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This Is What Wall Street's Terrifying Robot Invasion Looks Like
pigrabbitbear writes "Given the the endless mind-whirling acronyms, derivatives and structures of the financial markets, we're rarely served with a visualization that so elegantly illustrates the arrival of Wall Street's latest innovation. This is what High Frequency Trading — the official monicker of Wall Street's robot army — looks like, when specially programmed computers make massive bets at lightning speed. Created by Nanex, the GIF charts the rise of HFT trading volumes across all U.S. stock exchanges between 2007 and 2012. The initial murmur, the brewing storm, the final detonation: Not just unsettling, it's terrifying."
...why high speed trading is a good idea for anyone? It seems like the equivalent of slash-and-burn agriculture where you're destroying a resource (in this case basically sanity) in exchange for a one-time benefit of briefly being faster than your competitors.
So can someone explain how the world is a better place than if, say, you could only issue one trade per second?
G.
Human behavior.
Bubbles exist when the market becomes disconnected from the true value (if there is such a thing!) of the asset...
I don't know much about HFT, but I am pretty sure that the HFT algos no nothing about the true value of the asset, and they are just gaming the markets.
When most of the trades in the market are traders trying to out-gaming each other, that can't be healthy.
Automated trading is a Bad Thing.
It is a joke to call it Market. It's no more than a Vegas Slot machine.
When Fascism comes to America, it will call itself Anti-Fascism, and tell you to give up your guns.
Except the costs have gone up. Dramatically.
Remember that bull market back in 1999? NYSE upgraded their networks in the 3rd quarter of that year to handle a whopping 1,000 quotes/sec.
Today, you need to process 1.5 million quotes a second. Apples to apples. Well, except for the trading part, there, it's apples to rotten tomatoes
Here's a graph comparing growth in quotes and trading. http://www.nanex.net/aqck/2817.HTML
I'm all for more faster trading. But that demands increased transparency. I should know more about where my $20,000 trade executed and the route my order took than my $20 order from Amazon.
The real Luddites are those who like obscurity. Because if the markets were as transparent as they should be "with a greater degree of computer involvement", then the game wouldn't work.
Knight Capital, a conservative market-maker, is going bankrupt because it's automated trading algorithms ran for 30 minutes in a poor configuration (losing money on each trade). How much did they lose? About $440 million dollars. In 30 minutes. Because someone didn't make it to the STOP command in time.
Not a bubble, just a way to destroy an organization in an automated fashion very quickly.
You have an unusual viewpoint if you consider HFT to be progress.
I consider it to be inevitable. Given that, you must learn to deal with it in whatever way suits you best.
I am all about reality, not hiding my head in the sand or spending my life trying to stuff worms back in a can.
"There is more worth loving than we have strength to love." - Brian Jay Stanley
If I take droppings from a bunch of individual chickens, put them together, cook them a little, and then sell them as "Chicken derived high-fiber compound", I can't very well lie to you and tell you that I'm not selling you shit.
-- Let us endeavor so to live that when we pass even the undertaker shall be sorry. -- M. Twain
You are missing a vital piece of information. You explain what a bubble is but not why it forms. The reason for most large bubbles is when currency is inflated and rates are set below a market rate by a central bank. This new money has to go somewhere and wherever it goes it causes a misallocation of resources. This can happen without a central bank but without an endless source of new money those bubbles tend to be small and burst quickly.
Also there is no such thing as the true value of anything. Value is completely subjective. Everyone values things differently. In fact that is the only reason anyone trades. I value the gallon of milk more than the price while the store values the money more than the milk. Nobody goes around trading things of equal value.
I love Jesus, except for his foreign policy.
And that is why the use of computers is better, because it enables the transparency you crave.
Could you define "transparency" for us? Because you don't seem to mean it the same way as the rest of the world.
HFT may indeed have created something resembling "transparency", but only insofar as it has made the entire market no more meaningful than a biased random number generator. What does it mean to conservatively invest in a company with strong financials and good growth potential, when entire sectors rise and fall with near-perfect correlation? Or more to the point, why do we even have a stock market?
If it makes me a Luddite that I believe "investing" should have at least something to do with lending someone with an idea money in exchange for a cut of the profits, then I'll accept that crown proudly. When "investing" means trying to game the underlying system, do we really wonder why the economy sucks?
