frequency Trading and Predatory Practices on Wall Street Are Destroying Investor Confidence and Your Portfolio (Hardcover)
Broken Markets tries to be informative of the problems with modern stock markets. At times, the book is informative. Unfortunately, the authors cannot make the picture clear. Their arguments sound correct at first, but after thinking about it, they contradict themselves many times on the same page (i.e., the authors are not coherent) Examples:
- authors claim that HFT provides liquidity to the top 5% liquid stocks, but hurts the remainder 95% because they are unwilling to create a market for the less liquid stocks. On the same page, they also claim that the specialists (human market makers) are driven out because they cannot compete on speed. But if both these statements are true, why don't the human traders make markets for the 95% when HFT is not present? Makes no sense.
- authors complain about the parity priority rules. Also, they say that old specialist systems are better and praise NYSE over NASDAQ, BATS, EDGE, etc. Upon looking into the issue, only NYSE has parity priority rules, and these rules were shenanigans from the past. In other words, the authors are using bad policy from the past, claim it's used on the newest exchanges (BATS, NASDAQ, Direct EDGE) when it's not, while praising the old NYSE. This is straight up mis-representing the facts.
- authors correctly state that there's no SEC rule against flash orders, and claim they are alive and well. This is a lie. After searching on Google, I found out that NASDAQ and BATS policed themselves immediately back in september 2009 and Direct EDGE ended the practice in february 2011 (for stocks). ARCA never had flash orders. (NOTE: flash orders are present in the options market)
- on medium liquidity stocks, the authors claim that the HFT is moving the bids/asks up and down without any trades happening, and this pushes the price the mutual fund is paying in execution. Also the authors claim HFT only hold stocks for seconds. Third they claim that the previous system where the investors would trade only between themselves was offering better prices. These 3 statements create a contradiction. Here's how: say investor A is buying and investor B is selling, while you have HFT (market maker) C. Since C's holding time is so small, it must be that it trades with both A and B within a short period. This means the most C can do is make the spread. Since spreads are smaller, the system is more fair than the old stock market system. This contradicts the main claim of the book. What the authors should have said is that there are different strategies. In particular one that tries to capture the spread and minimize the holding time, and another that plays on momentum. The authors are confusing by taking some properties from some strategies and combining with properties of others. The result is incoherence.
- the authors correctly state many times, that in times of stress HFTs don't want to provide liquidity (too risky). They say the specialist system was better because they were forced to make a market. In reality no rule can force the market maker to make markets. As 1987 proved, the specialists simply didn't pick up the phone. So, it was way way worse... the market became totally illiquid. During the flash crash, the spreads were huge (about 1%) and the price move was tremendous, but there was a market (not all HFTs left). The 1987 crash took days to recover, while the flash crash recovered in 10 minutes. Also, as a magnitude, the 1987 crash was much bigger (44% from watermark, 22% in one day, and 30% in consecutive day loss); the flash crash is generally quoted at 9%. The modern market proved to be the much more robust system by comparison. The authors fail to recognize that. In any case, this should be an example on how modern market makers are better than the old time specialists. The authors draw the opposite conclusion.
- the authors keep calling HFTs as "wall street". In reality these first have little to do with banks. Yes, there are HFT groups at Goldman and Barclays, but there are maybe 100 different HFT firms, and some are not even located in NY. (Getco in Chicago, Knight in Jersey City, Tradebot in Kansas, Tradeworx in Red Bank) More important is that these firms are technology firms and in structure have nothing to do with banks. The authors are trying to piggy-back on the layman hate of banks to create hate for HFTs. Also, the HFTs are very diverse and very disorganized. The author is claiming the HFTs were using lobbying, but in reality the SEC decided to push for new rules because the old system ware extremely unfair and opaque. A couple of big HFT firms (Getco) are lobbying and try to create barriers of entry for the competition. This is nothing compared to the lobbying from banks and old brokers like the authors.
- the authors mention Kweku Adoboli, an UBS rogue trader as a bad example on HFTs. I'm not sure what they are trying to accomplish here, as this trader has nothing to do with the automatic market making of HFTs, and even if he had it'd be an example on how to lose lots of money. The authors are simply trying to link HFTs to a scandal, when no link is present. This is intentional, malicious and manipulative.
- authors claim that the fact that a hidden order matched on NASDAQ is identified with the same number if is filled multiple times (lots of partial fills). The authors claim that this is a big disadvantage because the other players can figure out there's a lot of liquidity there because the same number appears many times. This is just stupid, as the player that puts the hidden orders can just put many small orders of 100 shares, and different ID numbers would be generated. The authors are either stupid or playing stupid here.
