Slashdot Mirror
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.
As one of the articles explains, HFT algorithms trade almost exclusively based on other trades. Guess what behavior is almost guaranteed to cause a bubble?
<xml><I><am><so><damn>Web 2.0</damn></so></am></I></xml>
Human behavior.
No where does the author define the units at play, EXPLICITLY.
So, I'm guessing that it's the volume (number of) shares traded on a specific day, on a minute basis throughout the entire business day. Multiple data are included, representing the various trading markets in the US.
That makes:
x: time (from 8 am to 4 pm, eastern time)
y: shares traded at time x (multiplier? could be x10^1, x10^7, or who knows)
chart title: the specific day depicted
PS: I don't reply to ACs.
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.
You have an unusual viewpoint if you consider HFT to be progress.
Yeah, capitalism will .. survive for sure, because you need shotgun and canned food to survive the post broker war era ;)
Wall Street is really pushing the envelope on high performance computing and programming. It's hard to not be impressed by the hardware and performance.
Owning stock in a company actually mean owning as share in the Goods the company was going to sell?
Seems almost alien in today's world of baffling bulls**t which is what we get out of Wall Street. Makes Calculus look like finger painting.
A feeling of having made the same mistake before: Deja Foobar
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?
I think it had more to do with the government guaranteeing normal loans (subsidized by low FED interest rates), government subsidized loans and government entities buying sub-prime loans. If you were a bank, why wouldn't you make bad loans to sell to Franny and Freddy.
Linked articles don't make a good case for "terrifying". The bank collapse was caused by the bubble burst, not the other way around. And it wasn't brought on by electronic trading.
Pardon me for being so blunt here, but pull your head out of your ass.
The collapse was caused by a severe lack of deregulation, brought on by greedy assholes who didn't give a shit about anyone else but themselves.
Now go ahead and tell me how we're not staring at the same damn thing.
Oh, and then tell me again how there was so much done with the collapse before to actually deter or even stop those greedy assholes from doing it again.
Yeah, I'd say "terrifying" is a damn good word here.
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.
HFT means high-frequency, not long term. Bubbles take years to develop, no microseconds.
matter how they are used too. So far looks like weapons of mass economy destruction
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?
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.
There's an interesting parallel between the bots and scripts people use to play TradeWars 2002 and the bots and scripts people use to trade on the stock market. It seems to me that the TW2002 arms race may serve as a model for understanding the fundamental problem and what Wall Street or government regulators might be able to do about it.
You don't see anything slightly unusual about basing the financial underpinnings of our economy on computer programs that interact with each other and dictate the value of companies not based on actual profits, revenues, results, business methodology, strategic planning, or company history, but rather base the primary value of the company solely on the current trend of their stock, driving company value up and down in an attempt to exploit nanosecond timing to skim fractions of pennies off actual sales & purchases?
We've seen several examples of bugs in these programs that translate into financial ruin for not only the people running the bots, but random companies as well until the trades get reversed. How much faith do you have that out of hundreds of these bots, none have any bugs that pose a greater risk? (Knowing that all programs have bugs, and we've seen this exact kind of problem already happen due to bugs)
I guess I'm a luddite for wanting a financial system that pretends to be based on reality.
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
Is they bring near unlimited liquidity to the market. They also don't move valuation, and they only compete against themselves to make the market more liquid thus reducing the actual profits they are "siphoning off the top". It's a race to the bottom alright, the bottom of HFT profits. Or do you'll believe that if they achieve another few order of magnitude of frequency, suddenly they'll drain the entire market of all it's value in a single day?
This is what you get when the uninformed do journalism.
This article has only HFT volumes to go by, and yet draws some dark conclusions about the future.
It's all nonsense. I've been in HFT since before the beginning of the animation. I can say that the trades are mostly very simple. They are written with great care and attention to risk. HFT shops have no unfair advantage - like any trading company they put up risk and capital in order to attempt to make a profit. And when things go wrong they can lose bug and fast. The reason for growth in HFT is partly due to how easy it really is.
More and more trading companies are trying to enter the game.
HFT is like Target. They cut margins to next to nothing and make it up with volume.
Knight is really a good example. They had the worst case scenario: heir robots were buying and selling on bad information and their risk systems didn't detect it. Bad for Knight. But did it crash the whole market? Did it have the same effect as the mortgage CDO fiasco? Not at all. HFT shops aren't leveraged. If they put up $1 they could lose $1. And often they do.
Asimov's vision of the world economy being controlled by machines has become reality.
Unfortunately for us, the machines we actually put in place bear little resemblance to those he described. Instead of being programmed with the 3 laws, and therefore a help to mankind by eliminating poverty and famine, we have programmed them to enrich the few at the expense of the many.
Such a system can not, and will not, be sustainable - as History so abundantly proves.
Just wait till two or three of these HFT machines goes wacko together and wipes out the entire market. These machines operate without human intervention. They buy and sell completely without human input. Now if 2-3 or more of these machines start operating in a repeating cycle with each other they could damage so many stocks simultaneously that in theory they could crash the entire market.
If the knight trades had been a little closer to sensible they could have triggered other HFT systems into buy and selling cycles. These things are dangerous IMO and they need some strict regulation such that they can't make trades worth more than the value of the assets in the company. Essentially margin rules that regular humans must abide. Even then I would still be concerned about the "perfect storm" problem where multiple HFT systems begin playing off each other and ride the market into a crash.
That algorithm can be executed with or without computers.
Which is the problem in all of this. Any broad 'plan' can be executed just as well by hand as it can by HFT computers. People who are seriously concerned about shifting the entire value of a company or a market move billions of dollars in a single transaction and don't particularly care about nanosecond to nanosecond events.
Everything else is being scraped together the same way traders did before, only faster. Which isn't really good or bad. Stupid people made stupid trades, stupid people design bad algorithms and made stupid trades, people make mistakes, people programming computers make mistakes.
Now THAT would be some fun trolling.
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.
No, or rather that is how minor bubbles occur. Large bubbles are caused by an excess of investment dollars chasing too few good investment opportunities (aka, consumption) more or less by definition. People may have been attracted to do more investing by whatever reason, but truest value of a good or service is inherently ultimately based on consumption, not speculation.
The most important thing you needed to understand about investment dollars is they *MUST* be invested in something. If they just sit around, under a mattress for example, then they lose value and you come out even worse. Even gold is no true protection against a bubble, you just get a gold bubble. More or less this is one of the key reasons all the banks got carried along with their own "scams", they really are unable to just opt out. There certainly are some investors who are better than other, or at least better understand a particular situation, but as an overall effect a bubble is a correction of investment capital to match existing demand for goods and services. That is how everyone can lose money in the same game.
To be sure, you can have too little investment capital, we just don’t have that problem right now.
The greatest danger of HFT is probably to the types of investors that are compelled to act in a predictable manner for whatever reason, large mutual funds or retirement funds are excellent examples. But overall the creation and collapsing of bubbles rapidly is probably a benefit to the economy in that more quickly adjusts investment capital.
It's only terrifying if you are some kind of luddite.
Everything is getting faster, with greater degree of computer involvement.
HFT is not wrong because it uses computers, HTC is wrong because the algos react only to change in prices and have no input whatsoever on the actual value of the enterprise behind the stocks. That is: the HTC reaction is based on the ones perception on the perception of the others - it is tolerable for low levels of "second hand perceptors" but... when the level of them is high, the risk of "computerized market panic" increases dramatically.
“To err is human, but to really foul things up you need a computer.”
(Paul Ehrlich)
“A computer lets you make more mistakes faster than any invention in human history–with the possible exceptions of handguns and tequila.”
(Mitch Radcliffe)
In other words: in HFT, the wrong is not the use of computers, but how you use them.
Questions raise, answers kill. Raise questions to stay alive.
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
The HFT shops I've worked at are all for transparency.
Dark pools are considered inefficient.
When you trade on an exchange all the quotes, prices, volumes and trades are public. What else would make things more fair?
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.
Based on what? Just increases in volume?
Grab your pitchfork!
I'd recommend waiting for a little more evidence.
So far all research into the subject has concluded the HFT is good for markets. But don't let facts dissuade you.
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.
See hotdog.
For around seven years I programmed a derivative trading system. Unfortunately our company went out of business due to lack of capital and possibly because our large competitors were cheating (not obeying firewalls between trading for customers and trading for themselves).
I view high-frequency trading (HFT) as great for society. Here is why: What HFT gives you is the fairest and most accurate (best) price for something. When there are many, many trades, the price gap between the individual trades becomes so low that there is no chance that you'll pay too little or too much for something or that you'll wait too long for your trade to happen. I'm talking about people who just want to buy something, not HFT traders.
You're hungry and you want to cook yourself dinner. Your dinner is made up of commodities that are traded, except perhaps for the parts that you bought at the local farmers market. But you and the farmer used gas and a vehicle of some sort to make the transaction. If you rode your bike, your bike is lubed with oil and made of steel, etc. With HFT in play, everything that went into the transaction was bought and sold at the fairest price possible. Nobody got gyped because of low market volumes that day, and nobody had to pay a gigantic fee to a broker because the cost per transaction is now tiny.
Of course you have issues like the flash crash. The best way to look at the flash crash is like this. Shares of John Gotts (JG) are worth $40, based upon fundamentals (intrinsic worth) and an idea about the future. Somebody sold a gigantic number of shares of JG for $20. Excellent computer algorithms put in buy orders for JG at $15 and possibly foolish computer algorithms found a way to sell shares of JG at that price, foolish if they bought the shares for more than $15 or smart if they bought the shares for less. The spiral kept going downwards due to both foolishness and intelligence. You can see that there were many, many winners. Every algorithm that bought shares for JG at less than $40 had the potential for a huge windfall. There are no rules against creating an intelligent HFT to look for mini-flash crashes and make a killing as a result. Fortunately or unfortunately, many of the trades that did happen were unwound by the exchange.
Finally, what I need to stress here is that computers aren't trading with other computers. Teams of programmers working with traders are writing code that does their bidding. The computer is the trader's tool, not the trader itself.
The collapse was caused by a severe lack of deregulation, brought on by greedy assholes who didn't give a shit about anyone else but themselves.
Is it a typo or intentional? If intentional, do you care to explain how less regulation encourages "the greedy assholes to give a shit"?
Questions raise, answers kill. Raise questions to stay alive.
It’s certainly fair to say that if you take a long, five-year view, then you can see a clear rise in trading activity. But it’s also fair to say that there’s something quite literally out of control going on here. Just as the quants at Knight found themselves unable to turn off their machines for 30 long minutes last week, the HFT world in aggregate seemingly has a mind of its own when it comes to trading patterns. Or, to put it another way, if there’s a pattern here, it’s one incomprehensible to human minds.
deal with it mentally? that's the whole problem, buddy. we can't.
insensitive clod overlords obligatory xkcd car analogy russian reversals whoosh pedant fanbois ftfy in 3...2...1..PROFIT
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?
Gah, sorry missed a / on one of my quite tags and accidentally hit submit rather than continue editing.
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!
It's only terrifying if you are some kind of luddite.
