Interview with former high frequency trader, Dave Lauer

chat with traders episode 88 this is your key to the minds of Trading's elite performers those who profit in relentless markets here on the chat with traders podcast you'll hear about the skill sets and tactics that lead winning traders to win so you can level up and become a better trader here's your host Aaron playfield shout out to technician for sponsoring this episode traders if you came to move on from outdated and limited charting technology technician is the answer their award-winning app arms modern traders with the ability to chart analyze and trade from anywhere now the technician app is available for mobile tablet and even desktop and it's free there are no trials either it's actually free for as long as you use it so visit technician app com2 get started today again that's technician app com what's going on team welcome back to another episode of the chat with traders podcast I know I said all the time but thank you so much for being here I really appreciate you tuning in my guest this week is Dave Lauer dave is a former high-frequency traders for firms such as Citadel and Austin trading he's worked specifically in various areas of the hft pipeline including research and modeling building hardware and programming in operating strategies which are measured in millions of a second or microseconds following the flash crash Dave left his role as a trader for various reasons we discussed during this episode and now as a partner of core group he consults to institutional managers on market structure and best execution dave was also featured in the VOD mentary the wall street code along with other chat with traders guests Haim boudic Eric hon sada and Blair hull I really enjoyed speaking with Dave and I hope you'll enjoy this thing just as much show notes for this episode can be found at chat with traders comm Ford / 88 now here it is my interview with Dave Lauer by telling us a little bit about how you got your start in financial markets like where did all of this begin for you yeah I'll try and keep it quick although I like to tell the story I think it's kind of a funny story but I got my start as a kid so when I was young and I was playing around with a little thing you know called AOL which was America online and you could put together this sort of paper I guess we would call it now like a paper portfolio of paper trading and I just put all these companies that I knew and it was the mid 90s and so the companies I knew were Intel and Microsoft and cirrus logic and us robotics and that kind of thing and and I said look at this I could buy this portfolio for $2,000 and so I told my parents about that and they just kind of dismissed it I think it was like you know 14 years old or something and then I you know like a year or a few months later it was like oh hey look this portfolio is worth $4,000 okay I would try my parents like you really should buy this and they just said oh you don't know what you're talking about you know forget about it and a year later you know it had doubled again and it just seemed to keep doing that and so eventually we started a stock Club and focused on high tech and that was a pretty lucrative thing to do in the mid late 90s going into 2004 markets and trading and so when I went to school I take computer science and I got a master's in finance and I came out and I I still wanted to do high tech so I started and a startup that was funded by Goldman Sachs and we built a piece of hardware for accelerating low latency trading systems and trillion C trading desks and so I did that for a few years from 505 209 it was pretty good time to sort of be involved in that part of the industry and then I eventually decided I should be doing the trading not selling equipment to the trader so I became a high-frequency true and I worked at Citadel and then in Austin trading I did that for a couple years and I did everything from quantitative research and modeling to programming the trading strategies and you know managing them and executing you know dealing with them executing trades that kind of thing and and they scaled up pretty large I specialized in etf market making auctions opening and closing auctions event based trading like around news events and we also did quite a bit of inner listed arbitrage between different geographic markets like us in Canada for example and that was that ran through 2010 and the flash crash where I was working at one of the largest liquidity providers for the e-mini market and so obviously the flash crash was an interesting event to see from that perspective it was on the desk right next to me and I was really good friends with those guys and it was it was kind of eye-opening so I think within a year after that I had left high-frequency and I'd left financial services and I really had no interest in the industry anymore it's kind of disgusted with it and I built a storytelling website with with a good friend of mine and the first story I told was why I left financial services why I left high-frequency trading and again it was 2012 so it was kind of fortuitous it was just a good time too to talk about that kind of thing and someone from a radio station in the US National Public Radio asked me to come on and tell the same story and I did and the next thing I know I was getting calls from the US Senate and the SEC and from Brad katsuyama and I yaks and you know so I kind of found this new path in back into the industry where I realized I can you know kind of take what I learned and use it in a different way and so ever since then that's been what I've done I tried to help people understand market structure I've really focused on institutional asset managers and helping them reduce the friction of interacting with markets reduce the cost reduce the opportunity to lead the information and have slippage that kind of thing right right well I really want to break this down because this is super interesting so just going right back to when you've mentioned that you were that you got involved with a start-up that was funded by Goldman Sachs I'm really keen to hear a little bit more about that you what were you exactly working on there was it that actual hardware and not the sort of the software but more of the hardware that's used for high-frequency trading is that right yeah so we built a piece of hardware the company is still around although they have since shifted but what we did was we built this this piece of hardware for something called middleware messaging so you know almost every high-frequency trading desk you have all these market data feeds coming in right and then that data has to get sent out to lots of different models those models have to act on that data and then send orders to the market you know and that can that that is true whether you're dealing with you know massively distributed co-located systems or not and so the hardware that we built we actually put feed handlers in the hardware we'd started with like inch Hartke we had an Oprah feed handler which at the time was something that almost nobody could contend with those data volumes they were just massive and so we