- the authors correctly mention that the computation of indexes are based on the prices on the exchange. They claim that because of fragmentation, the regular investor doesn't see the accurate index and HFTs can compute their own based on all the prices. This is simply a stupid argument, because of reg NMS the market only has one price, and any advantage an HFT would have would be in milliseconds. The investors are not doing strategy based on changes in milliseconds. Also, since it's an aggregate, a lot of data goes into the computation of the index. Even sampling would be more than good enough to make decisions based on the index for long term investing. (unless you're doing microsecond level arbitrage, which obviously investors are not doing) In other words, the authors are claiming the investors are at a disadvantage when in reality they are not based on their example.
- colocation: the authors say it's unfair, and claim it's something new. In reality colocation appeared with the first market during the time of John Law in the 1700's when prices were different at different parts of the same square. In the 1800's the Rothschild family send their children to different markets basically using colocation. There was always a need to get close to the market. In the pit, many traders were selected from football linebackers simply because they were bigger, more visible and able to jerk others around. Needless to say we used to have a much more unfair system. Now, everybody who collocates in a datacenter has cables of the same length, (i.e., no advantage to anyone) and it's relatively cheap to colocate compared to the fees of the past.
- algos that read news: it's just stupid to complain. if they make mistakes they lose. they take risks. it's their problem. the authors claim the algos that read news destabilize the market because they can make mistakes. humans can make mistakes too. if algos make mistakes, doesn't that create opportunities for others?
- stop-loss: the authors claim many times that these orders may be triggered by temporary swings (flash crash is an extreme case). These are traditional types of instructions given to brokers. The authors never take issue with the stop-loss orders, which obviously accentuate the swings (i.e., sell when stock drops) and increase volatility. If you want to minimize volatility, stop loss orders are obviously bad to the market. No mention that these orders affected the flash crash in the sense that it made the drop bigger.
- the mention of BATS IPO is laughable at best. BATS chocked on their own technology. Nothing to do with HFTs.
- the mention of the lack of IPOs is hilarious. The authors claim that it was automatic trading the reason why we had few IPO's in the last 10 years, and also claim it costed the US economy 20 million jobs. Yeah, it had nothing to do with the fact that the banks sold a lot of snake oil during the tech bubble... and also nothing with the fact that it got expensive to go to IPO based on other regulation that has nothing to do with HFT. I'm not sure what the authors were smoking, but it must have been very potent.
On top of these the authors completely fail to recognize how much better the market is for some stocks, if not all. Say trading IBM, the spread is at times 1-2 cents and it's hard to move the price, but with the specialists, it was 100 times bigger. The costs of trading IBM went down by a factor of 100. In other words, up to 100 times reduction in costs. On trading bank of america, the spread is always 1 cent, while in the past it was force to be at least 12.5 cents, and it was at least 25 because of the gentlemen agreement they had between them.
The authors are experienced old brokers/traders from the old Instinet that cannot compete and frankly understand the market microstructure only superficially. The bottom line is that they are bitter they cannot compete with the HFT, and don't seem to have the skills to build good algos for execution. They didn't complain in the past when they were sitting in the middle making huge spreads from their clients. (yeah, they want that system back)
I give it 1 star because the book is manipulative. The authors do illuminate some of the actual problems (most which got fixed), but are trying hard to manipulate the reader and paint their image of HFTs by fabricating facts. Initially I thought they are just clueless, but after reading the entire book I'm sure they are malicious. Also note that the authors have economic incentives to stop modern trading. If you want reasons why not to trust an old broker, this book is for you.
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Showing 1-10 of 11 posts in this discussion
Initial post: Jul 18, 2012 1:29:32 PM PDT
Rico Blaser says:
I fully agree with your analysis even if I would have worded some of the criticism a bit more... politely :-)
Posted on Aug 6, 2012 2:01:02 PM PDT
Paul Baclace says:
I give this review zero stars because it viciously defends the status quo with plenty of rhetoric ploys.
I hope the people who find your review helpful think that the book must be touching a nerve to bring out reviews like this.
In reply to an earlier post on Aug 6, 2012 4:49:34 PM PDT
Yes, and you prefer to choose lies over facts because it's not the status quo!? Also the lies and transparent, as I documented them in the review.
