Tradeworx' defense of their HFT strategies

Quote from d138:

I will mainly repeat that something is fishy about your broker. 1.0101 CAN'T be quoted on US equity exchanges.
Unless the second case you describe is a just coincidence, you are being ripped off. Is it possible that your signal is well know and 1.02 disappear because somebody else acts?
Are you 100 % sure you orders go immediately and directly to the open market and get posted there?
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Ok, I guess technically, you are correct that 1.0101 CANNOT APPEAR on US equity exchanges. However, it can be present in dark pools, where it can be TRADED. Which essentially means the same thing...

Those subpenny orders can not be QUOTED but they can be TRADED

http://www.stocktrading.com/subpenny.pdf

With the rising expansion of algorithmic trading,
traders had created programs to automatically sub-penny
the NBBO. The SEC realized this practice was a major
problem and adopted Rule 612 to deal with it. The rule
“prohibits market participants from accepting or displaying
orders or quotations in a pricing increment smaller
than a penny, except for orders or quotations in stocks
that are priced at less than US$1 per share.” The express
purpose was to “limit the ability of a market participant
to gain execution priority over a competing limit order by
stepping ahead by an economically insignificant amount,”
according to the SEC’s “Regulation NMS” document.

With this rule in place, why does the problem still
exist? The rule bans sub-penny quoting but not sub-penny
trading. In its rule release, the SEC specifically permitted
broker/dealers to trade in sub-pennies to provide price
improvement. It states that “a broker/dealer could, consistent
with the proposed rule, provide price improvement
to a customer order that resulted in a sub-penny execution.”
Broker/dealers are taking advantage of this exemption.
They can fill the order in-house, providing their
nominal price improvement, or they can use dark pools
to hide in front of the NBBO and remain in compliance
with the rule (because the order is not displayed).
 
So basically, here is a screen shot from back when I was trading PARD at 1.58... you wouldn't be able to SEE the 1.5801 order, but it would be in a dark pool where, technically, it was not quoted on the orderbook. But that order would always be there, stepping in front of your order, and getting filled before you (if it was a buy).
 

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You are correct in that those subpenny orders cannot be DISPLAYED on the order book on prices > 1.00

However, in stocks such as ETRM, when it was trading at, say 90c, then there was no regulation of not displaying subpenny orders, yet as a retail trader, we were not allowed to input subpenny orders. So you would put in an order of a buy at 0.90 when the B/A was 0.90 by 0.91

and then immediately a 0.9001 buy order would step in front of you on the orderbook, and there was nothing you could do about it, since you could not place an order with more than 2 decimal places.

I do not know if this was a specific limitation with Etrade, only, or was systemic.

Here is a copy of an email I sent explaining how I was getting subpennied to a buddy of mine in January

**************
two specific examples I deal with every day..


Ex 1: I am trying to by 100K shares of ETRM... if I put in a limit buy order for 100K at 0.72, when the bid ask is 0.72 by 0.73, within less than 1/4 of a second, a buy order will appear at 0.7201
and since I cannot bid in fractional pennies through most brokers (not etrade) as a retail trader, I cannot get filled.

Ex 2: When I am trying to unload on a huge bid. I have been in scenarios where a 1$ stock is running up fast, and huge bids are flashing, maybe 250K... I had a 50K position that I wanted to unload, and I saw that the pps stopped moving (at ~7% profit level).

Then a huge bid appeared probably 200K$, which was trying to scare people into buying, assuming the price would continue up. Then, it sat there for 2-3 mins. I put in my limit sell order at about 2-3% UNDER the bid just in case. Should have filled on the bid. But the bid was HFT, and they are fast enough to see my order, and pull their bid orders milliseconds before it executes. I get filled at the low end of my limit sell. Lost about 2000$ (actually, to be exact, made 4K instead of 6K) by not getting filled on the bid that was showing.

I am fine with the game of putting up huge bids to scare up buying and huge asks to scare people into selling. But a bid is a bid and an ask is an ask. If someone takes me out with a huge buy order above my ask, I should not be able to see it, and pull my ask order before it gets executed.

these scenarios happen to me several times a day.

g
**************
 
Quote from gambler2075:
But that order would always be there, stepping in front of your order, and getting filled before you (if it was a buy).
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In this example, where is your 1.58 order posted? Is it posted on the open visible market?
If no - why do you allow your broker to post your order at some "who the hell knows" dark pool where 1.5801 order will step ahead of it?
If yes - then you order will likely be traded before the 1.5801 order, since your quote is visible to everybody.

Getting back to the topic. No doubt you are being screwed. However it's not HFT, but your broker who screws you. And in order to do it, it does not need to be fast.
 