Everything is getting faster, with greater degree of computer involvement. Deal with it mentally or sell everything you own and go live in a cabin in the woods somewhere.
if only the woods could actually support 7 billion human beings, we could all go live there. But since they can't, we'll need to figure out a way to be more productive than machines which are increasingly capable of performing more and more work that only a few years ago required a human being to do.
Just how many new occupations has the economy created in the past 20 years? How many occupations have been automated and rendered obsolete?
Unless we start paying people to have fun, enjoy themselves and frolick in the park there is not going to be much work left for anyone to do.
No one has a right to their *own* opinion. They have a right to the TRUTH.
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.
Hear hear!
I am a big fan of Interactive Brokers - while their desktop app is pretty cool, the API is what makes them truly outstanding: http://www.interactivebrokers.com/en/p.php?f=programInterface&p=guide-default
... or a violin
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?
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.
Cheaper for who, and more expensive for who?
There's no real contradiction between the claims. It's cheaper for the trading houses. It's more expensive for those who aren't doing high speed trades.
I've also heard it claimed that the mechanisms used in high speed trading would be illegal if done by people instead of by computers. I'm not really into stock frauds, so I couldn't evaluate the claims. Something about "forward pruning"? The impression I got was that it involved making bids that you didn't intend to execute, so that you clogged up the system until it got to the price where you were willing to buy, but I'm not at all sure I understood this correctly.
I think we've pushed this "anyone can grow up to be president" thing too far.
It's hardly "terrifying" when I have no idea what either of those unlabelled axes are supposed to represent.
Just showing something getting bigger over time is not really useful information.
It looks like there are a few HFT types on this thread. For mere mortals with no access to this stuff, what aspects of the equities markets are left uncovered and exploitable as traders move towards these new algorithmic tools? What kinds of lucrative medium term trades are made available (if any) by this that were previously big centers of attention but no longer?
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.
Not anymore, with Economics 2.0 right around the corner. Charlie Stross's Accelerando seems increasingly prescient:
"...add a delay factor for propagation across the system, call it six light-hours across, um, and I'd say ..." she looks at Sirhan. "Oh dear."
"What?"
The orang-utan explains: "Economics 2.0 is more efficient than any human-designed resource allocation schema. Expect a market bubble and crash within twelve hours."
There is also a common procedure in which they make a bunch of bids but do not execute in order to find out out another persons price.
If you don't want to face the risks of trading, you shouldn't trade. Period. What is wrong on your picture is that the trades were reversed. They shouldn't.
Stock fluctuations don't bring financial ruin to random companies, just for ompanies trading stocks or derivatives.
Now, about the actual topic. HFT is not a problem. High frequency cancelation of orders is. That's why everybody that researches HFT concludes it is not a problem, yet anybody can look at the market and see something is wrong.
Rethinking email
Also there is no such thing as the true value of anything. Value is completely subjective.
Don't act obtuse. Whether or not we can concretely call company X "better" than company Y, we can say that company X has no debt, a low P/E, and a high profit margin, while company Y owes its ass to the banks and loses money quarter after quarter. HFT completely ignores that in favor of "Company Q, with a correlation of 0.9 to company Y, just went up a penny, so buy buy buy Y!".
So, you mean that there is great oportunity for profit with anti-panicky bots?
Rethinking email
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.
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.
Bubbles just take years because your trade has hight friction. HTF is the tech that opens the opportunity of microssecond long bubbles (and panics) for us.
Not a completely bad thing.
Rethinking email
Stock shares are fungible. If I have 10000 shares of XYZ at the beginning and end of the day, and alternately buy and sell 100 shares every few seconds, how long have I held those shares? Add some 0s and tha's what pur human traders working for market makers have done for centuries.
HFT just automates what those humans did,and it's great if you have to trade some thinly-traded security for which there didn't use to be any market makers (because it wasn't worht a human's time to do the math when so few shares traded). It really sucks when the best bid/ask out there allows you to buy for $3 or sell for $1 - I'm happy enough to see this move to $1.60 and $1.50, and don't care at all that a different broker is making money as a result.
Socialism: a lie told by totalitarians and believed by fools.
So, you mean that there is great oportunity for profit with anti-panicky bots?
Theoretically yes... the small detail: only if you have the money to buy everything when everybody else is selling (hint: Lehman Brothers didn't)
Questions raise, answers kill. Raise questions to stay alive.
Some are saying HFT issues only affect HFT traders. However, when your FDIC insured deposits are being played on this table instead of being loaned out, the losses can easily impact the population at large, and the diversion of money is allegedly hurting the economy these days. Keep the banks in banking. Keep the brokers brokering. Stop letting them leverage other peoples assets. Then by all means allow HFT to continue on its merry way with their own money.
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.
You don't need to buy everything. You just need to buy some of it, and wait for people to realize the price is wrong.
If your hint is about Lehman Brothers bankrupcy, it's way off. They got bankrupt buying overpriced stuff. A more apt comparison would be somebody that got fully into stocks at the 2009 low, and sold them by 2010.
Rethinking email
http://www.zerohedge.com/news/interview-high-frequency-trader
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
The stock market IS based on reality. You are buying and selling shares of a company. HFT might cause temporary swings in what those shares are trading for, but it does nothing, that's right, absolutely nothing, to the value of the underlying company.
Let's look at it another way. Say we have a market that buys and sells a commodity like crude oil. You buy a few hundred barrels of oil and hold on to them. Then some HFT algorithms go to work in the oil markets. Now you are seeing much wider swings in the price of oil. Does this actually alter the value of a barrel of oil? Can you suddenly do less with a barrel or more if the price goes up or down? What you are buying has an inherent value.If trading algos cause the price to swing one way or another, you have just found opportunities to buy or sell something at a price that is much better for you.
It's people that don't take the time to understand how financial markets work and blindly throw their money at something they assume will just go up and up that get superstitious about HFT.
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.
And as long as they don't get a fucking bailout, justice is served. Or could you seriously argue that Knight didn't deserve it's fate? Companies whi exist only to trade stocks can easily be destroyed by problems with HFT. Companies that actually produce goods and services aren't materially affected if their stock price goes off the rails for 30 minutes. I don't see any kind of problem here.
Socialism: a lie told by totalitarians and believed by fools.
The only value of X is what you can sell X for. The price of most stocks is driven short term almost entirely by fashion. HFT simply capitalizes on the realization that the herd usually stampedes in the same direction. Long term it's irrelevent.
Socialism: a lie told by totalitarians and believed by fools.
It's only terrifying if you are some kind of luddite.
It's only terrifying if the algorithm is messed up and you lose every cent you've ever had. And seriously, just what is that algorithm anyhow?
If there is one thing that you can bet your life on, is that HFT trading will always be 100 percent legit, there will be no possibility of those in the know to manipulate it for their own ends. (sarcasm off) I can see insider trading modules being sold as an upgrade. To me, it is like electronic voting. With the amount of money at stake, and people's penchant for doing unethical things, it just cannot be trusted. There is a truism in the stock market - It only goes up over time. Just not for most of us.
The shepherds did so well protecting the flock that the sheep no longer believed that wolves existed.
HFT exists soley to exploit arbitrage. There is no benifit to this, these trades would happen a split second later anyway. HFT is just jumping in the middle of them to take its cut without contributing anything. So instead of trying to come up with ways to discourage this activity such as a trasaction tax, maybe it would be better to just have the exchange resolve these arbitrage situations automatically either to the benifit of the bid or ask or splitting the difference.
I got bored reading the article, but didn't see anything there about HFT.
Here's a question for you though - What changed in the late '90's that brought about all the banks trading the derivatives mentioned in the article you linked? (Hint - social engineering by a President trying to encourage home ownership by people who banks didn't want to lend money to)
$440 million changed pockets. The money didn't just go away. Sucks for Knight though.
I consider it to be inevitable. Given that, you must learn to deal with it in whatever way suits you best.
Right. Because stock prices are nature's law - in the same way, economists are scientists.
Oh, the beautiful gloss of greality!
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.
You are of course right. Lemme see
Bell goes.
All trades are placed in a 1 minute queue.
At the end of that minute, a new queue is formed, and all the trades for the first minute are confirmed.
HFT disappears as you can only do business once every minute, and you don't get to see what your competitors have done for that minute.
The downside of this is that the financial sector will insist on more transparency... but not too much... Wait, we didn't mean you could look at our dirty laundry...
A sig is placed here
To display how futile
English Haiku is
Based on what? Just increases in volume? Grab your pitchfork! I'd recommend waiting for a little more evidence. So far all research into the subject has concluded the HFT is good for markets. But don't let facts dissuade you.
Is HFT invulnerable to attack? Are there scenarios by which an enemy could wreak havoc? The problem with this stuff, is that it reminds me of the connectivity of the Power grid.
Whatever could go wrong?
The shepherds did so well protecting the flock that the sheep no longer believed that wolves existed.
That's for value traders, not arb. Not to denigrate the former, but that's not what HFT is about.
Have you got your LWN subscription yet?
Huh? HFT works quite well with IB, at least it did back in 2005-2007, when I played around with SUNW and others via IB's API. Who does value trading anymore?
I'm not arguing they get what they deserved. They should be left to fail; an example to those who wish to follow in their place.
My point was that automated market decisions can be dangerous, and can cascade quickly in a complex system.
Now, about the actual topic. HFT is not a problem. High frequency cancelation of orders is. That's why everybody that researches HFT concludes it is not a problem, yet anybody can look at the market and see something is wrong.
How about an explanation on how HFT is invulnerable to destructive interference? Then follow up with how it is impossible for HFT to create, even accidentally, stock market chaos? And frankly, your" Just don't trade" silliness, is just stupid. I have funds in the stock market, and a lot of people do. Just handing out crap like that is just saying "I know more than you, but can't be bothered to tell you, so if you don't believe me, then go away." Sorry, that is bullshit, and here I am giving you the chance to alleviate people's concerns. Just answer those questions and the world will be back in your thrall.
The shepherds did so well protecting the flock that the sheep no longer believed that wolves existed.
Don't make stop-loss orders. You are trying to create a very basic algorithm to prevent loss or preserve profit. Stay on top of the share prices and sell based on inherent value.
With the loans they were giving packages of shit loans AAA ratings. That's clearly fraud, and yet afaik, nobody has been charged with fraud. In fact, afaik, there's nothing that prevents the same thing from happening again.
-- Let us endeavor so to live that when we pass even the undertaker shall be sorry. -- M. Twain
Or, you know, maybe it's people who want price to actually reflect value instead of taking wild swings? If I buy a barrel of oil, I want it to be because I believe that a new technology has been implemented to make it more valuable than it used to be. Buying it simply to wait for the HFT-fueled upswing serves no purpose other than to destabilize the market for the sake of speculators. It's a negative damping effect, and those never end well.
Everything is better with chainsaws.
If the government decides it's not in the public interest they can stop it. At least they should tax it so as to extract the maximum revenue. E.g. 0.1% on every transaction, waived if you hold the instrument more than 10 minutes.
Markets are correlated with or without HFT. Destroying HFT would not change than, only increase inefficiency.
