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NJ Server Farms Remake the US Financial Markets
1sockchuck writes "The engine of Wall Street has shifted from the stock exchange floor to data centers in New Jersey, where computer-driven trading now accounts for 56 percent of all trading activity, according to the New York Times. 'While this Tron landscape is dominated by the titans of Wall Street, it affects nearly everyone who owns shares of stock or mutual funds, or who has a stake in a pension fund or works for a public company,' the Times writes. 'For better or for worse, part of your wealth, your livelihood, is throbbing through these wires.' There are also photos of the data centers powering the high-speed trading operations, while 60 Minutes has video of a huge new 'liquidity center' run by the NYSE."
And nothing of value was gained.
...that automated trading has and will cause more trouble than it is worth to the overall economy.
When Fascism comes to America, it will call itself Anti-Fascism, and tell you to give up your guns.
>Can pennies throb?
Sure. It's a widely used idiom, popular in phrases such as "The sweaty lumberjack lustfully thrust his throbbing pennies deep into the moist slot of the pink piggy-bank."
Some of my favourite people are from th US; Vonnegut, Chomsky, Bill Hicks.
“Markets are there for capital formation and long-term investment, not for gaming,” [Michael Durbin] says here
Amen to that. The markets should operate as though there are humans at every step. Otherwise there's no need for humans on the edges, either.
There is just one difference, though. The trading machines, regardless of their location, have the same length cable to the switch. Even if it means coiling some of it up. The latency demands are so strict, the customers even care about the cable length - and it's just easier to give all the customers the same length than to maintain tiered pricing on the racks.
Majority of trading (at least in the US) is computer. According to this, average length of time a stock is held is under 35 seconds.
The mainstream financial reporting in the US is a complete joke -- everyone fixates on the Dow, as though it held any meaning. At the end of each day, some "meaningful" reason is given for a less than 1% move, however automated trading never seems to be included.
Netflix joins the Dow??? Is that what this country is reduced to? No manufacturing, just service?
Meanwhile, SEC regulation is a total joke, insider selling is rampant, accounting is a joke...
But, if you're a retiree, where else can you hunt down returns? CDs are long dead.
This kind of thing always makes me wonder why you see so many homeless people. They could just smash someone's head in with a rock and have a nice, clean, warm home with three squares a day and plenty of time to read or watch TV.
The reason is, those homeless people, unlike the bankers, aren't heartless sociopaths. I think when the bankers rob you of everything you've spent your life saving, you may find the same is true of you, unfortunately.
When you're afraid to download music illegally in your own home, then the terrorists have won!
In other words, the IT guys who maintain these servers all have greasy hair, don't wear shirts, and are total douchebags.
That's 72 hours of liquidity gone, there is an opportunity cost there ... an opportunity cost measured in true dollars going into the pockets of speculators. Basically we have traded wider spreads for higher instability, is it a good trade? Maybe, dunno.
Personally I think bids and offers should be matched up only once every hour ... I don't see any need for this stuff to happen at wire speeds.
If you can find a way to reduce bid-ask spreads without this kind of stuff, then I'll agree. Until then, I can't join the chorus of detractors.
With liquidity in the market, anyone who buys stock gets a narrow spread. Take liquidity out of the market, and you send us back to the dark days when stocks would trade at $1/8th spreads if you were lucky. $1/4 was common. Not only did you pay higher commissions, you paid the spread.
Unless you're pining for the days when you called your broker, paid him a percentage of the trade, and he placed your order in a market with a huge spread then you should be thanking the liquidity providers, not bashing them.
The current system doesn't hurt the little guy. The old system made it so the little guy wouldn't even think about it. I know, because I came of age when the old system was still in place for a few years. Buying in with a $1/4 spread on something trading for $10-$20, and then waiting for a significant percentage gain just to cover the spread??? No thank-you. HFTs? I LOVE them.
For all intensive purposes, "whom" is no longer a word. That begs the question, "who cares"?
If you match bids and offers once per hour, you're going to widen the spread pretty dramatically. It's no coincidence that the spreads have tightened up as trading speed has increased. If you force market markers to hold securities for at least one hour, they're going to have to widen their spreads pretty dramatically in order to compensate for the risk.
You would also see significantly higher volatility in the market. The way things currently stand, you can get a very good idea of what a security is worth at any given instant. If you have to wait an hour before the market updates, it's going to be hard to predict what the next trade price will be. That's going to result in a lot more price volatility, which will also increase spreads.
