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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.
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.
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!
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"?
Not true either. It is trivially easy to find articles with data to the contrary.
Are those the articles where flipping a burger into a bun and sticking a piece of lettuce on top is counted as 'manufacturing'?
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?