We desperately need to implement at least one one of two really, really simple solutions - A transaction tax, and an end to intraday trading. Either of these would kill HFT overnight, and good riddance!
Which President are you referring to? Disclaimer: I'm not taking any sides between Democrats and Republicans. They both screw us and give to their preferred 1%'s.
All of the damage was set in motion long before our current President took office.
What caused the housing bubble was no more than insatiable greed for ever growing profits from someplace.
It was not enough that you could sell a mortgage to another company within a couple of weeks at most with some properly filed paper work. We needed it faster.
It was too hard to go to court and actually fight with home owners when disputes arose over mortgages. No. No. No. We needed deeds of trust and laws to bypass due process and just kick people out of their homes without any way to defend themselves.
It was not enough to make origination fees off normal home buyers and package up their loans in huge instruments and sell them. We needed new loans that made speculative investors take interest and start buying more houses than ever before.
If was not enough to make huge amounts of money off the speculative investors. We needed to fuel the ever growing beast as fast as fucking possible for as long as fucking possible .
What did we get? Poor unsophisticated people with bad credit, low income, and no chance in hell of paying off a mortgage that was going to have monthly payments increase 50%-100% within 24-36 months.
All of those speculative investors that had short term goals for properties within the next 3-5 years? They're screwed proper.
All of those average home owners who were lured in by cheap home equity loans with people whispering in their ears that there was no bubble? Totally fucked.
Guess what?
YOU CAN'T BLAME THIS ON JUST *ONE* PRESIDENT.
Nice try though.
Bubbles take years to develop, no microseconds.
Not anymore. Thanks to the magic of computers, self-reinforcing feedback between a sufficiently large number of "traders" means the price can skyrocket or crash in a matter of minutes.
Lots of replies to your post! The bank collapse could have been contained had government enforced existing laws. There is/was a massive amount of fraud in the bubble, which the FBI was aware of at the time, as well as others who paid attention.. At the least, fraudulent loan applications could have been pursued. At a better level, bank/finance firms clearly misrepresented to investors about the underwriting standards when they sold the bundled products. We also have fraudulently signed and notarized documents on titles. So, lots of low hanging fruit in the real estate bubble.
The Federal Reserve has injected massive amounts of money into the system to try to contain the crash, and bubbles still persist. In the stock market, only chumps are getting prosecuted. The major players (Goldman Sachs and other HFT firms) are untouched.
The fine article states (on page 7): "The thing is, the SEC already has rules against placing orders not intended to be filled. Obviously, it doesn’t enforce them very well."
http://www.hsdl.org/?view&did=456724 is a nice PDF from where on page 126 we read:
"The FBI significantly reduced its investigative efforts for fraudulent activity involving financial institutions (such as banks). Principally, the FBI scaled back its handling of lower dollar cases [SENSITIVE INFORMATION REDACTED]. We agree that the FBI must prioritize its investigations and first address the most egregious criminal activities. However, discussions with USAOs and analysis of USAO data revealed that no other federal agency has replaced the reduced FBI effort in this crime area. Therefore, an investigative gap exists for financial institution fraud (FIF), [SENSITIVE INFORMATION REDACTED]."
This is also found at http://www.justice.gov/oig/reports/FBI/a0537/chapter13.htm
Michael Burry made billions (with a b) betting on the downfall of the CDO's. After writing an op-ed in the New York Times asking why the government (including the Federal Reserve) didn't see the same things he did, he was audited by the IRS. So, again we're looking at a massive financial system where the rules are not being enforced.
As somebody who actually deals in the market and writes algos, I have to add you have no idea what you are talking about.
HFT by itself does not push the price around. What HFT does is be the catalyst to any slight news. Think of it as follows. Put a fire in a forest and it burns, but it burns with some control. Put a fire in a forest that 100% oxygen and you don't have a chance in hell. This is HFT in a nutshell.
What happens when there is any slight movement whatsoever the HFT will overdo the moves. This then leads to the problem of psychology where traders will ask, "maybe there is something wrong with this company and they begin to sell off even more." The 100% pure oxygen HFT will then begin wild fire that nobody can control.
HFT is a problem and it needs solving. Case in point, America uses much more HFT due to the lower market costs. Europe is not better, it is that in Europe costs of doing business are much higher hence not as attractive for HFT. Where have all of the screw ups been? Oh yeah America...
"You can't make a race horse of a pig"
"No," said Samuel, "but you can make very fast pig"