Why is Joe Brennan defending high frequency trading?

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cacophony
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Why is Joe Brennan defending high frequency trading?

Post by cacophony »

Just stumpled upon this article, and was surprised to see Joe Brennan's position:
http://www.bloomberg.com/news/2014-04-0 ... abuse.html
Regulators should seek ways to prevent abuses without blocking high-speed firms that may actually benefit investors by providing liquidity to the markets, Joe Brennan, global head of Vanguard’s equity investment group, said in a telephone interview.
Michael Lewis has a great response to the claim that HFT adds liquidity on today's KQED Forum, starting at 33:48:
http://www.kqed.org/a/forum/R201404041000

The entire interview is worth hearing.
Last edited by cacophony on Fri Apr 04, 2014 7:53 pm, edited 1 time in total.
manwithnoname
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Re: Why is Vanguard defending high frequency trading?

Post by manwithnoname »

cacophony wrote:Just stumpled upon this article, and was surprised to see Vanguard's position:
http://www.bloomberg.com/news/2014-04-0 ... abuse.html
Regulators should seek ways to prevent abuses without blocking high-speed firms that may actually benefit investors by providing liquidity to the markets, Joe Brennan, global head of Vanguard’s equity investment group, said in a telephone interview.
Michael Lewis has a great response to the claim that HFT adds liquidity on today's KQED Forum, starting at 33:48:
http://www.kqed.org/a/forum/R201404041000

The entire interview is worth hearing.
Because it benefits retail investors

http://www.cbsnews.com/news/jack-bogle- ... d-markets/

[OT comment removed by admin LadyGeek]
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cacophony
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Re: Why is Vanguard defending high frequency trading?

Post by cacophony »

manwithnoname wrote: Because it benefits retail investors

http://www.cbsnews.com/news/jack-bogle- ... d-markets/

It would help if you researched your question before posting.
lol, a little defensive aren't we? I'm guessing you didn't even listen to the audio clip.

To quote your article:
"Main Street is the great beneficiary," said Bogle, while acknowledging that he hasn't read Lewis's latest book. "We are better off with high-frequency trading than we are without it."

Sounds like Bogle may be somewhat ignorant to the specifics of Lewis's findings, so this hardly provides much insight. But moreover, the implied question was about Vanguard's defense of the liquidity argument, which your article doesn't address at all.
Last edited by cacophony on Fri Apr 04, 2014 5:01 pm, edited 1 time in total.
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Re: Why is Vanguard defending high frequency trading?

Post by nisiprius »

Vanguard is part of the investment industry, they have to get along with everyone else. They are using polite and guarded language, pulling their punches, saying that it is only a few traders, using a lot of "mays" and "probablys." (One interesting "may:" "high-speed firms that may actually benefit investors,"--may, not does).

But, putting my own spin on it, I think the words I've underlined are the signal, and the rest of the message is noise.
Vanguard Group Inc., the world’s largest mutual-fund company, said only a minority of high-frequency traders may be hurting other investors.

Regulators should seek ways to prevent abuses without blocking high-speed firms that may actually benefit investors by providing liquidity to the markets, Joe Brennan, global head of Vanguard’s equity investment group, said in a telephone interview.

There are high-frequency traders that probably unfairly tax the system by taking it too far,” Brennan said. “We’re in favor of market structure rules that continue to evolve to make sure liquidity providers are just that, and get paid for liquidity and nothing more.

Money managers such as Vanguard, which buy and sell trillions of dollars worth of stocks on behalf of their investors, for years have sought to determine the impact of high-frequency trading on the assets they run. Vanguard, which handles more than $2 trillion, has been waging a battle to make sure it gets the best prices possible for its funds, Brennan said, using its own computer software and other tactics. Capital Group Cos., with $1.14 trillion in assets, has backed a startup exchange that seeks to protect investors from predatory traders.
In short, I read this as saying:
  • Vanguard says "abuses" are occurring, even if they soften this by saying it is only a few bad apples doing it.
  • Regulators need to "seek ways to prevent abuses," = more activist stance or new regulations or both. In any case, they "need" to do something, Vanguard does not think everything is fine.
  • "in favor of market structure rules that continue to evolve" = new regulations.
  • "...to make sure liquidity providers are just that, and get paid for liquidity and nothing more." This is again saying that currently they are being paid to do something "more" than providing liquidity.
Translation: New regulations are needed to stop abuses which are currently occurring.
Last edited by nisiprius on Fri Apr 04, 2014 5:13 pm, edited 5 times in total.
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Re: Why is Vanguard defending high frequency trading?

Post by cacophony »

Thanks for actually providing a thoughtful reply, nisiprius! :happy
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Re: Why is Vanguard defending high frequency trading?

Post by garlandwhizzer »

Michael Lewis has written a couple of very popular books, Liars Poker and The Big Short, both of which addressed what seemed to me more serious problems than his latest book about HFT. Both Bogle and Gus Sauter (who used to be head man at Vanguard) have stated that on balance HFT lowers transaction costs and that those costs have decreased as HFT has increased. It is clear that neither of them see HFT as "rigging the market." I don't think it's because they aren't as financially astute as Mr. Lewis. I believe the claim that the market is rigged is designed as hyperbole that is intended to sell more books and generate a bigger publicity splash for Mr. Lewis who is running thin on scandalous Wall Street topics to write about.

There are inequities that need to be addressed to level the playing field in HFT and bid-ask spreads-no doubt about that-but in my opinion this does not amount to the assertion that "the market is rigged." I fear the effects of such hyperbole on the huge legions individual investors who are already too frightened by two recent severe bear markets to invest in stocks, and who now hear the drumbeat that the market is rigged. A large population of investors may now give up and forget about stocks altogether which will ultimately be harmful to achieving their long term financial goals. Michael Lewis adds to his fame and popularity but the investing public may suffer for it in the long run.

