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High-Frequency Traders Are the Ultimate Hackers, Says Mark Cuban
An anonymous reader writes "Billionaire Mark Cuban talks in an interview with the Wall Street Journal about how he thinks high-frequency trading can be quite damaging to stock markets. He goes so far as to call high-frequency traders the 'ultimate hackers.' He says, 'They're running software programs that have one goal, and that's to exploit the trading systems as early and often as possible. As someone who wrote software for eight years and who keeps up very closely with the technology world, that scared the hell out of me. The only certainty in the software world is that there is no such thing as bug-free software. When software programs are trying to outsmart other software programs and hack the world's trading platforms, that is a recipe for disaster. ... How many times an hour are there failures across individual equities around the world because of software running algorithms battling each other for supremacy to make a profitable trade? We have no idea. It's not a question of if or when we have meltdowns, it's just a question of how big and where. It's straight out of War Games. And that's before we even get to the possibility of nefarious or sovereign hackers getting involved.'"
This is insulting to hackers.
Mark is currently trending because of the way that he handled ESPN analyst Skip Bayless last week, on live tv. He completely owned.
http://www.youtube.com/watch?v=hv2jqFd2-qI
All trading should be required to be at the hand of a human. No trade should be able to be reversed (buy/sell) in under a minute (if not more).
"National Security is the chief cause of national insecurity." - Celine's First Law
it is pure, unrestrained capitalism. What could possibly go wrong?
It's anti-free market for sure. They're skimming off the system without contributing a damn thing and adding inefficiency and misinformation into the markets. It shouldn't be illegal, but congress should enact a transaction tax on trades that is just big enough to make HFT not worthwhile.
You know, there's a reason why trading servers are still in the borough of Bank in London, on Manhattan island in New York, connected to newly laid fibre optic cable in Sydney etc. And it's not cheap real estate/labour costs. It's the speed of light. Seriously. Sub ms counts in this game.
Science advances one funeral at a time- Max Planck
"it is pure, unrestrained capitalism. What could possibly go wrong?"
It is nothing of the sort. Capitalism is a means of producing things. Wall Street produces nothing.
Wall Street isn't "capitalism". It's a government-endorsed casino. There's a pretty big difference.
It's commonly argued that HFT lowers transaction costs overall, presumably that's not such a simpl question, but ..
There are definitely rich people who make a lot less money now that HFT lowers *some* transaction costs. It's therefore worth picking apart the messenger's credentials a bit.
And the SEC, Obama, congress, etc. would actually regulate Wall St. if their lives depended upon it. Instead, they'd simply pass laws making HFT hard for smaller outfits, while granting Goldman-Sacks and Morgan-Stanly increased HFT.
The Christian religion has been and still is the principal enemy of moral progress in the world. -- Bertrand Russell
I chatted with some guys on an FPGA forum about this. They were convinced that HFT was good, as it increased the liquidity of the market.
I ran the line that it's bad, as it exploits that over the short term all players in the market do not have complete information on the state of the market, and is therefore a highly sophisticated form of insider trading.
In truth it it is just a mechanism to suck wealth away from those who actually create it (or invest in stocks of companies that create wealth), and does more harm than good.
Much like spam mail, HFT would cease to be an issue if a transaction came with even a tiny overhead. (And in both cases, I doubt it'll ever happen.)
The easiest fix would be to stop the roll-backs when they fuck up. Let a few of them go broke instead of "oh I didn't really mean that, can I have a do-over?" and the rest might have a bit more caution.
Or remove the ability to post a bid then remove it before it can be actioned. Make any bid stand for a minimum time before it can be withdrawn. 10 seconds would be long enough.
On the downside, if you fix it, you don't get all the fancy new superfast internet links.
I'm guessing that wasn't on their radar screen...
Comment removed based on user account deletion
How hard would it be to say:
Stocks/bonds/commodoties have an undodgable tax of 0.2%? This is collected out of the trade automatically and sent to DC in real time.