Stocks aren't priced in a bubble. Companies have an effect on each others prices. HFT makes the price discovery process quicker, and for less profit. You are also wrong about HFT gaming the system. HFT plays an important role in the market place. Without it prices would swing more violently, risk would be less manageable,the cost of trading would skyrocket. Portfolios would cost more to rebalance, so they would be less profitable. Growth would decline or reverse.
Also, you are wrong about a transaction tax. A tax on each transaction would result in wider spreads increasing the cost to the investor, not the market maker. This is because the spreads are as tight as they are only because there is a low cost to market makers.
Removing intraday trading would be insane. A replacement system would be even more complex - with more inefficiency and more opportunity to game the system. Today people can offset risk as it arises. If you can only trade once a day you have to give risk a higher cost resulting in higher cost to investing and slower growth.
You can get insurance for anything. Whether or not you are smart enough to get enough insurance is another matter entirely.
Even the whole Facebook NASDAQ thing and there's an insurance fund to cover those problems, which were technical but not HFT. Now the insurance fund isn't big enough for that sort of problem, and I'm not sure how exactly it's supposed to work given that, but people who have small losses like that would have been dealt with already.
We work much less now than we used to, and we do meaningful work MUCH less than we used to. The hordes of retail clerks, marketers, etc. are all repurposed farmers. And probably the make-workish profession of all? The people who play games with numbers on stock markets.
In summary, we DO pay people to have fun, enjoy themselves and frolic. Except not in the park... people like to think they're useful.
You know not of what you speak.
HFT has introduced a new era of price instability and top-down manipulation. HFTs read headlines that have been crafted to create certain responses which get front-run. They cause flash crashes. They bankrupt brokerages when they go awry.
It is the fault of the exchanges. They should kick these guys to the curb, but they are making too much money on them. They have driven retail investors out of the market instead. As such, these HFTs overwrite the pricing mechanism of people buying and selling based on actual research and real data (signal) and leave behind nothing but churn (noise). With the pricing mechanisms destroyed, the markets no longer function. This will lead to nothing but tragedy, and soon.
If this were World of Warcraft, then HFT would be mining/farmer bots and they would get banned by Blizzard...
I never thought there would be a day when I'd find more common sense in the rules of an online game than in those of our governments/economies, but there you have it...
There really is a queue at the exchange. What's important is the time to get into the queue. That would still be the case even if the queue weren't processed until the end of a delay.
BTW, they are orders. The trades are the result not the input.
Well you could still look at the underlying loans and see how they aren't triple A. They already gave crazy disclaimers about how dangerous it was to invest in them. The rating agencies are monopolies and blessed by the government, there's no free market in ratings agencies. A year ago S&P actually did something sensible and downgraded the US bond rating and immediately got investigated for fraud for rating those derivatives too high. But it's much worse now, all those people doing those crazy things got trillions in bailouts, and now the US government is guaranteeing an even larger percentage of mortgages.
The government need not intervene in that way. Rather, the SEC should stop looking at tranny porn and investigate the links between the HFT bucket shops and the exchanges (ie do their fucking jobs and enforce existing laws and regulations). Many are on the up and up, but some are linked in such that they can frontrun orders, stealing from human traders (ie they see someone place an order for a stock, and they rush in and buy before the order can be placed, raising the price by a few cents, then sell it to the buyer at a higher price). This phenomenon is a major reason that retail has almost totally exited the markets.
It's not the involvement of computers that is at issue. It's the use of computers in privileged positions to screw you out of few dollars on each transaction and in ways that destabilize markets. I don't trust a market trade order any more. The price can go up or down in the blink of an eye and you can end up selling for much less than the stock was worth an instant before your sale was executed and less than it is reported to be a milliseconds later. They're making every market they touch a sucker's game.
Ah, OK, it does look interesting, but most probably your definition of "high frequency" and mine differ by an order of magnitude.
Have you got your LWN subscription yet?
What? I guess you forgot about the flash crash, and the, oh, hundred odd mini-flash crashes that we have had since then.
Not ALL HFT is bad, but some of it certainly is. The exchanges are negligent in their duties to their clients when they allow some HFTs better access than others, and outright criminal when they allow them to frontrun orders after they are placed and before they can be executed.
Speaking of executed, I didn't realize Jamie Dimon was a fan of Tolkien. Let me guess, you were rooting for Sauron?
Or to put it another way, it's Windows based. Nobody serious trades on a Windows platform. Don't even think about trying to drive it from Excel and win anything.
Have you got your LWN subscription yet?
You don't need to buy everything. You just need to buy some of it, and wait for people to realize the price is wrong.
I guess some are still waiting for people to realize the prices after GFC are wrong (are they?)
Questions raise, answers kill. Raise questions to stay alive.
Except when it causes a flash crash to zero, or a flash smash to 500,000. Then trades have to be canceled, and the market crumbles a little more as more people leave, disgusted.
Of course, if all these bucket shops were made to honor their bad trades when their algos go rogue, they would mostly go out of business and we wouldn't have to worry about it. Presumably, those that were left would actually do what they are supposed to do and provide liquidity, rather than frontrunning and manipulating prices on the microsecond scale.
To quote Dave Barry, on the Great Depression as seen from the 1980s:
The stock market of the 1920s was very different from the stock market of today. back then, the market was infested by greed-crazed slimeballs, get-rich-quick speculators with the ethical standards of tapeworms, who shrieked "buy" and "sell" orders into the telephone with no concern whatsoever for the nation's long-term financial well-being. whereas today they use computers.
"Nine times out of ten, starting a fire is not the best way to solve the problem." - my wife
Except that those trades get canceled, making people lose faith in the markets.
The programs don't have to have bugs to vise huge losses. They just have to interact in an unexpected way with other HFT programs.
When a dictator takes over your nation and takes most your money, that is a zero sum game. Same amount of money except shifted ownership. Long term, that zero sum game becomes apparent to the masses as the fraud that it is. What we have here is the wealthy sucking money out from the economy at the expense of everybody else; it should be obvious but there are still a lot of people drinking the cool aid.
WE PAY TAX ON OUR TRANSACTIONS. A business pays tax on ALL its transactions needed to make a profit. Yet these financial services and stock traders do not pay tax on their transactions in their market.... because the bankers have all the power.
The purpose for this "market" is not to be a distributed casino it is to openly raise capital for businesses under a unified set of regulations to make it easier, but NOT too easy where we end up not only losing the reason for it's existence but it can HARM business and society. The market is a place to buy into the future of businesses not to gamble off some "system." This has been underway for some time; it will continue to get worse just how far depends on how susceptible people are to modern propaganda.
Democracy Now! - uncensored, anti-establishment news
Quoting without intention to trade the quote is illegal.
This applies equally to HFT.
That has already happened a couple of times. First the "Flash Crash", and then a few other, smaller market wide crashes which resulted in some, but NOT ALL trades being canceled. I can't imagine how much money insiders made off of that shit, and how many bottles of Bollinger were shared as a result. That doesn't mention the hundreds if not thousands of flash dashes and crashes that have occurred in single equities since then.
An investor only needs the best ask and best bid. They don't need the full microstructure.
You do realize that owning stocks without stop losses is like sleeping in a room with 1000 rabid apes in it, right? You won't just get your face ripped off, they won't so much as find a splinter of bone when they are done with you.
Depends. If it is following the general idea of the stock market, i.e. more efficient allocation of resources such that companies, investors, and humanity as a whole tends to grow, then yes, it is progress.
On the other hand, if it is simply the investor equivalent of a bot network, intended to screw their clients, destroy companies, and set humanity back a few decades / centuries / millenia, then no, it is not progress.
At the end of the day, when all of the balances come due (so to speak), the market must prove itself to be an improvement, however slight, over blind investment. That means that more people must experience better products / services than without it (and so forth). Should it fail in this singular task, mankind gets knocked back to the stone age. The financial systems will collapse, currencies everywhere will implode, and technology itself will seemingly dissolve; but then, we all know this, and no one in their right mind wishes to repeat the mistakes of their predecessors.
I am John Hurt.
Right, except that your order gets frontrun and the price of the stock rises by 10% while you are trying to fill your order, and falls back immediately after. Same thing when you sell it. Also, your stops are gained during the constant flash crashes, and if THAT didn't wipe you out, then JPM calls up your broker and tells them to transfer all their customer's money to them leaving you with nothing (ie MFGlobal aka you just got MF'd).
If a more profitable alternative is discovered, then that will be inevitable. As electricity tends to follow the path of least resistance, as water tends to flow from the highest points to lower ones, so investors will adopt what is most profitable to them.
I am John Hurt.
And yet many people do, every day. They're called pacemakers.
I am John Hurt.
it is never your property.
in order to become property you have to own it for more than a few microseconds. HFT is nothing but a roulette wheel spinning. you get to choose between red or black, and that's it.
HFT has no real world value except to make the overall stock market bounce around like a drug addict going through withdrawal. Trading is supposed to represent an investor looking to support a company in exchange for profit. HFT means you think the company itself is worthless but you want to gamble anyways. if the stock market is to represent investing then you should be required to hold on to your investment for a minimum amount of time. I like a day but even an hour or two would basically cut 90% of the daily volatility out of the market.
Look at it like this Company A's goes up and down every second the actual price isn't changing company profits aren't changing The overall value of the company isn't changing but it's stock worth is bouncing around for no good reason. Some companies are massively overvalued. others are so massively undervalued it is funny. Stocks are supposed to represent long term interests however the stock market itself is forcing companies to look only until next quarter any further out and they are punished massively.
i thought once I was found, but it was only a dream.
One thing I've always wondered: If the market for the most part trades based on other trades, then it is basically trading with itself. It is a closed system, occasionally infused with data from the real world. What meaning then does the stock price have?
As I understand it, supposedly the market arrives at a price based on its perception of the value of the underlying company, with its future prospects and the time value of money factored in. Unless these algorithms are taking this data into account, I'm not sure this idea is true now. After all, these algorithms are the ones setting the price. If they are not looking at the underlying company while setting the price, then the price they set has nothing to do with the underlying company or its prospects. Of course, there are still trades made that take the fundamentals into account, but as more volume becomes algorithmic volume, then the relationship between the stock price and the underlying value of the company becomes more tenuous.
This is equivalent to the Captain of the Titanic on being informed that they're Icebergs ahead starts a trading platform in icecube futures. They're all all fucking insane on Wall Street.
AccountKiller
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.
It's terrifying to people who don't trade. I trade about 5-10 times a month and once you get used to it, you can spot these behaviors and adapt to them. I don't have enough money to be a day trader and the transaction fees will kill you if you aren't doing very large trades. Yet I still am able to play on the volatility of stocks and make money. I'll never get rich doing it, but I continue to outperform just about any other investment on a regular basis and recovered from the crash a couple of years ago. Without any analytics engine, just my own intuition and research. People who do HFT have to do extremely large amounts in order to recover the trading fees.
Trading has never been about balance sheets, it's always been about outguessing what the other guy is going to do. Thinking otherwise is naive. In every trade, there is a guy who thinks the stock is going to up more, and another who either thinks it's going to go down or he has a better place to invest. The only people who only use balance sheets and company reports are newbies. I stopped using them 3 or 4 years ago when I realized they were useless. Today's newspaper is far more valuable.
