The Wall Street Code: HFT Whisteblower Haim Bodek on Algorithmic Trading

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.

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  1. YankeeFrank

    What’s to investigate? This is blatant market manipulation: eliminating transparency to manipulate competition and gain a tactical edge. It directly contraverts the so-called efficient markets hypothesis. “Hide not slide.” Fer ‘chrissakes. Go to jail. Do not pass go. Do not collect $200.

  2. Morty

    I guess this would be more interesting if there were any retail investors left on Wall Street. Now that it’s machines buying and selling to other machines, it hard to give a rat’s butt.

  3. Bryan Sean McKown

    Important post. I will check out the documentary, but what are the other “order types” at “other stock exchanges” that facilitate cutting into the order line? What about cutting into line in other markets i.e. currency exchange rates with prior knowledge of heavy volume orders a few minutes before the close? Allegedly, DOJ/Holder has the latter under investigation. Time to bust the HFT scams wide open.

    1. TimR

      The other order types? I don’t know, but does it really matter unless you’re actually writing the code or using it? They seem to just be euphemisms for “Give me an unfair advantage as we agreed on; you scratch my back, I’ll scratch yours.”

  4. TimR

    The documentary is interesting for seeing some of the locales and characters involved in that world, but IMO seems to have a hard time getting to the bottom line. Bodek’s analogy about the Metallica concert midway through might be the most direct statement of the issue.

    I didn’t notice if they asked him: was he not allowed to include the favorable “order type” in his code? i.e., he was not connected enough to do business on favorable terms, like some of the HFTs? Although apparently it was not *such* a big deal, because some guy at an Xmas party didn’t mind telling him what his problem was.

    It seems like such a blatant scam. Odd to me that Bodek says only 10 guys would be capable of doing it? It sounds like an incredibly simple thing (though I’m not a coder) to just include a tag saying, in effect, “treat this order favorably” (that is pre-agreed on with the exchange.) Maybe I’m misunderstanding him.

    What about those cheesy freeze-frames where people turn and look at the camera, and their coding credits scroll down next to them… I was hoping they’d have some non-techie “loser” who would turn dramatically, the “Coding” header would appear and then… nothing would scroll down. And they’d notice, and sort of shrink down ashamedly.


      I think he refers to the software people who coded the exchange’s order-type decision logic, not the 50-100 trading firms who knew about it

  5. AbyNormal

    from Bodek’s Blog: I was asked recently if the complexity of electronic markets had evolved to such a point that our current regulatory framework was no longer adequate. I think the excerpt below is a good starting point for such a discussion. I don’t see why basic notions of fairness, transparency, and non-discriminatory access wouldn’t apply to the current market structure issues at hand. (if only)

    “With four parameters I can fit an elephant, and with five I can make him wiggle his trunk”
    John Von Neumann

    (sorry if this is a double post…im being redirected this a.m)

  6. MB

    After watching this a couple of days ago, the thing that struck me is that it’s just skimming. Legal, super genius skimming. But the point of it is they specify PENSION managed money (billions) as DUMB MONEY. If that’s dumb, then individual money is MORON money.

    The other thing that seemed darkly humorous and made me laugh was one of the other 10 traders expressed his astonishment at the flash crash, and that he had completely lost faith in the system. One of the skimmers has lost faith! He realized all HIS money could get taken!! So funny.

    I really don’t know what more the SEC needs. These guys are capable of sabotaging a system. The system’s “rules” are intentionally left to be arcane, because it advantages those ‘dat makes da rules. So it shall ever be.

    Stupid or not, I’ve stayed out of the market. I don’t have the knowledge on how to buy protection and to build it in. Without at least that, it’s simply a roulette wheel, and I’m not that lucky. The SEC disgusts me. The Madoff and ilk are a big “get” (that they’d been tipped off years before on, before doing anything about it), and they ignore the herd of elephants in the room.

    Someone should do something about it, but they haven’t, can’t or don’t want to. Period.

    1. Sluggeaux

      Wall Street sees “Pension managed money (billions) as dumb money” and feels entitled to loot it at will. The lack of Federal protection of state and local government pension investments is at the heart of the crisis. I have been a saver in CalPERS for nearly 30 years. When I met with the Chief Actuary of CalPERS in Sacramento in 2003, my plan was “super-funded” with 120% of the assets needed to pay projected obligations — this was after the 2001 Tech bubble burst.

