Algorithmic Trading Rapidly Replacing Need For Humans

DMandPenfold writes "Algorithmic trading, also known as high frequency trading (HFT), is rapidly replacing human decision making, according to a UK government panel which warned that the right regulations need to be introduced to protect stock markets. Around one third of share trading in the UK is conducted by computers fulfilling commands based on complex algorithms, said the Foresight panel in a working paper published yesterday. Nevertheless, this proportion is significantly lower than in the U.S., where three-quarters of equity dealing is computer generated. The Foresight panel, led by Dame Clara Furse, the former chief executive of the London Stock Exchange, argued that there are both benefits and severe risks to algorithmic trading. There was 'no direct evidence' that the computer trading in itself increased volatility, it said, but in specific circumstances it was possible for a series of events with 'undesired interactions and outcomes' to occur and cause massive damage."

Comments

Re:Not replacing, just adding on top

[Hatta]

It's not replacing humans, it just improves profit making for those who want to trade

By siphoning value away from those who want to do something productive.

Absolutely

[Anonymous Coward]

As someone who worked at Goldman Sachs, I can completely attest to this; a lot of the software was automated, but what the trading group was always asking for was basically an autopilot system; they wanted to sit back and just let the money roll in. One of them, I remember it distinctly, said that he'd love it if he didn't have to watch all the various windows all the time because he "had better things to do".

This was the same group of guys who, one of them told me "if I could kill you, not get caught, and make money because if it...I wouldn't think twice".

Fun times...

This is bullshit.

[brxndxn]

HFT does not help the market in any way. It does not promote the investing of capital. Going into and out of a company in less than a second is ridiculous. Steps need to be taken to stop HFT in its tracks before the whole market is ruined.

This will fix HFT:

1. random delay in all trades.. stick a 100ms to 1000ms delay before all trades are posted on the market
2. tax all trades by a miniscule percentage.. give straight to government debt
3. enact a rule that all trades stand.. erroneous trades made by a computer algorithm will never get rolled back

Re:This is bullshit.

[LordNacho]

I Googled it. Here's a report about what some researchers think:

http://www.tradersnarrative.com/what-if-hft-is-actually-good-for-the-market-4723.html

"That public perception may need to be adjusted according to this recent research by finance PhD candidate, Jonathan Brogaard (Kellogg). The paper looks at the effect of HFT on equity markets and through analysing the strategies used by these firms it considers their profitability, impact on market liquidity and volatility.

There is evidence that high frequency trading contributes to price discovery and liquidity. There is also evidence that it has a minimal impact on volatility and may even reduce it. There is also no evidence that they engage in front-running. HFT demand for liquidity (42.7%) is slightly higher than their supply of liquidity (41.1%) and they provide the inside quote about 65% of the time."

Re:This is bullshit.

[dannys42]

The problem with studies like that, and much of the analysis of the stock market, is that it's all done on the numbers. The researchers may be absolutely correct in their study. However, what the current state of the stock market does do is encourage the "wrong" state of mind for many businesses. It's my belief that going public ruins more companies than it helps for exactly this reason (this would be a human study not a numbers study). People start making decisions based on what they thing the investors want that quarter. And to me, that's the surest way to kill a business, as you've now taken away from your focus on your customers and your employees. So while HFT may increase liquidity and all that good stuff, it's doing so at the cost of the long term health of the company. (Not all businesses fall into this of course, but it appears to be more common than not).

I may not be a serious day trader, but as an (albiet modest) investor, I want a company that thinks long term. And it's my understanding the stock market was originally created for investment purposes. What sort of "investment" is it to put money into company for a second or even a day or a week? I actually think the time window for making trades should be more like one a month or even a quarter or maybe twice a year. With a longer period between trades, I understand people may feel uneasy about the commitment, but I think that's exactly what it should mean to "invest." However, if it's a big enough deal to people, then perhaps you could also have a (shorter) window for backing out (with perhaps a small penalty).

Re:This is bullshit.

[bluefoxlucid]

In communism, the government holds reins on the market and dictates activity.

In free-market capitalism, big money holders find ways to hold reins on the market and dictate activity.