Yawn. Most smart people are pretty well diversified, so any single dump of a stock isn't really going to affect them. Dumps in stable companies like Apple rarely last long, look how fast it recovered from the panic around it's earnings. A few months ago Ruger took a huge dump, and then recovered. This story plays out over and over again. Right now, a great method to make money is to play off of other people's panic, or unrealistic expectations. Ride the rise and sell before reality hits, buy on the downside when the same people panic sell. It has nothing to do with profit or loss, just trying to figure out what other people will do. It's all about human behavior. And always has been.
Yawn. nothing really pertinent here. Soothsayers and naysayers that want attention. Trading programs need constant attention because of human behavior and trying to stay one step ahead. It's probably not sustainable in the long run, too much overhead to come up with new rules ahead of the next guy.
I rarely read replies, it's my opinion and if you thought about your opinion a little more, I'm OK with that.
Hacking into a single HFT shop will maybe get you some source code, and maybe cost the shop serious money. Even put it out of business, perhaps.
But the overall effect on the marketplace as a whole? Little more than negligible.
It's not just FDIC deposits, it's your IRA and 401K. Since hardly anyone gets a pension anymore, we're all pretty much forced to be investors if we ever want to retire. And these bastards are leeching off our investments and putting them at risk.
Never let a lack of data get in the way of a good rant.
Hacking into a single HFT shop will maybe get you some source code, and maybe cost the shop serious money. Even put it out of business, perhaps. But the overall effect on the marketplace as a whole? Little more than negligible.
But what if the hacker is a well funded entity that might have an interest in causing as much havoc as possible?
The shepherds did so well protecting the flock that the sheep no longer believed that wolves existed.
You have no idea what you are talking about.
HFT doesn't push the price around. Supply and demand, profit, news, similar company price changes - the unseen hand - push the price around.
HFT just makes it quicker and more efficient.
Even if the value of a company stays steady, the bids will be below the value and he asks will be above. The market maker makes 1c per pair of trades acrid he spread per share.
When companies price fluctuates it's mostly due to fluctuations in other instruments. Commodities, futures, options, other stocks, bonds, currencies, etc...
When the price of milk futures changes, it affects the price of Kraft Foods because their costs change, and therefore their profit.
HFT does not change price discovery (very basic economics) it makes it happen quicker.
HFT results directly from competition, and has made the markets much more efficient.
There isn't that much havoc a single HFT shop can do.
With an enormous amount of effort you might be able to push some prices around. But before those trades settle the fraud would be detected and the trades broken.
There would be a cost, but it's not like NYSE wouldn't open the following day, or the dollar would be worthless.
Then why do they pay so very much for the rest of it?
Support the EFF and Creative Commons. The war is coming, and they're supporting you...
YOU CAN'T BLAME THIS ON JUST *ONE* PRESIDENT.
Nice try though.
"I am a most unhappy man. I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated Governments in the civilized world no longer a Government by free opinion, no longer a Government by conviction and the vote of the majority, but a Government by the opinion and duress of a small group of dominant men." -Woodrow Wilson, after signing the Federal Reserve into existence
You may be right that the $440 million changed pockets, but I doubt it. In the stock market, money appears and disappears like ocean mists.
Say Bill Gates has a billion stocks, they're worth $5 each, he's worth $5 billion on paper. Stock goes down to $4, he just lost a billion dollars. Nobody made those billion dollars, they just evaporated like the ether they always were.
In your world the ideal market is a place where no one can ever trade. In my world the ideal market is where anyone can trade almost instantly at or near the desired price. Guess which one is closer to what HFT actually is? Don't let your jealousy of the rich man being able to roll over his capital much easier than you cloud the fact that no one is forcing you to complete a transaction. HFT is only providing a solution to the supply/demand of the market at any given point in time. It does not make the market. It does not force you to sell a share. It does not force you to buy a share. It does, however, enable you to sell your shares almost instantly at the asking price. And it does enable you to buy stock almost instantly at the bid. Now if you're a day trader trying to make money off the spread, HFT will eat your lunch. If you're an investor, however, HFT is your friend.
Strangely enough, the actual number of shares traded is declining after having peaked a while back, which seems to fly into the face of people who think that HFT is skewing the market. You'd think that if HFT businesses were just rolling the same cash over and over, this would increase the total number of trades and thus add to the overall volume of the market. But no, that's not the case. What's happening is that when their algorithms want to buy stock, they will buy it from you faster than anyone else. And likewise on the other end of the transaction. How does this affect you, if you manage to make the trade you were going to make anyway?
The REAL problem with the market is government money printing which is now pouring trillions into the market every year so that stock prices inflate not because of any actual connection to a company's performance, but because the economy is so bloated. It wouldn't matter if the market only went up, but the higher you go, the further down you get to fall when falling time comes...
Seven puppies were harmed during the making of this post.
Can yu explain a bit or point to a source on how all this works? I literally hate it when options are 20% apart on the bid ask. I can't make a good investment with that spread factored in. It's worst that playing bingo. So if HFT heps narrow the bid/ask then for me it's great. But I don't see what's their gain yet, or how they affect the market.
unfinished: (adj.)
Slashot is full of luddites though. Every community has the self-hating losers. Don't be discouraged or think, even for a second, that there is anything wrong with you just because your derision in their direction raises their cackles.
Any guest worker system is indistinguishable from indentured servitude.
have no input whatsoever on the actual value of the enterprise behind the stocks.
Stock prices have not reflected the actual value of companies for many, many years. Certainly since before the market was computerized. Stocks move according to people's expectations - not the actual facts. The facts only work to justify price moves in hind-sight. Oh yeah, the price went up/down because of... But if you tell me you can pick a "winning stock" by looking at the company's books, why aren't you a billionaire yet?
Seven puppies were harmed during the making of this post.
I think it is a significant mis-understanding of the situation to lay blame for the mortgage fiasco on the poor and unsophisticated.
Where on earth did you get the idea that I blamed the poor and unsophisticated? From your own story the people to blame are the loan consultants and the bankers, and in your case, it sounds like there was some fraud involved.
When loan consultants started running out of speculative investors they needed somebody to come in and get loans. That's why there were shoving people into the exotic loans that probably required less paper work (thank the bankers).
You do not sound unsophisticated. I'm talking about people that would have never, ever, qualified for a mortgage in a million years if it were not for pure greed on the part of the loan consultants, and outright "professional scumbags" in the financial sector that were sucking up these worthless loans into worthless financial instruments to sell on Wall Street.
We don't need to blame people whose only crime was believing a professional telling them that they could afford a home loan and enjoy home ownership. We need to blame the professional that absolutely knew these people would be in foreclosure within 3-4 years.
But if you tell me you can pick a "winning stock" by looking at the company's books, why aren't you a billionaire yet?
'cause I haven't had any time to do it, I decided there are more important things in my life.
Others seem to do it quite well.
Questions raise, answers kill. Raise questions to stay alive.
I know little about HFT, HFQ or HFW(hatever). But if an algorithm is many a company worth $5 dollars $1 dollar, it's based on a future dividend pay. So the computer is gifting you privilege to pay $1 for a return that should have cost you $5. Assume the opposite scenario, where it should be woth $5 and and it went to $10. Now suppose you own the stock, which will have a return double of what it should have. (now you need $2 for every %dividend that it shields). So you can sell for $10 what truly was worth only $5. Now suppose you don't own the stock and it's just making its price inflated, Buy a put at $7 with a 6 month expiration and way. But that wont likely happen, they company would sell it's own stock, as would anyone that saw that their $5 turned $10 undeservedly. Or the company itself would float more shares (but who'd buy that). Getting $10 for something worth $5 is good business regardless of who cashes it. And doesn't last long because no HFT or hedge fund would survive by doing that.
Another different thing is naked short selling. I think it should be banned (if it's not done already) Actually, any short selling should be banned (as I understand it). Basically, it can enforce a lower price by generating bearish pressure for a sustained time, until actorrs convince themselves the market knows best. Since the company may have their cost of capital affected by their stock value, it can create situation where the company profitability, market credibility, bargaining power and overall brand may be affected in real life, just because of the short selling effect. This is unethical, wrong and dangerous.
A analogy, suppose you sell lemons, and that after a day, they expire (no longer fresh). You go to the market and offer them for the fair price of $5. No a short seller has this awesome idea of selling lemons they don't have -with the promise to deliver them later, for the exact quantity that you brought to market that day. You had 50 lemons. And the short seller offers $4 for 50 lemons, exhausting demand. The lemon seller will wait until the end of the day, and realize there's not market at $5. Nor $4. Nor $1. And a mistery shopper now offers $0.5 for 50 lemons. The short seller gets the lemon for $0.5, and deliver them for $4 with amazing margin. The one that harvested the lemons gets a huge loss.
This happens to company that typically fond themselves needing to repay debt. If their stock falls significantly (eg. short selling), then a lot of shareholder value is lost because they must issue much more (bringing the price further down). After this is done, it's only been a transfer to the short seller with no additional function or value to the market. A pure brute force game on trading what you don't and have never owned.
unfinished: (adj.)
I was thinking something more along the lines of "poisoning the protocol." in fact, i would be very surprised if there was not some magic combination of numbers that could trigger a flash crash in the HFT algos. Its just a matter of whether finding it and executing on it is feisable. Sounds like a challenging (fun) problem. (Sry for typos, on a mobile)
Fanboy Status: Apache Flex, C#, Eclipse, KDE, Pirate Party, Ron Paul, Slackware, Windows 7
Say we have a market that buys and sells a commodity like crude oil. You buy a few hundred barrels of oil and hold on to them. Then some HFT algorithms go to work in the oil markets. Now you are seeing much wider swings in the price of oil. Does this actually alter the value of a barrel of oil?
Um....yes? From my perspective, the "value" of a barrel of oil is the amount of money someone will give me for it. If the price is swinging widely, that impacts the "value" of that oil.
In the past, in fertile land, men truly worked during 7 or 8 months a year and only during peak seasonal work was work really hard. I know this because my grandfather could spend 4 to 5 months doing whatever he wanted. Today, because of "productivity", you need to work 10 hours a day. The cost of land perfectly is determined by the max productivity of that land. And taxes in many ways also force you to match average productivity. Where I live I pay like $9000 a year in propert taxes. And everthing is 75 more expensive due to sales tax. Not to mention all the other taxes and myriad of things you need to pay just to get even with life, after what comes eating, clothing, etc). So, today, if you want to live a farm style, you better prepare for hard work. Same with everything. Malthus underestimated "pruductivity" but wasn't stupid regarding the bronce law of salaries.
unfinished: (adj.)
Slashdot users apparently no longer care about reality or facts, just about who can whine the loudest about how unfair life is.
Thanks for adding something real to the discussion.
"There is more worth loving than we have strength to love." - Brian Jay Stanley
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.
That's absurd. On the contrary, regulators expect that all quotes are bona fide and tracked by an audit trail. No high-speed "shenanigans" will have any impact on a thorough post-trade audit. Where did you hear this claim?
The term "quote stuffing" comes to mind. That is abuse of the trading platform, effectively a DoS attack against the exchange and other participants. Definitely a bad thing. However, it has no intrinsic impact on the price that the "stuffer" can execute.