As for it being the status quo, it's actually not true. The fixed income, corporate bonds, and other OTC markets (which incidentally much bigger than the stock market) are not electronic, and the banks are fighting hard not become electronic. Guess how big the spread is in all those markets? 1%! Compare than to Stocks especially highly traded ones (0.01%) So, yeah, the banks and brokers have the incentive of keeping the status quo, while going electronic is the modern way. Unfortunately for them, it's hard to stop progress, and investors are not stupid. Also, all the other qualities of the market are much better for stocks. In the OTC, only the banks are making the market, and they will tax you much higher margins. The recent scandal with Knight... they have 100 million profit per year, and half is due to market making (and not necessarily high speed). Now, they are 10-20% of the stocks market, and by an extrapolation the entire market making industry makes maybe 500m in profit. Compare that to the sum of trading profit on all the banks. Goldman Sachs alone is in billions. I think you should do your homework. I for one am rooting for Black Rock on their new platform to bring down the transaction costs on all the investors. Same with HFT. The more competition the smaller the transaction costs.
Posted on Aug 7, 2012 4:42:52 PM PDT
Last edited by the author on Aug 8, 2012 8:51:01 AM PDT
In the markets says:
This review is riddled with errors and personal attacks. This reviewer pretends to make a fact-based rebuttal, but has a very slim grasp of the facts himself.
Here are some simple examples - he's wrong about the 1987 crash, wrong about regulations, wrong about how stocks trade, wrong about IPOs, and wrong even about the term "Wall Street."
Here's more detail, point by point:
1) "Why don't the human traders make markets for the 95% when HFT is not present? Makes no sense." It makes perfect sense. There isn't enough volume in the lower volume stocks to sustain a market making business without the higher volume stocks. This is a very well-established fact.
2) "Authors complain about the parity priority rules. Also, they say that old specialist systems are better..." The authors never say the old specialist systems are better. They say there were features of those markets that were better - not the whole system - a subtlety obviously lost on this reviewer.
3) "Authors correctly state that there's no SEC rule against flash orders, and claim they are alive and well. This is a lie." As the reviewer implies, the order type is alive and well in options - not a lie at all.
4) "Since spreads are smaller, the system is more fair than the old stock market system." In the old stock market system, dealer participation rates were 20%. Today, HFT participation rates touch 70%. That's more fair? In the old system, investors got the spread 80% of the time, and today, only 30% of the time. That's better?
5) "Also, as a magnitude, the 1987 crash was much bigger (44%)" For someone so concerned about the facts, the reviewer is off by a factor of 100%. The 1987 crash was a 22% drop. Are the rest of this reviewer's "facts" off by 100%?
6) "The authors keep calling HFTs as 'wall street'. In reality these first have little to do with banks." Equating banks and only banks with "Wall Street" is this reviewer's private definition of "Wall Street." A more accurate definition would include many involved in financial services whether they're affiliated with a bank or not. Getco isn't "Wall Street" at this point? Too funny.
7) "the authors mention Kweku Adoboli, an UBS rogue trader as a bad example on HFTs" Actually, the book doesn't claim Adoboli himself was an HFT trader at all.
8) "authors claim that the fact that a hidden order matched on NASDAQ is identified with the same number if is filled multiple times (lots of partial fills). The authors claim that this is a big disadvantage because the other players can figure out there's a lot of liquidity there because the same number appears many times. This is just stupid, as the player that puts the hidden orders can just put many small orders of 100 shares..." That's true, assuming they know what's going on. They didn't, and that's the problem.
9) "This is simply a stupid argument, because of reg NMS the market only has one price, and any advantage an HFT would have would be in milliseconds." The market does NOT have only one price. Reg NMS does NOT enforce that. Prices can go off at or between the NBBO and, depending on the spread size, differ by many basis points between the listing market and the other markets. And if someone merely clears the BBO at the listing market, they can ISO another market and cause considerable price deviations that are NEVER picked up in an index calculation. The reviewer shows considerable ignorance of these basic facts.
10) "colocation: the authors say it's unfair, and claim it's something new" Co-location IS new. Firms were never able to host their computers in the same facility as exchange computers until co-location. That's just a fact.
11) "algos that read news: it's just stupid to complain. if they make mistakes they lose. they take risks. it's their problem." It's everyone's problem. Did the reviewer ever hear about what happened to the price of United Airlines when an old (negative) news story was posted on the internet by accident, algos picked it up, and the stock cratered? Typical of some, the reviewer doesn't appear to care apparently because it's a cost to nameless/faceless investors, right?
12) "stop-loss: the authors claim many times that these orders may be triggered by temporary swings (flash crash is an extreme case)" The reviewer seemingly wants to ban stop-loss orders, an order type that's been protecting investors for decades - at least until the erratic price movements of the HFT era. How do investors protect themselves when, say, they have to work for a living and can't follow every tick in the market?