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Re: Why is Vanguard defending high frequency trading?

Post by manwithnoname »

cacophony wrote:
manwithnoname wrote: Because it benefits retail investors

http://www.cbsnews.com/news/jack-bogle- ... d-markets/

It would help if you researched your question before posting.
lol, a little defensive aren't we? I'm guessing you didn't even listen to the audio clip.

To quote your article:
"Main Street is the great beneficiary," said Bogle, while acknowledging that he hasn't read Lewis's latest book. "We are better off with high-frequency trading than we are without it."

Sounds like Bogle may be somewhat ignorant to the specifics of Lewis's findings, so this hardly provides much insight. But moreover, the implied question was about Vanguard's defense of the liquidity argument, which your article doesn't address at all.
for the benefit of the rest of us, what are Lewis's finding that we are ignorant of?
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Re: Why is Vanguard defending high frequency trading?

Post by gerrym51 »

check Richard Pryors role in Superman 3 and his characters taking all the fractional amounts in transactions using a computer program then you'll understand. :mrgreen:
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Re: Why is Vanguard defending high frequency trading?

Post by sls239 »

Both Bogle and Gus Sauter (who used to be head man at Vanguard) have stated that on balance HFT lowers transaction costs and that those costs have decreased as HFT has increased.
But the whole cost of the techniques used by HFT are not necessarily contained within what is labeled "transaction costs" is it?
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Re: Why is Vanguard defending high frequency trading?

Post by IlliniDave »

Just because HFT activity does some good things doesn't mean HFTs should be given free reign to do anything they can dream up and pull off with their technology. At the same time, presuming Lewis is correct, just because a few HFTs engage in a questionable practice doesn't mean HFT should be obliterated. I think there's plenty of room in the universe to be critical of and curb a specific tactic some HFT practitioners use some of the time without consigning the exchanges to the stone age. I don't think anyone's talking about banning high-speed activities, just curbing this one "scalping" technique.
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Re: Why is Vanguard defending high frequency trading?

Post by cfs »

Good conversation.

The whole thing about high frequency trading is good material for smart software programmers and smart super computer builders.

No rigging required to win in the Wall Street Casino--just get the fastest toy to stay ahead of the game.

Thanks for reading this note.
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Re: Why is Vanguard defending high frequency trading?

Post by Jack »

cacophony wrote:Why is Vanguard defending high frequency trading?
Vanguard is not defending high frequency trading. Joe Brennan, CEO of Vanguard, is defending high frequency trading (albeit with some reservations).

Joe Brennan also defends enormous compensation packages for CEOs (he just happens to be one). He also defends the suppression of most shareholder rights initiatives in proxy voting of Vanguard mutual fund shares. Joe Brennan's interests are not necessarily the same as your interests. As much as you would like to believe that Vanguard is entirely separate from Wall Street, Vanguard is very much involved in Wall Street and needs to play nicely.
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Re: Why is Vanguard defending high frequency trading?

Post by KyleAAA »

cacophony wrote:
manwithnoname wrote: Because it benefits retail investors

http://www.cbsnews.com/news/jack-bogle- ... d-markets/

It would help if you researched your question before posting.
lol, a little defensive aren't we? I'm guessing you didn't even listen to the audio clip.

To quote your article:
"Main Street is the great beneficiary," said Bogle, while acknowledging that he hasn't read Lewis's latest book. "We are better off with high-frequency trading than we are without it."

Sounds like Bogle may be somewhat ignorant to the specifics of Lewis's findings, so this hardly provides much insight. But moreover, the implied question was about Vanguard's defense of the liquidity argument, which your article doesn't address at all.
I haven't read the book yet, but by all accounts Lewis didn't provide any new information or analysis or engage in any novel scholarship. I would expect somebody like Bogle to be familiar with Lewis's arguments without having to read the book.
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Re: Why is Vanguard defending high frequency trading?

Post by manwithnoname »

IlliniDave wrote:Just because HFT activity does some good things doesn't mean HFTs should be given free reign to do anything they can dream up and pull off with their technology. At the same time, presuming Lewis is correct, just because a few HFTs engage in a questionable practice doesn't mean HFT should be obliterated. I think there's plenty of room in the universe to be critical of and curb a specific tactic some HFT practitioners use some of the time without consigning the exchanges to the stone age. I don't think anyone's talking about banning high-speed activities, just curbing this one "scalping" technique.
But aren't HFT traders operating within the rules set by the SEC and Finra including NMS? I have a problem with the hoard of posters claiming that HFT are engaging in violations of the Securities laws including skimming, front running and insider trading when the regulatory agencies have not been following up on any violations.
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Re: Why is Vanguard defending high frequency trading?

Post by manwithnoname »

Jack wrote:
cacophony wrote:Why is Vanguard defending high frequency trading?
Vanguard is not defending high frequency trading. Joe Brennan, CEO of Vanguard, is defending high frequency trading (albeit with some reservations).

Joe Brennan also defends enormous compensation packages for CEOs (he just happens to be one). He also defends the suppression of most shareholder rights initiatives in proxy voting of Vanguard mutual fund shares. Joe Brennan's interests are not necessarily the same as your interests. As much as you would like to believe that Vanguard is entirely separate from Wall Street, Vanguard is very much involved in Wall Street and needs to play nicely.
I think its John Brennan not Joe Brennan.

http://en.wikipedia.org/wiki/John_Brenn ... guard_CEO)
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Re: Why is Vanguard defending high frequency trading?

Post by Jack »

manwithnoname wrote:I think its John Brennan not Joe Brennan.
Sorry about the confusion. Joe Brennan is cited from the Bloomberg article in the original post talking about HFT. He is the head of the Equity Index Group at Vanguard overseeing 80 funds. John Brennan is the CEO.
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Re: Why is Vanguard defending high frequency trading?