      Today, my employer and I are being asked to increase our contributions substantially. Why? Because of real estate losses driven by fraud, the asset bubble, and finally default due to TBTF banks pulling credit from projects and taking CalPERS assets in the ensuing “defaults.” High-frequency traders are being given unfair advantages which allow them to game prices and loot MY savings.

      This is a failure of regulation, driven by a Congress and a Presidency (and Executive Branch) who are bought and paid for through K Street money and the revolving door. However, private equity owns the “lamestream media” (who says Sarah Palin didn’t have good writers?) and you won’t read about it outside of blogs like this one…

      1. readerOfTeaLeaves

        High-frequency traders are being given unfair advantages which allow them to game prices and loot MY savings.


        Minute 31:00 “{People} do not understand {what is happening}… it’s too complicated for people to understand…” – Peterffy

        Minute 32:00 “90% of of finance doesn’t know how the US stock market works…” – Bodek

        Minute 33:00 “…What’s changed … is these exchanges have now been taken over… by *investors* – private equity companies – not necessarily interested in growing small companies and going public, but instead, just generating a monthly return… HFT {generates fees from trading}…”

        So our savings are now gamed for the benefit of private interests that have zero to do with price discovery. IOW, systematic, iterative “looting”.

      2. TimR

        I think HFT though may just be a cherry on top of the whole scam Sundae. As Michael Hudson explains it (and I guess it goes back to Marx and before), it’s *not possible* for the “real” economy to deliver compound interest returns indefinitely. It quickly becomes absurd, as Marx says, if you had 5% annual growth on a penny (or whatever) at the time of Jesus, you soon enough would supposedly be the proud owner of a gold nugget the size of the universe (paraphrasing…)

        So all the 8% promised returns on pension funds or whatever, all these “investments”, are doomed to failure. Eventually those compound returns become too much for the real economy to bear. Hence the recurring “crises of capitalism,” as creditors write off debts and take possession of real world assets in lieu of payment. (Or get bailed out by the Fed as the case may be.)

        HFT strikes me, as an admitted outsider, as just the current way of playing the same old game. It probably introduces some new twists here and there, shuffles the players around (or some of them), floats some boats and sinks others (it’s a highly remunerative jobs program for geeks, for one thing.) But the game itself could never deliver the promised returns. We need a game that lifts the burden from labor and industry and places it on the rent-seekers, monopolists, finance, FIRE, etc.

        1. Newtownian

          Tks loads for this concise comment.

          Clearly sceptical economics buffs are converging on the same conclusion that Limits to Growth scientists have been also on about since Malthus.

          The numbers don’t add up i.e. this is the mother of Ponzi schemes. And the best thing you can do at the moment is not be the mug at the bottom of the heap.

        2. M2999

          The Stock Market is highly correlated to population growth, and the carbon economy. Both must soon end. Either threw a managed plan or a crash.

    2. Lord Koos

      “…fueled a sweeping SEC inquiry into the activities…”

      Wow. Maybe they will send out some sternly-worded letters.

  7. Watt4Bob

    I like to think of my post of October 2012 as being Part 1 of 2;

    Part one describing the technique in the form of a couple useful analogies, which is the same thing Haim Bodek is explaining.

    Part 2 (which I haven’t written) would describe the obvious, to me at least, ‘target’ of the whole set of HFT systems.

    The most important part of the story surrounnds the actual impact of HFT, the part about who gets hurt in a market dominated by HFTs.

    To understand who gets hurt it’s necessary to understand that large institutional investors cannot choose to avoid the trading environment because it’s rigged, they Must Trade in order to assure the health of the fund.

    Because they must trade, these investors are caught, like the proverbial fish-in-a-barrel, and the HFT firms are harvesting those fish.

    The MSM keeps pushing the meme that HFT doesn’t impact the little guy, but once you understand that the prime ‘target’ of HFT firms is large institutional investors,( which includes large pension funds ) you realize it’s all the millions of American pensions and 401K plans that are being systematically skimmed.

    It continues to amaze me that the self-described geeks responsible for building these systems insist on side-stepping the issue of morality, because it’s obvious even to me that the purpose of these systems is to allow a very few people to bilk the most of us.

    1. TimR

      Watt- I just skimmed your article, but I could not tell if you were separating out HFT from what Bodek describes here: “cheaters”/front-runners even within the HFT world.

