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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."
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.