Post by Levett »

"I haven't read the book yet, but by all accounts Lewis didn't provide any new information or analysis or engage in any novel scholarship. I would expect somebody like Bogle to be familiar with Lewis's arguments without having to read the book."

Actually, Bogle's comments to CBS Marketwatch suggest he's not clued in.

What you mean by "all accounts" mystifies me.

The new information came from Brad Katsuyama and his team and is related in Lewis's book.

Try reading the book--always a good idea. I'm about a third way through and I have not read its like.

Lev
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Re: Why is Vanguard defending high frequency trading?

Post by cacophony »

KyleAAA wrote: I haven't read the book yet, but by all accounts Lewis didn't provide any new information or analysis or engage in any novel scholarship. I would expect somebody like Bogle to be familiar with Lewis's arguments without having to read the book.
To quote Michael Lewis in the 60 minutes interview:

"I spoke to dozens of big and famous investors who said that when Brad Katsuyama laid out to me how the market was rigged my jaw hit the floor"

If this is true I wouldn't expect Bogle to know the specifics if he hasn't read anything about Katsuyama's findings.
Last edited by cacophony on Fri Apr 04, 2014 7:47 pm, edited 2 times in total.
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Re: Why is Vanguard defending high frequency trading?

Post by cacophony »

Jack wrote:
manwithnoname wrote:I think its John Brennan not Joe Brennan.
Sorry about the confusion. Joe Brennan is cited from the Bloomberg article in the original post talking about HFT. He is the head of the Equity Index Group at Vanguard overseeing 80 funds. John Brennan is the CEO.
Ah, I made the same mistake, thanks for clarifying.
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Re: Why is Vanguard defending high frequency trading?

Post by in_reality »

manwithnoname wrote: Because it benefits retail investors

http://www.cbsnews.com/news/jack-bogle- ... d-markets/
Schwab doesn't think so ... http://pressroom.aboutschwab.com/press- ... cy-trading

Here is a quote from the article you linked:
"We really can't say that the market is rigged without convincing evidence," said Haoxiang Zhu, an assistant professor of finance at MIT's Sloan School of Business, adding that Lewis hasn't made that case.
Here is the quote from the article I linked:
Some high-frequency traders have claimed to be profitable on over 99 percent of their trading days. Our understanding of statistics tells us this isn’t possible without some built in advantage. Instead of leveling the playing field, the exchanges have tilted it against investors.
Just curious, did you ever have a statistics course?
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Re: Why is Joe Brennan defending high frequency trading?

Post by cfs »

Team

William (Bill) McNabb is Vanguard's CEO (he relieved Mr Brennan in 2008).

Thanks for reading this note.
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Re: Why is Vanguard defending high frequency trading?

Post by IlliniDave »

manwithnoname wrote:
IlliniDave wrote:Just because HFT activity does some good things doesn't mean HFTs should be given free reign to do anything they can dream up and pull off with their technology. At the same time, presuming Lewis is correct, just because a few HFTs engage in a questionable practice doesn't mean HFT should be obliterated. I think there's plenty of room in the universe to be critical of and curb a specific tactic some HFT practitioners use some of the time without consigning the exchanges to the stone age. I don't think anyone's talking about banning high-speed activities, just curbing this one "scalping" technique.
But aren't HFT traders operating within the rules set by the SEC and Finra including NMS? I have a problem with the hoard of posters claiming that HFT are engaging in violations of the Securities laws including skimming, front running and insider trading when the regulatory agencies have not been following up on any violations.
Yes, that's true to the best of my knowledge (that the letter of existing laws/regulations has not been violated), but that doesn't mean that the particular practice in question should be allowed to continue. I've heard the technique likened to front running, but not called front running in the technical sense (which I think is a breach of fiduciary responsibility between broker/client). The only reference I've heard to insider trading was an anecdotal comment about a hedge fund manager who thought he was being victimized by an insider (presumably someone inside his own organization) before he understood the mechanism some of the HFT people were using to his disadvantage. Skimming I've heard used in the the ordinary sense of the word, but that's all. I never realized there was a specific SEC legal definition of "skimming".

Inactivity by the regulatory agencies doesn't give me confidence all is well proceeding ethically and above board. :)

But all that is essentially immaterial. The regulators either will or won't address the practice in the future. Until that happens, traders who prefer to avoid ceding a fraction of every trade they make to the HFT racers can use IEX or other counter tactics now that all this is out in the open. Traders who are happy to give a fraction of every trade to the guys with the shortest fiber cables needn't do anything different than they have been. I hope the people who execute trades on my behalf are among the former.
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Re: Why is Vanguard defending high frequency trading?

Post by rnitz »

Jack wrote:
cacophony wrote:Why is Vanguard defending high frequency trading?
Vanguard is not defending high frequency trading. Joe Brennan, CEO of Vanguard, is defending high frequency trading (albeit with some reservations).

Joe Brennan also defends enormous compensation packages for CEOs (he just happens to be one). He also defends the suppression of most shareholder rights initiatives in proxy voting of Vanguard mutual fund shares. Joe Brennan's interests are not necessarily the same as your interests. As much as you would like to believe that Vanguard is entirely separate from Wall Street, Vanguard is very much involved in Wall Street and needs to play nicely.
Wow. Aside from the mistakes regarding Jack Brennan and Joe Brennan, this strikes me as quite political.
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Re: Why is Joe Brennan defending high frequency trading?

Post by Jack »

rnitz wrote:Wow. Aside from the mistakes regarding Jack Brennan and Joe Brennan, this strikes me as quite political.
Sorry about the name confusion. As cfs kindly pointed out above, McNabb actually replaced Brennan a while back.

