Haim Bodek is a former Goldman and UBS trader, more recently the founder of his own trading firm, who has come firmly out against how stock exchanges work with high frequency traders. Readers spoke approvingly of this recently-released short documentary about his efforts.
For more background, here are the relevant sections from a September 2012 Wall Street Journal article, For Superfast Stock Traders, a Way to Jump Ahead in Line:
Mr. Bodek approached the Securities and Exchange Commission last year alleging that stock exchanges, in a race for more revenue, had worked with rapid-fire trading firms to give them an unfair edge over everyday investors.
He became convinced exchanges were providing such an edge after he says he was offered one himself when he ran a high-speed trading firm—a way to place orders that can be filled ahead of others placed earlier. The key: a kind of order called “Hide Not Slide.”
The encounter set off an odyssey for Mr. Bodek that has fueled a sweeping SEC inquiry into the activities of sophisticated trading firms and stock-exchange operators—including Nasdaq OMX Group Inc., NDAQ -0.32% NYSE Euronext, Direct Edge Holdings LLC and BATS Global Markets—according to exchange and other officials, and lawyers with knowledge of the inquiry…
Exchange officials don’t deny making available certain advantages, like data feeds with detailed information about trades, that the high-frequency traders can use. The exchanges’ position is that these are fully disclosed; they can be used by anyone with the right hardware and technical savvy; and they ultimately benefit all investors because by pulling in a higher volume of orders, they make it possible to buy and sell more easily and at better prices….
In papers filed with the SEC, Mr. Bodek took aim not at the data streams but at the way orders from high-frequency traders work. He focused on “order types”—programmed commands traders use to tell exchanges how to handle their bids and their offers to sell…
Mr. Bodek’s career has tracked the rise of computer trading on Wall Street. Now 41, he began in the late 1990s creating programs to trade options—contracts that provide the right to buy or sell a stock for a certain price within a certain time…
In 2007, with a partner, he started a high-frequency trading firm called Trading Machines LLC.
His firm did well at first, Mr. Bodek says, but in 2009 its performance worsened on several trading platforms, including Direct Edge, a computerized market based in Jersey City, N.J. Trading Machines’ profits fell by more than $10,000 a day, Mr. Bodek says.
He suspected a bug in his trading code and talked with officials of several trading venues. Then at a holiday party hosted by Direct Edge on Dec. 2, 2009, Mr. Bodek says, he spoke with the company’s sales director, Eugene Davidovich. Mr. Bodek says Mr. Davidovich told him his problem wasn’t a bug—he was using the wrong order type.
Mr. Bodek had been using common “limit orders,” which specify a price limit at which to buy or sell. Mr. Davidovich, according to Mr. Bodek, suggested that he instead use an order type called Hide Not Slide, which Direct Edge had introduced in early 2009, about the same time Trading Machines’ performance started to suffer.
Mr. Bodek says Mr. Davidovich told him Direct Edge had created this order type—which lets traders avoid having their orders displayed to the rest of the market—to attract high-frequency trading firms…
Mr. Bodek says he realized the orders he was using were disadvantaged, compared with Hide Not Slide orders. He says he found that in certain situations, the fact that a Hide Not Slide order was hidden allowed it to slip in ahead of some one-day limit orders that had been entered earlier. He also learned that other stock exchanges had order types somewhat like Hide Not Slide, with different twists.
“Man I feel like an idiot. Never grasped the full negative alpha embedded in a normal day limit,” Mr. Bodek emailed Mr. Davidovich several days later. “Negative alpha” is trader jargon for poor performance.