13) "the mention of Facebook is laughable at best. HFTs were not even present during the first days of the Facebook IPO, because you cannot short in the first week (too expensive as Morgan Stanley doesn't want to let you borrow the stock easily)" First, this is incorrect. Does the reviewer have access to Nasdaq Level II data? He will see very active HFT market makers in the stock. Oh, wait. One more thing. The book doesn't mention the botched Facebook IPO at all (the book came out two weeks after the Facebook IPO and was certainly in press at the time).
14) "the mention of the lack of IPOs is hilarious" Yes, so hilarious that David Weild, the author of the chapter on IPOs, was invited to the White House to watch the President sign the JOBS act.
The reviewer's concluding remarks are just vicious personal insults, unsupported by any facts at all. But what can we say about someone who gets his own facts so amazingly, bizarrely wrong?
In reply to an earlier post on Aug 7, 2012 6:50:22 PM PDT
Last edited by the author on Aug 7, 2012 8:10:48 PM PDT
This is fun. :) I'll also reply point by point to your reply.
1) Ok, but were market makers present in those 95% of the stock before HFT? You seem to say no, but the book claims that the human market makers in those 95% of the stock were driven away by automatic market makers. I have a problem with this claim (HFT drives away human market makers in 95% of the stocks that are not being serviced) You're comment seems beside the point.
2) It feels weird that authors complain about the parity feature of NYSE, but they never mentioned that this was part of the old specialist and pit system. The book feels bias on this regard. And btw, I'm totally against having parity rules, and I believe they should be banned.
3) Yes, flash orders are present in the options market. But the authors claim they are also present in the stock market when in fact they are not. My review was about the stock market piece, not about the options market. Here clearly there is a lie in the book.
4) Smaller spreads generally means lower transaction costs. Much smaller spreads means much lower transaction costs. Now we have smaller spreads. Fair was probably the wrong word to use. I'm looking at it from the point of view of the investor. I should have said lower costs, not fairer costs.
5) I meant the market fell 44% from the high watermark. I'll clarify in the review. The DJIA high happened on Aug 25th 1987 closing at 2722.42. The close on Oct 19th was at 1738.74, a 44% drop. What you're quoting is the one day drop, of 22% on Oct 19th. I think the most fair comparison would be the consecutive day drop, which happened Oct 13 to Oct 19, a 30% drop from 2508.16 to 1738.74.
6) The average reader thinks of wall street as banks literally on wall street (even occupy wall street went to ... wall street). A book about HFT should have mentioned they have little to do with the traditional banking. This is a shortcoming in the book, and this is a book review. I see nothing wrong with this comment.
7) True, but they do mention Kweku Abdoli as being on a delta desk that is related to HFT and automatic trading. The average reader is not sophisticated enough to realize the difference, and literally as the book reads: Kweku Abdoli - bad, related to automatic trading -> automatic trading bad. Why would you even mention Kweku Abdoli in a book about HFT? Can you explain?
9) Well, I don't think so. It's actually better now, in particular for the index computation. HFT or arbitrageurs are already doing to job for you by making sure that say ... the MSAP future is in line with the underlying stock. All you have to do now is look at the futures contracts.
10) As I explained co-location has a long history. Hint: do a search on Rothschild and the Napoleon wars, John Law, and the trading pit. Exactly the same concept. The only difference is that now it's cheaper to co-locate and it's more fair (cables of the same length vs size of the pit trader).
11) People trade inefficiently all the time. It's always been their problem. Why complain about algo reading news. They can do whatever they want on their risk. I don't see why the authors are bringing up the subject. If the algo disrupts the market, it traded inefficiently and lost money. Their loss.
12) I have no problem with stop-loss. But the authors are saying this is protection -- it never was. In fact this "protection" accentuates swings. If authors are concerned about volatility as they claim to be they should have mentioned that stop-loss increases volatility. I'm not saying volatility is good or bad. It just is. It always was. Look at historical data.
13) You're right, Facebook was not mentioned. But BATS was, and HFT had nothing to do with that. I'll correct the Facebook comment. I must have confused it with the articles the authors wrote on the Facebook botched IPO.
14) Big disconnect here. The claim that electronic markets stopped IPO's is farfetched. It just happened to coincide with the end of the tech bubble, and that's the real reason it's harder for companies to IPO. Nobody wants to buy pets.com anymore.