I'm not in a thinking mood whether this should be on sales or purchase. It would hurt high frequency traders because they'd be paying mad taxes, but people who invest like a sane man for long term the tax is negligable.
God spoke to me
Also, do we really want lower transaction costs? They might shave pennies or even dollars off a stock market trade, but if the point of the stock market is investment in a company (rather that shifting wealth around) wouldn't we want incentive to stay vested in a company?
The trouble with HFTs is they siphon money w/o adding value. As near as I can tell they're the definition of an economic parasite. Again, I'm open to being proven otherwise, it's just I don't see what value they add. They don't hold onto the stock long enough for the real investors to use the capital they put into the market. They just seem to drive up the cost for real investors....
As for Obama, he's got his hands full with oil and commodity speculators....
Hi! I make Firefox Plug-ins. Check 'em out @ https://addons.mozilla.org/en-US/firefox/addon/youtube-mp3-podcaster/
Bullshit...HF trading is just front-running by other means in the sense that they make profits because they have info about stock prices before other investors (hence the need for high speed lines and co-location). HFT traders make a profit... so they are taking money out of the system... not adding liquidity to the system. Typical bankers - they steal from you and try to convince you that they are doing you a favor.
Didn't he already suggest perhaps a penny per trade fee or half a penny, something like that as a way to curb HFT? In any case, either a money or time constraint added to the mix would probably put an end to it as it is today. But that would never happen because too many people make way too much money on this scam.
So many injustices..so little time..
I'm sorry but have you seen who's working at the Federal Reserve or the FDIC? Bankers and Wallstreet CEOs, that's who. The banks and the government are the same guys and the line between them is no more. Regulation? Hahahahahahahahh... what a quaint notion. We got here through Capitalism... because corporations want power and they can rig the government game in their favor. Its time for something completely different and I don't mean a penguin on the telly!
This is totally correct. Most people now just locate whole junks of their algo platform in the same data center as the exchange (co-location). Once it's there, I've seen people questioning and arguing about minutiae such as which switch its connected to or length of ethernet/fibre cable vs competitors. Tiny fractions of a millisecond are very significant in this game. Then there's the kernel optimizations, assembly in-lining, FPGAs etc.
I think (probably unpopularly) that it's a bit unfair to brand these guys as 'hackers' implying that it's some sort of dirty word. Smart engineers will always find a way to make something faster, better, stronger. To think that people in finance would accept that things "have got fast enough now and we should just stop" is a bit naive. Why should finance technology be any different from any other kind of technology?
Also, bugs ARE of course there and is basic fact of having an imperfect model. These are pretty much immediately exploited in quite a Darwinian way by other market participants. This is why one model makes more money than an other. I'm not sure why the article's author thinks this is some kind of blinding revelation. Even in extreme examples such as during the flash crash, for every stupid model making disastrous trades, there was someone on the other side of each trade making a massive profit. Survival of the fittest, welcome to capitalism.
One final though is that people can't just 'hack' the exchange. Organisations like the FSA exist to ensure that each transaction that occurs is audited to make sure that it has a financially sound objective, not just gaming the system for weaknesses. Market participants can fined very significantly for getting this wrong.
This article is really just uneducated scare-mongering.
Capitalism is a method of allocating resources through the private sector and that's precisely what Wall Street does. If I give you money to start your business, did I produce something? How is that any different from a company like facebook (which I hate btw) going public and getting $16B to expand its business?
Capitalism is just one method of allocating resources. Another method of allocating resources is to have the gov't do it - i.e. communism.
Long term investing isn't gambling, but day-trading most certainly is. The number of factors that go into a stock price's short term movements are so numerous as to be incomprehensible. You'd have better luck predicting a coin toss based on starting velocity, wind speed, ambient humidity, etc., than you would predicting a stock's day-to-day movement based on all available data.
it is pure, unrestrained capitalism. What could possibly go wrong?