actually built this accelerated networking appliance that would go into the data center and you know like I said Goldman was one of the funders and so I spent quite a bit of time at Goldman was a contract worker there for over a year and sort of got to play in their development lab and data center which was just for a tech geek kind of the craziest thing that you know you can imagine it was just a ton of fun right so had you had much experience with that your hardware aspect of things prior to this no no I'd always been a I'd always been a software guy although you know I've been building my own computers since well since we built my first one with my dad when I was seven the you know so I I know I knew some stuff but I was very new to the hardware space I was really came into it as a programmer okay sure sure so you know that that hardware that you were working on where did that actually fit into things like where was that where did that go I guess is the question like did it go in there and the datacenters yeah it would go in like the the main the firm's main data center usually where he would bring all the market data feeds in although some did want it in Colo spaces and that was more practical you know if you were in a Colo space that had multiple exchanges obviously it was a little expensive to put a piece of this hardware in every Colo space but eventually not not at the company I was at but others went that route where they started putting these things in cards rather than in appliances like we did and then it made a little more sense to go you know to all the individual coalos okay and was this used solely by Goldman or was it used industry-wide yeah it was it was industry-wide I mean we had if there was a really interesting way for me to be introduced to the industry you know I never worked on Wall Street before and never done anything you know professional financial services and being the third employee at this startup you know I was in all you know I was in almost every meeting at every major company you know every major big bank most of the hedge funds all the prop shops and you know understanding kind of how they all worked and what the their problems were and then how you know maybe what we were doing could help with some of those things right right got it so tell us a little bit more about and you know the next step from there we went on to Citadel I'd became to hear about the type of things you were employed to do that yeah so you can imagine I don't really talk specifically about what I did there I can I'm happy to talk kind of generically about my years and hft but it's still a very secretive industry and not wanting to ever take the risk of litigation I just generally don't talk specifically about companies that I were dead okay okay now that's cool that's good I understand that if I just assumed I if I don't do that I'm okay all right so we talked a little bit about how hft firms optimize their strategies for speed you know besides the virtual hardware like the types of hardware that you worked on are there any other ways that they like what are some of the other ways that hft firms to use to really reduce the elation see as much as possible yeah so it's funny because you know working at at Ravello which was the startup I worked at you know we solved one part of the problem but you were it didn't matter if you solve one you know block in a pipeline if you you know you're only as fast as your slowest point right so and that time in those few years I became a real latency measurement and and mitigation specialist that's really what I focused on and I came up with different techniques for measuring it ones that are sort of just started to become more mainstream just a couple of years ago you saw the financial from information for him adopt one of our techniques that we had published a paper on which was about instead of looking at volume in terms of messages per second we used to look at it in terms of messages or network frames per millisecond because the micro bursting at the millisecond level was a major component of latency and so you know you needed to control for that and be able to handle micro bursting on that time scale and I'd imagine these days it might even be you know they might they might be down to the microsecond but you know we would look for opportunities to optimize latency that you would measure in double-digit microseconds when I had built one of my trading strategies when I was actually in hft and believe it or not this was in Java but it was running on a cert on a server in a Colo space would measure every message in and out of that box so it was an event-driven strategy so it was very easy to know when the message came in that I was reacting to and the order went out which was the reaction and I would measure those wire-to-wire latencies at the network switch level and my average or median latency was around 40 micro seconds from message hitting my server to order leaving my server and you know at tolerances of 40 microseconds with standard deviations of you know double-digit microseconds you have to look for every possible source of delay and you know so you just look the up and down the entire stack you look at your networking equipment from you know on your switches and your routers you look at the kind of lines that you're using whether you're all fiber or you know you have to sometimes you have to hunt down fibre to copper switches because those kill your mill your latency you have to look at the network card that you're using you want to use Colonel bypass technology so you're not dealing with your operating system overhead and that's you know then you have to tune all of your network card settings your network driver settings it all depends on the particular network ship car you know the chip in the car and the driver that you're using you want to tune your OS and your buffer sizes and that's you know that's before anything is even hit your own software which you have to just profile and tune rigorously and one thing I was able to do with that trading strategy was if I got an event that I wanted to react to and I tried to react to it and I missed I could measure you know the response time of that exchange on average to the times that I would get that I would get my fills and then I could measure the in the time from the market the public market data feeds of whoever beat me to that film to hitting that order and I could profile my competitors and understand exactly how fast they were and I would know exactly how many microseconds I had to take off in order to start beating them again and it was you know it was something that you had to pay attention to it would come up every week or two it was this you know sort of this race with each other and you know I mean it was it was very difficult and it was some really interesting and challenging engineering problems but you know it I think in the end you started to wonder what am i spending all this time trying to shave microseconds what exactly is that doing for the market mmm-hmm now I've got a couple questions based off of you know what you said there so probably the first one is 40 micro seconds are