But aside from that, pointing out facts is now considered political? It is well documented that Vanguard votes their proxies supporting management initiatives and against shareholder initiatives at a much higher rate than other mutual fund companies. Why would pointing that out be considered political? That is an investor issue directly related to investor returns.
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Re: Why is Joe Brennan defending high frequency trading?

Post by adios_logic »

This is probably the best thing to read to explain why (not Vanguard, but it's not like Vanguard isn't paying attention to trading costs): http://online.wsj.com/news/articles/SB1 ... 2237652362

They think it saves them money.

Gus Sauter said this a couple years ago “We’ve measured our transaction costs and over the past 15 years, they’ve been cut by about 60 percent,” Sauter said. “That results in hundreds of millions of dollars a year in savings to investors in our funds.”

http://www.forbes.com/sites/alexandraze ... y-traders/
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Re: Why is Vanguard defending high frequency trading?

Post by manwithnoname »

in_reality wrote:
manwithnoname wrote: Because it benefits retail investors

http://www.cbsnews.com/news/jack-bogle- ... d-markets/
Schwab doesn't think so ... http://pressroom.aboutschwab.com/press- ... cy-trading

Here is a quote from the article you linked:
"We really can't say that the market is rigged without convincing evidence," said Haoxiang Zhu, an assistant professor of finance at MIT's Sloan School of Business, adding that Lewis hasn't made that case.
Here is the quote from the article I linked:
Some high-frequency traders have claimed to be profitable on over 99 percent of their trading days. Our understanding of statistics tells us this isn’t possible without some built in advantage. Instead of leveling the playing field, the exchanges have tilted it against investors.
Just curious, did you ever have a statistics course?
The only statistical formula needed to be successful in investing is buy low, sell high.

But you know that, right?
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Re: Why is Joe Brennan defending high frequency trading?

Post by in_reality »

adios_logic wrote: Gus Sauter said this a couple years ago “We’ve measured our transaction costs and over the past 15 years, they’ve been cut by about 60 percent,” Sauter said. “That results in hundreds of millions of dollars a year in savings to investors in our funds.”

http://www.forbes.com/sites/alexandraze ... y-traders/
Nice, but I think it may miss the point.

Here is what Gus says:

“But in fact, the 50 different venues we have to trade on, without high-frequency traders, there’s nothing to knit them back together again… Otherwise you’ll see a stock trading on a certain exchange at one price and trading on another at a different price. It’s the high-frequency guys who are looking across all of the exchanges saying that doesn’t make sense and they bring all the exchanges together at one point in time.”

OK so high-frequency traders unite the market and we have seen lower costs.

Can't these goals be realized without:

1)HFT pumping out millions of orders in a matter of seconds, only to reverse the majority of them so as to gain information not available to other market participants
2)the practice of selling preferential access or data feeds
3)eliminate order types that allow high-frequency traders to jump ahead of legitimate order flow.

Yes, computers have replaced humans in trading over the last 15 years and costs have fallen. We can see that in Goldmans Sachs 2000 purchase of a trading floor unit for $5.4 billion. Human did most of the trading then and now that unit is worth like $300 million. So yes times have changed.

Is Gus Sauter asserting that these technological changes could not reduce costs without giving the HFT an advantage? Merely noting that falling costs are associated with the rise of HFT does in no way testify to there being a necessity for HFT to have an advantage. If you and Gus are asserting that the advantage HFTs have is the cause of the falling costs, then please show me how costs would not have fallen were that advantage not conferred.

How do HFT firms manage to be profitable 99 percent of their trading days? It's called by having access to information that no-one else has.

I guess your case is that we benefit by allowing differential access to information, but I do not view your case as proven and that the truth is cost would have fallen even without HFT firms being conferred an advantage.
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Re: Why is Joe Brennan defending high frequency trading?

Post by Jack »

adios_logic wrote:Gus Sauter said this a couple years ago “We’ve measured our transaction costs and over the past 15 years, they’ve been cut by about 60 percent,” Sauter said. “That results in hundreds of millions of dollars a year in savings to investors in our funds.”
Fifteen years ago quotes were fractional in which the smallest bid/ask spread possible was 1/16 of a dollar or 6.25 cents. Today bid/ask spreads can be one penny due to decimalization. The conversion to decimal pricing in 2001 alone accounts for a 60% reduction in transaction costs. Forget high frequency trading.
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Re: Why is Joe Brennan defending high frequency trading?

Post by grayfox »

I would expect Vanguard management, Gus Sauter, etc. to defend the status quo. Everyone nowadays makes money by taking a percentage of Assets Under Management. The more people invest, the more money is made. Nobody inside the industry wants people to think the market is rigged, which would scare away investors.

And since this kind of front-running effects only "impact-sized traders" like mutual funds, small investors could probably avoid it by investing in individual stocks and not big mutual funds. That would be bad for fund companies.

The interests of Vanguard management is not always aligned with the interests of Vanguard investors, who I believe are also the owners of Vanguard. It is a classic principle-agent problem.
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Re: Why is Vanguard defending high frequency trading?

Post by KyleAAA »

cacophony wrote:
KyleAAA wrote: I haven't read the book yet, but by all accounts Lewis didn't provide any new information or analysis or engage in any novel scholarship. I would expect somebody like Bogle to be familiar with Lewis's arguments without having to read the book.
To quote Michael Lewis in the 60 minutes interview:

"I spoke to dozens of big and famous investors who said that when Brad Katsuyama laid out to me how the market was rigged my jaw hit the floor"

If this is true I wouldn't expect Bogle to know the specifics if he hasn't read anything about Katsuyama's findings.