Well, if you look at the history of capitalism,
this will probably end with the USA invading another country over the price of bananas.
Monkey business I tell you, it's all monkey business.
[Fuck Beta]
o0t!
That's the whole point about it being stored in the courthouse, in the same county as the property, for the lifetime of the loan.
If it is required by law to be a physical document, and that all transactions must be witnessed by an officer of the court, it is pretty damn hard to counterfeit a transaction without the illicit cooperation of an officer of the court.
It is already a matter of public record the ownership history of a property. All I am asking is that it become a matter of public record the history of any past or present loans against the property as well.
If you did that it would make very hard for anybody, home owner and lenders alike, to lie.
Done "correctly," HFC is bad for society because, like insider trading done "correctly," it specifically screws the "have nots" to benefit the "haves."
Yes, the screwed-up trades are a problem, but those are the side-show. The real problem is that those with the ability to do HFC can use that ability to "jump ahead in line" and screw those who don't have this ability.
Knowledge is how to play a game, intelligence is how to win, wisdom is knowing what game to play.
Yup, and that is the system we had. Unfortunately, the companies thought that system moved too slow and had a high transaction cost. So they bullied the regulators to let them keep their own clearing house... which they didn't properly maintain. It's the dumbest concept ever, private companies self-regulate on who owns the land today and then tell the government at their leisure. Little wonder that we are now seeing the benefit of our great grandfather's line of thinking.
I think Mr. Cuban has a point.
The markets were originally meant to support businesses by allowing folks to invest so that companies could raise capital. Investors could then get returns in the form of dividends etc. Obviously, trading in stocks is an excellent way for folks to make money and this is fully supported by the market paradigm.
The problem with programmed trading at these levels is that it prioritizes arbitrage over the health of the companies the market is supposed to serve. It's a perfect example of the pendulum too far at one end.
Cheers,
Bruce.
Quo vadis?
I get that if an arbitrageur who performs the classic arbitrage of buying a stock on one exchange and selling it on another where it's trading at a higher price is effectively connecting willing buyers and sellers who would agree on a price if they all had access to a common exchange. I also get that arbitrages on derivatives make the prices of related securities more internally consistent (not necessarily better, just more consistent).
What function does HFT serve in the market? The common answer I've heard is that they provide liquidity, that is, that they provide counter parties for trades that other people were looking to make, but if they exit that position within milliseconds by making the reverse trade to someone else, that means they only acted as a middleman between two willing parties that would have found each other in a short time anyway. I don't see how you can provide liquidity without having an openended commitment to sitting on an open long or short position the way a traditional marketmaker does. So how does this HFT provide liquidity that wasn't already there, and if it isn't providing that, what useful function is it serving?
Look the purpose of the stock market is to facilitate the trading of securities. The societal good of that is that it frees up and allocates money to companies that are producing more value , or doing it more efficiently. This is a way to reward smart companies and incentivize new technologies.
This shit has nothing to do with any of that. They're gaming the system for a purpose to which it was never meant to be put and further, they're endangering everyone else while they're at it. Those are just the facts.. none of that was my opinion.
This is where Citizen United matters a lot . Romney is promising to re-Bushify the stock market if he gets elected. That means Wall Street is going Romney. That means huge sums of money are being poured into his campaign and if he wins , the market stands a good chance of cratering the economy again.
Greed has located a positive feedback loop and is exploiting it in a predictably greedy fashion.
The thing is, this is obviously reckless and has nothing to do with free markets. It's as if we threw away any concept of a social good except the servicing of the impulses of richest greediest people our society can produce.
Greed is an innate flaw in human thinking under most circumstances. It's not some magic rocket fuel that impels society towards greater wealth and innovation. That's a bullshit narrative told to you by drug addicts who don't want to be separated from their drug . And nothing more.
The thing is, the fanaticism on the right is also in a positive feedback loop with the right wing noise machine. Even though their economic deregulatory policies cratered the economy, they are taught how to deny that fact by the right wing noise machine. This clears them to vote more of the same into office.