I've been following stories about what to do for months now. Most of the authors still live in the 20th century, if not the 19th.
Here's the ugly truth: There are no simple answers.
The HFTs are making money faster than they could print it if they had a printing press. There is no way you will solve this problem with a simple tax or a simple regulation or a simple law. You will need multiple, interacting component, or your nifty little "solution" will be circumvented before the ink is dry.
I distrust any "solution" that can be explained in less than three paragraphs. We don't live in a world that simple anymore.
Assorted stuff I do sometimes: Lemuria.org
Anyone else think Trent Reznor should write the score for that gif?
Why is this needed, when it was never needed for other types of speculators or market-makers in the past? You are seeking perfection in a system which has never been perfect.
It's possible to minimize trading even with funds in the stock market. Pick funds which generate very low transaction costs (i.e. those which trade very little). Rebalance your funds on a low-frequency basis, maybe quarterly at most. You will find very little competition with HFT if you do this, because your holding periods will be so vastly different. A home-office day trader, OTOH, is practically getting in line for a sucker-punch.
What am I missing?
The fact that people who are making millions on HFT can and will find a way to convert that money into a way to circumvent your "solution". I don't know how (and if I knew, I'd not post it, but wait until such a law is created and then sell the solution for a few dozen millions to the HFTs), but I do know that big money always finds a way. Why do you think the drug trade still exists?
Assorted stuff I do sometimes: Lemuria.org
But... why? An insider has information which can be used once, and in a very low-frequency fashion, for maximum profit. Insiders don't need HFTs, because by definition they have an information advantage over everyone else.
They bought at the offer and sold at the bid, over and over again. They definitely handed that money over to other market makers.
... when you've got something like this to finish companies and ruin economies?
Privacy is terrorism.
When "investing" means trying to game the underlying system, do we really wonder why the economy sucks?
newsflash: Computer reads /. front page .. US dollar drops 30 points
Don't doubt it. If I sell something worth $5 for $1, it's guaranteed that I lost $4 and the buyer earned $4, since in the Knight case, that something remained at $5 once people figured out nothing had changed. Moreover, when you earn your salary, you are not creating money. Your employer (or your client) is trading your time for money - for exactly how valuable your work is. If you get paid more, you likely are providing more value or being more productive. Microsoft is no different. They did good choices, and capture revenue from companies and individuals that traded their salary/revenue for Software. Again, money traded hands. The only measure of wealth creation is the real NDP (cousin to real GDP). It means there are more people producing, that people are more productive, or a combination. In the mortgage fiasco, housing skyrocketed. But again, no "money" was created. You can decide your cat is worth $1 billion dollars. And if your neighborhood and everyone you know believes it's a fair price, you'd be a millionaire. But if you find a buyer, you'd have 1 billion, and the buyer will have a dog worth $200, and he'd have lost $1 billion - $200. Again, money traded hands.Bubbles like prime crisis happen to bad causes: there are big commissions, bonuses, and a sense of wealth. But it's just trading.
Now, if we all suddenly agree each tree is worth a billion bucks. Did we just create money? Not really. We just created the illusion of wealth. If you buy a tree and spend $1 billion, you'd have a tree and a paper that says "paid $1 billion". But again, you'd have only traded your $1 billion for a tree. And the illusion can last for as long as the belief is sustained.
You are always trading money for things, and vice versa. And Kight transferred $440 in profits to savvy buyers/sellers.
unfinished: (adj.)
They told us the future would mean more spare time. This has happened. However some people work 80 hours, while others work none. Some make 100 times more then others.
Paying people to have fun would be called socialism and that is obviously a bad thing, because it puts the human first and not the company.
I work in a "socialist" country. I have 34 payed holidays. I have a 13th month check. I have medical insurance. The company is making money and shares part of its profits.
So it is possible.
Don't fight for your country, if your country does not fight for you.
What you say is nonsense. If it was true that stock prices bounce around like a drug addict I would be rich long ago. Remember that a company is a real asset. If the price goes down for whatever reason, just buy it and happily collect the dividend in Hawaii forever. As long as you have a buy order at a particular price no HF trader can trade below it. Dan
What you say is not true. Here is a good blog post explaining and illustrating the volatility the last 100 years: http://brooklyninvestor.blogspot.co.il/2012/06/market-volatility.html . Dan
"Others" do it quite well? So many "others", huh? Yeah everyone can be a Warren Buffet. No, this is like asking the 110 year old lady what her secret is for long life. And one old lady will tell you it's cold showers every morning. Another one will say praying to God every day. Still another will say getting up at 5am and going to bed at 6pm. But you see, that's just selection bias. I pretty much guarantee that even if you do all those things, you'll die much, much sooner. Your example was pretty poor. Buffet may think it's real easy to do what he does. Truth is even he doesn't exactly know how or why he can do what he does. Sure he can try to rationalize it and explain it to people, but he has no clue. Otherwise, as the saying goes, everyone would be doing it. You want evidence? OK, how many Warren Buffets are there?
Picking one extreme example and trying to pass it off as the norm is a fallacious way to try to justify an argument. You add to this by basically saying "I could be a multi-billionare too, but I don't feel like it". No buddy, neither you nor me will be billionaires like Mr. Buffet. But if you tell yourself you can pick stocks by looking at the financial statements of a company - statements that have been cooked until they are overdone, I guarantee you will not only not be a billionaire but rather poor to boot. And the evidence is pretty much in my favor - 80% (according to the SEC) of all traders lose money. But hey, what do I care. It's not my money. Have fun. And enjoy your wait. If you're patient enough, you probably will make it out with a profit. But not 50 billion...that I'm willing to bet on.
Seven puppies were harmed during the making of this post.
I consider it to be inevitable. Given that, you must learn to deal with it in whatever way suits you best.
How about we deal with it by taxing all trading (a tax small enough to be unnoticable to normal traders would do) or having fixed trading moments (i.e. once every few minutes)?
HFT offers vastly increased risk with zero benefit to society, why should society bend over and take it high-frequency style?
Slashdot social media options: AIM, ICQ, Yahoo, Jabber and Mobile Text. Why no MySpace?
Picking one extreme example and trying to pass it off as the norm is a fallacious way to try to justify an argument.
Buddy, wipe that foam around you mouth and listen...
1. You asked me
if you tell me you can pick a "winning stock" by looking at the company's books, why aren't you a billionaire yet?
and I answered to you that I did not even try and that's why I'm not a billionaire. Would I have tried, I maybe could give you other answers
In any case, if I would try, I would include in my decisions information outside my perception on the perception of other players.
2, You line of argumentation seemed to imply that is impossible for anyone to pick winning stocks based on the "book value". Thus I gave you a counter-example of somebody that can. In no case I said that "everybody can become billionaires by using the book value"... why, I wouldn't know, see point 1.
Therefore, either it was a misunderstanding from my side (in regards with my assumption on your point of view) or you are building a quite tall straw man
I'm lacking the time to continue the discussion... if so you like, you may consider that you won the debate.
Questions raise, answers kill. Raise questions to stay alive.
1. It doesn't matter who is doing the whining, is there complaint true? You don't dispute it is true.
2. I can recognize that HFT is a parasitic trading that takes money away from investors and the companies they invest in.
3. I am not a former stock broker, hence you claim doesn't apply to me.
It's a parasitic trade, it's no different from any other scalping in it's nature, however it's grown to such an extent that it's threatening the underlying investor market and thus needs to be stopped.
"If you think HFT is bad, then you must think $0.99 individual tracks"
False equivalence, if iTunes was HFT scalped, you'd be paying $99 for the track you really want and unable to buy any other tracks. Meanwhile the artist would be getting only $0.26, and the middle men HFT traders $98.01.
A rip off market rigged for insiders is good for no one and (to use your argument) only HFT rip off insiders defend it.
You do realize that owning stocks without stop losses is like sleeping in a room with 1000 rabid apes in it, right?
You do realize that owning stocks without stop losses is like owning your own business, right? Sure, if the business becomes worthless, you lose it all.
But market shenanigans temporarily driving the price down CAN'T HURT YOU UNLESS YOU SELL. If the company is still worth something, the price WILL rebound, and you can sell then. Keep money you might need in a deposit account, or in gold coins under your bed, or whatever, but for actual investment stop-losses are not nearly as necessary as you think. If a high percentage of firms you invest in really do lose all their value overnight, maybe you should select stocks by throwing darts -- you'll do better.
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?
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.
I used to fancy on the idea of a 0.1% tax on any stock or financial product held for less than 1 month, or possibly 1 week. Would it make sense? I have the feeling it would rid us of any kind of speculation in a very short time and would possibly bring finance back to its true use, which is to provide funds to the economy. What would the drawbacks of such a system be?
Would it not be possible for the stock exchanges to make a trading system where bids and offers are resolved at the end of fixed time slots? Let us say 1 second per slot. At the end of the time slot the trades are performed. This would avoid the issue of government intervention and taxation. In other words: It would be a technical fix which is in the interest of stock exchanges (in so far as they want to prevent some of the problems associated with HFT).
Trading has never been about balance sheets ... ...
Dumps in stable companies like Apple rarely last long, look how fast it recovered from the panic around it's earnings.
It has nothing to do with profit or loss, just trying to figure out what other people will do. It's all about human behavior. And always has been.
First you say it has nothing to do with actual values. Then you point out that the panic was based on earnings (which of course relate to values). Then you go back to saying it has nothing to do with profit or loss, but instead is about human behavior--but you had just described a human behavior, panic, which was related to earnings.
Stock prices are based on values and earnings. No stock would trade for long for a company that does not make money. I've heard a lot of people say that no one trades on value, etc... maybe I don't get the terminologies, but it seems to me that the vast number of people introducing money into the markets do trade on value, or least are expecting that the decisions for their money are made on value. Let's not forget just how much of America's retirement is based on stocks, it's freakishly large amount for many people. I can't NOT be in the market with this money because it will simply stagnate with alternatives like savings rates, so there is really no choice but to invest in stocks and bonds (and I'm sure this is by design to some degree).
Our currency is no longer based on a tangible commodity. Our stock prices used to be based on actual and anticipated performance as well as assets of a company--sure it's always been about guessing, but those guessers used to be done at human speed--now what we've got is the equivalent of pong running at 4GHz and every time one side misses the "ball" with it's paddle we have either a flash crash or hyper inflation.
No the problem is that it will not disappear because it will move to the side. Case in point UK. They have a stamp tax on stocks. What happened? The financial industry created CFD's Essentially these are leverage products that trade on top of the stocks (sorta like futures) are not subject to the stamp duty. Granted they don't get the stock benefits, but they still warp the market.
As somebody who works in the market, the solution is to introduce a 50 ms holding rule. It would work as follows. You put in a bid, or ask. The moment it goes onto the market you have a 50 ms waiting period before you can put in another bid or ask. You can cancel your original bid and ask within 1 ms, but you cannot put in another one until your 50 ms is up. This action will introduce a delay and slow the market down.
"You can't make a race horse of a pig"
"No," said Samuel, "but you can make very fast pig"
Transaction taxes are pointless. The financial industry is based on the notion of creating an artificial world. Stocks, money, etc are all artificial human constructs. Thus they can create a new construct, like CFD's, or move back to OTC, etc. These constructs will warp the market in the same way, but using indirect forces. The only real way to stop HFT's is to put in speed bumps like the 50ms holding rule I was commenting on.