      Bodek was doing fine as an HFT guy, then hit a wall one day. Spent a year going over his maths, then a guy at a party tells him, “Dude, you don’t have the secret code. You’re not in with the in crowd. All the hip HFT kids are using ‘Hide not Slide’ order types. Get with the program.”

      Instead it seems Bodek either could not or did not, and went to the SEC to complain his HFT pals were playing dirty. The SEC made gruff noises of concern, nodded their heads earnestly, but were giggling at him behind his back. “What a dork! No wonder nobody would tell him the code for so long.”

      Bodek has no problem with HFT per se. It’s a gold mine for children of physicists who hung out at parties with Nobel-prize winners as kids, then stumbled into the quant world when they grew up. It’s a fun, brainy thing to mess around with, and the pay is swell.

      1. Watt4Bob

        When I wrote my piece I was unaware of the type of characters involved in the HFT industry.

        Haim filled in the blanks in a certain sense.

        The picture that emerges certainly has more flavor than I thought.

        My assumption was that HFT firms employed people like Haim, but I didn’t understand that people like Haim might be going into the business themselves.

        I see a lot of these people in the IT industry, they have much in common with the classic idiot savant, or maybe it’s closer to the autistic spectrum. They understand anything technical in a NY second so to speak, but don’t get the most obvious social implications of their actions.

        Karl Rove’s computer guru, the one who built the man-in-the-middle election-stealing system that rigged the 2004 Ohio vote count was another of these narrow spectrum geniuses, he was a devout Catholic who believed he was ‘saving babies’ by helping the supposedly pro-life Republicans hack the election.

        His name was Michael Connell, and he died when his own small plane crashed in Dec 2008.

        He had been served with a subpoena in Ohio in a case related to the election tampering.

        It was rumored that he had been threatened by Rove who expected him to take the fall for the election rigging.

        There was some speculation that the guy was too straight to lie under oath, and he had to be silenced.

        What I’m getting at, and I understand it is hard to imagine, is that there are not only old-fashioned evil people running these schemes, but guys like Haim and his genius buddies who just don’t get that what they’re doing is wrong.

        It was clear from the rest of the video that a lot of these ‘businessmen’ think that anything that isn’t specifically forbidden by law is A-OK.

        Looks like the SEC has the same blind-spot, except it’s not genetic.

  8. Fibognocchi

    The Hide Not Slide order type was not exactly a secret at Direct Edge. See this article from May 2009: .

    Setting aside the question of whether or not HNS orders are intrinsically unfair, were Bodek’s problems caused by the new order type itself or his own failure to stay current with trading platform technology?

    1. readerOfTeaLeaves

      What does either issue have to do with actual markets, real exchanges, or price discovery?

      If capitalism is built upon markets, and the function of markets is supposedly to discover prices, this entire issue of HFT – no matter what algorithms, or what technologies – reveals the charade that capitalism has become.

      This points to one of the deeper chasms in the crisis of current global capitalism, IMVHO.

    2. TimR

      Fib- So Haim’s complaint to the SEC is that these order types disadvantage regular traders vs. HFTs? I guess I was misreading the WSJ excerpt and Haim’s comments in the documentary, I didn’t realize these order types were made public.

    3. Little bird

      Hide Not Slide was never submitted to the SEC in any regulatory filing for approval.

      It is the tip of the iceberg.

    4. Little bird

      Why wasn’t there any regulatory filing to the SEC seeking approval for Hide Not Slide? Isn’t that a bit unusual for a feature this important?

  9. skippy

    Market volatility

    In such trading, every millisecond counts and the competition to provide ever-faster trading networks is fierce.

    The first microwave connection between London and Frankfurt was turned on last October by Perseus Telecom.
    Continue reading the main story

    Originally used in the 1970s for phone networks
    Microwave networks rely on dishes that are installed on buildings and mobile phone towers
    Signals can be disrupted by bad weather
    They have limited capacity

    According to the company, the system cut about 40% off the time taken to complete a trade compared with traditional fibre-optic networks.

    They cannot entirely replace fibre optics because the signal can be disrupted by bad weather and the network has limited capacity.

    HFT in Europe is believed to account for nearly 40% of total equities trading, generating 6.7tn euros (£5.6tn) a year.

    The method is controversial and has also been blamed for causing market volatilities, such as the notorious flash crash in May 2010 that wiped 10% off the value of the stock market in minutes.

    Increasingly regulators are looking at ways to bring in tougher rules for such trading.