We've effectively turned our economy over to people with a a group of compulsive gamblers and risk junkies. This is a completely different thing than supporting risk taking entrepreneurs.
Look societies live, grow and die. They die because they become captive to an entrenched minority who games the social cultural political system and secures for itself some positive feedback loop that reinforces their power and permits them to write the rules of society to their personal, narrow advantage. Thenceforward, at every decision point, their local, short terms needs are serviced first and in our case, almost exclusively.
We may be living in a dying society that will catastrophically implode . Our refusal to address global warming in more of the same dynamic with the oil and coal companies finding a positive feedback loop in their campaign contributions and right wing noise machine.
Citizen's United matters more than you think. SCOTUS overturned a hundred years of hard won lessons about politics and money and democracy this week in their Montana decision , which is nothing more than en extension of their Citizen's United decision. This from a political wing which claims to abhor the ideologically driven, no-nothing meddling of Big Government into the policies of the States and of business and other boots-on-the-ground forms of hard won, real world knowledge.
Money isn't speech and corporations aren't people. These are two more -in-your-face patent absurdities that future generations, if there are any, will laugh out loud at in middle school classes and serve as the Cliff Notes on Why America Collapsed 101.
You have to understand that rational thinking and reasoning about even the basic, obvious facts of the world does NOT come naturally to people. As proof of this I offer a recent story about an ongoing cause for mass murder in Africa- Penis Shrinkage Through Sorcery.
I 'll link to the Reuters story because otherwise you might suppose I am accidentally reporting satire.
http://www.reuters.com/article/2008/04/23/us-witchcraft-idUSN2319603620080423
Long story short, m
The companies that produce things raise money by selling shares of their company (stocks) or borrowing money (bonds) on Wall Street. So, no, Wall Street doesn't produce anything on its own, but it provides a service that enables others to. It certainly doesn't resemble a casino.
This BS is +5 Insightful?
Wall Street today, especially the HFT programs, exactly resembles a casino! When you're making million dollar trades, not based on valuations, assets or long-term business strategic planning but based on automatic triggers in a market with irrational herd mentality it is EXACTLY like blowing a wad of cash on a "hot streak" at the craps table or roulette wheel. There are thousands of HFT programs interacting in an unpredictable manner with each other in the market. There is no possible way to track that volatility and rationally invest in the short-term in such a market.
In fact, I was outraged when I heard my son's class was using coin flips to determine the winners and losers in the class's "stock market". Investing is not gambling!
Why are you mad? Your son's class is smarter than you, apparently. Or did you not know that the hedge fund managers being paid millions in fees can outperform monkeys throwing darts at stocks only 61 out of 100 times when tested? (That was run by the Wall Street Journal, by the way.) Or that the professional managers outperformed the Dow Jones Average index only 51 out of 100 times? Short-term investing certainly is gambling!
Light a fire for a man and he'll be warm for a day. Light a man on fire and he'll be warm for the rest of his life.
All that effort for so little value to society...
"Or that the professional managers outperformed the Dow Jones Average index only 51 out of 100 times?"
Since the DJIA goes up over time, on average, matching it makes money, over the long term. If a trader, high frequency or otherwise, is making money on average, he is participating in something that is very much NOT like a casino.
Fallacious logic. And the same logic that led mass hordes of people to think that investing in housing will ALWAYS make money on average. The OP supposes that actively investing is a skill set, and not based on random luck. Therefore, professional investors who have spent years training and being educated on investing should be able to consistently beat (A) monkeys throwing darts at stocks and (B) beat an index based on a LISTING of stocks, not on professional predictions of how well they're going to do in the future! They can only do (A) 61% of the time... and doesn't it worry you that they can't beat the monkeys 99% of the time? And they can't beat a LISTING of the biggest stocks more than 51% of the time!
