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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."
You have an unusual viewpoint if you consider HFT to be progress.
It's only terrifying if you are some kind of luddite.
Correct. For the financial world it's the new normal. And actually, the financial landscape has now become more egalitarian than it ever has been because the cost of setting up a respectable high frequency operation is so low. Basically, you're looking at a few relatively inexpensive 1 or 2U boxes colocated at the trading venue sites and you're going to need to rent the fairly expensive high speed links between them. Way way way less than the traditional cost of setting up a bricks and mortor trading shop. Anybody can do it. Oh, but you'll need to write some software because nobody is going to give it to you at a price you can afford.
Have you got your LWN subscription yet?
Wrong.
http://www.thisamericanlife.org/radio-archives/episode/355/the-giant-pool-of-money
A special program about the housing crisis produced in a special collaboration with NPR News. We explain it all to you. What does the housing crisis have to do with the turmoil on Wall Street? Why did banks make half-million dollar loans to people without jobs or income? And why is everyone talking so much about the 1930s?
From this, I would draw the opposite conclusion: we should oppose proposals for a financial transaction tax at all costs! If high-frequency trading is the disease, then a tax on transactions is not the cure. It would make government addicted to the new revenue and therefore dependent on the high-frequency traders, thus ensuring that those leaches will never go away.
A better solution, I think, would be to require stock exchanges to operate on a once-per-second clock. Any trade orders that arrive within each timeslice would be executed in a random order, so as to defeat any advantage the high-frequency traders would get by being fast.
To repeat my comments from just a few days ago , the fine article states on page 4:
Many HFTs will make near-simultaneous trades on different exchanges and profit because of the delay in one of the exchanges. An example will help me explain: let’s use the NASDAQ and EDGE exchanges, and say that ABC stock is trading at $1.00. The HFT will send a bunch of quotes (offers) to NASDAQ and EDGE, trying to sell ABC stock at $1.01. Once the NASDAQ order is accepted, the HFT can simultaneously cancel the $1.01 sell order on the EDGE exchange and replace it with a buy order at the original price of $1.00. EDGE immediately accepts that $1.00 order, because its system has not caught up to the new price of $1.01, and the HFT’s net position becomes zero. This is possible because of latency, which is jargon for delay in the system. The net result is, the HFT captures a $0.01 arbitrage. By scalping this tiny amount from many trades, the profits add up quickly
Let's repeat: the HFTs are putting orders on the system for which they have no intention of fulfilling. This is a violation of SEC rules, yet the SEC does nothing. There was an AC responder to my post who made a blanket denial cancellations were happening. Care to respond?
You may not be aware that the derivatives market, where much of the high-frequency trading occurs, is valued at $791 TRILLION dollars (with a "T"). That's many times the total gross domestic product of the entire planet. And not one dime of that money represents anything that exists. It is not equity in a company that can be used to build a plant. It is not "shares of stock". It is not "money in the bank" that can be lent to individuals or companies.
When you've got that much wealth tied up in the virtual world, HFT could easily warp the value of the "real world". It can corrupt economies. A little hiccup in the derivatives market was all it took to cause an economic collapse in 2008 that is still being felt worldwide and has cost the United States upwards of $3Trillion just in ongoing bailouts and the rolling bailout knows as Quantitative Easing. That little hiccup is why your house is still only worth about half of what it was in 2007.
You don't have to be a Luddite to be concerned about the secretive, looking-glass world of "The Market".
You are welcome on my lawn.
Shouldn't it be pretty simple to stuff this worm back into its can?. Put a 1% tax on the sale price (not gains) for any stock which is held for less than 1 minute. HFT will instantly disappear. Human beings will never notice. What am I missing?
So HFT becomes jerky with 1 minute response lags causing less stability? As it is, 3 algorithms see an undervalued position, and try to buy in, they push the price up by a penny or two and then exit to the slightly slower HFT. If they don't reverse positions quickly enough, the surge in demand will cause the undervalued position to overshoot and become overvalued and crash back. If you are going to tax this, go with a 0.01% or 0.001% tax on the sale price for everyone - anyone adjusting positions even daily will only be charged 2.5% or 0.25% for the year, while HFT might hit a 10-20% rate if they are averaging 10 or 100 transactions a day - I don't know enough about how often the same funds are used daily to know what the right rate is, but hitting around 10% of principal would slow things down a bit.