you able to put that in perspective for us like can you compare that to anything at all well it takes you 300 milliseconds to blink your eye and that's so maybe 300,000 microseconds it takes a nerve impulse I think about on average 80 milliseconds to get to your you know to your brain so that'll be 80,000 microseconds so you know I I'm not sure oh my all my scales are in millisecond you know that we can relate to so yeah microseconds you know you're talking millions of a second so 45 millionths of a second it's it's a it's a time scale that's hard to get your head around and that was you know that was in like 2010 and 2011 so they're you know these guys now they're dealing in single-digit microseconds they're optimizing nanoseconds things were headed that way when I left but you know that's you that's certainly where they're at now yeah yeah that's incredible I mean it's so hard to get your head around just how granular that that amount of time is you know what I mean yeah they're very little you can relate to yeah yeah so you said that you were like analyzing and monitoring your competiting hft firms to see you know how many microseconds their orders were sort of hitting the servers and bouncing back out and if other firms were just a couple microseconds like a couple millionths of a second faster did that mean that you would boo if you weren't faster than them I mean I know that's that's probably bit of a newbie question but I mean was it really like though for the the things that I was doing it was pretty black or white it was you know an event would hit you'd want to go clear out a bunch of price levels and you know either you got it or they got it because the quantitative side of what what we were doing was not you know dramatically advanced I would say I mean it you know it was probably hard math for most people but it's not like we always used to say it ain't rocket surgery you know what we were doing so it was very much about speed and many hft strategies are speed dependent and that's why you have this competition over lasers and microwaves now back then you know it was the Sprint networks line the Chicago to New York line was that was a major change a major shift and if you weren't on it you know that you might as well go do something else and that was the difference of like two and 1/2 milliseconds or something like that so you know there are other strategies that are more quantitatively driven that are not as speed dependent but you know there are you know there's a pretty substantial class of strategies that are speed dependent and I wish I should clarify often when I when I mean speed dependent I mean yeah it's usually not about who's second fastest it's usually about who's the fastest now that's for for aggressive trading strategies for more passive market making strategies you know it's okay to be in the group of the fastest but you know as a it's all about sort of queue position through the passive market making strategies so you know as you are slower it means your queue position is further and further in the back right you're you're further and further towards the end of the line and the closer to the end of the line you get the more toxic the order flow that you're interacting it's which you know the more informed it means that generally you're on the wrong side of the trade so when you're at the front of the line you have this backstop of a bunch of people behind you where if you get hit and you realize you don't want to be in this position you can scratch out at whoever you know with whoever's behind you but if you don't have that backstop and generally you know if you get hit and you don't want to hold that position or its price of moving against you you know you're screwed you're gonna lose money mmm and you and you talked about using Lices and marker wipes in your response there how how it's such how such things been used so pretty much for market data transmission although some people also send orders over those lines as well but if you you know if you you can imagine that point-to-point data transmission is just it it's gonna be faster than a line that runs underground that probably doesn't go in a straight line and also data traveling through the air is going to be faster and then data bouncing around the fiber optic line bouncing off the sides of the wire so you know there's a pretty substantial latency difference even if the distance itself is the same you know even if somehow you got a fiber line that was point-to-point traveling wirelessly is still going to be faster by a little bit mm-hmm and these data transmit is like you know it lasers or microwave towers or what if you want to call them these individually owned by said hft firms yeah you have some that are owned by individual hft forums a guy who tracks a lot of this stuff I think he's Belgium Belgian anthropologist and Alexandre Lemonnier and he does really interesting reports on wireless data transmission and whether individual firms own the towers or vendors own a bunch of the towers - so like Mackay Brothers I forget that the other the other firm but you know you have vendors that own these towers and sell the wireless spectrum you know on the on the the towers and then you have some hft firms that have just gone ahead and built their own okay and then that's the sign for some of the cables that are underground as well is that right yeah that's true although most of the time is you know firms don't lay their own cables most of the time it's just it's vendors that own the cables to telecommunication companies that are the circuits okay okay so you know anyone who's maybe seen you in the wall street code or heard you speak and other interviews has probably heard your story about trading during the flash crash but for anyone who might not have you know heard you will take on on the the situation would you mind sharing that story with those listening to this podcast yeah sure I'd love to you know it was like I've said before it was a pretty you know impactful event for me really changed how I saw the impact of of high-speed trading on the market and just generally you know the the complexities of market structure and where it was leading us to you know it was it was just kind of a normal day at the time you know 2010 there was there was a lot more volatility and now we're starting to see volatility but you know for the last couple of years we've been in a pretty low vol environment but in you know 2010 that wasn't the case I mean you can I got my start in an actual trading in 2009 so it was a very you know very followed a couple of years and so you know the markets they were down a couple percent rioting in Greece that kind of thing it wasn't anything exceptional you know the art day was just kind of proceeding as normal and we were training and I was working on new training strategies at the time and you know I don't remember anymore the exact times I'd have to look it up again but you know I was like around 220 or so I look up at CNBC and the Dow was down you know whatever it was and I looked up a couple minutes later dropped another hundred points and I said oh man that's a that's a pretty quick drop