I wasn't referring to big and famous investors so much as people in the industry i.e. programmers working on Wall Street. The big names like Buffett and Soros probably wouldn't need to bother with something like this. But rest assure what Katsuyama "discovered" wasn't a secret. Who do you think implemented those systems? They big banks certainly don't have the capability to implement something like this in-house, which means reams of consultants/contractors as well who have no loyalty to the bank. There are thousands if not millions of people involved in building these systems and they all talk.
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Re: Why is Joe Brennan defending high frequency trading?

Post by manwithnoname »

grayfox wrote:I would expect Vanguard management, Gus Sauter, etc. to defend the status quo. Everyone nowadays makes money by taking a percentage of Assets Under Management. The more people invest, the more money is made. Nobody inside the industry wants people to think the market is rigged, which would scare away investors.

And since this kind of front-running effects only "impact-sized traders" like mutual funds, small investors could probably avoid it by investing in individual stocks and not big mutual funds. That would be bad for fund companies.

The interests of Vanguard management is not always aligned with the interests of Vanguard investors, who I believe are also the owners of Vanguard. It is a classic principle-agent problem.
Jack bogle doenst think the markets are rigged and he is aligned with the interests of Vanguard investors.

http://www.cbsnews.com/news/jack-bogle- ... d-markets/

I don't understand the paranoia of why its bad for investors if the AUM costs go down because it means someone one must be rigging the stock markets. Strange days are upon us.
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Re: Why is Vanguard defending high frequency trading?

Post by cacophony »

KyleAAA wrote:
cacophony wrote:
KyleAAA wrote: I haven't read the book yet, but by all accounts Lewis didn't provide any new information or analysis or engage in any novel scholarship. I would expect somebody like Bogle to be familiar with Lewis's arguments without having to read the book.
To quote Michael Lewis in the 60 minutes interview:

"I spoke to dozens of big and famous investors who said that when Brad Katsuyama laid out to me how the market was rigged my jaw hit the floor"

If this is true I wouldn't expect Bogle to know the specifics if he hasn't read anything about Katsuyama's findings.

I wasn't referring to big and famous investors so much as people in the industry i.e. programmers working on Wall Street. The big names like Buffett and Soros probably wouldn't need to bother with something like this. But rest assure what Katsuyama "discovered" wasn't a secret. Who do you think implemented those systems? They big banks certainly don't have the capability to implement something like this in-house, which means reams of consultants/contractors as well who have no loyalty to the bank. There are thousands if not millions of people involved in building these systems and they all talk.
Sure, but you said that you would expect Bogle to be familiar with the specifics. So unless Bogle happens to have an extensive Wall St. programming background I'm not following your argument.
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Re: Why is Joe Brennan defending high frequency trading?

Post by cacophony »

Jack wrote: Fifteen years ago quotes were fractional in which the smallest bid/ask spread possible was 1/16 of a dollar or 6.25 cents. Today bid/ask spreads can be one penny due to decimalization. The conversion to decimal pricing in 2001 alone accounts for a 60% reduction in transaction costs. Forget high frequency trading.
There are a lot of comments about how the only impact of HFT is a penny on each transaction, but that's not the real concern. Listen to the interview I posted in the original comment.
The concerns are really about causing market instability due to all the needless complexity that HFT introduces.

To quote the interview:
"The real problem that the little guy should be very concerned about is that in order for the system to maximize the take of high frequency traders who then share that take with the exchanges and banks is that its had to make itself very complicated and the complexity is all in the service of maximizing the collisions between high frequency traders and the ordinary investors. Now in making itself complicated and fast for the benefit of a handful of participants, it has made itself a lot less stable. The symptoms of this instability are things like the flash crash [of 2010], Nasdaq going out for hours, IPOs of Facebook for example getting screwed up. A stock market that is technologically dysfunctional is less trustworthy. What is the consequence of less trustworthy stock market? Big companies, productive companies have to pay more for capital because capital is more expensive to raise. The economy is not as prosperous as it would otherwise be. This is a massive social issue."
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Re: Why is Joe Brennan defending high frequency trading?

Post by Ricola »

cacophony wrote:Just stumpled upon this article, and was surprised to see Joe Brennan's position:
http://www.bloomberg.com/news/2014-04-0 ... abuse.html
Regulators should seek ways to prevent abuses without blocking high-speed firms that may actually benefit investors by providing liquidity to the markets, Joe Brennan, global head of Vanguard’s equity investment group, said in a telephone interview.
Michael Lewis has a great response to the claim that HFT adds liquidity on today's KQED Forum, starting at 33:48:
http://www.kqed.org/a/forum/R201404041000

The entire interview is worth hearing.
Seems obvious that they would want to avoid a mass exit of the markets if investors believed they were rigged.
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Re: Why is Joe Brennan defending high frequency trading?

Post by cacophony »

Ricola wrote: Seems obvious that they would want to avoid a mass exit of the markets if investors believed they were rigged.
Yet Schwab is somehow able to take a much firmer stance without mass exit or panic:
http://pressroom.aboutschwab.com/press- ... cy-trading
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Re: Why is Joe Brennan defending high frequency trading?

Post by Epsilon Delta »

The fairness of the market is a matter of degree, not a binary choice between rigged or not rigged.

The market is large and involves many people. There is almost certainly some criminality, let alone unfairness, but how much matters. If the collective loss is millions then while I'd like to see it reduced it really does not have much practical difference. If the collective loss is trillions that's another matter altogether.

This seems to be missing from the discussion of HFT. Would either side like to put a upper or lower bound on what the impact is?
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Re: Why is Joe Brennan defending high frequency trading?

Post by hiddensee »

The problem with regulation is that while it may (or may not) eliminate ways people can covertly game the market, it introduces a lot more new ones. It's not clear whether we come out ahead.
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Re: Why is Joe Brennan defending high frequency trading?