So what happens when the index listings themselves come crashing down? I certainly hope you're not expecting those professional fund managers to exercise those wonderful "skill sets" and pull your retirement out of the fire...
Light a fire for a man and he'll be warm for a day. Light a man on fire and he'll be warm for the rest of his life.
Mr. Cuban has a point indeed.
It's exactly the same point that has been given by anybody remotely knowledgeable about software development ever since this high frequency trading started.
It's probably a similar point given by any economists who understands the concept of "long term".
Let's hope stock exchanges listen to a billionaire.
Slashdot social media options: AIM, ICQ, Yahoo, Jabber and Mobile Text. Why no MySpace?
Which is why I've always considered high-frequency trading to essentially be a timing attack on stock market servers.
"How does efficient market theory explain all the millionaire and billionaire stock traders Manhattan and London?"
It doesn't, of course. But... given hundreds of years of solid evidence, it should. So... what is the difference? How did those things happen?
A few were smart. A few got lucky. Many of them already HAD family money.
Most of the rest is due to market-fixing, cronyism, insider trading, etc.
When the free market is allowed to work, it works. But we have over 100 years now of government and insider interference in the free markers, to the extent that they can hardly be called free anymore.
Sorry, but you can't point to a system that has been almost hopelessly corrupted, and call that evidence that the system as designed doesn't work. That's a logical fallacy.
Today's Wall Street is very, very far from a "free market".
The problem with programmed trading at these levels is that it prioritizes arbitrage over the health of the companies the market is supposed to serve.
Exploiting actual arbitrage opportunities would contribute to the health of the market itself, surely! But what makes you think that is what trading bots are doing? Aren't they simply scalping miniscule price movements at extremely high frequency?
I think that Cuban is wrong when he dismisses arguments that high frequency traders are providing markets with liquidity, clearly they are. And I think that software bugs in trading programs would sound primarily in reduced profits for their operators. However, I think he is correct to be concerned. As trading is increasingly conducted on the basis of tiny price movements without any regard to the underlying equities, and that at higher frequency and quantity, markets are being exposed to mass phenomena and feedbacks which have the potential to dislodge the performance of equities from the underlying performance of the actual companies, perhaps to disastrous consequences.
Better to be despised for too anxious apprehensions, than ruined by too confident a security. --Edmund Burke
Simple solution has already be proposed. Queue trade requests in such a way that a random delay is inserted. The delay will be negligible and go unnoticed for humans but it would definitely screw up milliseconds traders.
Everything I write is lies, read between the lines.
"Greed is an innate flaw in human thinking under most circumstances. It's not some magic rocket fuel that impels society towards greater wealth and innovation. That's a bullshit narrative told to you by drug addicts who don't want to be separated from their drug . And nothing more."
Bingo. Greed is manifestation of survival instinct, hyperbolised by emotions and feelings and "know how" around in your society. How it come that most greedy people are from societies who are created by people most in need? Because they are *afraid* to go where they once were. Hunger and feeling of being poor and misarble is something what kicks survival instinct into berzerk mode. US was created by poor but determined people to live better. Determination isn't bad in it's case, but overlooking wider implications of despair and our instincts, thinking that only they matter, is problem. Problem is that people who learn to live this way usually also fuel their positive loop that they can't be wrong with fully trusting their survival instinct.
user@ubuntubox:~$ stfu This server is going down for shutdown NOW!
And we do have an idea of what's actually going on. Here's a detailed example of the recent Facebook IPO problems: http://www.nanex.net/aqck/3099.html.
I think that Cuban is wrong when he dismisses arguments that high frequency traders are providing markets with liquidity, clearly they are. And I think that software bugs in trading programs would sound primarily in reduced profits for their operators.
*Cough* - Remember the flash crash? If anything, it showed that HFT is the market. Trading volumes have grown exponentially since derivatives and HFT went mainstream. It's not going to end well.