Quote from d138:

In this example, where is your 1.58 order posted? Is it posted on the open visible market?
If no - why do you allow your broker to post your order at some "who the hell knows" dark pool where 1.5801 order will step ahead of it?
If yes - then you order will likely be traded before the 1.5801 order, since your quote is visible to everybody.

Getting back to the topic. No doubt you are being screwed. However it's not HFT, but your broker who screws you. And in order to do it, it does not need to be fast.
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So in that case I placed a 1.58 buy order, which is sent to Etrade, to be filled whereever anyone can sell me shares at 1.58. Looking at the order book, you would THINK that retail (who can only bid 1.58 in this case, not 1.5801) would get filled.

WRONG ANSWER!

The next sell that comes along, was clearly meant to sell at 1.58, but of course, there was a dark pool buy in at 1.5801, which of course gobbles up those 8000 shares that were sold. And of course since it was a dark pool, you could not see it anywhere.

This happens ALL THE TIME. You think your 1.58 order is the best order (which it is according to the orderbook that you can see) but then you see some selling (in this case 8000 shares) which was intended at 1.58, and it fills at 1.5801, so it is clear that there is ANOTHER order book that is filling orders by subpennying you, and getting those shares, in front of you. As a matter of fact, you will almost NEVER get filled at 1.58, as long as someone wants to get shares (yes, maybe they are a broker/dealer, not HFT, you are correct) before you.

g
 
Ok, I feel like we are on the same page here:

Example 1. You are allowed to trade in sub-penny increments sub dollar stock by your broker. Not sure if changing the broker will help, but this problem has nothing to go with HF. These are regulations, broker rules.

Example 2. Yep, you can't hit the $200K. Again these are regulation that does not allow you to send an ISO order that would be executed immediately for all 3 levels. Yes, MM, HFT and broker dealers can do it, you can't. However these are again regulations, that were designed to protect a retailer customer.

Example 3. Yep, your order at 1.81 will not get filled. This is due to darkpool and market makers. It does not have a lot with HFT, except that that are not a retailer customers and can use darkpools.
 
Quote from d138:

Ok, I feel like we are on the same page here:

Example 1. You are allowed to trade in sub-penny increments sub dollar stock by your broker. Not sure if changing the broker will help, but this problem has nothing to go with HF. These are regulations, broker rules.

Example 2. Yep, you can't hit the $200K. Again these are regulation that does not allow you to send an ISO order that would be executed immediately for all 3 levels. Yes, MM, HFT and broker dealers can do it, you can't. However these are again regulations, that were designed to protect a retailer customer.

Example 3. Yep, your order at 1.81 will not get filled. This is due to darkpool and market makers. It does not have a lot with HFT, except that that are not a retailer customers and can use darkpools.
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Ok, thanks for the replies

1) Must be that my broker just sucks... I will have to check on this
2) Seems unfair that my sell orders could get seen by those with big bids and they would have time to react and pull those big bids before my sell orders could get filled.
3) So if I have that 1.58 order out there, and there is a dark pool 1.5801 order that can get put in front of it, but is not displayed on my poweretrade L2 orderbook, does it matter if that 1.5801 is displayed or not displayed? the bottom line is that that 1.5801 will get filled when someone sells 8000 shares at 1.58(01) before my bid will get filled, so for all intents and purposes, my 1.58 bid does not exist. That is ridiculous.

g
 
The retail investors doesn't really care about commissions or that 1 penny spread if they make only a few trades per year.

this is an industry stuff and don't need public opinion.

is it fair and orderly market?


Quote from MGB:

The SEC is asking for public comments as they explore market structure issues including high-frequency trading, colocation and dark pools. You'll find several letters from many HFT firms, mutual funds (Vanguard, T. Rowe Price), Bright Trading, etc.

http://sec.gov/comments/s7-02-10/s70210.shtml

Tradeworx, an HFT shop in Redbank, N.J., submitted a letter with in-depth examples of many HFT strategies, including how profits are earned through rebates. I found it to be educational.

http://sec.gov/comments/s7-02-10/s70210-129.pdf
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I also have problems with displayed limit orders disappearing on me when I try to execute large trades at the displayed limit price. For example, say a stock has a best bid of 10.20 with 3000 shares shown at that price. When I try to sell let's say 3000 shares at that price many times none of my shares get filled and the price of the stock immediately moves down a few pennies.

To me it seems like I'm getting screwed, and it happens A LOT. There is no way the price randomly moved lower right before I sent in my order the amount of times this has happened to me. My broker is Interactive Brokers and I use SMART Order Routing. Sometimes I hide these orders and sometimes I don't, but this doesn't seem to effect things. So far my only work around is to trade in 200 share increments and hope I get filled when it seems to me it should be a given.

Could someone please resolve this issue for gambler and I.
 
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