so I went back to what I was doing and you know took a look at our training strategies everything go online look back up a minute later is out another hundred points my boss was sitting right next to me as a friend of mine and I you know I said hey watch it look up look what's going on and and he looked up and he said wow whatever you know I went back to what he was doing then like a minute later it's out another hundred points and I said hey something's going on here I think he looks back up he looks at it you know we started looking at all of our training strategies and we weren't during the day you know we had again like I said some training strategies a lot of our stuff at the time hadn't been really fully built out yet we we had moved from one firm to another relatively recently so it wasn't hard for us on the equities desk to shut down what we were doing but you know we looked over as I said before the the futures guys are right next to us and they were starting to scramble you know they were starting to to panic and to you know no one had any idea what's going on and so the you know the market dropped again and obviously kept dropping at at one point the CEO of the firm came running over to the equity index guys and he was just you know shut it off shut it all off started screaming we ran over we start helping them like close programs down everyone's just shut it you know every everything is just control C control see everywhere you can go kill the programs hit the stop buttons you know bunch of things have your big red button did your stop training and then we all kind of at that point no one knew what was going on we all kind of gather around one monitor which just showed the e-mini order book and as you're watching the order book you know the one of the most liquid instruments in the world you just start you start seeing like price levels disappear and quantities just drop to nothing and they you know the bids in the offers they start spreading out where it usually it's a very thick book and then they start you know moving away from each other and suddenly the you know the books gone we're looking at we're like what the hell is going on there's nothing there you know and we didn't know it was it a datafeed problem it was something crazy going on we look it with the TV the market was down no like crazy at that point and ensure you it's easy to look back and say oh but then everything bounced back and you know but that at that moment you had never thought this could happen you had no idea of what was gonna what was going to happen now you didn't know what to do you didn't know if you could trust your data or not all the feeds were screwed up you know I think I remember the SIP at that point was like minutes behind anything and and so you just kind of sat there and yeah slowly trader you know the traders came back into the market things started to move we started turning things back on but you know there was that moment then I'll just I'd never forget where you know you don't know if the markets coming back you don't know what just happened to it and you know I I just I think it was that it was that thing you know that just made me start to really question what was happening and really as a firm and set us in a strange direction to you know we I remember the CEO coming out a quarter later and he said oh we're gonna get more involved in the public debate make sure people understand what we're doing and see if we can help and and so you know it was a real turning point I think for the obviously for the industry and for regulators and you know it was it was a dramatic way to experience it on the floor of one of the largest emini traders I'd be digging the episode we're about halfway through it we still got plenty to go now just a just a quick word for our sponsor here so listen up team we've got technician sponsoring the podcast again this week I'd really like to drive home some of the cool features technician have to offer users of their award-winning charting and trading platform so let's run through a few of those now real quick first technician is available for mobile tablet and desktop all of which is free to use it's obvious technician have been very particular with the design of the platforms interface and charts because it looks a million bucks and I don't say that lightly charts are easily customizable and there's a great big range of drawing tools and various indicators that you can use as you please technician connects to a growing list of brokerages so you have the ability to actually trade directly from the chart all within the same window you can also pull up a stock twits and newsfeed related to the chart you're viewing again in the same window and if you're not actively trading or you're keen to try out something new technician also have a built-in demo trading feature so it's planet check out there for all this and so much more visit technician app comm and sign up to start using technician for free again that's technician app comm you know there's there's still a lot of debate and a lot of confusion about what actually really happened that day and what sort of caused it I mean do you have your own version of what you think may have led to that event I do yeah I you know I'm oh I'm a student of complex systems and something that I got really I was was just a passing hobby at the time of the flash crash but you know over time I've gotten much more into and and and spent a lot more time reading books about and you know I'm a strong believer that that the market is a complex system has been for a long time it's a different kind of complex system now than it used to be when it was human driven and you know to me there was no cause of the flash crash there it's that simple there you in a nonlinear complex adaptive system you don't have cause and effect you know you can you can be the regulators and point to the Waddell and Reed order and say well that was what caused it but you know you've had that those sized orders before and since despite being rare and they didn't cause flash crashes so you know it's it's a very unique confluence of events that recall that you're required to have something so dramatic happen and and so you know my preferred term that I've read in the academic literature is this you know this is this feedback loop or this illiquidity contagion and so you know the system entered a positive feedback loop and all these ages reacted in the same way much like we did on our trading floor we pulled everything so did everyone else you know every probably all the liquidity providers because the you know you didn't trust your data you didn't know what was going on so you stopped trading and that's what happened and it's you know a million individual react individual actions that led to something like that and you know that's the kind of thing we see on a regular basis on a single stock level now and you know I that a big part of that is that we need a greater diversity of market making we need market making on different time scales and you know there there are ways to encourage that from a regulatory perspective that in the least in the u.s. we don't go down that