    Other technologies that may be used in future to help make trades even faster include the use of drones as platforms for wireless links.

    skippy… bonus link:

    1. skippy

      More stuff…

      Over the last thirty years, capital has abstracted upwards, from production to finance; its sphere of operations has expanded outwards, to every nook and cranny of the globe; the speed of its movement has increased, to milliseconds; and its control has extended to include “everything.” We now live in the era of global finance capitalism.

      The term “finance capital” comes from Rudolf Hilferding, the Austro-German Marxist theoretician. He was categorizing an increasing concentration and centralization of capital in large corporations, cartels, trusts, and banks.1 For Hilferding, the earlier competitive “liberal capitalism,” opposed to intervention by the mercantilist state, was transformed at the turn of the century into monopolistic “finance capital” which was integrated into a “centralized and privilege-dispensing state.” He thought that flows of investment capital served to integrate the nascent global economy, which was operating predominantly under the control of the City of London, then the leading power center. Hilferding saw finance capital engaged in vigorous expansion, constantly searching for new spheres of investment and markets. The similarities between the turn of the nineteenth century and the turn of the twentieth are striking.

      More recently, David Harvey has argued that ownership (share holders) and management (CEOs) of capitalist enterprises have fused together, as upper management is increasingly paid with stock options.2 Raising the price of its stock becomes the objective of corporate operations. Productive corporations compete by generating rapid increases in the price of the corporation’s stock, immediately through gimmicks and trickery, but more basically through firing workers, moving production, and raiding pension funds. Corporations heavily involved in production—automobile or steel makers, for example—have become increasingly financial in orientation, diversifying into credit, insurance, real estate, etc. Harvey says that all of this is connected to the burst of activity in an increasingly unregulated, and rapidly globalized, financial sector which is engaged in a process that he describes, similarly to Randy Martin,3 as “the financialization of everything”—meaning control of all areas of the economy by finance. The tremendous economic power of the new entrepreneurial-financial class enables vast influence over the political process. As John Bellemy Foster and Hannah Holleman put it, “the financialization of U.S. capitalism over the last four decades has been accompanied by a dramatic and probably long-lasting shift in the location of the capitalist class, a growing proportion of which now derives its wealth from finance as opposed to production. This growing dominance of finance can be seen today in the inner corridors of state power.”4 – snip

      When the contradictions of global finance capitalism moved the system into crisis, as in the Great Recession starting in 2007, the state comes to the rescue of capital, the resurrection of economic growth is the urgent priority, while the environment is the necessary sacrificial lamb. Instead, the problems that capitalism periodically encounters are said to be solvable through the market mechanisms (carbon trading) that radical critics say causes them.

      The neoliberal globalization that deindustrialized the first world, and industrialized parts of the third world—Brazil, South Korea, China, and India—resulted in a spectacular globalization of environmental destruction. Globalization of this neoliberal, financial kind means that economic growth rates slow down in the “deindustrialized” center, but increase rapidly in some peripheral industrializing countries at rates of 8–10 percent a year. China’s economy grew fourteen fold between 1980 and 2006 to the equivalent of a GDP of $4.4 trillion, and India’s economy grew six fold to $1.2 trillion,18 with carbon dioxide emissions quadrupling in both countries. China’s carbon dioxide emissions from burning fossil fuels amounted to 407 million tons of carbon in 1980 and 1,665 million tons in 2006; India’s went from 95 million tons in 1980 to 411 million tons.19 Much of this production and pollution is connected to consumption in the first world—40 percent of China’s product is exported, and 20 percent of India’s, while both economies have become dramatically more export-oriented. So we have seen the globalization of an economy, still centered on serving consumption in the high-income countries. This has led to an intensification of the globalization of pollution, as evidenced from carbon dioxide emissions. In 2006 global fossil-fuel carbon emissions amounted to 8,230 million metric tons of carbon. In global terms, more than 500 billion tons of carbon have been released to the atmosphere from the burning of fossil fuels and cement production since 1750, and half of these emissions have happened since the mid-1970s when it was already known that greenhouse gasses caused global warming.20 The point is that environmental pollution is driven by economic necessity under capitalism. It is necessary to pollute so that money can be made. Within the existing political-economic context, drastically decreasing pollution can only be brought about by economic recession. Thus, between 2008 and 2009 there was a temporary decline of 5.9 percent in global carbon dioxide emissions from burning fossil fuels. This was brought about by a decline of 2.5 percent in global GDP, a decline of 11.5 percent in the manufacturing production index, and a reduction of 40 percent in raw steel production.21 Yet it is politically impossible for parties or governments to suggest, in effect, that the necessary price of ending environmental destruction is a declining economy. The “solution” is to displace discussion “upwards” from the national scale to the international. Upward displacement in the environmental discourse necessarily takes the form of UN conferences, “Earth summits,” and non-enforceable Protocols. Economic necessity produces endless political evasion on the environment.22