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?
That has little to do with HFT, and a lot to do with the fact that the price of just about everything intangible is driven first by fashion, and only a distant second by any underlying value. It's always been that way, but effective global communication has unified financial fashion sense, to where on any given day everyone seems to rush into or out of cash. All of that is noise though, it's only day-by-day that things are strongly coupled. Over the course of years you see prices diverge sharply between good comanies and shitty companies (ignoring bailouts for the moment for the sake of my blood pressure).
When "investing" means trying to game the underlying system, do we really wonder why the economy sucks?
Markets in the modern sense were invented in the 16th century, and speculating has dominated "investing" for the entire 4-500 years. It's not a problem per se, as long as we have regualtions to limit margins and counterparty risk. It has no real effect on the economy. (Bubbles suck, but require non-speculative investors to get foolishly drawn in to get big enough to matter).
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!
Spoken like someone who doesn't understand why market makers are so valuable. Thinly traded markets blow goats. The cost to low-volume individual traders like me is very high when large bid-ask gaps appear. Narrowing the bid-ask gap is win-win: the casual buyer, the casual seller, and the market maker all come out ahead!
Socialism: a lie told by totalitarians and believed by fools.
This comment by m_m offers a good perspective:
"Let me posit that HFT has driven a lot of people out of business: the specialists, execution brokers and day-traders who used to collect the large rents built into the system in the days of old. HFT and algo-trading practitioners are rent-seekers too, but their rents are far smaller. And the vast majority of the whining you hear is from exactly the people that HFT has displaced. I have read or heard nothing about how medium-to-long-term investors are being disadvantaged by HFT; to the contrary, their costs have gone down substantially. As for destabilizing the system, sure, a lot can be done to improve the market structure and micro-structure. But we have just come through one of the most volatile and unstable periods ever; did you really expect this or any market structure to survive through this without showing the occasional crack? And what you got, even then, was the Flash Crash and some instances of erroneous behavior, the most egregious of which was Knight. In the days of specialist-and-broker intermediation, we got Black Monday without any macro stress of remotely comparable scale; we got lots of (human) fat finger errors all the time, too. So, are you saying that it is morally and socially acceptable for one group of error-prone humans to extract large rents from the system, and it is not morally or socially acceptable for another group of (differently) error-prone humans to extract much smaller rents?"
If you think HFT is bad, then you must think $0.99 individual tracks, MP3 players, and digital distribution are also bad since the RIAA no longer dictates how you buy and what you do with the content. It's really not that much different.
Imagine how much harder physics would be if electrons had feelings! -Feynman, maybe
Rather than executing trades at a million per second it would be better to execute bankers at a few dozen per day.
similar to the french revolution
after a year or two of that, re open the markets with manual trades only, pen and paper and voice communication, no automated signalling or actions of any kind
Snowden and Manning are heroes.
Back late Fifties a smart, rich old trader (who also happened to teach econ) was asked by a government panel what he'd do to "fix the market." He specified two things: eliminate puts and calls; any stock bought must be held minimum six months.
This is such crap, my employer isn't even part of the S&P 500 anymore and over 1% of the total shares trade each day on the market. Any listed security is going to have plenty of trading partners. Quit trying to justify the salami attack on the market that is HFT.
There are 4 boxes to use in the defense of liberty: soap, ballot, jury, ammo. Use in that order. Starting now.
I'm an Investment Adviser Representative, so I work in the industry, a mere pawn 2000 miles from Wall St. HFT hits home for me, as it costs my clients money. There's a legal foothold here to ban this activity, called Front-Running. If I hear a co-worker say "I'll place that buy order for 1000 shares of Google as soon as we hang up" and I then race over to my computer to place my own Google buy order first I can be prosecuted. It's called Front-Running because I'm racing my order in in-front of a trade I know is coming. (My new holding should bump up a tick when their order comes in next driving up the market price. It works more reliably with thinly traded stocks. And did I mention it's illegal?) And yet the exchanges, for payment, allow the high-frequency traders to see incoming trades. It's illegal, plain and simple. The question is why no one has stopped it yet. The CFTC has done some good investigations, I hear. I can't give investment advice as every person's situation is unique. But do you think more or fewer potential investors will want to get in the market once this criminal activity is stopped?