path but in other countries like Australia and Canada you guys have and you know I think that makes for stronger markets yeah now that's that's really interesting and I don't know if this is almost you know a little bit beyond the scope of the podcast but would you be able to sort of explain what you mean by there's no sort of cause and effect in complex systems yeah so it you know it just means that in complex systems you have emergent phenomena you have you know things that sort of just self organize or just come out of you know chaos is a term for it it's kind of very specific term it doesn't you know it it doesn't mean you know sort of the chaos as we think of it as sort of a mathematical term but you know you have this this transition to turbulence that happens in complex systems which is you know if you've ever seen pictures of fractals they many fractals are actually you know the visualization of what it looks like what the math looks like of a transition from a system to turbulence and so when a system transitions into turbulence it it doesn't do so because something happened in particular it does so because it's an emergent property of a complex system it's kind of complicated it's kind of complicated to explain it but you know it's chaos theory and nonlinear dynamics have a lot to say about this kind of thing and it what it means is if you think there was an event that tipped a system into turbulence and you can say that that event will always tip that same system into turbulence that's cause and effect that's linear causality but if you know you have the same event happen and sometimes it will push the system over and sometimes it won't then you can't really say there's a cause and effect there because there's too much going on to model it in a linear fashion you know it has to be this dramatic confluence of events that happens that pushes it you know that that pushes the system over the edge I think it's them you know not not being really an expert in this I think that's the best way I can explain it if I'm not there enough that helped it anything yeah now that was really good and I think you I think that's similar to what you explained in in the wall street code I think it was you that said that you know if all the same events were to happen again in the same order you might get a totally different result was was that that's right that's exactly it and that's the most that's the most important part is you know it's like it's sensitive dependence on initial conditions it's the butterfly effect right so it's not that you know maybe it is model a bola maybe it is not but the thing is that at our level you know there there are such tiny differences between what pushes the system into turbulence and doesn't that we you know we might think it was the same set of things that happened but you know we're not able to model that that impact of something so tiny that we wouldn't even be measuring it and yet it blossoms into such a large impact you know on a complex system yeah that's it's hugely fascinating so following the flash crash you kind of mentioned right at the beginning you had like this epiphany one day that led you to pretty much quit working within an hft firm I mean can you tell us a little bit of what was going through your mind at that point yeah it was interesting I mean it was so in May 2010 was the flash crash and i-i-i i definitely got concerned and like i said you know our firm the CEO came out a quarter later names like hey we're gonna be involved in the you know public discussion blah blah blah so you know let us know let me know if you have any ideas on market structure or anything you know what you're thinking and so it was funny i wrote this whole thing up and i was like no I think we should advocate for these kinds of changes in the market and a couple of the changes would have hurt the firm no doubt and I said but as a firm before long-term focused if we're really interested in that you know long term strong resilient markets are what are in our interests rather than maybe short term profits so you know we should we should look at this stuff and I I sent him I emailed it to him and I asked to sit down with him and talk to him about it and he did and he sat down with me and he practically laughed at me I mean not probably he did he laughed he's like he looked at it he like laughed he's like no this is what I meant this is what I was okay you know you didn't really mean what would help the markets you know was how do we sell ourselves or something like that so you know that was another event that kind of set me on a different a different trajectory I kept working there for another few months and then my wife got pregnant for the first time and I said alright I don't know I don't know how I'm going to you know tell my kids this is what I was doing or you know and and this is this is really not meant to be a judgment on people who are in the industry continue to do it I've very good friends there and this was this was a deeply personal thing and you know I said to my wife I said I I just don't think this is what I should be doing I don't think it's a good use of my time of my you know intellect I feel like I could be doing better stuff I came up with this analogy you know the the work was very stressful you know your writing software that is responsible for millions of dollars going through and in very short time scales hugs would be incredibly stressful cost a lot of money and I said I don't know that you know you have a certain budget of stress in your life I hate you you can only have so much stress before you're done and I said I don't know that this is what I want to spend my stress I said this I know I don't know what I was strand my stress budget on in my life I feel like I could be doing more responsible things or you know something that made the world a bit of a better place not to sound too bleeding-heart or anything but so it was really funny bye bye May or June of the next year I left and so actually moved into my mom's house in New Jersey from Chicago and so there I was 31 with a pregnant wife living at my mom's house an unemployed it was pretty sweet so tell us a little bit about what you do today I know you're you found it or co-founder of core group I mean what sort of projects are you involved with there yeah a core we we're more constructive consulting shop you know I I got a partner who has great experience also in market structure he's been kind of a leading voice for years Kristin Agee we've got a bunch of programmers that work for us and we do all sorts of different market structure consulting projects but we have recently and it's funny this this is just as coincidental but just today we're launching our new website at Kor trading comm and we're really you know narrowing our focus to what we call best execution consulting so a lot of our work has become working for institutional asset managers hedge funds pension plans mutual funds you know long-only is that kind of thing in long shorts but you know anyone who is crushing large orders through the market and needs to make sure that they're using sort of industry-leading best execution practices