Communism is arguably better, except that it's really identical aside from trading "vicious, self-serving market leaders" for "brain dead, incompetent market leaders." It turns out putting idiots in charge is just as bad as putting tyrants in charge.

It is thus sensible that we would occasionally look at a situation, knee jerk "That's Not Fair(TM)," and then calmly and rationally begin to investigate the unfairness to determine if we can make it fair without doing too much damage. Every time we try to regulate something, there is a cost ... but there are already economic costs, like the out-of-control prices of college tuition and books, or the decoupling of rental property rates from rental operating costs (if there is more money in the area, rent prices go up and the poor get pushed out--in other words, it will always be expensive to live decently, and the middle class will likely continue to shrink while the poverty line continues to raise). Fixing any of these things is dangerous; they're already broken, but you can do far worse.

HFT is one of these things. It has an economic cost I'm not very interested in (I dislike the practice, but not on any specifically well researched basis), but to regulate it away would also have economic costs. You have to determine if those costs are in excess of the social and economic value gained by eliminating HFT before you even begin to regulate it.

Re:This is bullshit.

[LordNacho]

This is not possible in all markets, and is definitely fishy. But also, because most markets do not allow this, it is not the main business of HFT traders.

Additional regulations

[Halo1]

Algorithmic trading, also known as high frequency trading (HFT), is rapidly replacing human decision making, according to a UK government panel which warned that the right regulations need to be introduced to protect stock markets

Like making it illegal for humans to beat the algorithms?

Re:Not replacing, just adding on top

[Tsingi]

In other words, the system will become so complex that we will quite literally be unable to ever quite figure out what's going on, until, of course, it all collapses, kills trillions of dollars in value, renders most economies smoking ruins, and then everyone will finally ask "Why the fuck did ever let that happen?"

Umm, I think we've already been there.

Awesome...

[RobinEggs]

I've never been convinced that HFT is anything but a scam to make institutional investors more money without doing more research or making more socially responsible investment decisions.

The company worth truly investing in, in the sense that you hope it survives and hope it continues to grow as opposed to only making you lots of money, is the one that will treat the environment, their employees, their supply chain, and their customers with respect while paying investors and owners a respectable return.

HFT algorithms don't give a fuck about any of that, exactly like the stereotypical Wall Street broker doesn't care about any of that; in fact HFT algorithms were written when brokers realized they could make more money in corrupting and managing young mathematicians than in doing their own jobs. HFT just further emphasizes empty, short-term speculation without regard to the product sold, the behavior of the company, or the future potential of the company. It enables the irresponsible greed of people who just want to make a dollar in the next day to become the irresponsible greed of people who just want to make a dollar in the next 0.0000000001 seconds.

Re:Awesome...

[FoolishOwl]

If investment decisions are better made by computer program than by human investors, what justification is left for private ownership of capital? And what's the argument against planned economics?

Can we have another look at the idea of democratically deciding upon our social priorities?

Re:Not replacing, just adding on top

[ipoverscsi]

The purpose of the stock market is to provide price discovery. If you had perfect information at all times you would know the price of a good and the stock market would be pointless. But because perfect information is impossible, the stock market crowd-sources the gathering of information so that the true price can be discovered.

Determining the price of a good is something only a human can do. Price is a value quantified, and determining value requires sifting and filtering of information and the application of significant amounts of gut instinct. Computers cannot set prices since they don't have any concept of value -- they have neither needs not wants.

Computer assisted trading -- trades where people set stops and buy limits -- is okay because the human has done the work to determine the valid price ranges a priori; the computer simply executes the bid on behalf of the user.

High Frequency Trading, however, should be illegal since it does not involve human value judgements at all. It simply allows a computer to front-run actual humans and siphon off people attempting to perform a useful act -- that is, price discovery.

"Both benefits and severe risk"

[GameboyRMH]

Benefits: More money transferred to the very wealthiest individuals as traders who can't afford HFT servers (physically as close to the trading floor as possible - at these speeds, light is too damn slow) are at a severe disadvantage.

Severe risks: Potential for total economic collapse to take place in the blink of an eye.

I punch those numbers into my calculator and it makes a frownie face.