Post by nisiprius »

Epsilon Delta wrote:Would either side like to put a upper or lower bound on what the impact is?
No, because the impact of "unfairness" is not easily measured in dollars. In Animal Spirits, Akerlof and Shiller write about this, commenting that although economists do not completely ignore fairness,
it has been continually been pushed into a back channel in economic thinking.
The apologists for front-running in HFT see the dollar value. The public sees the unfairness.

It is possible that the result of all this may be some unfair treatment of high-frequency traders by the public.
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Re: Why is Vanguard defending high frequency trading?

Post by KyleAAA »

cacophony wrote:
KyleAAA wrote:
cacophony wrote:
KyleAAA wrote: I haven't read the book yet, but by all accounts Lewis didn't provide any new information or analysis or engage in any novel scholarship. I would expect somebody like Bogle to be familiar with Lewis's arguments without having to read the book.
To quote Michael Lewis in the 60 minutes interview:

"I spoke to dozens of big and famous investors who said that when Brad Katsuyama laid out to me how the market was rigged my jaw hit the floor"

If this is true I wouldn't expect Bogle to know the specifics if he hasn't read anything about Katsuyama's findings.

I wasn't referring to big and famous investors so much as people in the industry i.e. programmers working on Wall Street. The big names like Buffett and Soros probably wouldn't need to bother with something like this. But rest assure what Katsuyama "discovered" wasn't a secret. Who do you think implemented those systems? They big banks certainly don't have the capability to implement something like this in-house, which means reams of consultants/contractors as well who have no loyalty to the bank. There are thousands if not millions of people involved in building these systems and they all talk.
Sure, but you said that you would expect Bogle to be familiar with the specifics. So unless Bogle happens to have an extensive Wall St. programming background I'm not following your argument.
No I didn't. I said I would expect Bogle to be familiar with Lewis's arguments. Being familiar with his arguments doesn't require him to be familiar with the specifics. The fact that things like this happen isn't a secret. Hell, I'm not in finance at all and I knew it was happening. Are there REALLY people on this board who didn't at least suspect this was happening? Come on... This approach is obvious.
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Re: Why is Vanguard defending high frequency trading?

Post by cacophony »

KyleAAA wrote: No I didn't. I said I would expect Bogle to be familiar with Lewis's arguments. Being familiar with his arguments doesn't require him to be familiar with the specifics. The fact that things like this happen isn't a secret. Hell, I'm not in finance at all and I knew it was happening. Are there REALLY people on this board who didn't at least suspect this was happening? Come on... This approach is obvious.
We're arguing in circles here, so I'm going to bow out with a simple reminder that you haven't read the book.
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Re: Why is Vanguard defending high frequency trading?

Post by KyleAAA »

cacophony wrote:
KyleAAA wrote: No I didn't. I said I would expect Bogle to be familiar with Lewis's arguments. Being familiar with his arguments doesn't require him to be familiar with the specifics. The fact that things like this happen isn't a secret. Hell, I'm not in finance at all and I knew it was happening. Are there REALLY people on this board who didn't at least suspect this was happening? Come on... This approach is obvious.
We're arguing in circles here, so I'm going to bow out with a simple reminder that you haven't read the book.
No, but I've read very detailed descriptions about his findings and I was already aware of these types of shenanigans long before the book came out, and I'm not even in the industry. That coupled with comments from other people more in-the-know than Lewis leads me to believe I'm pretty qualified to comment. It seems far more likely that Lewis is exaggerating about "big famous investors jaws hitting the floor" than such luminaries being completely unaware of even the possibility this is going on. I mean, their own institutions often pay for access to these data feeds. Do they do so just for the fun of it? Are we expected to believe these people don't even have VERY basic analytics in place (super cheap to implement and use, btw) when there are billions of dollars at stake? I find that much more difficult to swallow than the simpler explanation that Lewis is merely promoting himself a little too strenuously. Of course institutions attempt to use speed to their advantage and of course some of them succeed in doing so some of the time, but the empirical data backing up Lewis's assertion that the stock market is rigged hasn't been forthcoming and if his book DID contain such data, there would be no need to read it in order to know about it.
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Re: Why is Vanguard defending high frequency trading?

Post by cacophony »

KyleAAA wrote: No, but I've read very detailed descriptions about his findings and I was already aware of these types of shenanigans long before the book came out, and I'm not even in the industry. That coupled with comments from other people more in-the-know than Lewis leads me to believe I'm pretty qualified to comment. It seems far more likely that Lewis is exaggerating about "big famous investors jaws hitting the floor" than such luminaries being completely unaware of even the possibility this is going on. I mean, their own institutions often pay for access to these data feeds. Do they do so just for the fun of it? Are we expected to believe these people don't even have VERY basic analytics in place (super cheap to implement and use, btw) when there are billions of dollars at stake? I find that much more difficult to swallow than the simpler explanation that Lewis is merely promoting himself a little too strenuously.
Here's a bit more detail from the NYT article:
Eventually Brad Katsuyama came to realize that the most sophisticated investors didn’t know what was going on in their own market. Not the big mutual funds, Fidelity and Vanguard. Not the big money-management firms like T. Rowe Price and Capital Group. Not even the most sophisticated hedge funds. The legendary investor David Einhorn, for instance, was shocked; so was Dan Loeb, another prominent hedge-fund manager. Bill Ackman runs a famous hedge fund, Pershing Square, that often buys large chunks of companies. In the two years before Katsuyama turned up in his office to explain what was happening, Ackman had started to suspect that people might be using the information about his trades to trade ahead of him. “I felt that there was a leak every time,” Ackman says. “I thought maybe it was the prime broker. It wasn’t the kind of leak that I thought.” A salesman at RBC who marketed Thor recalls one big investor calling to say, “You know, I thought I knew what I did for a living, but apparently not, because I had no idea this was going on."
So you think they're all pretending to not understand what was happening?
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Re: Why is Vanguard defending high frequency trading?