policies procedures that they're doing robust quantitative analysis we've gone from a situation in which there was very little data on trading available to one in which there's way too much and so now you have lots of firms at these large institutions that are collecting all this data analyzing their trading behavior and they're overwhelmed by it they don't even know how to you know what to make of it and so we try and help them understand what their quantitative analysis means making sure they're doing the right kind they're looking at things in the right way we hope that we help people reduce their transaction costs and you know working for you work for pension plans or mutual fund companies and you know that those those cost savings go directly to people's retirement that kind of thing and you know that's again that's the kind of thing that I like doing we do market structure workshops where we'll do a half-day or full-day session and we'll completely customize it to the firm and you know that help them understand the history of market structure how did we get here you know where are we what are the complexities of market structure words of mean for you as a firm or as a regulator we've done that that workshop for several regulatory agencies in the US and so that's that's the kind of stuff we do in our for-profit lives we also found in a not-for-profit called healthy markets and at healthy markets we've got institutions who are members so we represent again the you know institutional asset managers and the spectrum of small hedge funds that are you know a little over a billion dollars to large asset managers like Janice or sei that are hundreds of billions of dollars and with those with those asset managers we help them again we help them understand and keep them on top of market structure we comment on new regulations mostly in the u.s. sometimes in other countries we try and help regulators see things from the investors perspective we advocate within the industry for better standards around transparency and disclosure we we do rigorous examinations of 80s and dark pools and we're now in the midst of building something that we call the healthy markets Research Institute which is going to provide a data platform for academics and other people that want to study market structure where they can get public and proprietary data in an unconnected way from an you know an independent provider for free with you know and proprietary data so that people can do Studies on market structure with proprietary data and then other scientists can replicate those studies you know and see if they can get the same results or if they can refute or support the results of other studies you know that's a little thing I like to call science and for some reason we don't have that in market structure we have regulations that are being written right now that are not based on data that are not based on detailed study of what's going on in markets or that are based on conflicting studies and that's a dynamic that we're looking to change yeah right very cool so you you said something there about you know how we've gone from a situation of having very little financial data to now having too much like too much that we don't know what to do with it you wouldn't happen to have any sort of stats or idea on how fast the amount of data that's available is growing would you the research institute platform we just got a grant so we're actually building it right now I can tell you that I was just talking about this yesterday is someone where if you look at opera data and and SIF data so if you take peak data rates which is what you kind of have to plan for and you try to build something that can store that kind of data you need to plan for around 22 terabytes a month and that's just Papa book equities and options now options is a mate is the major component of that so when you take options out it's more like 1.7 terabytes a month but you know so that's the scale you're talking about now with the research platform we're planning on doing equities to begin with although we will do futures and options quickly thereafter but we want to do full depth of book equities and for that for a few years of data you're talking over a hundred terabytes that's incredible yeah that's a lot of spice there's a lot of space and that's why we we have to partner with people like Google or Amazon to try and figure out how to make sense of that kind of data right right okay well so you know while you're there at core group I know it was sometime in the past couple years you actually testified to Congress on their dangers of high speed trading at what were some of the issues that you raised with them yeah as I've testified before the Senate Banking Committee twice and you know both times I try and take this perspective that I think I like to think is very pragmatic you know I don't think that high-speed trading in and of itself is a bad thing I think that I'm a technologist I'm a programmer I I think that the march of technology is inevitable and it's a good thing but I do think that some serious issues are are leading to unnecessary complexity in our markets and a lot of those come down to conflicts of interest so you know when you look at exchanges and exchanges our part regulator and part publicly traded for-profit entity that's an example a pretty dramatic example of a major conflict of interest right so who does the what should the exchange be optimizing for should it be optimizing its revenue or should it be optimizing the quality of its market and these things are often at you know not the same thing so you know I I often talk about that fundamental srl conflict I talked about the conflicts with brokers routing orders you know what what should the broker be optimizing for when the client pays a fixed Commission and the broker gets charged per share depending on where it routes the order - should the broker be optimizing for its clients execution quality or for its own costs and you know if it's optimized for its own costs and it's gonna route to a high rebate venues where it it sits there passively and most likely doesn't get executed versus you know routing for execution quality where it's going to route to an inverted then you would have to pay but get executed and get better execution quality so you know these are these fundamental conflicts we find them in all sorts of places and often they can exacerbate some of the negative aspects of high-speed trading you know of which there are some and and there's nobody in the industry that will tell you that there are no negative aspects of it but there are a few in the industry that will tell you there are no positive aspects to it also I think that you know most trading at this point is high speed and the question is you know is it this this kind of activity that's been called predatory which is aggressive trading in in structural arbitrage of the market and that's a lot of what you know like it or hate it some of the issues and flash boys were very relevant were very accurate you know having worked at ie X and worked with those guys I can tell you that personally you know it was very a very good