      And yet, under neoliberalism we find state regulation of development, and its relations with the environment, diminishing in significance due to the intensification of neoliberal beliefs about government, markets, and policies. This includes mass beliefs. Hence the Tea Party movement is founded on the idea of a smaller, less interventionary government at a time when state intervention in the form of environmental regulation is all we have in the way of collective response to the destruction of nature. Marxists have sometimes spoken of “false consciousness,” but this is more a case of “inverted consciousness”—the opposite of what should be the popular mentality. Or maybe “perverse consciousness”? Perverted that is. – snip

      skippy… calling Mr Mex…

      1. Nathanael

        “…Over the last thirty years, capital has abstracted upwards, from production to finance;…”

        One of the main topics in Veblen’s _Theory of the Leisure Class_.

        It’s actually gotten weirder than that, becuase the leisure class now does not understand the legal details of their own financial scams (as we see from the foreclosure frauds). They also do not understand the financial details (as we see from the HFT and algo trades). They think they can hire people to do all of that.

        This means we have people in the elite leisure class who know only one thing: how to run scams and pressure people. There’s another name for these guys: mobsters. Eventually people get sick of them and kill ’em, and the sooner the beter.

      2. Jeremy Grimm

        If 40% of China’s goods, and 20% of India’s goods, are for export, and if the U.S. receives a large part of these exports without matching them with their own exports to China and India (matching in terms of their pollution costs) — what does that mean in terms of America’s share of pollution? Is this imbalance already captured in the estimates of our contribution to world pollution? If not, which I suspect is the case, this makes the U.S. position on the environment even more egregious and increases the share of guilt that must lay on the head of U.S. businesses and consumers.

        Is this yet another legacy we leave for our children and grandchildren?

        1. Newtownian


          In answer to your question no and yes. No its not caught in national accounts. Yes people in the academy are capturing this.

          This review on ecological footprinting including from a colleague shows how US and UK carbon reductions are illusory in that yes they are being transferred off shore – which will really screw up Carbon trading IMHO

          Wiedmann, T., Lenzen, M., Turner, K., Barrett, J., 2007. Examining the global environmental impact of regional consumption activities — Part 2: Review of input–output models for the assessment of environmental impacts embodied in trade. Ecological Economics 61, 15-26.

  10. TimR

    The interview with Thomas Pettify around 11:30 is pretty incredible. Listen to that story about how he got around the official rule that they enter trades on a keyboard. What a crazy world.

  11. Jazzbuff

    I am not an attorney but it seems to me this is a case of conspiracy to front run the market. Why is this not a massive RICO case against the exchanges and the traders?

  12. Doug

    Chris Martenson’s 2012 interview with Joe Saluzzi on HFT ( bonus: innocuous hint of QE induced market ramp early in interview; plunge protection type market manipulation near the end):

    ZeroHedge has been all over this for years. Recent post on quote stuffing, volume and quotes per trade:

  13. Doug

    Chris Martenson’s 2012 interview with Joe Saluzzi on HFT ( bonus: innocuous comment on QE induced market ramp early in interview; reference to plunge protection type market manipulation near the end):

    ZeroHedge has been all over this for years. Recent post on quote stuffing, volume and quotes per trade:

  14. Doug

    Chris Martenson’s 2012 interview with Joe Saluzzi on HFT ( bonus: innocuous comment on QE induced market ramp early in interview; reference to plunge protection type market manipulation near the end):

    ZeroHedge has been all over this for years. Recent post on quote stuffing, volume and quotes per trade:

  15. Doug

    Chris Martenson’s 2012 interview with Joe Saluzzi on HFT ( bonus: comment on QE induced market ramp early in interview; reference to plunge protection type of market manipulation near the end):

    ZeroHedge has been all over this for years. Recent post on quote stuffing, volume and quotes per trade:

Comments are closed.