Another consequence is that you're likely to put smaller shops completely out of business. Holding a security for a minimum of one hour in an environment where pricing information is not available is just not something that smaller firms will be able to do (if nothing else, net capital regulations will foreclose it, due to the enormous risk). For the big firms, it will be like a return to the good old days- all those pesky HTFs gone, and only 2-3 market makers for any given security. This, more than anything else, will increase spreads and spell the end of the exchanges and a return us to the days of market makers. "You want to buy 100 shares of MSFT? You'll pay what we say. What are you going to do, go buy it from someone else? Good luck with that!" "You're ready to sell your 100 shares of MSFT? You'll get what we're willing to give you. What are you going to do, go to someone else? Try to trade it on an exchange? Har har har!"
This is a complex situation. The rise of the HFTs was one of the biggest shakeups in Wall Street history- the large firms lost huge chunks of their control of the market, and are still reeling from the shock of lost profits. They would be more than happy to see the end of HFT and a return to the days when they controlled the market. HFT's may cost the market $0.01/share, but that's nothing compared to the bad old days of monopoly market makers extracting $2/share or more.
Personally I think bids and offers should be matched up only once every hour ... I don't see any need for this stuff to happen at wire speeds.
Numerous markets had, and do have, this "feature." For example, trade-at-close aggregates all the orders at the day's close, and everyone gets the same price if the close price is within their limit.
The effect of this feature was to benefit the technologically sophisticated traders (I was one back in the nineties.) You waited until a few seconds before the close, then slammed limit orders onto everything that moved: the poor retail guy who had put in an order 1 minute ago was your counterparty, and he had just given you a free option for 58 seconds.
The standard explanation proffered by the HFT owners and customers is they "add more liquidity". This is repeated so many times that laypeople buy it; see typical comments in this thread like "we have traded wider spreads for higher instability". This is not the entire story: the liquidity is for them, not for you . That there is sometimes a spillover liquidity and spread improvement for participants in the wider market is merely a convenient observation suitable for PR. The past and ongoing flash crashes demonstrate that when the liquidity trades against them, they pull this vaunted liquidity quicker than you can blink, literally. They're not going to leave money on the table supplying liquidity into the market if they don't have to.
Another oft-made claim is "anyone is welcome to do what we do, there are no barriers to entry". That is not quite the entire story as well. The defining feature of an HFT firm over the retail investor apart from scale (you need accredited investor-scale financial depth just to ante up the money to the exchange to cover their risk for you fracking up your code and making market on your fracked up orders they then have to make good upon) is access, as the articles this story links to amply documents. They are quite different from most market participants. While it is true that one doesn't have to have special institutional privileges and access to buy these newfangled digital-age "exchange seats", and "merely satisfying" some financial and technical criteria make these seats putatively easier to obtain than the old seats, make no mistake about it, they are more privileged than the old school NYSE exchange seat holders: they enjoy special access to the markets that "non-seat holders" do not, namely preferential positioning in the order flow inspection pipeline, or put another way, they enjoy market making access without market making responsibilities. Just because you no longer have to have a hallowed name descending from the Mayflower, a family history intertwined with the exchange, and an imposing granite edifice for offices to qualify for an exchange seat that buys access to the order flow doesn't mean that preferential access is open to everyone. The day the exchanges open up the HFT level and quality of tick access for the same price as 15-minute delayed ticker quotes, would be the day that I withdraw this observation.
If you chafe at these new special breed of privileged market participants, then an old school remedy is still available: with privileged market access, comes market making responsibilities and market making regulatory oversight. Perhaps not as much responsibility as the exchanges, but definitely more than those without the preferential access, commensurate with their impact upon the market as shown by the flash crashes. Let them have the special access, but make good on the liquidity and spread claims with regulatory enforcement; that is, they continue eating at the trough even when the liquidity and spread moves against them. It didn't stop the old school market makers from coming up with different licenses to print money, so they'll still make great bank (though they'll bitch like a platoon of coked-up noob IB's at Penthouse for having to run through regulatory hoops that didn't exist before, instead of spending that time cranking the next batch of algorithms onto FPGAs), but coupling privileged market access with market making responsibilities did truly impart long-term benefits to participants in the wider market. Arguable if the benefit was proportional, but as long as we will tolerate differential access, we might as well at least maintain the marginal benefits of status quo ante, eh?