"You can't make a race horse of a pig"
"No," said Samuel, "but you can make very fast pig"
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"
We don't have *time* to get a warrant!
To err is human. To really fuck things up, you need a computer.
"When information is power, privacy is freedom" - Jah-Wren Ryel
That was the point of the CDO though - to reduce the overall risk by joining smaller risks together. If you are a lender and you loan $1million, with a 10% risk of default then you have a 1 in 10% chance of losing everything and on average you get 90% back. If you make 10 loans of $100k at 10% risk then you've got a more complex risk but what you can avoid is the black-or-white nature of the single loan where you either get what you expected or get nothing. So by collateralizing a bunch of loans you are creating a risk curve. The odds of you losing everything are much lower, and the presuming your loan pays back some amount more than you lent your risk of making any loss is significantly reduced. It's the same as insurance. You expect occasional large payouts but overall you take in more than you pay out.
So having a product made of non-triple-A loans is fine, so long as the risks are correctly understood - a problem with a vast number of things in finance. Two things occur: First people don't take into account, or aren't aware of, the interconnected nature of the risks - they are not independent. In the real world someone might stop paying their mortgage due to events that are connected to them only, but as a group the loans may be affected by much larger scale events (e.g. economic downturn, war, environmental disaster). Second is that the responsibility for the risk was passed on: the person making the loan gets their money when they sell the CDO to the market so their need to ensure that they have correctly analyzed the risk is significantly reduced, hence all the selling of loans to people who were in no way able to repay them. The people buying the CDOs _should_ have been thoroughly investigating the products they were buying - at least some kind of independent audit sampling the quality of loans to ensure that the risk matched what was being presented - but while everyone was making money that doesn't happen, what could be wrong when everyone's getting richer?
The whole thing is not really any different to how most stock market investments are made. Diversify risk so that isolated drops in value can be absorbed and the overall investment turns a profit. If there is a major stock market shift then everyone loses - pension funds etc., the big, long-term investors that everyone wants to see lose a lot in these situations. Playing a long term game means they recover in time, but still they are affected by systemic problems and in some cases affected by poorly categorized or unknown risks (financial/accounting scandals spring to mind).
In fact the only thing to do is guarantee some of those products, to stem the panic and cut the losses. On the other end there need to be tighter regulations on lending, right at the end-user point. I don't know about the US but in the UK this is definitely the case - we already have pretty strong regulation around lending and especially mortgages and people I know who are mortgage assessors for lenders are now incredibly cautious and will follow requirements to the letter - partly as every application they approve will be checked and any discrepancies mean that everything they've done will be thoroughly investigated.
The government involvement is a trade-off between a true free-market where, yes, all the people who made out like thieves in the boom will be shirtless in the bust and having some kind of limits on the damage that can occur. Allowing an enormous crash like we would see without the bailouts will affect everyone. Pensions, investments, businesses, economies will all collapse and that will leave _everyone_ in a bad situation. Perhaps a few bad people will learn a lesson, but we will all definitely take an enormous punishment. It's not fair, but nothing is, and to take that as a basis for action is unfortunately naive. The best of a bunch of bad choices is more careful regulation. I'd like to see a much more proactive and independent approach to quantifying the risks being taken in some of these areas and a bit more backbone fro
Comment removed based on user account deletion
HFT has created transparency, in so much as it's put a lot of old-boy-networks out of business. Back in the day, if you wanted to trade a stock, you went through multiple humans on phones. They, in no possibly imaginable way were 100% on your side. They'd maybe perform their duties out of order, or accidentally delay an order or do things far further under the table. Thus, you could win or lose by who your friends were.
At least these days you can be fairly sure that an exchange actually matches orders deterministically. The fact you can't make money wheeling and dealing stocks as easily (or maybe not at all) is mostly because HFTs (and indeed anyone trading for a living) is much better at it than you. And one thing I can say with absolute certainty is that any rule you can think of that you think will "solve" the "HFT problem" won't do what you think it will. Trust me on this: there are hundreds, if not thousands of people who are much brighter than you who are also highly motivated working their entire careers on working around any rules you create.
Honestly, if you don't like this shit, then go play on a different stock exchange. They all have different rules, so go pick one you like the look of. Just because your beloved Apple stocks aren't listed there probably means you won't do this. That being the case, you either need to man-up and play the same game as everyone else, or lose your money, or shut up.
The value of the asset is what someone else will pay for it - that's all.
If I have a bottle of tap water and walk out into the city, the asset value will be close to zero - everyone's got a tap, so no one needs my asset. If I go into a desert, then maybe I can sell it for a couple of bucks. The underlying asset hasn't changed, yet the value has.
Algo traders do care about the asset value - it's just that the asset isn't a tangible thing. Just like you care about how much a music download costs - that too isn't a tangible asset, yet it has a value. If everything has to be a tangible asset, then we'd live in a world without music recordings, TV, /. and a bazillion other things. The only "gaming" going on is on you - you believe the market is some magical place where you'll be safe. No one has a right to make money on a market of any kind. You couldn't start buying and selling vegetables without worrying about Sprawlmart undercutting you because they're better at it than you, and you can't buy and sell on an exchange without someone else doing it better than you.
I think you may be more concerned with intangible assets that are linked to their tangible counterparts by such complex means that there is no way to mentally link the two. IMHO, this is where problems occur because there's no way the average politician or financial regulator is ever going to be able to think about them in such a way as to protect the majority of us from the minority. And yes, we do need that protection, just as the majority of us need protection from the minority of murderers. How you stop intangibles when they get "too intangible" is anyone's guess.
The fact that your employer was big enough to ever be part of the S&P 500 is prima facie evidence that it's not the sort of small-cap stock that the parent is talking about.
One of my former employers is a small cap, and I haven't seen more than $100 a day in trades in the four years since I've left.
Well, yes, that too. But positive feedback loops are a real bitch. In a real, physical system, positive feedback can be mitigated through damping, time delays, etc. In the worst case, you are still limited by the strength of your actuators - you'll saturate the system, or become slew-rate limited. Sticking a microphone next to a loudspeaker may make an unpleasantly loud sound, but it doesn't immediately become infinitely loud. HFT has the potential to blow up, almost without bound, almost immediately. Would the liquidity and purity of the market really suffer that much if the minimum hold time was, say, one second? At the very least, it would slow the ridiculous arms race of who can clear the most trades per second. I'd be pleased it we could free up the brainpower of some of those very smart people to solve more important, though less immediately profitable, problems. When a billion-dollar investment to shave a millisecond off latency times becomes worthwhile, it is time to change the game to straighten out our priorities.
Well, yeah the software *and* the bankroll large enough to survive that kind of cut throat trading environment. Unfortunately, firefly quotes are not considered legal tender in the stock markets.
Well.. maybe. Or Maybe not. But Definitely not sort of.
I just ran out of mod points or you would have gotten +1 insightful.
Dunbal, I don't think you understand the latency required to do HFT.
A great deal of their advantage comes from housing their computers as close as possible to the stock trading computers. The gov't allows them to store and connect their equipment so closely, giving the HFT traders an unfair advantage. If the gov't wanted to stop it, they would simply say: "Nope! Go put your servers somewhere else!"
HFT would become unprofitable for many of the most abusive uses overnight.
the profit in HFT comes from exposing those who cannot protect themselves to risk via liquidity.
Long term investors have precisely zero interest in microsecond liquidity. It means their fortune can be lost without a chance of recovery when the markets go haywire, such as on May 6th 2010: http://en.wikipedia.org/wiki/2010_Flash_Crash
Tell me, what use is this kind of behavior to the market?
http://www.zerohedge.com/news/wtf-skynet-chart-du-jour
That's IBM we're talking about. This is of precisely zero value to the long term health of the market.
HFT needs to be banned, or microtransactions taxed a fraction of a cent per transaction. Not so much that it's not prohibitive to meet the market if it really needs the liquidity, but enough to protect the "little guy".
But that's exactly what I'm saying.
The algos submit buys and sells to the exchange.
Even if some hacker had complete control and replaced the algo, about the worst it could do would be sell short in a loop.
In a very short time, the stock would drop in value. But that triggers a circuit breaker in the exchange halting trading in that symbol.
Then an investigation would identify the bad trades and break them.
It would be bad, but not even a fraction of the mortgage CDO fiasco.
Ha, right.
http://www.zerohedge.com/news/wtf-skynet-chart-du-jour
It's clearly enough to push IBM around.
IBM!
IBM is not a small cap.
This is antagonistic towards long term investors. Some guys had trailing stops and were shaken lose by bending the system. Sorry, but that's stealing to the tune of (volume * range/2).
IE, a few million shares in volume * (196.50-195.00)/2
so 2,000,000 * 0.75, or $1.5m.
Stolen.
The only reason this hasn't been criminalized yet is the public has no idea what's going on, and the politicians are receiving campaign contributions from the guys benefiting from HFTs.
I don't think any exchanges are matching subpenny anymore.
Even crossfinder. Yes: the dark pool!
The price levels that are hidden due to crossing the nbbo just cause trouble. They exist because of stupid rules that attempt to protect the customer, by forcing a broker to shop around to find the best price. These days the markets do that naturally, because any discrepency is captured by Arbitrageurs.
I agree that those prices should be displayed.
"What happens when there is any slight movement whatsoever the HFT will overdo the moves."
I don't buy this. You need to realize that HFTs are in fierce competition against each other. If one of their algorithms overshot the equilibrium price other HFTs can take advantage of this and make a fortune. In short: Even HFTs have to aim for the market price. Otherwise they will lose out.
I do realize that there are some other issues with HFT. But I do recognize that they are very beneficial in price discovery.
May 6th 2010 is a great example of this:
http://en.wikipedia.org/wiki/2010_Flash_Crash
While I will grant that HFT has a role in lowering spreads and increasing liquidity,
this comment by mfw13 offers a different perspective:
High-frequency trading harms longer term investors by distorting prices.
Fundamental to the orderly functioning of markets is the idea that asset prices reflect the underlying value of assets they represent. In the case of stock markets, this means that the price of a stock at any given time should represent the perceived value of the assets it represents. This implies that trades are being made which reflect informed opinions and judgments about whether the current price of an asset accurately represents the present and/or future value of its underlying assets.
However, algorithms do not have the capability to make these types of judgments. Nor do they care about the present or future relationship between price and actual underlying value. All they care about is pricing inefficiencies.
This is why high-frequency trading is so dangerousi.e. because it does not care about the relationship between underlying asset value and current price which is the underpinning of orderly and well-functioning markets.
Why would any sane person invest in the stock market when they have no faith that asset prices are accurately reflecting the value of their underlying assets? High-frequency trading is now such a high percentage of overall trading volume that the long term value of an asset barely factors into its current price at all.
Ten years ago, a billion shares a day was considered to be huge volume.now its 4-5 billion shares a day, and let me tell you, all that extra volume isn’t coming from rational investors making judgments about the long terms values of stocks.
Beauty is in the eye of the beerholder.