Plus, how HFT screws casual traders is absolutely abject. Joe wants to sell X for $9.99, Jack wants to buy it at $10.01. Instead of letting Joe and Jack do their trade normally, allowing Joe to pocket an extra $0.02, the algo (which is located at the market maker's premesis, to get the info in advance) discovers Joe's price by issuing tiny trades, and buys at $10 from Joe. It then immediately sells to Jack at $10.01, discovering his price in the same manner. People should be running around with pitchforks over this.
Forget the hacking component, high speed trading is legalized theft. Think about it, the essence of equitable trade is a wealth transfer in which both parties contribute something: I give you money, you give me a loaf of bread, and we both come out ahead. Or in the case of stock you give me partial ownership in a company.
Granted stock trading has always had a certain element of gambling to it, but when it's humans it's still a matter of "I think this company is under-valued and want to buy in before anyone else realizes it". Basically it's a form of risk-management. High speed trading is essentially a man-in-the-middle attack - whereas normally stockholder A would sell buyer B their stock when they felt the market was overpriced, now they sell to speed trader S at a slightly lower price, and person B buys at a slightly higher price. Both A and B, the people actually looking at the market and weighing risks and benefits, have lost some of the value of their trade. Meanwhile the speed trader has profited by that value difference without contributing anything whatsoever to the transaction. They're parasites upon the market, adding costs and instability and giving nothing back - the sooner we ban them the better.
To hear them talk you could build a mid-ocean trading center along the data-lines as just pull money out of the air, making money from nothing. Here's a hint - if it sounds too good to be true it probably is: It's not pulled out of the air, it's pulled out of the pockets of people that are actually doing the risk-management the market was created for.
--- Most topics have many sides worth arguing, allow me to take one opposite you.
Citizens United v. FEC has nothing to do with corporate personhood. That concept has been around since the late 1800s.
"Congress shall make no law ... abridging the freedom of speech"
A law which prohibits an organization from running a TV ad about a politician is a clear violation. Remember, the SCOTUS doesn't "legislate" or weigh the predicted results of the decision. They interpret the Constitution, and they made the right decision.
Financial de-regulation is a red herring. The politicians want you to believe deregulation was the problem for a multitude of reasons. First, the people that did it are long gone so there's nobody to vote out. Second, it gives the appearance that no laws were broken, and third, the fix is easy. More regulation. It's BS.
Government has at least 4 agencies specifically to regulate the financial sector and the FBI to investigate. They have all the regulations and evidence they need. The problem is that the feds literally will NOT enforce the existing laws.
"Money is Not Speech"
You guys DEFINITELY need a better meme. That statement is completely meaningless. IMO, it gives the impression that only word-of-mouth is immune from government infringement.
But the money isn't speech. The ad, pamphlet, etc is. Citizens' United decided that corporations had a Constitutional right to free speech. If they did have such a right, then it wouldn't be fair to limit their expenditures. But the obvious problem with that ruling is that corporations don't - and shouldn't! - have a right to free speech.
Corporations have to be people so they can own things and we can sue them. That's a well-established legal fiction. But they don't inherently get any human rights because of that. I, and many-to-most other people, think that granting corporations human rights is a mistake. What's next - the right to bear arms?
I have developed a truly marvelous proof of this comment, which this signature is too narrow to contain.
I don't think anyone is saying that speech is limited to what comes out of your vocal chords, or that only individuals have the right to free speech. A political group (political party, PTA, group of concerned neighbors) have a right to speak with one voice. But, I don't believe that a "Corporate Entity" should have the same rights as these sorts of political groups. A corporation has as it's sole motivating factor profit. It's voice in the political system will only pursue governmental action that promotes its own interest ie profit. Profit motive can and does often lead to actions that are detrimental to the society as a whole. Examples of this are everywhere toxic dumps, lead paint in toys, slave labor in the east, promoting monopoly power and on and on. We cannot allow corporations political speech and expect that everything will work out. Government should be the instrument of the People. It should restrain the actions of corporate entities not be their tool.
No sigs in BETA. Beta SUCKS.