depiction of who those guys are and what they were trying to do what we were trying to do for you know I worked there for quite a bit of time and you know there were structural issues in the market that had to do with market data feed latency differences and high speed firms exploiting those differences and brokers catering to that exploitation you know so these are the kind of things when I when I go before the Senate you try not to get deep deep into the detail but you try and point out those high-level issues that there are conflicts of interest that there are structural design deficiencies and that for some reason the SEC is not taking action and so you try and encourage you know Senate Banking Committee holds the purse strings for the SEC you know it has oversight responsibilities you try and encourage them to push these kinds of priorities right right so can you flesh out some of the you highlighted there some of the high speed firms that are using what what what some people might call predatory tactics can you flesh out exactly what some of those predatory tactics might actually be yeah so you know again the flash boys of example is is one that you know despite all of the attempts to refute it really has not been refuted and that is that if you don't route your orders in a latency aware way then you will see substantial order book fading and this still happens and you will hear many groups cite many studies that show that it doesn't happen and every single one of those studies is in a foreign market it's not fragmented so it's kind of a ridiculous analogy but in the u.s. you know you have a situation in which the nicey is in Mahwah Nasdaq's and Carter head bats is in Secaucus and if you have a market maker sitting resting orders in all of those order books with lasers between data centers or microwaves between data centers and you as an institutional broker send a large order you know in without considering how it's being sent between data centers that orders gonna clear out a price level at one exchange and it's gonna miss most of the liquidity on the others because those high-speed firms are gonna fade the order book in front of them you know I think that's an issue high speed traders will tell you that's not they will say well that's us our risk you know in response to supply and demand I think that that's a little of a stretch you know it's one thing if your orders get hit across all exchanges and then you adjust sure of course no one's gonna begrudge that but the idea that you can benefit from structural arbitrage because of high speed lines you know I don't see the benefit I don't see the improvement in market quality that results from that I just see increased volatility and uncertainty and order book instability so you know I I think that's an example of structural arbitrage and when you dig into the data sometimes you see that it's more than just cancelling and that's when people start to talk about predatory so it you know it's one thing if you've got orders resting across these different exchanges and you pull them in response to something happening it's another thing if when you see something happening you don't just pull your orders but you start aggressively taking out liquidity elsewhere in order to move the price against the order in transit and so that's where you you go from order book fade to something that a lot of people would consider predatory and when you dig into the data you see that happening you don't just see cancellations you see aggressive orders racing ahead of institutional orders now there are brokers that have figured this out and and for whom that's not an issue and there are others that that happen that use less sophisticated order routers and you know so that's one example another example is data feed arbitrage where if you know a venue is pricing midpoint orders based on the SIP and you have direct feeds you know you're anywhere from a couple hundred microseconds to a couple milliseconds faster than that matching system and so you know that during price level changes you can exploit that latency difference and that's another example of a predatory structural arm that doesn't enhance market quality so you know I think those are the things that we want to be concerned about and that we want to address and even if it's not a big issue so even if the one that I just described this midpoint arbitrage the data latency arbitrage is not a big issue which many would argue it's not and I still have yet to see data on whether it is or isn't but it's a confidence issue and markets are you know predicated on the confidence of participants and that's why IEX has been so successful you know those guys are on a mission and you know like them or hate them or think that they're just marketing whatever it is you know their business model is different and they are really there to serve investors and that's that kind of confidence and Trust has become rare in the industry and that's unfortunate but it does play a big role yes so I mean we're Qi are we I had a Dan Ison from IX on the podcast a few weeks back and he was he was really interesting to speak with so what was your involvement with IX like he said before you worked there for the I don't know it was a year or a few months or something what we working on there it was about eight months so it was when I just started being a consultant and like I said in 2012 when that that that story first went out on the radio Brad was one of the first people that contacted me so I went up and I met with them in the spring of her early summer of 2012 when they were just getting started no one knew who they were what they were doing and I loved it I loved what they were doing I I joined up with them right away and I had a great time there for about eight months just working with them on early designs I helped to design the technology systems that you know that were ultimately built in order to some extent built you know and some of the anti gaming techniques among a couple of their patents and I just I loved it I loved what they were trying to do to find a private market solution not to depend on regulators I'm still close with the guys there and and you know I have a lot of immense amount of respect and admiration for what they're doing what they've done and you know I think they're doing it for the right reasons and that's that's what was so refreshing to me and I am and it's kind of part of a broader point you know like I said I left the industry and I was kind of disgusted with it and having come back in and put myself out there and you know talked to a lot of people in the industry about what I'm doing and why it's it's been added really amazing and inspirational thing to meet a lot of like-minded people that you find out that there are all sorts of people in this industry it's not just the caricature that you hear in popular press and there are a lot of people out there that you know have a philosophy around trying to improve markets understanding that what we're doing is is sort of a fundamental part of the global economy and you know that there are there's more than just you know a profit motive at work and that there