If the government decides it's not in the public interest they can stop it. At least they should tax it so as to extract the maximum revenue. E.g. 0.1% on every transaction, waived if you hold the instrument more than 10 minutes.
Bro, that's not how government works.
Government stops things that it perceives are not in THEIR interest.
As long as they keep getting bigger campaign contributions from the people making billions on HFT than from the small guy looking to be protected from HFT, it will continue to exist.
Also, a simple tax wouldn't be enough, look into the CFDs created to get around the UK's stamp tax (tax on stock transactions).
It would be passed as a gesture to the small guy while the real game is allowed to continue.
I'm not really sure why the SEC hasn't banned HFT yet.
People react to the news anyway, and were very effective at crashing markets.
HFT does two things in such a situation:
1 combines much more information into the price
2 provides liquidity
Combining all the information simply prices more accurately and quickly. This resists momentum, not the opposite.
Providing liquidity gives people more confidence. A contributing factor to crashes is the lack of liquidity. When someone wants to sell, but there is no buyer, they lower the price to get rid of it before it drops even more. That really does create momentum.
HFT provides the buyer, which reduces momentum.
Fact: the biggest crashes over the past couple of years have occurred when HFT pulled out due to bad information and impossible quotes.
Fact: studies has concluded that HFT is overall good for the marketplace.
Yeah, just like the government can stop other things not in the public interest. Is cancer in the public interest? Is death in the public interest? How about crime, is that in the public interest? Or drugs? The government can PRETEND to stop it, but governments can actually do very little except take money from honest men. The day you realize how true this is, you will have gained a lot of insight into both politics and human nature.
If the government can take money from honest men, it should be perfectly within its power to tax financial transactions. Which is just what Shavano was suggesting. Or are you implying that those in finance are not honest men? If so, we are in agreement.
"What the American public doesn't know is what makes them the American public." -Ray Zalinsky (Tommy Boy)
Have you lived on a farm? My grandfather could spend 4 to 5 months doing whatever he wanted too... repairing machinery, maintaining his trap line, mending fences, looking after livestock and working for a forester to make some extra cash. When my sister and I showed up we got put to work weeding, picking berries, pulling carrots, picking rocks, mending socks, mucking out the barn, etc. During "peak seasonal work" there would be lots of accidents because farmers would essentially try to work around the clock. My grandfather lost his right index finger to a piece of farm equipment before I was born.
Going back further, most people essentially worked all the time simply to feed themselves. Sure, there were a few at the top who didn't have to, but almost everybody did.
Today you can live a life of comparative luxury working an unskilled job forty hours a week, or a more skilled job twenty. No, the luxury won't measure up to the people pulling eighty hours, but it's a lot more than all but the richest people had even a generation ago, never mind ten. And studies have shown that those people working eighty hours a week are actually getting LESS done than the people doing forty anyway.
And those taxes you're complaining about? They go towards things like a sewer system, so you don't have to go out periodically and either pump your outhouse or dig a new one. Also social security so that if you fall on hard times you won't starve to death.
Nope, there are Unix and Java interfaces for the app. You're just looking at the Excel version, which isn't the interesting part. It is the API that is the magic.
Is death in the public interest?
I know this is offtopic, but since you asked the question, I feel compelled to answer it. Yes, death is, in fact, in the public interest. The fact that life is finite is what gives it meaning. And on a less existential, more practical point, with no death, the population simply explodes out of control. And since you can't die, you end up with a growing mass of starving people on a barren rock of a planet like so many bacteria piled up in a petri dish. So yes, by all means, death is very much in the public interest. Take your turn at life, and move on so someone else can take theirs.
(Note, I take no issue with the gist of your post, just this one point.)
WWJD?
JWRTFM!
Bingo - understanding feedback is the key to this problem, mod parent up - feedback loops also dominate a lot of social systems as well and answers questions like "why is Snooki so popular?"
Everyone thinks the problem with automatic trading is that the computers can crash the market before anyone realizes it. But there is a bigger problem: run away stock prices. What happens if suddenly every stock was worth 1,000,000,000 times what it was a few seconds ago? What would that do to the economy?
Don't stop where the ink does.
the guys who own the exchange get money now from the current hft system. it's like an extra transaction fee done with incredible complexity to not appear as such. you could just easily make the market tick every 3 minutes. shit easy to implement and would level robo-trading to be the same for everyone.
world was created 5 seconds before this post as it is.
in order to become property you have to own it for more than a few microseconds
[citation needed]
For great justice.
What caused the economic collapse was the bubble in the housing market that caused people to take out unreasonably large mortgages they had no possibility of repaying. Saying derivatives caused it is like saying a dropped object falls because of the air between it and the ground.
For great justice.
I wasn't talking about replacing the algos, rather, reverse engineering them to find out what conditions will cause a flash crash through the interactions of the various algos in play. This has happened before a few times, entirely by accident. I saw a lecture on TED talks numbers awhile back that mentions there is even a profession in reverse engineering trade algos, for the purpose of identifying and countering them. I bet it would be possible, albeit challenging, to determine what market situations cause them to go out of whack, and then manipulating the market to trigger the race condition.
I agree this is probably not a realistic threat, but it certainly has my curiosity bone tickled. :)
Fanboy Status: Apache Flex, C#, Eclipse, KDE, Pirate Party, Ron Paul, Slackware, Windows 7
The fear about HFT seems to boil down to "things are happening that didn't used to happen before, must be bad." The algos are playing a high-risk zero-sum game, but only for the participants that are trading at the same timescale. For the classical buy-and-hold investor, its inconsequential. In the unlikely event a flash crash would occur and not get rolled back, it doesn't mean stock value has been "destroyed". It would be a tremendous windfall for fundamentals investors, who would buy it up to a fair value. In other words the HFT algos would lose the zero-sum game to players on a longer timescale. The reverse, a flash spike benefiting HFT at the expense of long term, wouldn't occur in practice. Traders would wait the extra 5 minutes to execute, like a tortoise playing a waiting game with a gnat.
For great justice.
We work much less now than we used to, and we do meaningful work MUCH less than we used to. The hordes of retail clerks, marketers, etc. are all repurposed farmers. And probably the make-workish profession of all? The people who play games with numbers on stock markets.
In summary, we DO pay people to have fun, enjoy themselves and frolic. Except not in the park... people like to think they're useful.
For your implied scenario to have any reality to it, you would need to accept that capitalism works by paying employees MORE than they are worth. That capitalists intentionally create useless jobs and reduce profitability simply to keep unemployment levels at a reasonable level and to increase their costs and reduce efficiency.
No one has a right to their *own* opinion. They have a right to the TRUTH.
Fallacy.
The guy who said the election was rigged won the presidency with the second-most votes.
You're playing word games.
Its supply and demand. He has something with a value. That value decreased, but it still has a value, and he can trade in for it.
And he didn't "lose a billion dollars", his worth, ie the value of his assets, decreased. He only LOST money if he came into the market with a 5b and comes out with 4b. Same as you only GAINED if you come out with more than went in. right now my invested dollars are up ~15%, but I haven't made any money yet, and wont until I cash them out (which I wont be doing).
The guy who said the election was rigged won the presidency with the second-most votes.
Bitcoin.
HFT is only providing a solution to the supply/demand of the market at any given point in time
NO. HFT is figuring out that I want to sell at $3 a share, and someone else wants to buy at $5 a share, then buying from me and selling to them before the other party can find my deal. Without HFT, We might have met in the middle, and both seller and buyer make a dollar per share on the deal. HFT, just leaches $2 out of the market for what? "Liquidity"? You've got to be kidding me. Go fuck yourself.
Fact: the biggest crashes over the past couple of years have occurred when HFT pulled out due to bad information and impossible quotes.
Question: Where did those impossible quotes come from? Why were they impossible? What prompted such quotes? Were the algo quotes, or human quotes? Was HFT any significant factor in why such impossible quotes were made?
Fact: studies has concluded that HFT is overall good for the marketplace.
Question: Who commissioned such studies? Are there any other studies commissioned by other people/groups? Do all studies of HFT reach the same conclusion? Are all such studies commissioned by the same people?
Overarching question: What are your sources?
So far, all I have is your say-so. Admittedly, that's also most of all I have for SerpentMage (the GP), but he also provides what looks like a real name in his email, and a short bio. I don't even have that for you. In addition, and no offense meant, but a username such as "tolkienfan" does suggest someone with a bent towards fantasy, and when that's all I have to go by, as compared to SerpentMage's claim to be a quant algo writer, then SerpentMage's comments at least appear to be a bit more authoritative.
Cheers,
"What in the name of Fats Waller is that?"
"A four-foot prune."
... the casual buyer, the casual seller, and the market maker all come out ahead!
That cannot be true. The money for the market maker has to come from somewhere and that means either the buyer or the seller is paying more/receiving less than they could have. So the market may be slightly less inefficient than it could have been, but your saying that all three come out ahead is disingenuous at best and absolutely false, if you compare against a perfect market.
As a corollary, you might want to consider that current market makers might actually be moving away from a perfect market rather than towards one - reducing inefficiency via one mechanism (better price discovery) only by adding inefficiency via another mechanism (increased risk due to volatility).
That is all.
I really did not understand that. If by that you mean "a lot of people trade, and telling them to stop is useles"? If so, fuck those people, if they can't risk losing money and trade stocks, there is nothing anybody can do for them, besides telling them "if you can't afford losing money, don't trade". If they'll just ignore that, well...
But if by that you mean "I don't even know how to invest my money and not trade stocks", you deserve an answer. Funds quota seem to be a losing proposition. In theory you'd hire somebody way better at money management than you, he'd manage your money and get paid some of the earnings. In practice experts don't get an overall result much better than non-experts, some get but evaluating experts is quite hard. Also, there are some huge conflicts of interest on their profession. You must keep in mind that all those things that your fund does, you can do too. You can buy and sell bounds, stocks, etc, and you can allocate them in a way that fits your willigness to risk.
Rethinking email
Not at all. Every subprime and underwater mortgage in the US could have been paid in full with significantly less than $500billion. Yet, just the first TARP bailout of the banks was what, $900billion? And subsequent banking bailouts come to another trillion, trillion and a half, not to mention "quantitative easing" which has cost us another half to one trillion.
AIG did not collapse because of people not being able to pay their mortgages. Same with Merrill Lynch. They were taking those mortgages and leveraging them thirty to a hundredfold. And the thing with leverage, in money as in physics, is that a small bit of energy at one end of the lever makes a big movement at the other.
And the problem gets worse to this day. Derivatives are inherently dangerous, but the risk is socialized so that the next time a big bank messes up, maybe from a little hiccup in their automated trading model, it's you and I that are going to be on the hook for the damages, just like last time.
And still, there is extreme political opposition to tightening up the regulations on these guys. Any politician who makes any effort to clean up this dangerous mess is targeted for destruction (example: Elizabeth Warren).
You are welcome on my lawn.
"In the case of stock markets, this means that the price of a stock at any given time should represent the perceived value of the assets it represents."