Post by KyleAAA »

cacophony wrote:
KyleAAA wrote: No, but I've read very detailed descriptions about his findings and I was already aware of these types of shenanigans long before the book came out, and I'm not even in the industry. That coupled with comments from other people more in-the-know than Lewis leads me to believe I'm pretty qualified to comment. It seems far more likely that Lewis is exaggerating about "big famous investors jaws hitting the floor" than such luminaries being completely unaware of even the possibility this is going on. I mean, their own institutions often pay for access to these data feeds. Do they do so just for the fun of it? Are we expected to believe these people don't even have VERY basic analytics in place (super cheap to implement and use, btw) when there are billions of dollars at stake? I find that much more difficult to swallow than the simpler explanation that Lewis is merely promoting himself a little too strenuously.
Here's a bit more detail from the NYT article:
Eventually Brad Katsuyama came to realize that the most sophisticated investors didn’t know what was going on in their own market. Not the big mutual funds, Fidelity and Vanguard. Not the big money-management firms like T. Rowe Price and Capital Group. Not even the most sophisticated hedge funds. The legendary investor David Einhorn, for instance, was shocked; so was Dan Loeb, another prominent hedge-fund manager. Bill Ackman runs a famous hedge fund, Pershing Square, that often buys large chunks of companies. In the two years before Katsuyama turned up in his office to explain what was happening, Ackman had started to suspect that people might be using the information about his trades to trade ahead of him. “I felt that there was a leak every time,” Ackman says. “I thought maybe it was the prime broker. It wasn’t the kind of leak that I thought.” A salesman at RBC who marketed Thor recalls one big investor calling to say, “You know, I thought I knew what I did for a living, but apparently not, because I had no idea this was going on."
So you think they're all pretending to not understand what was happening?
I think there's a very good reason hearsay isn't admissible in a court of law.

But think it through: the exchanges are asynchronous. If I order 100,000 shares of Microsoft, somebody front-runs me, but then somebody else orders 200,000 shares and skips in front of me in line, are they being front-run as well? Even if the front-runner has guaranteed 1st-place access on all exchanges worldwide and all the computing power in the world, they still couldn't process information fast enough to do so reliably for even a tiny fraction of market participants, not with all the supercomputers and fiber-optic cable in the world. 100,000 Googles and Facebooks working together couldn't do that. Rather, they would have to target a small select list of traders whose behavior and trading systems they could predict. So sure, the low-hanging fruit almost certainly does get picked off, but where's the data showing this ACTUALLY raises transaction costs to the point it's fair to label the system as rigged? Not even Katsuyama is making that claim.
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Re: Why is Joe Brennan defending high frequency trading?

Post by etm »

People need to stop being defensive. The problem, as outlined in today's NYT article, isn't caused by a conspiracy or anything like that. It's caused by structural problems that are taken advantage. It's not a "blame" problem. The IEX exchange attempts to eliminate the structure problems that cause the stock scalping. What's interesting is that a number of clients requested of their banks that their trades be run through the new IEX exchange. As the NYT article points out, banks are refusing to route trades to IEX against the explicit instructions of their clients to do so. And so it goes . . . .
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Re: Why is Vanguard defending high frequency trading?

Post by etm »

KyleAAA wrote:
cacophony wrote:
KyleAAA wrote: No, but I've read very detailed descriptions about his findings and I was already aware of these types of shenanigans long before the book came out, and I'm not even in the industry. That coupled with comments from other people more in-the-know than Lewis leads me to believe I'm pretty qualified to comment. It seems far more likely that Lewis is exaggerating about "big famous investors jaws hitting the floor" than such luminaries being completely unaware of even the possibility this is going on. I mean, their own institutions often pay for access to these data feeds. Do they do so just for the fun of it? Are we expected to believe these people don't even have VERY basic analytics in place (super cheap to implement and use, btw) when there are billions of dollars at stake? I find that much more difficult to swallow than the simpler explanation that Lewis is merely promoting himself a little too strenuously.
Here's a bit more detail from the NYT article:
Eventually Brad Katsuyama came to realize that the most sophisticated investors didn’t know what was going on in their own market. Not the big mutual funds, Fidelity and Vanguard. Not the big money-management firms like T. Rowe Price and Capital Group. Not even the most sophisticated hedge funds. The legendary investor David Einhorn, for instance, was shocked; so was Dan Loeb, another prominent hedge-fund manager. Bill Ackman runs a famous hedge fund, Pershing Square, that often buys large chunks of companies. In the two years before Katsuyama turned up in his office to explain what was happening, Ackman had started to suspect that people might be using the information about his trades to trade ahead of him. “I felt that there was a leak every time,” Ackman says. “I thought maybe it was the prime broker. It wasn’t the kind of leak that I thought.” A salesman at RBC who marketed Thor recalls one big investor calling to say, “You know, I thought I knew what I did for a living, but apparently not, because I had no idea this was going on."
So you think they're all pretending to not understand what was happening?
I think there's a very good reason hearsay isn't admissible in a court of law.

But think it through: the exchanges are asynchronous. If I order 100,000 shares of Microsoft, somebody front-runs me, but then somebody else orders 200,000 shares and skips in front of me in line, are they being front-run as well? Even if the front-runner has guaranteed 1st-place access on all exchanges worldwide and all the computing power in the world, they still couldn't process information fast enough to do so reliably for even a tiny fraction of market participants, not with all the supercomputers and fiber-optic cable in the world. 100,000 Googles and Facebooks working together couldn't do that. Rather, they would have to target a small select list of traders whose behavior and trading systems they could predict. So sure, the low-hanging fruit almost certainly does get picked off, but where's the data showing this ACTUALLY raises transaction costs to the point it's fair to label the system as rigged? Not even Katsuyama is making that claim.
Well, he points out that when he tries to buy 300,000 shares at 15 a share the "available" shares disappear and then reappear at a higher price. I'd love to be able to do that on E-Bay--you know, sell something at 100 then change my mind and say I really wanted 110 for it.
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Re: Why is Joe Brennan defending high frequency trading?