should be and and that's been a great part of all this and also you know a great part of the work that I did with those guys yeah and I daresay oh man you must have been thrilled to hear that they were approved as an exchange what just last month wasn't it yeah yeah absolutely I think they worked hard for it I think it's it's a an innovation that deserves its chance and I frankly and it was in our comment letters you know we we didn't we're a non-profit we didn't really want to take a stance on the issue but we found some of the criticism to be a bit absurd you know the idea that 350 microseconds would ruin the NMS system or ruin the order book and make liquidity unattainable when you had latency is higher than that accessing naazy liquidity or a far higher than that access in Chicago you know it's just some of the arguments were kind of off the wall and and I thought really dramatically Illustrated the split in the industry behind between investors and it was my account that I think four or five trillion dollars of asset managers supported ie X versus they're competitors and a lot of proprietary and high-speed trading firms and that was a pretty dramatic illustration to me of what's going on in markets today okay okay and as we know ix was before becoming an approved exchange was a dark poor and 80s I mean what's your views on dark pools like how does what affected dark pools have unlisted exchanges like is there any harm that can come from executing off-exchange oh I believe so absolutely and you know one of the principles of our nonprofit is that we believe in display liquidity we believe an open competition for order flow you know resilient markets are ones in which exchanges are the strongest part of the market that there's ample incentive to display orders and which border flow is not being segmented and siphoned away and that you know that and and in which market makers are profitable that so that's what we believe and so in which a lot of evidence bears out and a lot of data and academic study bears out so you know I think that when you have dark pools being run by bulge bracket brokers or major order routers that that's a pretty substantial conflict of interest and there have been a lot of enforcement cases that have shown that to be true you know hundreds hundreds of millions dollars at this point of enforcement and that when you there is a place for non-display liquidity both on exchange and off and these are very important and critical features to have in a market but when you have you know 20 80 s's of any you know substantial volume and massive fragmentation across a TSS and disparate business models and fee schedules and internalize errs that are siphoning off all of the retail order flow so that never makes it to an exchange you know you have all of these impediments to profitable order flow for market makers perspective getting to the market maker on the exchange and to me that's an issue that's what leads to more fragile markets so we believe that you know retail orders should go to an exchange like they do in Canada and Australia we believe that dark pools have a role but you know that it should be a much smaller role than they currently serve and then you know all of this massive fragmentation is a bad thing that there that there is a nice happy medium somewhere between you know the futures market which is monolithic and then the equities market which is completely fragmented and that regulation is sometimes needed to kind of help nudge the system in the right direction yeah okay okay so I mean we should probably start to wind this down I mean is there anything you want to add before we before we wrap this up you know like anything you'd like to see changed moving forward I don't know is there anything you'd like to mention or do you think we've pretty much covered enough for the time thing yeah a bunch of different things you know I think that you know from from me from a programmer more you know more of a scientific perspective I believe in data and data analysis and you know I want to see markets and regulation being much more data driven as opposed to these arguments that are filled with opinion of bias right now and that's what of what we're seeking to do with our with our nonprofit and you know I like to also empower people with information and help them understand the complexities of the market whether through stuff like this or you know when I when I work with SF managers and so you know I think the more information we get get into the hands of everyone and then into the right people the better so you know I'm always open for more opportunities to do that and you know happy to come back on if people are interested and you know if there are more questions or you know if people want to you know send me questions directly I'm always always happy to to correspond absolutely well where is the best place for you know any listener to act with you will find it more about you and core group where's the best place to go yeah you know if you just want to hear what I think I tweet a lot I'm sure people know so that's my handles just deal our and Twitter or if you want to email me it's Dave at Kor trading comm where you can just go to our new website Kor trading calm and there's a contact form there awesome good stuff good stuff man well I'll put all those links in the show notes as well at chat with traders calm so you can find everything they're all in one place Dave I just want to say man thank you so much for doing this it's been it's been awesome it's been really really fun so I appreciate you coming on in yeah thanks for having me enjoyed it you've reached the end of this episode of chat with traders but rest assured there are more episodes loaded with real market insight and zero hype on the way soon so to stay updated with each great new release subscribe to the podcast on iTunes and we'd love it if you leave a rating and review we'll catch you next time on chat with traders you

Channel: Chat With Traders

Views: 26,374

Rating: 4.8528733 out of 5

Keywords: trading, day trading, swing trading, high frequency trading, hft, the wall street code, kor group, allston trading, algo trading, algorithmic trading, high speed trading, wall street, high frequency trader, how high frequency trading works, high frequency trading documentary, high frequency trading 60 minutes, hft trading, hft documentary, eric hunsader, blair hull, haim bodek, vpro documentary, trading platforms, trader, day trader, flash crash, dave lauer

Id: 1ah7XokvcwA

Length: 63min 20sec (3800 seconds)

Published: Sun Sep 04 2016

Reddit Comments

[u/phoneslime]

I don’t really talk specifically about what I did when I broke the law “chuckles” oh man. I didn’t tell the anyone I was running a bunch of fuckery, but they all knew

[u/Jaali6084]

He's pretty much explaining that the PFOF is put into thousands of models that react in under 40 millionths of a second and probably much faster today.

This is straight manipulation across the board. No wonder Shitidel and HFT firms pay so much for the order flow.

[u/Ok_Read_7160]

It reminds me of the movie about the HFT war over fast signal: The Hummingbird Project