Wrong. It also represents the future worth of the company. http://en.wikipedia.org/wiki/Stock_price
Judging from someone else's analogy of purchasing a can of Coke in microseconds, it sounds like many have this misconception. Stock prices don't solely reflect commodity prices. It' s not like you can buy BP's stock under the assumption that oil costs a lot (or will cost a lot more tomorrow). There's a different class of stocks devoted to perform this function, and from my limited personal experience, fail at this function. Exchange Traded Fund USO attempts to reflect the spot price of a barrel of West Texas Light Intermediate Sweet Crude (sounds tasty! http://finance.yahoo.com/q/pr?s=USO). Regardless, stocks are not simply a reflection of current commodity prices. There's also an entire market just for commodities, the Futures Market.
"algorithms do not have the capability to make these types of judgments. Nor do they care about the present or future relationship between price and actual underlying value. All they care about is pricing inefficiencies."
That's what pricing inefficiency is. A difference in price and underlying value leads to a pricing inefficiency. Like others have pointed out, HFT's can lower spreads quicker, which is beneficial to us long term investors. BTW, humans write algorithms, and humans have judgement. If you write shitty code, or fail to evaluate fringe cases, your algorithms might have some costly repercussions. If you write elegant, robust code, you can prevent people from dying while operating machinery, fly a spaceship to the moon, or (as of late) prevent your firm from losing millions of dollars by making shitty trades.
"Why would any sane person invest in the stock market when they have no faith that asset prices are accurately reflecting the value of their underlying assets?"
Hedging. Sane people hedge their investments. Insane people don't. Then insane people complain when their retirement savings gets chopped after buying a bunch of over-priced stocks. It's possible to invest more money in the market and end up with a more conservative portfolio. Counter intuitive, ain't it? Add in some stock options, an understanding of the Black-Scholes Model (differential equation), and now you can begin hedging against a variety of risks.
I've seen soooooo many people hate on that which they don't understand without justification (or logic). Hoping they're just old geesers, otherwise we're going to continue with bubble trouble.
No trees were killed to send this message, but a great number of electrons were terribly inconvenienced.
The market maker makes the profit on that bid-ask gap. By taking the other side of transations in the actual exchange, employing a bunch of capital, and taking a bit of risk they can hold securities just long enough to profit from the spread. As soon as there are 2 market makers doing that, the spread becomes quite narrow. That's one reason why options with gap of 1/8 vs 3/8 are rare now (well, that and the fact it's all decimal now) - 20% apart is the victory.
The other gain for options specifically is that caluclating the appropriate price for every option in the chain every time the stock moves a bit was really labor intensive and error prone before computers took that over, and so would only happen for well-traded options.
Socialism: a lie told by totalitarians and believed by fools.
That cannot be true. The money for the market maker has to come from somewhere and that means either the buyer or the seller is paying more/receiving less than they could have.
True as a first order analysis, but false in practice. As soon as you have 2 market makers competing, the bid-ask gap nearly vanishes. You can see this historically in just about every thinly-traded security, especially options. Automation has made it profitable to be that second market maker in just about every market now.
Also note that the increased volatility is mostly intra-day, which is actually a problem for markey makers (they can actually lose money on sharp intraday moves), but just noise if you hold stock for any length of time.
The problems if capitalism are usually solved by competition, whereever competition is legally permitted. In this case, any given market maker would benefit from less efficient markets, but these are about the most competitive people in the world.
Socialism: a lie told by totalitarians and believed by fools.
Yes, my point was that they are (thus far) only dangerous to the people doing the automaiton, for whom I have no sympathy at all.
Socialism: a lie told by totalitarians and believed by fools.
For now. It *will* be problem when innocent buy-and-hold long term investors saving for retirement get soaked.
Why is this needed, when it was never needed for other types of speculators or market-makers in the past? You are seeking perfection in a system which has never been perfect.
It isn't a matter of seeking perfection. It's a matter of having no idea about what is going on. What and where where triggers buy or sell? If the trading is going along at such a fast pace, is the software weighted to hold my particular sell so that an investor who has more influence gets sold first? And therefore in a selling frenzy, is harmed less? Just a few milliseconds makes the difference. Same with when it's buy time. A short hold on my behalf makes me pay more, and then recoup less when I sell.
The shepherds did so well protecting the flock that the sheep no longer believed that wolves existed.
But... why? An insider has information which can be used once, and in a very low-frequency fashion, for maximum profit. Insiders don't need HFTs, because by definition they have an information advantage over everyone else.
That module comment was sarcasm. But as I noted in another post, when the buying and selling is happening at such a fast pace, there can be a lot of pressure to have some folks have an advantage at buy or sell time. Let's say that there is an event that triggers a lot of selling. As the price is dropping, it stands to reason that you want to sell sooner rather than later. So there might be a strong incentive to have some folks sell orders have priority over mine, or vice versa. The same when a stock gets hot. If a buy order is held off just a little in deference to others, the one held off pays more.
While it would be obvious in Luddite land if a sell order was delayed an hour or two, it won't be so easy with high speed trading.
The shepherds did so well protecting the flock that the sheep no longer believed that wolves existed.
What happens when everyone leaves? You know, like they did last year.
Uhh, the volatility is not visible when you plot on log scale. The fact that the volatility looks the same at the low end and the high end speaks to incredible REAL volatility. Further, that is a chart of the entire DOW Jones on a, what, bi-annual tick? You don't see any of the extreme volatility at that time scale. Similarly, you can't see any of the volatility leading up to any of the other market crashes either.
Here is a teeny tiny smattering of such events: http://www.zerohedge.com/news/wtf-skynet-chart-du-jour
Thank you for the reasoned and explanatory reply. One minor suggestion for the future would be to preface your comments about HFT with a simple statement that you work in the field. That might be visible if someone were to dig through your posting history, but I sure didn't catch it in this particular subthread; starting with that would have put your comments in a different light as I read them.
Cheers,
"What in the name of Fats Waller is that?"
"A four-foot prune."
It a law is never enforced, to what extent is it a law, and to what is it just an illegal pretext for punishing those you disagree with? The law is not enforced against HFT.
To be strictly honest, it would be quite difficult to claim that a program had an intention, and corporations are never jailed. So if the program is making the trades automatically as an agent of a corporation, who is breaking what law? And how could it be enforced? (Well, if the penalty were a fine, I suppose the corporation could be made to pay, but we don't put corporations in jail.) There used to be laws that would pull the charter of a corporation that acted in ways deemed anti-social, but I've never heard of such a law being used.
I think we've pushed this "anyone can grow up to be president" thing too far.
No. Capitalism recognizes only demand. It doesn't distinguish between needs and wants. Our overall economy, and our individual jobs with it, have shifted from mostly providing for our needs to providing for our wants. The capitalist "worth" of a job is simply how much someone will pay for it.
For example, a great many people are now so rich that they can pay someone to cook for them and wait on them. This was not true in the past. In the past there was a much smaller demand for cooks and waiters. As we've gotten collectively richer, such servants, although certainly not essential, have become very much in demand.
I bought my house in 1988.
You are welcome on my lawn.
All orders are attributed to a specific trader. Although an algo selected when to order, what price and so on, the trader takes responsibility for every order.
And it actually is enforced. I have first hand knowledge of inquiries and punitive actions.
Behaviors that are considered manipulative are punished very severely. They aren't good for the exchange, SRO or marketplace.
If milliseconds matter but your executions are going through a broker, I think it's safe to assume that you're talking about stop-loss orders here. Normal limit orders from retail traders are not sensitive to millisecond-level delays at the broker, as they are already typically delayed by the Internet connection, human trading decisions, and possibly even quote delays (i.e. reacting to the 20-minute delayed quotes publicly available, or reacting to "breaking news" from the media). Given that basis, I think it is a valid complaint if brokerages are not sending stop-loss orders to the exchange in time-price priority. However, you can mitigate that risk by sending stop-limit orders, where you can set your worst possible execution price.
See near the end: http://marshallbrain.com/manna1.htm
Or see my parable video:
http://www.youtube.com/watch?v=p14bAe6AzhA
"A parable about robotics, abundance, technological change, unemployment, happiness, and a basic income."
There's more stuff on other alternatives on my site.
Thansk for the insightful post.
A 21st century issue: the irony of technologies of abundance in the hands of those still thinking in terms of scarcity.
Uhhh. In order to illustrate the volatility it needs to be log scale. How else could you compare a change in 50 % when Dow Jones is 100 compared to 13000. Anyway, here is a graph of volatility of Dow Jones . http://schwert.ssb.rochester.edu/usvol.pdf . As you can see our volatility is quiet low compared to the thirties. Anyone who thinks a bit will understand that the claim that prices are somehow crazy nowadays compared to the good old days cannot be true, since it would mean that good dividend paying companies could be bought cheap by the simple strategy of entering a buy order with a low price. No HFT algorithm can buy below your order. Of course there are differences to the thirties. For example the volatility within a tenth of a second is much higher.
If it's legal then it's not immoral.
Casteism
giving the HFT traders an unfair advantage
Why? Does them having their serves right next to the exchange FORCE you to click the "sell" button? Does it somehow make you buy stock at a price you didn't want to buy it at? The ONLY advantage - if any - is that they get to be first in line. First in line can be a good thing. It can also be a pretty bad thing...
Seven puppies were harmed during the making of this post.
You misunderstand me. It's not that the government can take money from honest men - it's that the government ONLY takes money from honest men. You think drug dealers pay tax on their cocaine income? It also only cages the weak and stupid. The government will never find the money of dishonest men, and will never be able to put a smart man in jail because the smart man doesn't get caught. The greedy gets caught. The impatient gets caught. And the stupid gets caught.
Most people think that the government is some noble parent that's there to protect them from the big bad bully. No, the government IS the big bad bully. There are other bullies on the block, the monopolies, the gangs and organized crime, but they run and hide when the government shows up. They will just come back later. But it's the honest guy that doesn't get out of the way. He stays there, innocent, doing anything the government asks- no - tells him to do. Paying whatever he has to do. And he says thank you, even when he's left with nothing. Not true, if he's lucky he'll be told a lie with a chuckle, some sort of vague political promise. It's a sweet deal. For the government.
You're not called a bully if you're opressing the strong.
Seven puppies were harmed during the making of this post.
But how could that happen? Take the flash crash - prices when crazy for a minute or two, but returned to something reasonable as soon as hunams intervened. Price changes due to algorithmic mistakes won't have any durable effect on prices, I wouldn't think..
Socialism: a lie told by totalitarians and believed by fools.
Sorry, but you are incorrect in your assumption again. Please allow me to explain one of the more egregious uses of HFT.
HugeAssCo Inc. places an order for 500,000 shares of WidgetCo stock using normal means, at the price of $1.20/share. 0.04 seconds before the trade is executed, an HFT trader sees this trade incoming, and buys 500,000 shares of WidgetCo stock at $1.20/share, raising the price to $1.201/share, with the trade finishing 0.02 seconds before HugeAssCo's trade goes through. HugeAssCo Inc. now pays $600,500 for their stock instead of $600,000. HFT trader sells their stock 0.02 seconds later, and makes a profit of $500. Repeat this as many times per second as necessary.
Effectively, the HFT trader just used their faster response time to steal $500 from HugeAssCo, although it was through perfectly legal means.
No, the only value of X is what you can do with it. Monetization is the only price of X, and may or may not have anything to do with its value.