Post by DonCamillo »

I'd like to see a little changing of the rules to reduce abuses. For example, there could be a fee of 1 cent per hundred shares for orders placed and withdrawn in less than one minute.
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Re: Why is Joe Brennan defending high frequency trading?

Post by KyleAAA »

etm wrote:People need to stop being defensive. The problem, as outlined in today's NYT article, isn't caused by a conspiracy or anything like that. It's caused by structural problems that are taken advantage. It's not a "blame" problem. The IEX exchange attempts to eliminate the structure problems that cause the stock scalping. What's interesting is that a number of clients requested of their banks that their trades be run through the new IEX exchange. As the NYT article points out, banks are refusing to route trades to IEX against the explicit instructions of their clients to do so. And so it goes . . . .
I don't think anybody is being defensive or claiming it's a conspiracy, just that the ACTUAL empirical effect of the problem doesn't seem to be negative regardless of whether or not somebody technically "cheats." Being fair isn't really the goal of the system to begin with, so scalping doesn't really bother me because the overall system seems to work better with HFTs than without. Eliminating the scalping seems to be a case of throwing the baby out with the bath water. In other words, it appears to be a solution in search of a problem. I just think some people are annoyed with all the hand-waving as if any of this is new information.
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Re: Why is Joe Brennan defending high frequency trading?

Post by etm »

You can have HFT without the scalping. They don't go hand in hand. I think that's more the point and the point of the IEX exchange and the point Lewis made on TV today. In fact, Lewis was saying that you really can have an even lower cost HFT network without the middle men and dark pools causing problems.
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Re: Why is Vanguard defending high frequency trading?

Post by BigOil »

nisiprius wrote:Vanguard is part of the investment industry, they have to get along with everyone else. They are using polite and guarded language, pulling their punches, saying that it is only a few traders, using a lot of "mays" and "probablys." (One interesting "may:" "high-speed firms that may actually benefit investors,"--may, not does).

But, putting my own spin on it, I think the words I've underlined are the signal, and the rest of the message is noise.
Vanguard Group Inc., the world’s largest mutual-fund company, said only a minority of high-frequency traders may be hurting other investors.

Regulators should seek ways to prevent abuses without blocking high-speed firms that may actually benefit investors by providing liquidity to the markets, Joe Brennan, global head of Vanguard’s equity investment group, said in a telephone interview.

There are high-frequency traders that probably unfairly tax the system by taking it too far,” Brennan said. “We’re in favor of market structure rules that continue to evolve to make sure liquidity providers are just that, and get paid for liquidity and nothing more.

Money managers such as Vanguard, which buy and sell trillions of dollars worth of stocks on behalf of their investors, for years have sought to determine the impact of high-frequency trading on the assets they run. Vanguard, which handles more than $2 trillion, has been waging a battle to make sure it gets the best prices possible for its funds, Brennan said, using its own computer software and other tactics. Capital Group Cos., with $1.14 trillion in assets, has backed a startup exchange that seeks to protect investors from predatory traders.
In short, I read this as saying:
  • Vanguard says "abuses" are occurring, even if they soften this by saying it is only a few bad apples doing it.
  • Regulators need to "seek ways to prevent abuses," = more activist stance or new regulations or both. In any case, they "need" to do something, Vanguard does not think everything is fine.
  • "in favor of market structure rules that continue to evolve" = new regulations.
  • "...to make sure liquidity providers are just that, and get paid for liquidity and nothing more." This is again saying that currently they are being paid to do something "more" than providing liquidity.
Translation: New regulations are needed to stop abuses which are currently occurring.
nisi did you work the marketing department of MegaCorp where I worked LOL??? (I know you did not but...very accurate analysis IMHO, base on years inside a Fortune 50 Company.)

Product or PR/Management folks could take the 100% clear internal message on anything---always starting on PowerPoints it seemed, usually drafted from Engineering & Development Crew, massage it a little, pass it to "MarComm" (that's real Career/Job in big Companies "e.g. Marketing Communication"), run it back and forth with Legal (yech!) --- and out came a press release, ad copy, or a presentation. SO yeah, your right in your reverse engineering I think, near 100% right. "Some of this stuff is not good, we need new regs, but it's not a crisis yet (if it was they would add word like timely, or urgent etc...)" is my take....
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Re: Why is Joe Brennan defending high frequency trading?

Post by nisiprius »

Someone has gotta ask it... To get past the paywall, Google on "Fallout From High-Frequency Trading Hits Brokerages" (within quote marks).

WSJ yesterday.
Fallout From High-Frequency Trading Hits Brokerages
Shares of E*Trade, Charles Schwab and T.D. Ameritrade fell last week amid concerns sparked by Michael Lewis's book on high-speed trading....

Under an arrangement in use since the 1980s, discount brokerages sell most of their clients' orders to wholesale companies, which then trade against the orders without sending them directly to traditional stock exchanges. The wholesalers capture tiny profits on many of the trades, using superfast computers with complex algorithms to match orders.

Supporters argue that payment-for-order-flow deals help brokerages keep their costs low, benefiting small investors. Critics contend that such deals merely boost profits for brokers and wholesalers.

Analysts estimate the practice brings in anywhere from $92.5 million in annual revenue for E*Trade to $100 million for Schwab and $227 million for TD Ameritrade.
Here goes. Here's the question. No idea how to find the answer.

Does Vanguard Brokerage Services do this? If so, how much money does it bring in for Vanguard (and how does that compare with the situation when they were using Pershing?)
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