I wanted to like this book. I do think there are problems with the current status quo, but unfortunately the authors never touched those issues. This is why I think this book is bias and self-serving. In particular the exchange tier system is suspect. Different clients pay different fees and get different rebates. HFTs pay lower fees and get higher rebates. The authors complained about the taker-maker model in general, but they never made this point: the fees are different based on the broker and how much volume you bring. I wonder why they never mentioned this different fee/rebate. Also, brokers are not obliged by law to pass the rebates to their clients and in fact they rarely do (or so claims NY Times) This creates a big conflict of interest, and this is bigger than any problem presented in this book.
In reply to an earlier post on Aug 8, 2012 3:19:20 PM PDT
In the markets says:
I can tell from your response that you can be a reasonable guy with a sense of responsibility. You can admit where you're wrong, and at least here in the comments you are trying to argue your points where you think you're right - even though, to my mind, you're not right.
But your review doesn't live up to your own standards. Your review is just nasty. It's also just wrong on many important factual questions. Most seriously, it engages in unfounded character assassination, and you're better than that.
The authors of this book are agency brokers, plain and simple. They aren't specialists and they don't want to be specialists. They don't want to go back to the corruption of the past. They want to get rid of the corruption of the present. All they want to do is bring their client orders - mutual funds for the most part, as I gather - to a fair market. In my own review I gave them five stars. Is it because I think they're right about absolutely everything? No. Is it because I think they write as well John Grisham? No. It's because they got the big picture. Directionally, they are absolutely right. They nailed it. And they want to fix it, and they have the guts to stand up and say something. Who else in the industry is doing that?
I can tell that in some ways you want to fix it too. You might not like the book and that's your right. But do the authors deserve invective and accusations? No, they really don't. If you don't like the book, you don't have to give them five stars, but strip away your incorrect facts, the misunderstandings, and the personal attacks.
In reply to an earlier post on Sep 20, 2012 7:04:43 PM PDT
In the markets is spot on. Daniel clearly has more knowledge than most, but based on his remarks, he is not an institutional trader. I happen to work in the business and agree with the facts laid out and their criticism's. I recently heard Sal speak and his main complaints are the maker/taker model, the data the exchanges are selling, and the fact that hfts see the quote change faster than the public quote. If you took away the data feed, the hfts would not be able to front run orders.
Posted on Oct 1, 2012 4:12:52 AM PDT
Wow, just the commentary is longer than the book almost. As a daytrader I can jump right in there with you guys. But as someone who sees how hard it is to do that, lately Ive been swing trading. Let me explain. I like a stock. I will never buy it after its been up for more than 5 days in a row or on the 5 min chart it is nowhere near my 8 and 20 simple moving average. So lets say Im watching several stocks at one tiime that are pulling back from being over extended. So my stock which opened at 20.44, about the same price it closed at yesterday is moving up steadilly for the 1st 30 min of trading to 20.88. Now over the next 30 min it falls back to 20.50 and now minute by minute its creeping back up. So I decide to buy it if it crosses my 8ma and put a buy stop limit order in at 20.66. I get my 1200 shares filled immediately at that price(and if not I give it 2-5 more minutes and then I take however many shares they gave me.) 90% I get a complete fill because I only trade stocks with over 1m shares traded daily, usually 5m or more. So I now go to my daily chart and see where I think resistance or the end of the move might be(not important how I do that). I likely put my stop under the pullback pivot point at 20.49. I attempt to hold the stock until it moves back under the 8 or maybe the 20sma if risk amount per share isnt much bigger and then sell at limit or market,(often 2-10 days later depending how fast things are going. So if I can make a dollar or more per share with a .16 risk, why do I care about HFT's? They might even help me if they decide to move the price up a few pennys when Im close to my profit target and they may hurt me if I was a few pennys away from the stop.(all my stops are in my head, never manually till close to the target or stop. And even then I may sell at market if last 2 moves were upticks. Ithink HFTS hurt the other greedy scalpers and market makers and specialists and whatever goniff's are swimming around looking for a quick edge. But how would they hurt the buy and hold value investor who lets say buys AAPL at 100 and knows its going way higher and doesnt sell till its at 500. Who got hurt. Maybe a penny in slippage somewhere. Irrelevent to the long term player and even to me, the shorter term player. Its the scalpers that get hurt and they supposedly are providing liquidity anyway so their job is done. How do I get affected?
Posted on Dec 29, 2013 9:32:18 PM PST
[Deleted by Amazon on Dec 29, 2013 10:42:35 PM PST]
Posted on May 19, 2014 8:53:00 PM PDT
Daniel, which HFT firm do you work for?