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This Is What Wall Street's Terrifying Robot Invasion Looks Like
pigrabbitbear writes "Given the the endless mind-whirling acronyms, derivatives and structures of the financial markets, we're rarely served with a visualization that so elegantly illustrates the arrival of Wall Street's latest innovation. This is what High Frequency Trading — the official monicker of Wall Street's robot army — looks like, when specially programmed computers make massive bets at lightning speed. Created by Nanex, the GIF charts the rise of HFT trading volumes across all U.S. stock exchanges between 2007 and 2012. The initial murmur, the brewing storm, the final detonation: Not just unsettling, it's terrifying."
...why high speed trading is a good idea for anyone? It seems like the equivalent of slash-and-burn agriculture where you're destroying a resource (in this case basically sanity) in exchange for a one-time benefit of briefly being faster than your competitors.
So can someone explain how the world is a better place than if, say, you could only issue one trade per second?
G.
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.
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.
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.
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?
Except the costs have gone up. Dramatically.
Remember that bull market back in 1999? NYSE upgraded their networks in the 3rd quarter of that year to handle a whopping 1,000 quotes/sec.
Today, you need to process 1.5 million quotes a second. Apples to apples. Well, except for the trading part, there, it's apples to rotten tomatoes
Here's a graph comparing growth in quotes and trading. http://www.nanex.net/aqck/2817.HTML
I'm all for more faster trading. But that demands increased transparency. I should know more about where my $20,000 trade executed and the route my order took than my $20 order from Amazon.
The real Luddites are those who like obscurity. Because if the markets were as transparent as they should be "with a greater degree of computer involvement", then the game wouldn't work.
Knight Capital, a conservative market-maker, is going bankrupt because it's automated trading algorithms ran for 30 minutes in a poor configuration (losing money on each trade). How much did they lose? About $440 million dollars. In 30 minutes. Because someone didn't make it to the STOP command in time.
Not a bubble, just a way to destroy an organization in an automated fashion very quickly.
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
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.
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.
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
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.
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.
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?
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.
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
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.
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.
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.
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.
What does it mean to conservatively invest in a company with strong financials and good growth potential, when entire sectors rise and fall with near-perfect correlation? Or more to the point, why do we even have a stock market?
That has little to do with HFT, and a lot to do with the fact that the price of just about everything intangible is driven first by fashion, and only a distant second by any underlying value. It's always been that way, but effective global communication has unified financial fashion sense, to where on any given day everyone seems to rush into or out of cash. All of that is noise though, it's only day-by-day that things are strongly coupled. Over the course of years you see prices diverge sharply between good comanies and shitty companies (ignoring bailouts for the moment for the sake of my blood pressure).
When "investing" means trying to game the underlying system, do we really wonder why the economy sucks?
Markets in the modern sense were invented in the 16th century, and speculating has dominated "investing" for the entire 4-500 years. It's not a problem per se, as long as we have regualtions to limit margins and counterparty risk. It has no real effect on the economy. (Bubbles suck, but require non-speculative investors to get foolishly drawn in to get big enough to matter).
We desperately need to implement at least one one of two really, really simple solutions - A transaction tax, and an end to intraday trading. Either of these would kill HFT overnight, and good riddance!
Spoken like someone who doesn't understand why market makers are so valuable. Thinly traded markets blow goats. The cost to low-volume individual traders like me is very high when large bid-ask gaps appear. Narrowing the bid-ask gap is win-win: the casual buyer, the casual seller, and the market maker all come out ahead!
Socialism: a lie told by totalitarians and believed by fools.
This comment by m_m offers a good perspective:
"Let me posit that HFT has driven a lot of people out of business: the specialists, execution brokers and day-traders who used to collect the large rents built into the system in the days of old. HFT and algo-trading practitioners are rent-seekers too, but their rents are far smaller. And the vast majority of the whining you hear is from exactly the people that HFT has displaced. I have read or heard nothing about how medium-to-long-term investors are being disadvantaged by HFT; to the contrary, their costs have gone down substantially. As for destabilizing the system, sure, a lot can be done to improve the market structure and micro-structure. But we have just come through one of the most volatile and unstable periods ever; did you really expect this or any market structure to survive through this without showing the occasional crack? And what you got, even then, was the Flash Crash and some instances of erroneous behavior, the most egregious of which was Knight. In the days of specialist-and-broker intermediation, we got Black Monday without any macro stress of remotely comparable scale; we got lots of (human) fat finger errors all the time, too. So, are you saying that it is morally and socially acceptable for one group of error-prone humans to extract large rents from the system, and it is not morally or socially acceptable for another group of (differently) error-prone humans to extract much smaller rents?"
If you think HFT is bad, then you must think $0.99 individual tracks, MP3 players, and digital distribution are also bad since the RIAA no longer dictates how you buy and what you do with the content. It's really not that much different.
Imagine how much harder physics would be if electrons had feelings! -Feynman, maybe
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.
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 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.
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?
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.
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.
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.
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.
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
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.
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.
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.
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.
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.
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.
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?
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"
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
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.
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.
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.
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.
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.